**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM10-Q**

 

**Quarterly Report Under Section 13 or 15(d)**

**of the Securities Exchange Act of 1934**

 

| **For Quarter ended**      |   | **September  30, 2001** |
|----------------------------|--------|-------------------------|
| **Commission file number** |   | **333-43686**           |

 

**AMERICAN SPECTRUM 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.) |

 

| **1800  East Deere Avenue  Santa Ana, California 92705**   |
|------------------------------------------------------------|
| (Address of principal  executive offices)                  |
|                                                       |
| **949-797-4000**                                           |
| (Registrant’s telephone  number, including area code) |

 

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.

 

 

The registrant had10 shares of common stock outstanding as of September 30, 2001.

 

**AMERICAN SPECTRUM REALTY, INC.**

**TABLE OF CONTENTS**

###  

####  

| **Part I.    Financial Information** |                                                                                                                                                                 |   |   |
|-----------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                |                                                                                                                                                                 |   |   |
| Item 1.                                             | Financial Statements  of American Spectrum Realty, Inc. (Registrant)                                                                                                 |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Condensed  Consolidated Balance Sheets - September 30, 2001 and December 31, 2000                                                                                    |   |
|                                                | Condensed  Consolidated Statements of Operations for the nine months and three months  ended September 30, 2001 and 2000                                             |   |
|                                                | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000                                                              |   |
|                                                | Notes to  Condensed Consolidated Financial Statements                                                                                                                |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Financial Statements of Sierra Pacific Pension  Investors `84                                                                                                        |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Condensed  Consolidated Balance Sheets – September 30, 2001 and December 31, 2000                                                                               |   |
|                                                | Condensed  Consolidated Statements of Operations for the nine months and three months  ended September 30, 2001 and 2000                                             |   |
|                                                | Condensed  Consolidated Statements of Changes in Partners’ Equity for the year ended  December 31, 2000 and for  the nine  months ended September 30, 2001 |   |
|                                                | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2001 and 2000                                                              |   |
|                                                | Notes  to Condensed Consolidated Financial Statements                                                                                                                |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Financial Statements of CGS and the Majority-Owned  Affiliates                                                                                                       |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Condensed Combined  Balance Sheets – September 30, 2001 and December 31, 2000                                                                                   |   |
|                                                | Condensed  Combined Statements of Operations for the nine months and three months ended September  30, 2001 and 2000                                                 |   |
|                                                | Condensed  Combined Statements of Equity (Deficit) for the year ended December 31, 2000  and for  the nine months ended  September 30, 2001                     |   |
|                                                | Condensed  Combined Statements of Cash Flows for the nine months ended September 30,  2001 and 2000                                                                  |   |
|                                                | Notes  to Condensed Combined Financial Statements                                                                                                                    |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 2.                                             | Management’s  Discussion and Analysis of Results of Operations and Financial Condition of  American Spectrum Realty, Inc.                                       |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Management’s  Discussion and Analysis of Results of Operations and Financial Condition of  Sierra Pacific Pension Investors `84                                 |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                | Management’s  Discussion and Analysis of Results of Operations and Financial Condition of  CGS and the Majority-Owned Affiliates                                |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 3.                                             | Qualitative  and Quantitative Disclosures about Market Risk                                                                                                          |   |
|                                                |                                                                                                                                                                 |   |   |   |
| **Part II.    Other Information**    |                                                                                                                                                                 |   |   |
|                                                |                                                                                                                                                                 |   |   |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 1.                                             | Legal Proceedings                                                                                                                                                    |   |   |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item  2.                                            | Changes  in Securities and Use of Proceedings                                                                                                                        |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 3.                                             | Default Upon  Senior Securities                                                                                                                                      |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item  4.                                            | Submission  of Matters to a Vote of Security Holders                                                                                                                 |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 5.                                             | Other Information                                                                                                                                                    |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Item 6.                                             | Exhibits  and Reports on Form 8-K                                                                                                                                    |   |   |   |
|                                                |                                                                                                                                                                 |   |   |   |
| Signatures                                          |                                                                                                                                                                 |   |   |   |

 

 

 

**PARTI  - FINANCIAL INFORMATION**

 

**ITEM  1.                 FINANCIALINFORMATION**

 

 

AMERICAN SPECTRUM REALTY,INC. AND SUBSIDIARY

CONDENSED CONSOLIDATEDBALANCE SHEETS

*September 30, 2001 and December 31, 2000*

 

 
|                                                                                                            |   | **September 30,  2001  (Unaudited)** |       | **December 31,  2000  (Restated)  (Unaudited)** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|-------------------------------------------------|--------|
| ASSETS:                                                                                                         |   |                                 |       |                                            |   |   |   |
| Cash                                                                                                            |   | $                                    | 4,633      |                                            | $      | 21,560 |   |
| Accounts  receivable, net                                                                                       |   | 29,026                               |       | 18,005                                          |   |
| Accounts  receivable from affiliates                                                                            |   | 1,071,605                            |       | 675,327                                         |   |
| Transaction  costs                                                                                              |   | 6,711,516                            |       | 3,553,931                                       |   |
| Real estate held  for investment and equipment, net of   accumulated depreciation of $959,907 and $776,993 |   | 7,926,945                            |       | 8,019,018                                       |   |
| Prepaid and other assets,  net                                                                                  |   | 259,396                              |       | 247,397                                         |   |
|                                                                                                            |   |                                 |       |                                            |   |
| Total Assets                                                                                                    |   | $                                    | 16,003,121 |                                            | $      | 12,535,238 |   |
|                                                                                                            |   |                                 |       |                                            |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT:                                                                    |   |                                 |       |                                            |   |
|                                                                                                            |   |                                 |       |                                            |   |   |   |
| Accounts payable  and accrued expenses                                                                          |   | $                                    | 2,084,110  |                                            | $      | 727,465 |   |
| Note payable                                                                                                    |   | 9,201,348                            |       | 9,290,633                                       |   |
| Advances payable to  affiliates                                                                                 |   | 6,274,445                            |       | 3,639,702                                       |   |
|                                                                                                            |   |                                 |       |                                            |   |
| Total liabilities                                                                                               |   | 17,559,903                           |       | 13,657,800                                      |   |
|                                                                                                            |   |                                 |       |                                            |   |
| STOCKHOLDERS’ DEFICIT:                                                                                     |   |                                 |       |                                            |   |
|                                                                                                            |   |                                 |       |                                            |   |
| Common stock and  capital in excess of par value, $.01 par value; 1,000 shares authorized, 10  shares issued    |   | 100                                  |       | 100                                             |   |
| Accumulated deficit                                                                                             |   | (1,556,882                           | )          | (1,122,662                                      | )      |
|                                                                                                            |   |                                 |       |                                            |   |
| Total stockholders’  deficit                                                                               |   | (1,556,782                           | )          | (1,122,562                                      | )      |
|                                                                                                            |   |                                 |       |                                            |   |
| Total liabilities and  stockholders’ deficit                                                               |   | $                                    | 16,003,121 |                                            | $      | 12,535,238 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

AMERICAN SPECTRUM REALTY,INC. AND SUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

*For the Nine Months Ended September 30, 2001 and 2000*

*and for the Three Months Ended September 30, 2001 and 2000*

 

 
|                           |   | **Nine Months  Ended  September 30,  2001  (Unaudited)** |      | **Nine Months  Ended  September 30,  2000  (Restated)  (Unaudited)** |   | **Three Months  Ended  September 30,  2001  (Unaudited)** |   | **Three Months  Ended  September 30,  2000  (Restated)  (Unaudited)** |     |
|--------------------------------|--------|----------------------------------------------------------|-----------|----------------------------------------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------------------|----------|
| REVENUES:                      |   |                                                     |      |                                                                 |   |                                                      |   |                                                                  |     |
| Rental income                  |   | $                                                        | 1,304,310 |                                                                 | $      | 1,175,917                                                 |   | $                                                                     | 464,553  |   | $ | 381,616 |   |
|                           |   |                                                     |      |                                                                 |   |                                                      |   |                                                                  |     |
| EXPENSES:                      |   |                                                     |      |                                                                 |   |                                                      |   |                                                                  |     |
| Property  operating expenses   |   | 848,627                                                  |      | 817,807                                                              |   | 292,984                                                   |   | 260,891                                                               |     |
| Real estate  taxes             |   | 66,864                                                   |      | 65,781                                                               |   | 22,140                                                    |   | 22,362                                                                |     |
| General and  administrative    |   | 630,110                                                  |      | -                                                                    |   | 208,019                                                   |   | -                                                                     |     |
| Depreciation and  amortization |   | 192,929                                                  |      | 134,992                                                              |   | 65,885                                                    |   | 45,964                                                                |     |
|                           |   |                                                     |      |                                                                 |   |                                                      |   |                                                                  |     |
| Total expenses                 |   | 1,738,530                                                |      | 1,018,580                                                            |   | 589,028                                                   |   | 329,217                                                               |     |
|                           |   |                                                     |      |                                                                 |   |                                                      |   |                                                                  |     |
| Net (loss)  income             |   | $                                                        | (434,220  | )                                                                    | $      | 157,337                                                   |   | $                                                                     | (124,475 | ) | $ | 52,399 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

AMERICAN SPECTRUM REALTY,INC. AND SUBSIDIARY

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

*For the Nine Months Ended September 30, 2001 and 2000*

 

 
|                                                        |   | **2001  (Unaudited)** |     | **2000  (Restated)  (Unaudited)** |   |
|-------------------------------------------------------------|--------|-----------------------|----------|-----------------------------------|--------|
|                                                        |   |                  |     |                              |   |
| NET (LOSS)  INCOME                                          |   | $                     | (434,220 | )                                 | $      | 157,337 |   |
|                                                        |   |                  |     |                              |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                      |   |                  |     |                              |   |
| Depreciation and  amortization                              |   | 192,929               |     | 134,992                           |   |
| (Increase)  decrease in accounts receivable, net            |   | (11,021               | )        | 6,258                             |   |
| Increase in  prepaids and other assets, net                 |   | (22,014               | )        | (2,903                            | )      |
| (Decrease)  increase in deferred revenue                    |   | (2,295                | )        | 8,481                             |   |
| Increase in  accounts payable and accrued expenses          |   | 1,358,940             |     | 55,675                            |   |
|                                                        |   |                  |     |                              |   |
| Net cash provided  by operating activities                  |   | 1,082,319             |     | 359,840                           |   |
|                                                        |   |                  |     |                              |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                      |   |                  |     |                              |   |
| Purchases of  real estate held for investment               |   | (71,639               | )        | (106,911                          | )      |
| Purchases of  equipment                                     |   | (19,202               | )        | (1,343                            | )      |
|                                                        |   |                  |     |                              |   |
| Net cash used in  investing activities                      |   | (90,841               | )        | (108,254                          | )      |
|                                                        |   |                  |     |                              |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                      |   |                  |     |                              |   |
| (Increase)  decrease in accounts receivable from affiliates |   | (396,278              | )        | 1,272,056                         |   |
| Increase in  transaction costs                              |   | (3,157,585            | )        | -                                 |   |
| Increase in  advances payable to affiliates                 |   | 2,634,743             |     | -                                 |   |
| Principal  payments on note payable                         |   | (89,285               | )        | (74,575                           | )      |
| Equity  distributions, net                                  |   | -                     |     | (1,446,057                        | )      |
|                                                        |   |                  |     |                              |   |
| Net cash used in  financing activities                      |   | (1,008,405            | )        | (248,576                          | )      |
|                                                        |   |                  |     |                              |   |
| (DECREASE)  INCREASE IN CASH                                |   | (16,927               | )        | 3,010                             |   |
|                                                        |   |                  |     |                              |   |
| CASH, BEGINNING  OF PERIOD                                  |   | 21,560                |     | 7,610                             |   |
|                                                        |   |                  |     |                              |   |
| CASH, END OF  PERIOD                                        |   | $                     | 4,633    |                              | $      | 10,620 |   |
|                                                        |   |                  |     |                              |   |
| SUPPLEMENTAL  DISCLOSURES:                                  |   |                  |     |                              |   |
| Cash paid for  interest                                     |   | $                     | 451,695  |                              | $      | 480,962 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

## AMERICAN SPECTRUM REALTY, INC. AND SUBSIDIARY

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

## September 30, 2001

## (Unaudited)

 

 

 

1.             ORGANIZATION

 

Basis of Presentation

 

The accompanying unaudited interim consolidated financial statementsshould be read in conjunction with the audited financial statements for theyear ended December 31, 2000.  Thefinancial statements include the accounts of American Spectrum Realty OperatingPartnership ("the Operating Partnership"), a subsidiary of AmericanSpectrum Realty, Inc.  In the opinion ofmanagement, the unaudited financial statements contain all adjustments,consisting only of normal recurring adjustments, necessary for a fair presentationof the balance sheet as of September 30, 2001, the statements of operations forthe three and nine months ended September 30, 2001, and the statements of cashflows for the nine months ended September 30, 2001.  Operating results for the interim periods are not necessarilyindicative of the results that may be expected for the entire fiscal yearending December 31, 2001.

 

The consolidatedfinancial statements included herein have been prepared by management, withoutaudit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information normally included in thefinancial statements prepared in accordance with generally accepted accountingprinciples has been omitted pursuant to such rules and regulations, although managementbelieves that the disclosures are adequate to make the information presentednot misleading.  The financialstatements should be read in conjunction with the financial statements andnotes thereto included in American Spectrum Realty, Inc.’s (“ASR” or the“Company”) Registration Statement on Form S-4 for the year ended December 31,2000.

 

On August 30, 2001, CGS Real Estate Company, Inc. transferred its 100%Membership interest in Villa Redondo, LLC (“Villa Redondo”) to AmericanSpectrum Realty Operating Partnership, LP (“the Operating Partnership”) inexchange for partnership units of the Operating Partnership.  Villa Redondo is a 125 unit apartmentcomplex in California, with mortgage debt of approximately $9,200,000. Thistransaction was between entities under common control, and was recorded athistorical cost by the Operating Partnership and CGS Real Estate Company,Inc.  The financial statements of ASR asof and for the three-month and nine-month periods ended September 30, 2001 and2000 contain the assets and liabilities and statements of operations of VillaRedondo as if the transfer to the Operating Partnership had occurred on January1, 2000.  Additionally, the balancesheet of ASR as of December 31, 2000 has been restated to include the unauditedfinancial position of Villa Redondo. Villa Redondo's deficit balance is included as an offset to ASR's equityin the accompanying financial statements as of September 30, 2001 and December31, 2000.

 

Nature of Business and Transaction

 

ASR is a Maryland corporation established August 8, 2000 to be thelegal acquiror and registrant in a consolidation transaction.  Pursuant to the consolidation transaction,existing related partnerships have been merged into the Company or a subsidiaryin a transaction in which the partners will receive shares in the Company inexchange for their partnership units and owners of existing related entitieswill exchange ownership interests for units in American Spectrum RealtyOperating Partnership, LP, an operating partnership formed for this purpose andinitially wholly owned by the Company. Prior to October 19, 2001, ASR was a wholly owned subsidiary of CGS RealEstate Company, Inc.  On October 19,2001, pursuant to the consolidation, ASR merged with eight public limitedpartnerships, acquired the assets and liabilities of two private entities andcertain assets and liabilities of CGS and the Majority-Owned Affiliates.  The accounting acquirer in this transactionis Sierra Pacific Pension Investors `84 (SPPI84).  The financial statements of SPPI84 are presented following theASR financial statements.  These eventsare collectively referred to as the “Transaction”.

 

CGS includes CGS Real Estate Company, Inc. and various other entitiesinvolved in real estate development, management, ownership and operation.  CGS’ operations are located principally inTexas, the Midwestern and Western United States.  CGS’ properties consist of 16 office, office/warehouse, apartmentand shopping centers and one parcel of vacant land.  CGS is a predecessor entity of the Company.  The financial statements of CGS arepresented following the financial statements of SPPI84.

 

ASR is a full-service real estate corporation.  The Company’s primary business is theownership of office, office/warehouse, apartments and shopping center properties.  The public limited partnerships own 18office/warehouse and apartment properties. ASR initially owns 34 propertiesafter completion of the Transaction. The Company plans to expand its business by acquiring additionalproperties.  The Company will focusprimarily on office, office/warehouse and apartment properties located Texas,the Midwestern and Western United States. ASR intends to qualify as a real estate investment trust (REIT) no laterthan 2003.

 

The major activity affecting the Company’s books and records during theperiod from inception (August 8, 2000) to September 30, 2001 were costs relatedto the Transaction and the operations of Villa Redondo Apartments.  Costs that were incremental, directly attributableto the Transaction, and paid to third party vendors were capitalized astransaction costs.  These costs will beexpensed or capitalized as debt issuance costs or stock issuance costs.  The December 31, 2000 combined financialstatements of CGS and the December 31, 2000 financial statements of ASR,included in the Form S-4, disclose an uncertainty regarding the ability of CGSand its affiliates (including ASR) to continue as a going concern.  Management plans relating to these mattersinclude obtaining extensions of loan due dates from lenders, or refinancingdebt after the completion of the Transaction. Additionally, management anticipates that ASR will generate positivecash flows from operations, however, there can be no assurance these plans willbe achieved.  See footnotes to CGS’ financialstatements included in this Form 10-Q for further discussion of the goingconcern issue and management’s plans.

 

The advances payable to affiliates included in the accompanying balancesheets were payable to CGS and three of the public limited partnerships.  The advances payable to the three publicpartnerships were guaranteed by CGS, the general partner of the limitedpartnerships.  These advances payablewere eliminated upon consummation of the Transaction.

 

2.             SIGNIFICANTACCOUNTING POLICIES

 

Use of Estimates

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

Property and Equipment

 

Property and equipment isstated at cost and is depreciated using the straight-line method over theestimated useful lives of the related assets, ranging from three to thirtyyears.  Maintenance and repairs arecharged to expense as incurred. Significant renewals and betterments are capitalized.  At the time of retirement or otherdisposition of property and equipment, the cost and accumulated depreciationand amortization are removed from the accounts and any resulting gain or lossis reflected in operations.

 

Reclassifications

 

Certain reclassificationshave been made to the 2000 condensed consolidated financial statements toconform to the current period presentation.

 

3.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 1998, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 133 (SFAS 133) as amended by SFAS 137 and 138,Accounting for Derivative Instruments and Hedging Activities.  SFAS 133 establishes accounting andreporting standards requiring that every derivative instrument (including certainderivative instruments embedded in other contracts) be recorded in the balancesheet as either an asset or liability measured at its fair value.  SFAS 133 requires that changes in thederivative’s fair value be recognized currently in earnings unless specifichedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains andlosses to offset related results on the hedged item in the income statement,and requires that a company formally document, designate, and assess theeffectiveness of transactions that receive hedge accounting.  SFAS 133 was effective for the Companybeginning with the 2001 fiscal year.  SFAS 133 did not have a material impact on the financial statements.

 

In July 2001, FASB issuedSFAS No. 141, “Business Combinations”, which is effective for businesscombinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted forunder the purchase method and that the pooling-of-interest method is no longerallowed.  The Company will account forthe Transaction under the purchase method.

 

In July 2001, FASB issuedSFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after December 15, 2001.  SFAS No. 142 requires, among other things, that goodwill nolonger be amortized to earnings, but instead be reviewed for impairment.  The Company is currently analyzing theprovisions of SFAS No. 142 and has not yet made a determination of the impactthe adoption will have on its financial statements.

 

In June 2001, FASB issuedSFAS 143, “Accounting for Asset Retirement”. SFAS No. 143 addresses financial accounting and reporting obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The provisionsof SFAS No. 143 are required to be applied starting with fiscal years beginningafter June 15, 2002.  The Companybelieves the adoption of the provisions of SFAS 143 will not have a significanteffect on its financial position or results of operations.

 

In October 2001, the FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS 144), which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  SFAS 144 supersedes Statementof Financial Standards No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of”, and the accounting andreporting provisions of APB 30 related to the disposal of a segment of abusiness.  SFAS 144 will be effectivefor the Company beginning January 1, 2002, the first day of its 2002 fiscalyear.  The Company is currentlyassessing but has not yet determined the impact of adopting SFAS 144 on itsfinancial position and results of operations.

 

4.             SUBSEQUENTEVENT

 

The limited partners ofeach of the eight public limited partnerships approved the consolidationtransaction with ASR pursuant to the Registration Statement on Form S-4.  The closing of the consolidation transactionwas effective on October 19, 2001.  Theconsolidation transaction is described in the Registration Statement on FormS-4 of ASR.   Pursuant to theconsolidation transaction, all of the assets and liabilities of the publiclimited partnerships have been transferred to subsidiaries of ASR pursuant tomergers.

 

SIERRA PACIFIC PENSIONINVESTORS ’84

(A Limited Partnership)

CONDENSED CONSOLIDATEDBALANCE SHEETS

*September 30, 2001 and December 31, 2000*

 

 
|                                                                                                                                  |   | **September 30,  2001  (Unaudited)** |       | **December 31,  2000** |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|------------------------|--------|
| ASSETS:                                                                                                                               |   |                                 |       |                   |   |   |   |
| Cash and cash equivalents                                                                                                             |   | $                                    | 7,034      |                   | $      | 33,647 |   |
| Receivables:                                                                                                                          |   |                                 |       |                   |   |
| Note receivable,  net of deferred gain of $132,471                                                                                    |   | 1,618,300                            |       | 1,618,300              |   |
| Unbilled rent                                                                                                                         |   | 49,379                               |       | 48,713                 |   |
| Billed rent                                                                                                                           |   | 0                                    |       | 69,118                 |   |
| Interest                                                                                                                              |   | 131,308                              |       | 0                      |   |
| Due from  affiliate                                                                                                                   |   | 1,350,229                            |       | 936,752                |   |
| Income-producing  property – net of accumulated depreciation and valuation allowance of  $2,955,139 and $2,861,598, respectively |   | 1,152,263                            |       | 1,208,166              |   |
| Investment in  unconsolidated joint venture                                                                                           |   | 6,883,400                            |       | 7,063,438              |   |
| Other assets –  net of accumulated amortization of $237,235 and $197,100, respectively                                           |   | 282,449                              |       | 232,067                |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Total Assets                                                                                                                          |   | $                                    | 11,474,362 |                   | $      | 11,210,201 |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| LIABILITIES AND  PARTNERS’ EQUITY:                                                                                               |   |                                 |       |                   |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Accrued and  other liabilities                                                                                                        |   | $                                    | 166,135    |                   | $      | 248,108 |   |
| Note payable                                                                                                                          |   | 1,336,129                            |       | 1,349,748              |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Total  Liabilities                                                                                                                    |   | 1,502,264                            |       | 1,597,856              |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Partners’ equity  (deficit):                                                                                                     |   |                                 |       |                   |   |
| General Partner                                                                                                                       |   | (179,505                             | )          | (183,103               | )      |
| Limited  Partners:                                                                                                                    |   |                                 |       |                   |   |
| 80,000 units  authorized, 77,000 issued and outstanding                                                                               |   | 10,151,603                           |       | 9,795,448              |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Total Partners’  equity                                                                                                          |   | 9,972,098                            |       | 9,612,345              |   |
|                                                                                                                                  |   |                                 |       |                   |   |
| Total  Liabilities and Partners’ equity                                                                                          |   | $                                    | 11,474,362 |                   | $      | 11,210,201 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

SIERRA PACIFIC PENSIONINVESTORS ’84

(A Limited Partnership)

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

*For the Nine Months Ended September 30, 2001 and 2000*

*and for the Three Months Ended September 30, 2001 and 2000*

 

* *
|                                                                   |   | **Nine Months Ended  September 30,** |    | **Three Months Ended  September 30,** |   |
|------------------------------------------------------------------------|--------|--------------------------------------|---------|---------------------------------------|--------|
|                                                                   |   | **2001  (Unaudited)**                |    | **2000  (Unaudited)**                 |   | **2001  (Unaudited)** |   | **2000  (Unaudited)** |   |
| REVENUES:                                                              |   |                                 |    |                                  |   |   |   |   |   |   |   |   |   |
| Rental income                                                          |   | $                                    | 499,396 |                                  | $      | 439,178 |   | $ | 168,861 |   | $ | 166,636 |   |
| Interest income                                                        |   | 131,314                              |    | 119,379                               |   | 43,771 |   | 39,793 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| Total revenues                                                         |   | 630,710                              |    | 558,557                               |   | 212,632 |   | 206,429 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| EXPENSES:                                                              |   |                                 |    |                                  |   |   |   |   |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| Operating  expenses                                                    |   | 398,754                              |    | 358,641                               |   | 131,065 |   | 144,967 |   |
| Depreciation and  amortization                                         |   | 142,201                              |    | 110,324                               |   | 40,776 |   | 36,367 |   |
| Interest expense                                                       |   | 95,397                               |    | 96,723                                |   | 32,873 |   | 32,041 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| Total costs and  expenses                                              |   | 636,352                              |    | 565,688                               |   | 204,714 |   | 213,375 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| (LOSS) INCOME  BEFORE PARTNERSHIP’S SHARE OF JOINT VENTURE INCOME |   | (5,642                               | )       | (7,131                                | )      | 7,918 |   | (6,946 | ) |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| PARTNERSHIP’S  SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME       |   | 365,395                              |    | 306,521                               |   | 155,923 |   | 73,317 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| NET INCOME                                                             |   | $                                    | 359,753 |                                  | $      | 299,390 |   | $ | 163,841 |   | $ | 66,371 |   |
|                                                                   |   |                                 |    |                                  |   |   |   |   |   |
| Net income per  limited partnership unit                               |   | $                                    | 4.63    |                                  | $      | 3.85 |   | $ | 2.11 |   | $ | 0.85 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

SIERRA PACIFIC PENSIONINVESTORS ’84

(A Limited Partnership)

CONDENSED CONSOLIDATEDSTATEMENTS OF CHANGES IN PARTNERS’ EQUITY

*For the Year Ended December 31, 2000 and*

*for the Nine Months Ended September 30, 2001*

 

 
|                                                                  |   | **Limited Partners** |   | **General** |   | **Total  Partners’** |    |
|-----------------------------------------------------------------------|--------|----------------------|--------|-------------|--------|---------------------------|---------|
|                                                                  |   | **Per  Unit**        |   | **Total**   |   | **Partner**               |    | **Equity** |   |
|                                                                  |   |                 |   |        |   |                      |    |   |   |
| Proceeds from sale  of partnership units                              |   | $                    | 250.00 |        | $      | 19,418,250                |    |   |   | $ | 19,418,250 |   |
| Underwriting  commissions and other organization expenses             |   | (37.34               | )      | (2,894,014  | )      |                      |    | (2,894,014 | ) |
| Repurchase of  665 partnership units                                  |   | (0.03                | )      | (151,621    | )      |                      |    | (151,621 | ) |
| Cumulative net  (loss) income (to December 31,1999)                   |   | (70.59               | )      | (5,435,550  | )      | $                         | 133,334 |   | (5,302,216 | ) |
| Cumulative  distributions (to December 31, 1999)                      |   | (21.43               | )      | (1,650,006  | )      | (133,334                  | )       | (1,783,340 | ) |
|                                                                  |   |                 |   |        |   |                      |    |   |   |
| Partners’ equity  – January 1, 2000                         |   | 120.61               |   | 9,287,059   |   | 0                         |    | 9,287,059 |   |
| Transfer among  general partner and limited Partners                  |   | 2.42                 |   | 186,356     |   | (186,356                  | )       | 0 |   |
| Net income                                                            |   | 4.18                 |   | 322,033     |   | 3,253                     |    | 325,286 |   |
|                                                                  |   |                 |   |        |   |                      |    |   |   |
| Partners’ equity  (deficit) December 31, 2000                    |   | 127.21               |   | 9,795,448   |   | (183,103                  | )       | 9,612,345 |   |
| Net income  (unaudited)                                               |   | 4.63                 |   | 356,155     |   | 3,598                     |    | 359,753 |   |
|                                                                  |   |                 |   |        |   |                      |    |   |   |
| Partners’ equity  (deficit) – September 30, 2001(unaudited) |   | $                    | 131.84 |        | $      | 10,151,603                |    | $ | (179,505 | ) | $ | 9,972,098 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements

 

SIERRA PACIFIC PENSIONINVESTORS ’84

(A Limited Partnership)

CONSOLIDATED STATEMENTS OF CASH FLOWS

*For the Nine Months Ended September 30, 2001 and 2000*

 

 
|                                                                       |   | **2001   (Unaudited)** |    | **2000  (Unaudited)** |   |
|----------------------------------------------------------------------------|--------|------------------------|---------|-----------------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                     |   |                   |    |                  |   |
| Net income                                                                 |   | $                      | 359,753 |                  | $      | 299,390 |   |
| Adjustments to  reconcile net income to cash used in operating activities: |   |                   |    |                  |   |
| Deprecation and  amortization                                              |   | 142,201                |    | 110,324               |   |
| Partnership’s  share of unconsolidated joint venture income           |   | (365,395               | )       | (306,521              | )      |
| Decrease  (increase) in rent receivable                                    |   | 68,452                 |    | (39,824               | )      |
| Increase in  interest receivable                                           |   | (131,308               | )       | (119,371              | )      |
| Increase in  other assets                                                  |   | (96,042                | )       | (79,753               | )      |
| (Decrease)  increase in accrued and other liabilities                      |   | (81,973                | )       | 26,876                |   |
|                                                                       |   |                   |    |                  |   |
| Net cash used in  operating activities                                     |   | (104,312               | )       | (108,879              | )      |
|                                                                       |   |                   |    |                  |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                     |   |                   |    |                  |   |
| Payments for  property additions                                           |   | (37,639                | )       | (40,905               | )      |
|                                                                       |   |                   |    |                  |   |
| Net cash used in  investing activities                                     |   | (37,639                | )       | (40,905               | )      |
|                                                                       |   |                   |    |                  |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                     |   |                   |    |                  |   |
| Principal  payments on notes payable                                       |   | (13,619                | )       | (44,178               | )      |
| Capital  contributions to unconsolidated joint venture                     |   | 0                      |    | (43,000               | )      |
| Distributions  from unconsolidated joint venture                           |   | 542,434                |    | 497,393               |   |
| Loan to  affiliate                                                         |   | (413,477               | )       | (254,133              | )      |
|                                                                       |   |                   |    |                  |   |
| Net cash  provided by financing activities                                 |   | 115,338                |    | 156,082               |   |
|                                                                       |   |                   |    |                  |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                      |   | (26,613                | )       | 6,298                 |   |
|                                                                       |   |                   |    |                  |   |
| CASH AND CASH  EQUIVALENTS – Beginning of Period                      |   | 33,647                 |    | 31,562                |   |
|                                                                       |   |                   |    |                  |   |
| CASH AND CASH  EQUIVALENTS - End of period                                 |   | $                      | 7,034   |                  | $      | 37,860 |   |
|                                                                       |   |                   |    |                  |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                         |   |                   |    |                  |   |
|                                                                       |   |                   |    |                  |   |
| Cash paid during  the period for real estate taxes                         |   | $                      | 56,324  |                  | $      | 56,324 |   |
|                                                                       |   |                   |    |                  |   |
| Cash paid during  the period for interest                                  |   | $                      | 94,593  |                  | $      | 97,329 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

SIERRA PACIFIC PENSIONINVESTORS ’84 AND SUBSIDIARY

(A Limited Partnership)

## NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1.             BASISOF FINANCIAL STATEMENTS

 

In the opinion of Sierra Pacific Pension Investors ‘84’s (thePartnership) management, these unaudited condensed consolidated financialstatements reflect all adjustments which are necessary for a fair presentationof its financial position at September 30, 2001 and results of operations andcash flows for the periods presented. All adjustments included in these financial statements are of a normaland recurring nature.  The financialstatements include the accounts of Sierra Valencia, LLC, a wholly-ownedsubsidiary.  All significantintercompany balances are eliminated in consolidation.  The Partnership consolidates all entities inwhich it has a controlling equity interest.  These financial statements should be read in conjunction with thefinancial statements and notes thereto contained in the Annual Report of thePartnership for the year ended December 31, 2000.

 

Certain reclassifications have been made to the September 30, 2000Consolidated Statement of Cash Flows to conform to the September 30, 2001presentation.

 

2.             RELATED PARTYTRANSACTIONS

 

Included in the financial statements for the nine months endedSeptember 30, 2001 and 2000 are affiliate transactions as follows:

 

 

|                 |   | **September 30** |   |
|----------------------|--------|------------------|--------|
|                 |   | **2001**         |   | **2000** |   |
| Management fees      |   | $                | 19,061 |   | $ | 12,478 |   |
| Administrative  fees |   | 70,619           |   | 56,360 |   |
| Leasing fees         |   | 27,027           |   | 0 |   |
| Construction  fees   |   | 11,508           |   | 0 |   |
|                      |        |                  |        |  |  |  |  |

 

 

On April 16, 2001, thecombined financial statements of the parent of the general partner and otheraffiliates, including the general partner, (the Company) were issued.  The independent public accountants’ reporton such statements contained an explanatory paragraph relating to the abilityof the Company to continue as a going concern. The Company experienced losses in the periods presented and has a netcapital deficiency.  Certain entities inthe combined financial statements have not made debt payments when due andvarious lenders placed $10,250,000 of debt in default.  Certain entities also needed to pay orrefinance a significant amount of debt coming due in the next twelvemonths.  These factors raise substantialdoubt about the ability of the combined entities to continue as a goingconcern.

 

Management of the Company has plans related to these matters, which include,in addition to those items discussed above, obtaining additional loans fromshareholders, obtaining extensions from lenders or refinancing all debtsthrough the completion of the transaction discussed in Note 5.  In addition, if necessary, managementbelieves it could sell properties to generate cash to pay debt.  The Partnership does not believe that theeffect of the ultimate outcome of the circumstances surrounding the Companywill have a material adverse effect on its results of operations or financialposition.

 

3.             INVESTMENT IN UNCONSOLIDATED JOINTVENTURE

 

Sierra Mira Mesa Partners (SMMP) was formed in 1985 between thePartnership and Sierra Pacific Development Fund II (SPDFII), an affiliate, todevelop and operate the real property known as Sierra Mira Mesa, an officebuilding, located in San Diego, California. The Partnership’s initial ownership interest in SMMP was 49%; theremaining 51% was owned by SPDFII.  EffectiveDecember 31, 1996, the general partners amended the partnership agreement toallow for adjustments in the sharing ratio each year based upon the relativenet contributions and distributions since inception of each generalpartner.  At September 30, 2001 thePartnership’s interest in SMMP was 80.32%; the remaining 19.68% interest isowned by SPDFII.

 

The consolidated financial statements of SMMP include the accounts ofSMMP and Sorrento I Partners, a majority owned California generalpartnership.  Summarized incomestatement information for SMMP for the nine months ended September 30, 2001 and2000 is as follows:

 

 

|                                          |   | **September 30** |      |
|-----------------------------------------------|--------|------------------|-----------|
|                                          |   | **2001**         |      | **2000** |   |
| Rental income                                 |   | $                | 1,733,700 |   | $ | 1,608,103 |   |
| Total revenues                                |   | 1,940,163        |      | 1,794,537 |   |
| Operating  expenses                           |   | 714,658          |      | 692,164 |   |
| Share of  unconsolidated joint venture income |   | 43,709           |      | 116,068 |   |
| Net income                                    |   | 436,219          |      | 425,648 |   |
|                                               |        |                  |           |  |  |  |  |

 

As of September 30, 2001, SMMP holds a 51.51% interest in Sorrento IIPartners (SIIP), a California general partnership with Sierra PacificInstitutional Properties V formed in 1993, a 0% interest in Sierra Creekside Partners(SCP), a California general partnership with Sierra Pacific Development Fundformed in 1994, and a 33.55% interest in Sierra Vista Partners (SVP), aCalifornia general partnership with Sierra Pacific Development Fund III formedin 1994.

 

Summarized income statement information for these Partnerships, whichare accounted for by SMMP under the equity method, for the nine months endedSeptember 30, 2001 and 2000 is as follows:

 

 
|                |   | **SCP**          |    | **SVP**          |   | **SIIP**         |   |
|---------------------|--------|------------------|---------|------------------|--------|------------------|--------|
|                |   | **September 30** |    | **September 30** |   | **September 30** |   |
|                |   | **2001**         |    | **2000**         |   | **2001**         |   | **2000** |   | **2001** |   | **2000** |   |
| Rental income       |   | $                | 923,747 |             | $      | 744,330          |   | $ | 0 |   | $ | 0 |   | $ | 951,806 |   | $ | 1,013,425 |   |
| Total revenues      |   | 923,747          |    | 744,330          |   | 0                |   | 0 |   | 951,806 |   | 1,024,630 |   |
| Operating  expenses |   | 532,260          |    | 404,520          |   | 24,182           |   | 13,735 |   | 423,169 |   | 351,062 |   |
| Extraordinary  loss |   | 0                |    | 46,020           |   | 0                |   | 0 |   | 0 |   | 0 |   |
| Net (loss)  income  |   | (75,558          | )       | (206,327         | )      | (24,182          | )      | (13,735 | ) | 274,048 |   | 298,569 |   |
|                     |        |                  |         |                  |        |                  |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

4.             PARTNERS’ EQUITY

 

Equity and net income (loss) per limited partnership unit is determinedby dividing the limited partners’ share of the Partnership’s equity and netincome by the number of limited partnership units outstanding, 77,000.

 

During 2000, an amount was transferred between the partners’ equityaccounts such that 99% of cumulative operating income, gains, losses, deductionsand credits of the Partnership is allocated among the limited partners and 1%was allocated to the general partner. Management does not believe that the effect of this transfer wassignificant.

 

5.             CONSOLIDATIONTRANSACTION

 

The Partnership's limitedpartners have approved the consolidation transaction with American SpectrumRealty, Inc. ("American Spectrum") pursuant to American Spectrum'sRegistration Statement on Form S-4 and the closing of the consolidationtransaction was effective on October 19, 2001. The consolidation transaction is described in the Registration Statementon Form S-4 of American Spectrum that was declared effective by the Securitiesand Exchange Commission on August 8, 2001. Pursuant to the consolidation transaction, all of the assets andliabilities of the Partnership have been transferred to  a subsidiary of ASR pursuant to amerger.   The Partnership is theaccounting acquiror in this transaction. Stock certificates for AmericanSpectrum shares to be issued to the limited partners of the Partnership will bemailed to limited partners.

 

As of September 30, 2001,the Partnership has paid a total of $1,350,229 in expenses relating to theconsolidation transaction.  These costsprimarily relate to professional fees and are recorded as an affiliatereceivable on the balance sheet.  Whenthe transaction is finalized, the Partnership will be compensated withadditional stock.

 

6.             RECENTACCOUNTING PRONOUNCEMENTS

 

In June 1998, theFinancial Accounting Standards Board issued SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities”. SFAS No. 133 requires a companyto recognize all derivative instruments (including certain derivativeinstruments embedded in other contracts) as assets or liabilities in its balancesheet and measure them at fair value. The statement requires that changes in the derivative’s fair value berecognized currently in earnings unless specific hedge accounting criteria aremet.  SFAS No. 133, as amended, iseffective for fiscal years beginning after June 15, 2000. The Partnershipadopted the accounting provisions of SFAS No. 133 in 2001.  The implementation of SFAS No. 133 did nothave a significant effect on the Partnership’s financial conditions or resultsof operations.

 

In December 1999, the SECissued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition inFinancial Statements, which summarizes certain of the SEC staff’s views onapplying generally accepted accounting principles to revenue recognition infinancial statements.  The Partnershipadopted the accounting provisions of SAB 101 in 2000.  The implementation of SAB 101 did not have a significant effecton the Partnership’s financial condition or results of operations.

 

 

CGS AND THEMAJORITY-OWNED AFFILIATES

CONDENSED COMBINED BALANCE SHEETS

# ***September 30, 2001 and December 31, 2000***

 

 
| **(In 000’s)**                                     |   | **September 30,  2001  (Unaudited)** |    | **December 31,  2000** |   |
|---------------------------------------------------------|--------|--------------------------------------|---------|------------------------|--------|
| ASSETS:                                                 |   |                                 |    |                   |   |
|                                                    |   |                                 |    |                   |   |
| Real estate held  for investment, net                   |   | $                                    | 85,367  |                   | $      | 86,021 |   |
| Cash                                                    |   | 1,226                                |    | 1,787                  |   |
| Accounts  receivable, net                               |   | 1,258                                |    | 1,369                  |   |
| Notes and  accounts receivable from affiliates          |   | 98                                   |    | 95                     |   |
| Investments in  uncombined partnerships                 |   | 3,197                                |    | 3,241                  |   |
| Equipment, net                                          |   | 387                                  |    | 606                    |   |
| Goodwill, net                                           |   | 1,254                                |    | 1,373                  |   |
| Prepaid and  other assets, net                          |   | 14,358                               |    | 7,690                  |   |
|                                                    |   |                                 |    |                   |   |
| Total Assets                                            |   | $                                    | 107,145 |                   | $      | 102,182 |   |
|                                                    |   |                                 |    |                   |   |
| LIABILITIES AND  EQUITY (DEFICIT):                      |   |                                 |    |                   |   |
|                                                    |   |                                 |    |                   |   |
| Accounts payable  and accrued expenses                  |   | $                                    | 8,495   |                   | $      | 6,283 |   |
| Deferred revenue                                        |   | 2,229                                |    | 2,167                  |   |
| Notes payable                                           |   | 113,008                              |    | 110,175                |   |
| Notes and  accounts payable to affiliates               |   | 24,761                               |    | 18,618                 |   |
| Notes payable to  shareholders                          |   | 1,600                                |    | 1,300                  |   |
|                                                    |   |                                 |    |                   |   |
| Total  Liabilities                                      |   | 150,093                              |    | 138,543                |   |
|                                                    |   |                                 |    |                   |   |
| MANDATORILY-REDEEMABLE  COMMON STOCK OF SUBSIDIARY |   | 1,045                                |    | 1,045                  |   |
|                                                    |   |                                 |    |                   |   |
| MINORITY  INTEREST                                      |   | 1,279                                |    | -                      |   |
|                                                    |   |                                 |    |                   |   |
| COMMITMENTS AND  CONTINGENCIES:                         |   |                                 |    |                   |   |
|                                                    |   |                                 |    |                   |   |
| Equity (Deficit)                                        |   |                                 |    |                   |   |
| Capital                                                 |   | 2,481                                |    | 2,481                  |   |
| Accumulated  deficit                                    |   | (47,753                              | )       | (39,887                | )      |
|                                                    |   |                                 |    |                   |   |
| Total equity  (deficit)                                 |   | (45,272                              | )       | (37,406                | )      |
|                                                    |   |                                 |    |                   |   |
| Total  liabilities and equity (deficit)                 |   | $                                    | 107,145 |                   | $      | 102,182 |   |

 

The accompanying notesare an integral part of these condensed combined financial statements

 

CGS AND THEMAJORITY-OWNED AFFILIATES

CONDENSED COMBINEDSTATEMENTS OF OPERATIONS

*For the Nine Months Ended September 30, 2001 and 2000*

*and for the Three Months Ended September 30, 2001 and 2000*

 

* *
| **(In 000’s)**                                        |   | **Nine Months Ended  September 30,** |   | **Three Months Ended  September 30,** |   |
|------------------------------------------------------------|--------|--------------------------------------|--------|---------------------------------------|--------|
|                                                       |   | **2001  (Unaudited)**                |   | **2000  (Unaudited)**                 |   | **2001  (Unaudited)** |   | **2000  (Unaudited)** |   |
| REVENUES:                                                  |   |                                 |   |                                  |   |   |   |   |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |   |   |   |   |
| Rental income                                              |   | $                                    | 13,460 |                                  | $      | 11,914 |   | $ | 4,551 |   | $ | 4,206 |   |
| Property  management income                                |   | 3,833                                |   | 5,321                                 |   | 824 |   | 830 |   |
| Income from  affiliates                                    |   | 1,345                                |   | 1,380                                 |   | 580 |   | 416 |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Total revenues                                             |   | 18,638                               |   | 18,615                                |   | 5,955 |   | 5,452 |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| COSTS AND  EXPENSES:                                       |   |                                 |   |                                  |   |   |   |   |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Property  operating expense                                |   | 4,792                                |   | 3,966                                 |   | 1,796 |   | 1,464 |   |
| Property  management expense                               |   | 8,362                                |   | 8,076                                 |   | 1,919 |   | 3,085 |   |
| Depreciation and  amortization                             |   | 2,999                                |   | 2,566                                 |   | 522 |   | 843 |   |
| Real estate  taxes                                         |   | 1,097                                |   | 1,390                                 |   | 335 |   | 746 |   |
| Equity in income  of uncombined partnerships               |   | (53                                  | )      | (5                                    | )      | - |   | (275 | ) |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Total costs and  expenses                                  |   | 17,197                               |   | 15,993                                |   | 4,572 |   | 5,863 |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| OTHER EXPENSES  (INCOME):                                  |   |                                 |   |                                  |   |   |   |   |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Interest expense                                           |   | 9,300                                |   | 9,727                                 |   | 3,200 |   | 3,292 |   |
| Loss on  demolition of property                            |   | 867                                  |   | -                                     |   | 867 |   | - |   |
| Gain on sale of  property                                  |   | (100                                 | )      | (1,328                                | )      | - |   | - |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Total other  expenses (income)                             |   | 10,067                               |   | 8,399                                 |   | 4,067 |   | 3,292 |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Minority  Interest                                         |   | 251                                  |   | -                                     |   | 58 |   | - |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Net loss before  extraordinary items                       |   | (8,877                               | )      | (5,777                                | )      | (2,742 | ) | (3,703 | ) |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Extraordinary  items – loss on extinguishment of debt |   | -                                    |   | (1,861                                | )      | - |   | - |   |
|                                                       |   |                                 |   |                                  |   |   |   |   |   |
| Net loss                                                   |   | $                                    | (8,877 | )                                     | $      | (7,638 | ) | $ | (2,742 | ) | $ | (3,703 | ) |

 

The accompanying notesare an integral part of these condensed combined financial statements

 

CGS AND THEMAJORITY-OWNED AFFILIATES

CONDENSED COMBINEDSTATEMENTS OF EQUITY (DEFICIT)

*For the Year Ended December 31, 2000*

*and for the Nine Months Ended September 30, 2001*

 

 
| **(In 000’s)**                      |   | **Capital** |   | **Accumulated Deficit** |   | **Total** |   |
|------------------------------------------|--------|-------------|--------|-------------------------|--------|-----------|--------|
|                                     |   |        |   |                    |   |      |   |
| Balance,  December 31, 1999              |   | $           | 2,527  |                    | $      | (28,548   | )      | $ | (26,021 | ) |
|                                     |   |        |   |                    |   |      |   |
| Net loss                                 |   | -           |   | (11,212                 | )      | (11,212   | )      |
|                                     |   |        |   |                    |   |      |   |
| Net  distributions                       |   | (46         | )      | (127                    | )      | (173      | )      |
|                                     |   |        |   |                    |   |      |   |
| Balance,  December 31, 2000              |   | 2,481       |   | (39,887                 | )      | (37,406   | )      |
|                                     |   |        |   |                    |   |      |   |
| Net loss  - Unaudited               |   | -           |   | (8,877                  | )      | (8,877    | )      |
|                                     |   |        |   |                    |   |      |   |
| Net  contributions  - Unaudited     |   | -           |   | 1,011                   |   | 1,011     |   |
|                                     |   |        |   |                    |   |      |   |
| Balance,  September 30, 2001 - Unaudited |   | $           | 2,481  |                    | $      | (47,753   | )      | $ | (45,272 | ) |

 

The accompanying notesare an integral part of these condensed combined financial statements

 

CGS AND THEMAJORITY-OWNED AFFILIATES

CONDENSED COMBINEDSTATEMENTS OF CASH FLOWS

*For the Nine Months Ended September 30, 2001 and 2000*
| **(In 000’s)**                                                                        |   | **2001  (Unaudited)** |   | **2000  (Unaudited)** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                     |   |                  |   |                  |   |
| Net loss                                                                                   |   | $                     | (8,877 | )                     | $      | (7,638 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |   |                  |   |                  |   |
| Gain on sale of  property                                                                  |   | (100                  | )      | (1,328                | )      |
| Loss on  demolition of property                                                            |   | 867                   |   | -                     |   |
| Depreciation and  amortization                                                             |   | 3,344                 |   | 3,264                 |   |
| Equity in income  of uncombined partnerships                                               |   | (53                   | )      | (5                    | )      |
| Minority  interest                                                                         |   | 251                   |   | -                     |   |
| Extraordinary  loss                                                                        |   | -                     |   | 1,861                 |   |
| Changes in  assets and liabilities:                                                        |   |                  |   |                  |   |
| Decrease  (increase) in accounts receivable, net                                           |   | 111                   |   | (298                  | )      |
| Increase in  prepaid and other assets, net                                                 |   | (5,549                | )      | (1,820                | )      |
| Increase in  deferred revenue                                                              |   | 62                    |   | 1,927                 |   |
| Increase in  accounts payable and accrued expenses                                         |   | 2,212                 |   | 462                   |   |
|                                                                                       |   |                  |   |                  |   |
| Net cash (used  in) provided by operating activities:                                      |   | (7,732                | )      | (3,575                | )      |
|                                                                                       |   |                  |   |                  |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |   |                  |   |                  |   |
| Distributions  from uncombined partnerships, net                                           |   | 98                    |   | 14                    |   |
| Purchases of  real estate held for investment                                              |   | (2,249                | )      | (1,083                | )      |
| Proceeds from  sales of real estate held for investment                                    |   | 1,141                 |   | 6,816                 |   |
| Purchases of  equipment                                                                    |   | (7                    | )      | (261                  | )      |
|                                                                                       |   |                  |   |                  |   |
| Net cash (used  in) provided by investing activities                                       |   | (1,017                | )      | 5,486                 |   |
|                                                                                       |   |                  |   |                  |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                     |   |                  |   |                  |   |
| Borrowings  (repayments) of notes payable, net                                             |   | 2,833                 |   | (2,659                | )      |
| Increase in  accounts receivable from affiliates                                           |   | (3                    | )      | 1,310                 |   |
| Increase in  accounts payable to affiliates                                                |   | 298                   |   | 4,121                 |   |
| Equity  contributions (distributions), net                                                 |   | 1,011                 |   | (1,106                | )      |
| Proceeds from  (repayments of) loan from shareholders                                      |   | 300                   |   | (700                  | )      |
| Borrowings  (repayments) on notes payable to affiliates                                    |   | 3,749                 |   | (2,437                | )      |
|                                                                                       |   |                  |   |                  |   |
| Net cash  provided by (used in) financing activities                                       |   | 8,188                 |   | (1,471                | )      |
|                                                                                       |   |                  |   |                  |   |
| (Decrease)  increase in cash                                                               |   | (561                  | )      | 440                   |   |
|                                                                                       |   |                  |   |                  |   |
| Cash, beginning  of period                                                                 |   | 1,787                 |   | 458                   |   |
|                                                                                       |   |                  |   |                  |   |
| Cash, end of  period                                                                       |   | $                     | 1,226  |                  | $      | 898 |   |
|                                                                                       |   |                  |   |                  |   |
| SUPPLEMENTAL  DISCLOSURES:                                                                 |   |                  |   |                  |   |
| Cash paid for  interest                                                                    |   | $                     | 7,694  |                  | $      | 10,951 |   |

 

The accompanying notesare an integral part of these condensed combined financial statements

 

CGS AND THEMAJORITY-OWNED AFFILIATES

NOTES TO CONDENSEDCOMBINED FINANCIAL STATEMENTS

September 30, 2001

(Unaudited)

 

 

1.             BASISOF PRESENTATION

 

The accompanying unaudited interim condensed combined financialstatements should be read in conjunction with the audited combined financialstatements for the year ended December 31, 2000.  In the opinion of management, the unaudited financial statementscontain all adjustments, consisting only of normal recurring adjustments, necessaryfor a fair presentation of the balance sheet as of September 30, 2001, thestatements of operations for the nine months and three months ended September30, 2001 and 2000 and the statements of cash flows for the nine months endedSeptember 30, 2001 and 2000.  Operatingresults for the nine months ended September 30, 2001 are not necessarilyindicative of the results that may be expected for the entire fiscal yearending December 31, 2001.

 

The combined condensed financial statements included herein have beenprepared by management, without audit, pursuant to the rules and regulations ofthe Securities and Exchange Commission. Certain information normally included in the financial statementsprepared in accordance with generally accepted accounting principles has beenomitted pursuant to such rules and regulations; management believes that thedisclosures are adequate to make the information presented not misleading.  The financial statements should be read inconjunction with the financial statements and notes thereto included in the S-4for the year ended December 31, 2000.

 

Certain reclassifications have been made to the 2000 condensed combinedfinancial statements to conform to the current period presentation.

 

On August 30, 2001, CGS Real Estate Company, Inc. transferred its 100%Membership interest in Villa Redondo, LLC American Spectrum Realty OperatingPartnership, LP (“the Operating Partnership”) in exchange for partnership unitsof the Operating Partnership.  Thistransfer was between entities under common control and was recorded at historicalcost by CGS Real Estate Company, Inc.

 

2.             NATURE OF BUSINESS AND PRINCIPLESOF COMBINATION

 

CGS and theMajority-owned Affiliates (the “Company”) includes CGS Real Estate Company,Inc., (“CGS” a Texas corporation) and various other entities involved in realestate development, management, ownership, and operation.  The Company’s operations are locatedprincipally in the Midwest and Western United States and consist of office,office/warehouse, shopping centers, and multi-family apartment properties.  The Company’s combined financial statementsinclude the following subsidiaries and properties:

 
| **Subsidiaries**                             |   | **Properties**         |   |
|----------------------------------------------|--------|------------------------|--------|
|                                         |   |                   |   |   |   |
| American Spectrum Realty, Inc.               |   | Autumn  Ridge          |   | Parkade  Center |   |
| Bancor                                       |   | Villa  Redondo         |   | West  Florissant |   |
| S-P Properties, Inc.                         |   | Back  Bay              |   | Creekside/Riverside  Apts |   |
| American Spectrum Real Estate Services, Inc. |   | 7700  Irvine Center Dr |   | Pacific  Spectrum |   |
|                                         |   | Richardson Plaza       |   | Northwest  Corporate Ctr. |   |
|                                         |   | Sierra Technology      |   | Market  Place |   |
|                                         |   | Columbia N.E.          |   | Beach  & Lampson |   |

 

All significantintercompany balances are eliminated in combination.  The Company combines all entities in which it has a controllingequity interest.  Refer to the Company’saudited financial statements for the year ended December 31, 2000, which arecontained in the Company’s Form S-4/A – Amendment No. 5 to RegistrationStatement on Form S-4 Under the Securities Act of 1933, for description of theaccounting policies which have been continued without change except as notedbelow.  The details in those notes havenot changed except as a result of normal transactions in the interim or asnoted below.

 

3.             RELATED PARTYTRANSACTIONS

 

(i)            NotesPayable to Shareholders

 

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

 

(ii)           NotesPayable to Affiliates

 

Notes payable toaffiliates consists of various notes secured usually by real estate.  The notes bear interest at various rates,ranging from 6% to 12% and generally mature in various years through January2005.  Notes payable totaling $7,218,000are part of a settlement agreement entered into 1999 and were, pursuant to thesettlement agreement, were due prior to December 31, 2000.  Such notes were not paid in accordance withthe settlement agreement causing the settlement agreement to be declaredvoid.  The Company intends to repaythese loans late in 2001 using the proceeds from refinancing properties.

 

(iii)          Incomefrom Affiliates

 

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

 

4.             GOING CONCERN AND MANAGEMENT PLANS

 

On April 16, 2001, theCompany’s audited combined financial statements as of December 31, 2000 wereissued.  The independent publicaccountants’ report on such statements contained an explanatory paragraphrelating to the ability of the Company to continue as a going concern.  The Company experienced losses in theperiods presented and has a net capital deficiency.  Certain entities in the combined financial statements had notmade debt payments when due and various lenders placed $10,250,000 of debt indefault.  Certain entities also neededto pay or refinance a significant amount of debt coming due in 2001.  These factors, which continue to exist as ofNovember 16, 2001, raised substantial doubt about the ability of the combined entities,including the general partner, to continue as a going concern.

 

Subsequent to December 31, 2000, the Company took steps to cure debt indefault and is currently in negotiations to extend or refinance other remainingdebts that are past due.  Specifically,the Company has paid off and obtained separate financing for approximately$4,000,000 of debt that was previously in default, entered into a verbalagreement requiring a $100,000 payment to cure approximately $1,108,000 of debtin default and extended the terms of approximately $416,000 of debt previouslyin default, subject to the Company’s stock being traded on the American StockExchange by September 1, 2001.  Becausethe Company has been unable to meet the September 1, 2001 deadline, new termswill have to be negotiated.  Management believesthat the Company will be successful in obtaining another extension.  At September 30, 2001, approximately$5,100,000 of debt remains in default on two outstanding debt instruments.

 

On August 29, 2001, Goldman Sachs Mortgage Company commenced a lawsuitin the United States District Court, Central District of California against theCompany, seeking recovery of $4,668,387 as a result of the Company’s allegedbreach of its guaranty of a mortgage loan made by plaintiff to McDonnellAssociates, LLC.  The loan is secured bya second mortgage on the Northwest Corporate Center and came due on thematurity date.  The Company intends toretire this loan before November 30, 2001 with the proceeds from refinancinganother property.

 

At September 30, 2001, the Company appeared to be out of compliancewith debt covenants involving approximately $19,000,000 in loans from a bankand a financial services company.  Thebank loans are being refinanced and, as a result of the consolidationtransaction described earlier, the Company anticipates meeting the covenantrequirements for future periods.

 

Management’s plans in regard to these matters include obtainingextensions from lenders or refinancing debt through the completion of theTransaction (see Note 6).  Management anticipatesthe entity created by the Transaction will be able to refinance properties in afavorable interest rate environment, thereby substantially lowering debtservice costs.  In addition, relativelyexpensive secondary financing will be retired from the refinancing proceeds,creating further savings.  The Companycan make no assurances that the refinancing will be obtained.  In addition, if necessary, managementbelieves it could sell properties to generate cash to pay debt.  Management believes operating losses are aresult of the Company’s business plan that includes acquisition and turn-aroundof under performing properties.  Duringthe turn-around period, losses can accrue due to the temporary excess of operatingexpenses, interest expense, and management cost over rental income.

 

The Company has reached a preliminary agreement to extend debt totalingapproximately $22,000,000 until December 15, 2002. This agreement is not finaland is subject to the Company making certain payments and meeting otherconditions as outlined by the bank.  Inthe opinion of management, this extension will be successfully completed.

 

5.             MINORITYINTEREST

 

On February 28, 2001, a third party buyer (the “Buyer”) purchased a 49%undivided tenancy-in-common interest in the Company’s Creekside/Riversideproperty (the “Property”).  In exchangefor this interest, the Buyer agreed to pay the Company $1,000,000.  In addition, the sale agreement stipulatesincome and expenses shall be allocated to the Company and Buyer based upon theirrespective ownership interests.

 

The Company has accounted for this transaction as a joint venture andas such, the purchase price is accounted for as minority interest on theaccompanying balance sheet.  Further,income and distribution allocable to the Buyer are accounted for as an offsetto the minority interest account.

 

6.             CONSOLIDATIONTRANSACTION

 

American Spectrum Realty,Inc. (ASR) was established to be the legal acquirer and registrant in theconsolidation transaction, and is a wholly owned subsidiary of CGS.  On October 19, 2001, ASR merged with eightpublic limited partnerships, acquired certain assets and liabilities of CGS andthe Majority-Owned Affiliates, and acquired all of the assets and liabilitiesof two private entities.  The accountingacquirer in this transaction is one of the eight public limited partnerships(Sierra Pacific Pension Investors ’84). These events are collectively referred to as the “Transaction”.  The limited partners of each of the eightpublic limited partnerships approved the consolidation transaction with ASRpursuant to the Registration Statement on Form S-4 that was declared effectiveby the Securities and Exchange Commission on August 8, 2001.  The closing of the consolidation transactionwas effective on October 19, 2001.  Theassets and liabilities of each public partnership have been acquired in mergerswith subsidiaries of ASR pursuant to which the limited partnership interests ineach of the public limited partnerships have been exchanged for stock and promissorynotes of ASR (see footnotes to ASR’s financial statements included in this Form10-Q for further discussion on how notes arise).   In addition, holders of interests in the private entities wereissued operating partnership units in a newly formed operating partnership,that was initially wholly owned by ASR and will continue to be a consolidatedsubsidiary of ASR thereafter.  Theprivate entities and public limited partnerships are engaged in substantially thesame business as the Company.  The Companycurrently provides property management services to these entities.  ASR intends to qualify as a real estateinvestment trust (REIT) for federal income tax purposes beginning in 2003.

 

7.             RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 1998, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 133 (SFAS 133) as amended by SFAS 137 and 138,Accounting for Derivative Instruments and Hedging Activities.  SFAS 133 establishes accounting andreporting standards requiring that every derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability measured at its fair value.  SFAS 133 requires that changes in thederivative’s fair value be recognized currently in earning unless specifichedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains andlosses to offset related results on the hedged item in the income statement,and requires that a company formally document, designate, and assess theeffectiveness of transactions that receive hedge accounting.  SFAS 133 was effective for the Companybeginning with the 2001 fiscal year. SFAS 133 did not have a material impact onthe financial statements.

 

In December 1999, the SECissued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition inFinancial Statements, which summarizes certain of the SEC staff’s views onapplying generally accepted accounting principles to revenue recognition infinancial statements.  The Companyadopted the accounting provisions of SAB 101 in 2000.  The implementation of SAB 101 did not have a significant effecton the Company’s financial condition or results of operations.

 

In July 2001, FASB issuedSFAS No. 141, “Business Combinations”, which is effective for businesscombinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted forunder the purchase method and that the pooling-of-interest method is no longerallowed.  The Company will account forthe Transaction under the purchase method.

 

In July 2001, FASB issuedSFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after December 15, 2001.  SFAS No. 142 requires, among other things, that goodwill nolonger be amortized to earnings, but instead be reviewed for impairment.  The Company is currrently analyzing theprovisions of SFAS No. 142 and has not yet made a determination of the impactthe adoption will have on its financial statements.

 

In June 2001, FASB issuedSFAS 143, “Accounting for Asset Retirement”. SFAS No. 143 addresses financial accounting and reporting obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  The provisionsof SFAS No. 143 are required to be applied starting with fiscal years beginningafter June 15, 2002.  The Companybelieves the adoption of the provisions of SFAS 143 will not have a significanteffect on its financial position or results of operations.

 

In October 2001, the FASBissued Statement of Financial Accounting Standards No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets” (SFAS 144), which addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets.  SFAS 144 supersedes Statementof Financial Standards No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to Be Disposed Of”, and the accounting andreporting provisions of APB 30 related to the disposal of a segment of abusiness.  SFAS 144 will be effectivefor the Company beginning January 1, 2002, the first day of its 2002 fiscalyear.  The Company is currentlyassessing but has not yet determined the impact of adopting SFAS 144 on itsfinancial position and results of operations.

 

8.             LITIGATION

 

In December 1994, a subsidiary of CGS acquired the corporate generalpartner of certain public real estate investment funds (the “Funds”) inexchange for assumption of unsecured loans payable to the Funds (UnsecuredDebt).  Separately, the Company acquiredproperty from a Fund in exchange for cash and a purchase money note payable tosuch Fund secured by the property acquired (Secured Debt).  Pursuant to the terms of a litigationsettlement agreement relating to the Unsecured Debt, the Secured Debt, andother matters, CGS agreed to repay both debts and cause the Funds to distributethe proceeds to the partners of the Funds. As of December 31, 2000 interest and principal due to the Funds withrespect to the Unsecured Debt and Secured Debt totaled $7,218,000.  All amounts due under the settlementagreement were included in the notes payable affiliate account on theaccompanying balance sheet.  The Companydid not repay the amounts due in accordance with the settlement agreement.  As a result, the settlement agreement wasdeclared void.  Therefore, litigationrelating to the Unsecured Debt, Secured Debt, and other matters wasreinstated.  The Company intends to paythe amount due under the settlement agreement with proceeds from therefinancing of debt through the completion of the Transaction (see Note 4).

 

In December 1998, a related entity of the Company was named as adefendant in an action seeking compensatory and punitive damages related to adispute over the management of an account that the related entity handled forthe plaintiff.  A settlement agreementwas reached in May 2001 and the Company advanced the related entityapproximately $1,400,000 to pay for the settlement.  This advance was subsequently written off during the secondquarter of 2001.

 

In March 2001, the Company was named as a defendant in an actionbrought by certain limited partners of a limited partnership, which will not bepart of the consolidation, seeking damages in excess of $8,500,000.  The claims arise out of allegations by thelimited partners that an affiliate of the Company, as former general partner,breached various legal duties to the partnership for benefit of individuals andentities affiliated with the general partner. The Company is alleged to be one of the parties that benefited from thealleged breaches.  The outcome of thismatter is uncertain.

 

On August 29, 2001, Goldman Sachs Mortgage Company commenced a lawsuitin the United States District Court, Central District of California against theCompany, seeking recovery of approximately $4,668,000 as a result of theCompany’s alleged breach of its guaranty of a mortgage loan made by plaintiffto McDonnell Associates, LLC.  The loanis secured by a second mortgage on the Northwest Corporate Center and came dueon the maturity date.  The plaintiff hasnot taken any action to foreclose on this property.  The Company believes that it will be able to obtain financingfrom another lender to repay this loan. As a result, the Company does not expect that this lawsuit will have amaterial effect on its financial condition, position, or results of operations.

 

The Company is also party to various lawsuits and disputes that havearisen in the normal course of business. The liability, if any, arising from the unfavorable outcome of theseother matters is presently unknown.  Inthe opinion of management, the amount of ultimate liability, if any, withrespect to these other actions will not materially affect the financialposition or results of operations of the Company.

 

9.             SUBSEQUENTEVENT

 

The limited partners ofeach of the eight public limited partnerships approved the consolidationtransaction with ASR pursuant to the Registration Statement on Form S-4.  The closing of the consolidation transactionwas effective on October 19, 2001.  Theconsolidation transaction is described in the Registration Statement on FormS-4 of ASR.   Pursuant to theconsolidation transaction, all of the assets and liabilities of the publiclimited partnerships have been transferred to subsidiaries of ASR pursuant tomergers.

 

**ITEM 2****.          MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION**

**                        ANDRESULTS OF OPERATIONS**

 

**AMERICANSPECTRUM REALTY, INC.**

 

(a)           OVERVIEW

 

American Spectrum Realty, Inc. (“ASR” or the “Company”) was establishedon August 8, 2000 to be the legal acquiror and registrant in a consolidationtransaction. Pursuant to the consolidation transaction, assets and liabilitiesof existing related partnerships have been merged into or acquired by theCompany or a subsidiary in a transaction in which the partners will eitherreceive shares in the Company or units in American Spectrum Realty OperatingPartnership, LP, an operating partnership that was formed for this purpose andinitially  wholly owned by theCompany.  Pursuant to October 19, 2001,ASR was a wholly owned subsidiary of CGS Real Estate Company, Inc.  On October 19, 2001, pursuant to theconsolidation, ASR merged with eight public limited partnerships, acquired theassets and liabilities of two private entities and, certain assets andliabilities of CGS and the Majority-Owned Affiliates.  The accounting acquirer in this transaction is one of the eightpublic limited partnerships (Sierra Pacific Pension Investors `84).  These events are collectively referred to asthe “Transaction”.

 

CGS includes CGS Real Estate Company, Inc. and various other entitiesinvolved in real estate development, management, ownership and operation.  CGS’ operations are located principally inTexas, the Midwestern and Western United States.  CGS’ properties consist of 16 office, office/warehouse, apartmentand shopping centers and one parcel of vacant land.

 

ASR will be a full-service real estate corporation.  The Company’s primary business will be theownership of office, office/warehouse, apartments and shopping centerproperties.  The public limitedpartnerships own 18 office/warehouse and apartment properties. ASR willinitially own 34 properties upon completion of the Transaction.  The Company plans to expand its business byacquiring additional properties.  TheCompany will focus primarily on office, office/warehouse and apartmentproperties located in Texas, the Midwestern and Western United States.  ASR intends to qualify as a real estateinvestment trust (REIT) no later than 2003.

 

The following discussionshould be read in conjunction with the Financial Statements of ASR, includingthe respective notes thereto, which are included in this Form 10-Q.   This Form 10-Q also includes the FinancialStatements, notes, and corresponding Management’s Discussion and Analysis forSierra Pacific Pension Investors ’84 and CGS as of September 30, 2001.

 

(b)           RESULTS OF OPERATIONS

 

The Company was incorporated on August 8, 2000.  Therefore, a discussion comparing operatingresults with the corresponding periods in the prior year are not entirelymeaningful.

 

On August 30, 2001, CGS transferred its 100% Membership interest inVilla Redondo, LLC (“Villa Redondo”) to American Spectrum Realty OperatingPartnership, LP (“the Operating Partnership”) in exchange for partnership unitsof the Operating Partnership.  VillaRedondo is a 125 unit apartment complex in California, with mortgage debt ofapproximately $9,200,000.  Thistransaction was between entities under common control, and was recorded athistorical cost by the Operating Partnership and CGS.  The financial statements of ASR as of and for the three-month andnine-month periods ended September 30, 2001 and 2000 contain the assets andliabilities and statements of operations of Villa Redondo as if the transfer tothe Operating Partnership had occurred on January 1, 2000.  Additionally, the balance sheet of ASR as ofDecember 31, 2000 has been restated to include the unaudited financial positionof Villa Redondo.  Villa Redondo'sdeficit balance is included as an offset to ASR's equity in the accompanyingfinancial statements as of September 30, 2001 and December 31, 2000.

 

The major activity affecting ASR’s books and records during the periodfrom inception to September 30, 2001 were costs related to the Transaction andthe operations of Villa Redondo Apartments. Costs that were incremental, directly attributable to the Transaction,and paid to third party vendors were capitalized as transaction costs.  These costs will be expensed or capitalizedas debt issuance costs or stock issuance costs upon completion of theTransaction.

 

Total revenues represented rental income associated with the operationsof Villa Redondo Apartments.  Rentalincome for the nine and three months ended September 30, 2001 increased byapproximately $128,000, or 11%, and by approximately $83,000, or 22%,respectively, when compared to the corresponding periods in the prior year,primarily due to higher rental rates at the property.  The increase in rental income was also attributable to anincrease in occupancy from 90% at September 30, 2000 to 96% at September 30,2001.

 

Property operating expenses, which represented costs associated withthe operations of Villa Redondo Apartments, increased by approximately $32,000,or 3%, and by approximately $32,000 or 11%, for the nine and three months endedSeptember 30, 2001, in comparison to the same periods in the prior year.   These increases in operating expenses wereprincipally due to, among other factors, higher leasing costs and utilitiesincurred during the year.  Furthermore,rents deemed uncollectible were written -off to bad debt expense in the thirdquarter.

 

General and administrative expenses represented costs associated withthe ASR.  General and administrativeexpenses for the nine months and three months ended September 30, 2001 totaledapproximately $630,000 and $208,000, respectively.  No such costs were incurred in the corresponding periods in theprior year as ASR was only recently incorporated.

 

Depreciation and amortization expenses for the nine and three monthsended September 30, 2001 rose by approximately $58,000 or 43%, and byapproximately $20,000 or 43%, due to building improvements made at VillaRedondo Apartments and due to equipment purchases made by ASR.

 

(c)           LIQUIDITY ANDCAPITAL RESOURCES

 

As of September 30, 2001,the Company was in an illiquid position with cash and billed receivables ofapproximately $34,000 compared to current liabilities of approximately$2,084,000.  Prior to the Transaction,the Company was primarily dependent upon CGS to fund its operations.

 

During the nine monthsended September 30, 2001, the Company borrowed $2,634,743 from affiliates.  These advances are payable to CGS and threeof the public limited partnerships.  Theadvances to the three public limited partnerships were guaranteed by CGS, thegeneral partner of the limited partnerships. These funds were primarily used to pay for costs directly attributableto the Transaction, which were capitalized as transaction costs on the balancesheet or expensed, depending on the nature of the expense.  These advances were eliminated uponconsummation of the Transaction.

 

The consolidated entitythat includes the Company expects to achieve consistent positive cash flow fromthe effective date of the Transaction forward. Management anticipates the entity created by the Transaction will beable to refinance properties in a favorable interest rate environment, therebysubstantially lowering debt service costs. In addition, relatively expensive secondary financing will be retiredfrom the refinancing proceeds, creating further savings.  Reduction in the number of entities requiredto report to the Securities and Exchange Commission from eight prior to theTransaction to one following the Transaction will result in reduced internalstaff costs and fees for independent audits. Finally, consolidation of administrative functions into one location isexpected to reduce general and administrative costs.

 

Inflation:

 

The Company does not expect inflation to be a material factor in itsoperations in 2001.

 

 

### **SIERRA PACIFIC PENSION INVESTORS ‘84**

 

(a)           OVERVIEW

 

The following discussion should be read in conjunction with the SierraPacific Pension Investors ‘84’s (the Partnership) Consolidated FinancialStatements and Notes thereto.

 

The Partnership currently owns one property, Sierra Valencia (theProperty).  In addition, the Partnershipholds an 80.32% interest in Sierra Mira Mesa Partners (SMMP), which ismaintained on the equity method of accounting.

 

(b)           RESULTS OFOPERATIONS

 

Rental income for the nine months ended September 30, 2001 increased byapproximately $60,000, or 14%, when compared to the corresponding period in theprior year, principally due to occupancy fluctuations at the Property.  Occupancy fluctuated between 87% and 97%during the nine months ended September 30, 2000.  The Property was 100% occupied for the majority of 2001 and was100% occupied at September 30, 2001. Rental income for the three months ended September 30, 2001 remainedrelatively unchanged, increasing by approximately $2,000, or 1%, primarily dueto the higher overall occupancy.

 

Operating expenses increased by approximately $40,000, or 11%, for thenine months ended September 30, 2001, in comparison to the same period in theprior year.  This increase was in largepart due to higher maintenance and repair costs associated with the increasedoccupancy of the Property.  Further,data processing, insurance, and accounting and auditing costs rose during theperiod.  This increase was partiallyoffset due to write-offs in the third quarter of the prior year of rentsreceivable deemed uncollectible to bad debt expense.  Operating expenses for the three months ended September 30, 2001decreased by approximately $14,000 or 10%, principally as a result of the prioryear bad debt expense. This decrease was partially offset by, among otherfactors, higher administrative costs incurred during the quarter.

 

Depreciation and amortization expenses for the nine months and threemonths ended September 30, 2001 rose by approximately $32,000, or 29%, and byapproximately $4,000, or 12%, respectively, when compared to the same periodsin 2000, principally due to increased depreciation and amortization onadditional tenant improvements and lease costs associated with the increasedoccupancy of the Property.

 

The Partnership’s share of unconsolidated joint venture incomeincreased by approximately $59,000, for the nine months ended September 30,2001, in comparison to the same period in the prior year.  The increase in income generated by SMMP wasprimarily due to the recovery of rents previously written-off to bad debt andhigher common area maintenance fee recovery revenue.  SMMP’s increase in income was partially offset by, among otherfactors, a rise in utilities associated with higher energy costs.  During the quarter ended September 30, 2001,the Partnership’s share of unconsolidated joint venture income increased byapproximately $82,000 in large part due to SMMP’s higher common areamaintenance fee recovery revenue.

 

(c)           LIQUIDITY ANDCAPITAL RESOURCES

 

As of September 30, 2001, the Partnership was in an illiquidposition.  Total cash amounted toapproximately $7,000 compared to approximately $136,000 in currentliabilities.   Cash of approximately$104,000 was used in operating activities and approximately $87,000 was paidfor property additions and lease costs during the nine months ended September30, 2001.  The Partnership loanedapproximately $413,000 to an affiliate in 2001 relating to the consolidationtransaction discussed in Note 5 of the financial statements.  During the nine months ended September 30,2001, SMMP made distributions of $542,000 to the Partnership.

 

On October 19, 2001, the Partnership was merged into the consolidatedentity as discussed in Note 5.  Theconsolidated entity will generate positive cash flow.

 

Inflation:

 

The Partnership does not expect inflation to be a material factor inits operations in 2001.

 

 

**CGSAND THE MAJORITY OWNED AFFILIATES**

 

## (a)           OVERVIEW

 

The following discussion should be read in conjunction with the CGS andthe Majority-Owned Affiliates (the Company) Combined Financial Statements andNotes thereto appearing elsewhere in this Form 10-Q.

# ** **

(b)           RESULTS OFOPERATIONS

 

*Comparison of the Nine Months and Three Months EndedSeptember 30, 2001 to the Nine Months and Three Months Ended September 30,2000, respectively.*

 

Total revenues for the nine months ended September 30, 2001 increasedby $23,000 or 0.1% to $18,638,000 as compared to $18,615,000 for the ninemonths ended September 30, 2000.  Totalrevenues for the three months ended September 30, 2001 increased by $503,000 or9.2% to $5,955,000 as compared to $5,452,000 for the three months endedSeptember 30, 2000.

 

Revenue from propertymanagement operations decreased by $1,488,000 or 28.0% to $3,833,000 for thenine months ended September 30, 2001 as compared to $5,321,000 for the ninemonths ended September 30, 2000.  Revenuefrom property management operations decreased by $6,000 or 0.7% to $824,000 forthe three months ended September 30, 2001 as compared to $830,000 for the threemonths ended September 30, 2000.

 

Revenue from property management income decreased, for the nine andthree months period ended September 30, 2001, due to the sale of the Company’soperations in California and discontinuance of operations in Arizona during thefirst quarter of 2001 along with a decrease in property management income inthree other locations.   The decrease inproperty management operations resulted from the Company’s decision to winddown its involvement in third party brokerage and property management services.

 

Rental income for the nine months ended September 30, 2001 increased by$1,546,000 or 13.0% to $13,460,000 as compared to $11,914,000 for the ninemonths ended September 30, 2000.  Rentalincome for the three months ended September 30, 2001 increased by $345,000 or8.2% to $4,551,000 as compared to $4,206,000 for the three months ended September30, 2000.  The increase in rental incomeresulted primarily from new tenants moving into the recently remodeledNorthwest Corporate Center, higher market rental rates and an increase inoverall occupancy resulting from higher demand.

 

|                        |   | **Nine Months Ended September 30,** |       |
|-----------------------------|--------|-------------------------------------|------------|
|                        |   | **2001**                            |       | **2000** |   |
| Rental income               |   | $                                   | 13,460,000 |   | 72.2 | % | $ | 11,914,000 |   | 64.0 | % |
| Property  management income |   | 3,833,000                           |       | 20.6 |   | 5,321,000 |   | 28.6 |   |
| Income from  affiliates     |   | 1,345,000                           |       | 7.2 |   | 1,380,000 |   | 7.4 |   |
| Total revenues              |   | $                                   | 18,638,000 |   | 100.0 | % | $ | 18,615,000 |   | 100.0 | % |

 

 

 

 

|                        |   | **Three Months Ended September 30,** |      |
|-----------------------------|--------|--------------------------------------|-----------|
|                        |   | **2001**                             |      | **2000** |   |
| Rental income               |   | $                                    | 4,551,000 |   | 76.5 | % | $ | 4,206,000 |   | 77.1 | % |
| Property  management income |   | 824,000                              |      | 13.8 |   | 830,000 |   | 15.2 |   |
| Income from  affiliates     |   | 580,000                              |      | 9.7 |   | 416,000 |   | 7.7 |   |
| Total revenues              |   | $                                    | 5,955,000 |   | 100.0 | % | $ | 5,452,000 |   | 100.0 | % |

 

Because CGS and theMajority-Owned Affiliates will perform no third party management services afterthe Transaction is completed, all ongoing revenues will be derived from rentalincome.  Substantially all such revenuesare earned pursuant to fixed rent commitments since percentage rent income isimmaterial.  Rental income, as apercentage of total revenues, has increased due to increased occupancy and rentlevels and the declining role of third party management and brokerageactivities.

 

Total expenses excludinginterest for the nine months ended September 30, 2001 increased by $1,204,000or 7.5% to $17,197,000 as compared to $15,993,000 for the nine months endedSeptember 30, 2000.  Total expensesexcluding interest for the three months ended September 30, 2001 decreased by$1,291,000 or 22.0% to $4,572,000 as compared to $5,863,000 for the threemonths ended September 30, 2000.

 

Expenses excluding interest, impairment charges, depreciation andamortization for the nine months ended September 30, 2001 increased by $771,000or 5.7% to $14,198,000 as compared to $13,427,000 for the nine months endedSeptember 30, 2000.  Expenses excludinginterest, impairment charges, depreciation and amortization for the threemonths ended September 30, 2001 decreased by $970,000 or 19.3% to $4,050,000 ascompared to $5,020,000 for the three months ended September 30, 2000.

 

Expenses, excludinginterest, impairment charges, depreciation and amortization, as a percentage oftotal revenues, increased from 72.1% for the nine months ended September 30,2000 to 76.2% for the nine months ended September 30, 2001.  Expenses, excluding interest, impairmentcharges, depreciation and amortization, as a percentage of total revenues,decreased from 92.1% for the three months ended September 30, 2000 to 68.0% forthe three months ended September 30, 2001.

 

Components of expensesexcluding interest, depreciation, and amortization as a percentage of totalrevenues were as follows:

 

|                                  |   | **Nine Months Ended September 30,** |       |
|---------------------------------------|--------|-------------------------------------|------------|
|                                  |   | **2001**                            |       | **2000** |   |
| Property  operating & maintenance |   | $                                   | 4,792,000  |   | 25.7 | % | $ | 3,966,000 |   | 21.3 | % |
| Real estate  taxes                    |   | 1,097,000                           |       | 5.9 |   | 1,390,000 |   | 7.5 |   |
| Property  management operations       |   | 8,362,000                           |       | 44.9 |   | 8,076,000 |   | 43.4 |   |
| Other (income)  expense               |   | (53,000                             | )          | (0.3 | ) | (5,000 | ) | (0.1 | ) |
| Total cost and  expenses              |   | $                                   | 14,198,000 |   | 76.2 | % | $ | 13,427,000 |   | 72.1 | % |

 

                

|                                  |   | **Three Months Ended September 30,** |      |
|---------------------------------------|--------|--------------------------------------|-----------|
|                                  |   | **2001**                             |      | **2000** |   |
| Property  operating & maintenance |   | $                                    | 1,796,000 |   | 30.2 | % | $ | 1,464,000 |   | 26.9 | % |
| Real estate  taxes                    |   | 335,000                              |      | 5.6 |   | 746,000 |   | 13.7 |   |
| Property  management operations       |   | 1,919,000                            |      | 32.2 |   | 3,085,000 |   | 56.6 |   |
| Other (income)  expense               |   | 0                                    |      | 0.0 |   | (275,000 | ) | (5.1 | ) |
| Total cost and  expenses              |   | $                                    | 4,050,000 |   | 68.0 | % | $ | 5,020,000 |   | 92.1 | % |

 

The increase in property operating and maintenance, as a percentage ofrevenues, is a result of an increase in bad debt expense associated with thewrite-off of several uncollectable receivables.

 

Interest expense decreased by $427,000 or 4.4%, to $9,300,000 for thenine months ended September 30, 2001 as compared to $9,727,000 for the ninemonths ended September 30, 2000. Interest expense decreased by $92,000 or 2.8%, to $3,200,000 for thethree months ended September 30, 2001 as compared to $3,292,000 for the threemonths ended September 30, 2000.  Thedecrease was attributed to lower interest rates and the refinancing of severalloans with more favorable terms.

 

Net loss increased by $1,239,000 or 16.2%, to $8,877,000 for the ninemonths ended September 30, 2001 as compared to $7,638,000 for the nine monthsended September 30, 2000, primarily due to a gain on sale of property($1,328,000) in 2000 that did not recur in 2001.  Net loss decreased by $961,000 or 26.0%, to $2,742,000 for thethree months ended September 30, 2001 as compared to $3,703,000 for the threemonths ended September 30, 2000, primarily due to a decrease in property taxesand in property management operation expenses.

 

(c)           LIQUIDITY ANDCAPITAL RESOURCES

 

As of September30, 2001, the Company was in an illiquid position.  Total cash and billed receivables amount to approximately$2,600,000 compared to approximately $8,500,000 in current liabilities. TheCompany had cash balances totaling $1,226,000 as of September 30, 2001.  Cash and cash equivalents on hand as ofSeptember 30, 2001 decreased $561,000 when compared to the year ended December31, 2000.  We expect this level of cashflow to increase in the short and long term as a result of the consolidation ofthe Company with the other entities as described in Note 6 of the financialstatements.

 

Inflation:

 

The Company does notexpect inflation to be a material factor in its operations in 2001.

**ITEM 3****.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Market risk is the exposure or loss resulting from changes in interestrates, foreign currency exchange rates, commodity prices and equityprices.   ASR’s exposure to market riskat September 30, 2001 was limited since it had no floating rate debt orholdings of derivative financial or commodity instruments.  The primary market risk to which ASR will beexposed upon completion of the Transaction is interest rate risk, which issensitive to many factors, including governmental monetary and tax policies,domestic and international economic and political considerations and otherfactors that are beyond its control.

 

Sierra Pacific Pension Investors ’84’s exposure to market risk atSeptember 30, 2001 was limited as it had no floating rate debt or holdings ofderivative financial or commodity instruments.

 

CGS’ Qualitative and Quantitative Disclosures about Market Riskcontained in ASR’s Form S-4 /A  -Amendment No. 5 to Registration Statement filed under the Securities Act of1933 discusses market rate risk upon consummation of the Transaction.

 

**FORWARD-LOOKINGSTATEMENTS**

 

In addition to historicalinformation, this Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Act of 1934, as amended.  These forward-looking statements, althoughmade in good faith, are subject to certain risks and uncertainties that couldcause actual results to differ materially from those set forth in theseforward-looking statements.  Risks andother factors that might cause such a difference include, but are not limitedto, the effect of economic and market conditions; the Company’s ability torefinance mortgage loans to meet its liquidity requirements; other financingrisks, such as the ability to obtain debt or equity financing on favorableterms; risks relating to acquisition and development activities; uncertaintiesaffecting real estate businesses in general; and market competition.  As such, undue reliance should not be placedon these forward-looking statements. These risks are described in more detail in ASR’s Consent SolicitationStatement/Prospectus dated August 8, 2001. We assume no, and hereby disclaim any, obligation to update any of theforegoing or any other forward-looking statements.

 

 

**PARTII  - OTHER INFORMATION**

 

 

**ITEM 1.                 LEGALPROCEEDINGS**

 

None.  However, a lawsuit was commenced against CGSReal Estate Company, Inc. on August 29, 2001 that relates to a mortgage loansecured by one of the properties acquired by American Spectrum Realty, Inc.(“ASR”) in the consolidation transaction. The parties are in the process of discussing a settlement tolitigation.  ASR is not a party to thelitigation.

 

**ITEM  2.                 CHANGESIN SECURITIES AND USE OF PROCEEDINGS**

 

                None

 

**ITEM  3.                 DEFAULTUPON SENIOR SECURITIES**

 

None.

 

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

 

                None

 

**ITEM 5.                 OTHERINFORMATION**

 

                None

 

**ITEM  6.                 EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits

 

                None

 

(b)           Reports on Form 8-K

 

                None

 

 

**SIGNATURES**

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report be signed on its behalf by theundersigned thereunto duly authorized.

 

 

 
|                           | AMERICAN SPECTRUM REALTY, INC.             |
|--------------------------------|--------------------------------------------|
|                           |                                       |
|                           |                                       |
| Date:   November 19, 2001 | */s/  Thomas N. Thurber*              |
|                           | Thomas N. Thurber  Chief Financial Officer |