UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-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 Registrant as specified in its charter)
State of Maryland |
| 52-2258674 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
1800 East Deere Avenue |
(Address of principal executive offices) |
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949-797-4000 |
(Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý. No o.
The registrant had 10 shares of common stock outstanding as of September 30, 2001.
AMERICAN SPECTRUM REALTY, INC.
TABLE OF CONTENTS
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Financial Statements of American Spectrum Realty, Inc. (Registrant) |
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| Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 |
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| Financial Statements of Sierra Pacific Pension Investors `84 |
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| Condensed Consolidated Balance Sheets – September 30, 2001 and December 31, 2000 |
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| Financial Statements of CGS and the Majority-Owned Affiliates |
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| Condensed Combined Balance Sheets – September 30, 2001 and December 31, 2000 |
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| Condensed Combined Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 |
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PART I - FINANCIAL INFORMATION
AMERICAN SPECTRUM REALTY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
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| September 30, |
| December 31, |
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ASSETS: | |||||||
| $ | 4,633 | $ | 21,560 | |||
Accounts receivable, net |
| 29,026 |
| 18,005 |
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Accounts receivable from affiliates |
| 1,071,605 |
| 675,327 |
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Transaction costs |
| 6,711,516 |
| 3,553,931 |
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Real estate held for investment and equipment, net of accumulated depreciation of $959,907 and $776,993 |
| 7,926,945 |
| 8,019,018 |
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Prepaid and other assets, net | 259,396 | 247,397 | |||||
Total Assets | $ | 16,003,121 | $ | 12,535,238 | |||
LIABILITIES AND STOCKHOLDERS’ DEFICIT: | |||||||
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Accounts payable and accrued expenses |
| $ | 2,084,110 |
| $ | 727,465 |
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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 notes are an integral part of these condensed consolidated financial statements
AMERICAN SPECTRUM REALTY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2001 and 2000
and for the Three Months Ended September 30, 2001 and 2000
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| Nine Months |
| Nine Months |
| Three Months |
| Three Months |
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REVENUES: |
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Rental income |
| $ | 1,304,310 |
| $ | 1,175,917 |
| $ | 464,553 |
| $ | 381,616 |
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EXPENSES: |
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Property operating expenses |
| 848,627 |
| 817,807 |
| 292,984 |
| 260,891 |
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Real estate taxes |
| 66,864 |
| 65,781 |
| 22,140 |
| 22,362 |
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General and administrative |
| 630,110 |
| - |
| 208,019 |
| - |
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Depreciation and amortization |
| 192,929 |
| 134,992 |
| 65,885 |
| 45,964 |
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Total expenses |
| 1,738,530 |
| 1,018,580 |
| 589,028 |
| 329,217 |
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Net (loss) income |
| $ | (434,220 | ) | $ | 157,337 |
| $ | (124,475 | ) | $ | 52,399 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
AMERICAN SPECTRUM REALTY, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
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| 2001 |
| 2000 |
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NET (LOSS) INCOME |
| $ | (434,220 | ) | $ | 157,337 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Depreciation and amortization |
| 192,929 |
| 134,992 |
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(Increase) decrease in accounts receivable, net |
| (11,021 | ) | 6,258 |
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Increase in prepaids and other assets, net |
| (22,014 | ) | (2,903 | ) | ||
(Decrease) increase in deferred revenue |
| (2,295 | ) | 8,481 |
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Increase in accounts payable and accrued expenses |
| 1,358,940 |
| 55,675 |
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Net cash provided by operating activities |
| 1,082,319 |
| 359,840 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of real estate held for investment |
| (71,639 | ) | (106,911 | ) | ||
Purchases of equipment |
| (19,202 | ) | (1,343 | ) | ||
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Net cash used in investing activities |
| (90,841 | ) | (108,254 | ) | ||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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(Increase) decrease in accounts receivable from affiliates |
| (396,278 | ) | 1,272,056 |
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Increase in transaction costs |
| (3,157,585 | ) | - |
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Increase in advances payable to affiliates |
| 2,634,743 |
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Principal payments on note payable |
| (89,285 | ) | (74,575 | ) | ||
Equity distributions, net |
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| (1,446,057 | ) | ||
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Net cash used in financing activities |
| (1,008,405 | ) | (248,576 | ) | ||
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(DECREASE) INCREASE IN CASH |
| (16,927 | ) | 3,010 |
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CASH, BEGINNING OF PERIOD |
| 21,560 |
| 7,610 |
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CASH, END OF PERIOD |
| $ | 4,633 |
| $ | 10,620 |
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SUPPLEMENTAL DISCLOSURES: |
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Cash paid for interest |
| $ | 451,695 |
| $ | 480,962 |
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The accompanying notes are 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 statements should be read in conjunction with the audited financial statements for the year ended December 31, 2000. The financial statements include the accounts of American Spectrum Realty Operating Partnership ("the Operating Partnership"), a subsidiary of American Spectrum Realty, Inc. In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the balance sheet as of September 30, 2001, the statements of operations for the three and nine months ended September 30, 2001, and the statements of cash flows for the nine months ended September 30, 2001. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2001.
The consolidated financial statements included herein have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information normally included in the financial statements prepared in accordance with generally accepted accounting principles has been omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes 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 American Spectrum Realty Operating Partnership, LP (“the Operating Partnership”) in exchange for partnership units of the Operating Partnership. Villa Redondo is a 125 unit apartment complex in California, with mortgage debt of approximately $9,200,000. This transaction was between entities under common control, and was recorded at historical cost by the Operating Partnership and CGS Real Estate Company, Inc. The financial statements of ASR as of and for the three-month and nine-month periods ended September 30, 2001 and 2000 contain the assets and liabilities and statements of operations of Villa Redondo as if the transfer to the Operating Partnership had occurred on January 1, 2000. Additionally, the balance sheet of ASR as of December 31, 2000 has been restated to include the unaudited financial position of Villa Redondo. Villa Redondo's deficit balance is included as an offset to ASR's equity in the accompanying financial statements as of September 30, 2001 and December 31, 2000.
Nature of Business and Transaction
ASR is a Maryland corporation established August 8, 2000 to be the legal acquiror and registrant in a consolidation transaction. Pursuant to the consolidation transaction, existing related partnerships have been merged into the Company or a subsidiary in a transaction in which the partners will receive shares in the Company in exchange for their partnership units and owners of existing related entities will exchange ownership interests for units in American Spectrum Realty Operating Partnership, LP, an operating partnership formed for this purpose and initially wholly owned by the Company. Prior to October 19, 2001, ASR was a wholly owned subsidiary of CGS Real Estate Company, Inc. On October 19, 2001, pursuant to the consolidation, ASR merged with eight public limited partnerships, acquired the assets and liabilities of two private entities and certain assets and liabilities of CGS and the Majority-Owned Affiliates. The accounting acquirer in this transaction is Sierra Pacific Pension Investors `84 (SPPI84). The financial statements of SPPI84 are presented following the ASR financial statements. These events are collectively referred to as the “Transaction”.
CGS includes CGS Real Estate Company, Inc. and various other entities involved in real estate development, management, ownership and operation. CGS’ operations are located principally in Texas, the Midwestern and Western United States. CGS’ properties consist of 16 office, office/warehouse, apartment and shopping centers and one parcel of vacant land. CGS is a predecessor entity of the Company. The financial statements of CGS are presented following the financial statements of SPPI84.
ASR is a full-service real estate corporation. The Company’s primary business is the ownership of office, office/warehouse, apartments and shopping center properties. The public limited partnerships own 18 office/warehouse and apartment properties. ASR initially owns 34 properties after completion of the Transaction. The Company plans to expand its business by acquiring additional properties. The Company will focus primarily 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 later than 2003.
The major activity affecting the Company’s books and records during the period from inception (August 8, 2000) to September 30, 2001 were costs related to the Transaction and the 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 capitalized as debt issuance costs or stock issuance costs. The December 31, 2000 combined financial statements of CGS and the December 31, 2000 financial statements of ASR, included in the Form S-4, disclose an uncertainty regarding the ability of CGS and its affiliates (including ASR) to continue as a going concern. Management plans relating to these matters include obtaining extensions of loan due dates from lenders, or refinancing debt after the completion of the Transaction. Additionally, management anticipates that ASR will generate positive cash flows from operations, however, there can be no assurance these plans will be achieved. See footnotes to CGS’ financial statements included in this Form 10-Q for further discussion of the going concern issue and management’s plans.
The advances payable to affiliates included in the accompanying balance sheets were payable to CGS and three of the public limited partnerships. The advances payable to the three public partnerships were guaranteed by CGS, the general partner of the limited partnerships. These advances payable were eliminated upon consummation of the Transaction.
2. SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from three to thirty years. Maintenance and repairs are charged to expense as incurred. Significant renewals and betterments are capitalized. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reflected in operations.
Reclassifications
Certain reclassifications have been made to the 2000 condensed consolidated financial statements to conform to the current period presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133) as amended by SFAS 137 and 138, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 was effective for the Company beginning with the 2001 fiscal year. SFAS 133 did not have a material impact on the financial statements.
In July 2001, FASB issued SFAS No. 141, “Business Combinations”, which is effective for business combinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted for under the purchase method and that the pooling-of-interest method is no longer allowed. The Company will account for the Transaction under the purchase method.
In July 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company is currently analyzing the provisions of SFAS No. 142 and has not yet made a determination of the impact the adoption will have on its financial statements.
In June 2001, FASB issued SFAS 143, “Accounting for Asset Retirement”. SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are required to be applied starting with fiscal years beginning after June 15, 2002. The Company believes the adoption of the provisions of SFAS 143 will not have a significant effect on its financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes Statement of Financial Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 will be effective for the Company beginning January 1, 2002, the first day of its 2002 fiscal year. The Company is currently assessing but has not yet determined the impact of adopting SFAS 144 on its financial position and results of operations.
4. SUBSEQUENT EVENT
The limited partners of each of the eight public limited partnerships approved the consolidation transaction with ASR pursuant to the Registration Statement on Form S-4. The closing of the consolidation transaction was effective on October 19, 2001. The consolidation transaction is described in the Registration Statement on Form S-4 of ASR. Pursuant to the consolidation transaction, all of the assets and liabilities of the public limited partnerships have been transferred to subsidiaries of ASR pursuant to mergers.
SIERRA PACIFIC PENSION INVESTORS ’84
(A Limited Partnership)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
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| September 30, |
| December 31, |
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ASSETS: |
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| $ | 7,034 |
| $ | 33,647 |
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Receivables: |
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Note receivable, net of deferred gain of $132,471 |
| 1,618,300 |
| 1,618,300 |
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Unbilled rent |
| 49,379 |
| 48,713 |
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Billed rent |
| 0 |
| 69,118 |
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Interest |
| 131,308 |
| 0 |
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Due from affiliate |
| 1,350,229 |
| 936,752 |
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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 |
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Investment in unconsolidated joint venture |
| 6,883,400 |
| 7,063,438 |
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Other assets – net of accumulated amortization of $237,235 and $197,100, respectively |
| 282,449 |
| 232,067 |
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Total Assets |
| $ | 11,474,362 |
| $ | 11,210,201 |
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LIABILITIES AND PARTNERS’ EQUITY: |
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Accrued and other liabilities |
| $ | 166,135 |
| $ | 248,108 |
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Note payable |
| 1,336,129 |
| 1,349,748 |
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Total Liabilities |
| 1,502,264 |
| 1,597,856 |
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Partners’ equity (deficit): |
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General Partner |
| (179,505 | ) | (183,103 | ) | ||
Limited Partners: |
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80,000 units authorized, 77,000 issued and outstanding |
| 10,151,603 |
| 9,795,448 |
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Total Partners’ equity |
| 9,972,098 |
| 9,612,345 |
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Total Liabilities and Partners’ equity |
| $ | 11,474,362 |
| $ | 11,210,201 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
SIERRA PACIFIC PENSION INVESTORS ’84
(A Limited Partnership)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2001 and 2000
and for the Three Months Ended September 30, 2001 and 2000
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| Nine Months Ended |
| Three Months Ended |
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| 2001 |
| 2000 |
| 2001 |
| 2000 |
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REVENUES: |
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| $ | 499,396 |
| $ | 439,178 |
| $ | 168,861 |
| $ | 166,636 |
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Interest income |
| 131,314 |
| 119,379 |
| 43,771 |
| 39,793 |
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Total revenues |
| 630,710 |
| 558,557 |
| 212,632 |
| 206,429 |
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EXPENSES: |
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Operating expenses |
| 398,754 |
| 358,641 |
| 131,065 |
| 144,967 |
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Depreciation and amortization |
| 142,201 |
| 110,324 |
| 40,776 |
| 36,367 |
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Interest expense |
| 95,397 |
| 96,723 |
| 32,873 |
| 32,041 |
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Total costs and expenses |
| 636,352 |
| 565,688 |
| 204,714 |
| 213,375 |
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(LOSS) INCOME BEFORE PARTNERSHIP’S SHARE OF JOINT VENTURE INCOME |
| (5,642 | ) | (7,131 | ) | 7,918 |
| (6,946 | ) | ||||
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PARTNERSHIP’S SHARE OF UNCONSOLIDATED JOINT VENTURE INCOME |
| 365,395 |
| 306,521 |
| 155,923 |
| 73,317 |
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NET INCOME |
| $ | 359,753 |
| $ | 299,390 |
| $ | 163,841 |
| $ | 66,371 |
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Net income per limited partnership unit |
| $ | 4.63 |
| $ | 3.85 |
| $ | 2.11 |
| $ | 0.85 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
SIERRA PACIFIC PENSION INVESTORS ’84
(A Limited Partnership)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ EQUITY
For the Year Ended December 31, 2000 and
for the Nine Months Ended September 30, 2001
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| Limited Partners |
| General |
| Total |
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| Per Unit |
| Total |
| Partner |
| Equity |
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Proceeds from sale of partnership units |
| $ | 250.00 |
| $ | 19,418,250 |
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| $ | 19,418,250 |
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Underwriting commissions and other organization expenses |
| (37.34 | ) | (2,894,014 | ) |
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| (2,894,014 | ) | ||||
Repurchase of 665 partnership units |
| (0.03 | ) | (151,621 | ) |
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| (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 | ) | ||||
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Partners’ equity – January 1, 2000 |
| 120.61 |
| 9,287,059 |
| 0 |
| 9,287,059 |
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Transfer among general partner and limited Partners |
| 2.42 |
| 186,356 |
| (186,356 | ) | 0 |
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Net income |
| 4.18 |
| 322,033 |
| 3,253 |
| 325,286 |
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Partners’ equity (deficit) December 31, 2000 |
| 127.21 |
| 9,795,448 |
| (183,103 | ) | 9,612,345 |
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Net income (unaudited) |
| 4.63 |
| 356,155 |
| 3,598 |
| 359,753 |
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Partners’ equity (deficit) – September 30, 2001(unaudited) |
| $ | 131.84 |
| $ | 10,151,603 |
| $ | (179,505 | ) | $ | 9,972,098 |
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The accompanying notes are an integral part of these condensed consolidated financial statements
SIERRA PACIFIC PENSION INVESTORS ’84
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
|
| 2001 |
| 2000 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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|
| ||
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 notes are an integral part of these consolidated financial statements
SIERRA PACIFIC PENSION INVESTORS ’84 AND SUBSIDIARY
(A Limited Partnership)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of Sierra Pacific Pension Investors ‘84’s (the Partnership) management, these unaudited condensed consolidated financial statements reflect all adjustments which are necessary for a fair presentation of its financial position at September 30, 2001 and results of operations and cash flows for the periods presented. All adjustments included in these financial statements are of a normal and recurring nature. The financial statements include the accounts of Sierra Valencia, LLC, a wholly-owned subsidiary. All significant intercompany balances are eliminated in consolidation. The Partnership consolidates all entities in which it has a controlling equity interest. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Annual Report of the Partnership for the year ended December 31, 2000.
Certain reclassifications have been made to the September 30, 2000 Consolidated Statement of Cash Flows to conform to the September 30, 2001 presentation.
2. RELATED PARTY TRANSACTIONS
Included in the financial statements for the nine months ended September 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, the combined financial statements of the parent of the general partner and other affiliates, including the general partner, (the Company) were issued. The independent public accountants’ report on such statements contained an explanatory paragraph relating to the ability of the Company to continue as a going concern. The Company experienced losses in the periods presented and has a net capital deficiency. Certain entities in the combined financial statements have not made debt payments when due and various lenders placed $10,250,000 of debt in default. Certain entities also needed to pay or refinance a significant amount of debt coming due in the next twelve months. These factors raise substantial doubt about the ability of the combined entities to continue as a going concern.
Management of the Company has plans related to these matters, which include, in addition to those items discussed above, obtaining additional loans from shareholders, obtaining extensions from lenders or refinancing all debts through the completion of the transaction discussed in Note 5. In addition, if necessary, management believes it could sell properties to generate cash to pay debt. The Partnership does not believe that the effect of the ultimate outcome of the circumstances surrounding the Company will have a material adverse effect on its results of operations or financial position.
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners (SMMP) was formed in 1985 between the Partnership and Sierra Pacific Development Fund II (SPDFII), an affiliate, to develop and operate the real property known as Sierra Mira Mesa, an office building, located in San Diego, California. The Partnership’s initial ownership interest in SMMP was 49%; the remaining 51% was owned by SPDFII. Effective December 31, 1996, the general partners amended the partnership agreement to allow for adjustments in the sharing ratio each year based upon the relative net contributions and distributions since inception of each general partner. At September 30, 2001 the Partnership’s interest in SMMP was 80.32%; the remaining 19.68% interest is owned by SPDFII.
The consolidated financial statements of SMMP include the accounts of SMMP and Sorrento I Partners, a majority owned California general partnership. Summarized income statement information for SMMP for the nine months ended September 30, 2001 and 2000 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 II Partners (SIIP), a California general partnership with Sierra Pacific Institutional Properties V formed in 1993, a 0% interest in Sierra Creekside Partners (SCP), a California general partnership with Sierra Pacific Development Fund formed in 1994, and a 33.55% interest in Sierra Vista Partners (SVP), a California general partnership with Sierra Pacific Development Fund III formed in 1994.
Summarized income statement information for these Partnerships, which are accounted for by SMMP under the equity method, for the nine months ended September 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 determined by dividing the limited partners’ share of the Partnership’s equity and net income by the number of limited partnership units outstanding, 77,000.
During 2000, an amount was transferred between the partners’ equity accounts such that 99% of cumulative operating income, gains, losses, deductions and 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 was significant.
5. CONSOLIDATION TRANSACTION
The Partnership's limited partners have approved the consolidation transaction with American Spectrum Realty, Inc. ("American Spectrum") pursuant to American Spectrum's Registration Statement on Form S-4 and the closing of the consolidation transaction was effective on October 19, 2001. The consolidation transaction is described in the Registration Statement on Form S-4 of American Spectrum that was declared effective by the Securities and Exchange Commission on August 8, 2001. Pursuant to the consolidation transaction, all of the assets and liabilities of the Partnership have been transferred to a subsidiary of ASR pursuant to a merger. The Partnership is the accounting acquiror in this transaction. Stock certificates for American Spectrum shares to be issued to the limited partners of the Partnership will be mailed to limited partners.
As of September 30, 2001, the Partnership has paid a total of $1,350,229 in expenses relating to the consolidation transaction. These costs primarily relate to professional fees and are recorded as an affiliate receivable on the balance sheet. When the transaction is finalized, the Partnership will be compensated with additional stock.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 requires a company to recognize all derivative instruments (including certain derivative instruments embedded in other contracts) as assets or liabilities in its balance sheet and measure them at fair value. The statement requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended, is effective for fiscal years beginning after June 15, 2000. The Partnership adopted the accounting provisions of SFAS No. 133 in 2001. The implementation of SFAS No. 133 did not have a significant effect on the Partnership’s financial conditions or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which summarizes certain of the SEC staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. The Partnership adopted the accounting provisions of SAB 101 in 2000. The implementation of SAB 101 did not have a significant effect on the Partnership’s financial condition or results of operations.
CGS AND THE MAJORITY-OWNED AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
September 30, 2001 and December 31, 2000
(In 000’s) |
| September 30, |
| December 31, |
| ||
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 notes are an integral part of these condensed combined financial statements
CGS AND THE MAJORITY-OWNED AFFILIATES
CONDENSED COMBINED STATEMENTS 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 |
| Three Months Ended |
| ||||||||
|
| 2001 |
| 2000 |
| 2001 |
| 2000 |
| ||||
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 notes are an integral part of these condensed combined financial statements
CGS AND THE MAJORITY-OWNED AFFILIATES
CONDENSED COMBINED STATEMENTS 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 notes are an integral part of these condensed combined financial statements
CGS AND THE MAJORITY-OWNED AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
(In 000’s) |
| 2001 |
| 2000 |
| ||
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 notes are an integral part of these condensed combined financial statements
CGS AND THE MAJORITY-OWNED AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed combined financial statements should be read in conjunction with the audited combined financial statements for the year ended December 31, 2000. In the opinion of management, the unaudited financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the balance sheet as of September 30, 2001, the statements of operations for the nine months and three months ended September 30, 2001 and 2000 and the statements of cash flows for the nine months ended September 30, 2001 and 2000. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2001.
The combined condensed financial statements included herein have been prepared by management, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information normally included in the financial statements prepared in accordance with generally accepted accounting principles has been omitted pursuant to such rules and regulations; management believes that the disclosures are adequate to make the information presented not misleading. The financial statements should be read in conjunction with the financial statements and notes thereto included in the S-4 for the year ended December 31, 2000.
Certain reclassifications have been made to the 2000 condensed combined financial 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 Operating Partnership, LP (“the Operating Partnership”) in exchange for partnership units of the Operating Partnership. This transfer was between entities under common control and was recorded at historical cost by CGS Real Estate Company, Inc.
2. NATURE OF BUSINESS AND PRINCIPLES OF COMBINATION
CGS and the Majority-owned Affiliates (the “Company”) includes CGS Real Estate Company, Inc., (“CGS” a Texas corporation) and various other entities involved in real estate development, management, ownership, and operation. The Company’s operations are located principally 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 statements include 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 significant intercompany balances are eliminated in combination. The Company combines all entities in which it has a controlling equity interest. Refer to the Company’s audited financial statements for the year ended December 31, 2000, which are contained in the Company’s Form S-4/A – Amendment No. 5 to Registration Statement on Form S-4 Under the Securities Act of 1933, for description of the accounting policies which have been continued without change except as noted below. The details in those notes have not changed except as a result of normal transactions in the interim or as noted below.
3. RELATED PARTY TRANSACTIONS
(i) Notes Payable to Shareholders
Notes payable to shareholders consist of non-interest bearing advances, due on demand.
(ii) Notes Payable to Affiliates
Notes payable to affiliates 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 January 2005. Notes payable totaling $7,218,000 are part of a settlement agreement entered into 1999 and were, pursuant to the settlement agreement, were due prior to December 31, 2000. Such notes were not paid in accordance with the settlement agreement causing the settlement agreement to be declared void. The Company intends to repay these loans late in 2001 using the proceeds from refinancing properties.
(iii) Income from Affiliates
The Company includes various property management subsidiaries that provide leasing, brokerage, and other services to affiliates and unrelated parties. Amounts paid/received from property management services to properties included in these combined financial statements are eliminated. The property management subsidiaries also perform services for various uncombined entities in which the Company has ownership interests, the revenue from which has been reflected as income from affiliates in the accompanying combined financial statements.
4. GOING CONCERN AND MANAGEMENT PLANS
On April 16, 2001, the Company’s audited combined financial statements as of December 31, 2000 were issued. The independent public accountants’ report on such statements contained an explanatory paragraph relating to the ability of the Company to continue as a going concern. The Company experienced losses in the periods presented and has a net capital deficiency. Certain entities in the combined financial statements had not made debt payments when due and various lenders placed $10,250,000 of debt in default. Certain entities also needed to pay or refinance a significant amount of debt coming due in 2001. These factors, which continue to exist as of November 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 in default and is currently in negotiations to extend or refinance other remaining debts 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 verbal agreement requiring a $100,000 payment to cure approximately $1,108,000 of debt in default and extended the terms of approximately $416,000 of debt previously in default, subject to the Company’s stock being traded on the American Stock Exchange by September 1, 2001. Because the Company has been unable to meet the September 1, 2001 deadline, new terms will have to be negotiated. Management believes that 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 lawsuit in the United States District Court, Central District of California against the Company, seeking recovery of $4,668,387 as a result of the Company’s alleged breach of its guaranty of a mortgage loan made by plaintiff to McDonnell Associates, LLC. The loan is secured by a second mortgage on the Northwest Corporate Center and came due on the maturity date. The Company intends to retire this loan before November 30, 2001 with the proceeds from refinancing another property.
At September 30, 2001, the Company appeared to be out of compliance with debt covenants involving approximately $19,000,000 in loans from a bank and a financial services company. The bank loans are being refinanced and, as a result of the consolidation transaction described earlier, the Company anticipates meeting the covenant requirements for future periods.
Management’s plans in regard to these matters include obtaining extensions from lenders or refinancing debt through the completion of the Transaction (see Note 6). Management anticipates the entity created by the Transaction will be able to refinance properties in a favorable interest rate environment, thereby substantially lowering debt service costs. In addition, relatively expensive secondary financing will be retired from the refinancing proceeds, creating further savings. The Company can make no assurances that the refinancing will be obtained. In addition, if necessary, management believes it could sell properties to generate cash to pay debt. Management believes operating losses are a result of the Company’s business plan that includes acquisition and turn-around of under performing properties. During the turn-around period, losses can accrue due to the temporary excess of operating expenses, interest expense, and management cost over rental income.
The Company has reached a preliminary agreement to extend debt totaling approximately $22,000,000 until December 15, 2002. This agreement is not final and is subject to the Company making certain payments and meeting other conditions as outlined by the bank. In the opinion of management, this extension will be successfully completed.
5. MINORITY INTEREST
On February 28, 2001, a third party buyer (the “Buyer”) purchased a 49% undivided tenancy-in-common interest in the Company’s Creekside/Riverside property (the “Property”). In exchange for this interest, the Buyer agreed to pay the Company $1,000,000. In addition, the sale agreement stipulates income and expenses shall be allocated to the Company and Buyer based upon their respective ownership interests.
The Company has accounted for this transaction as a joint venture and as such, the purchase price is accounted for as minority interest on the accompanying balance sheet. Further, income and distribution allocable to the Buyer are accounted for as an offset to the minority interest account.
6. CONSOLIDATION TRANSACTION
American Spectrum Realty, Inc. (ASR) was established to be the legal acquirer and registrant in the consolidation transaction, and is a wholly owned subsidiary of CGS. On October 19, 2001, ASR merged with eight public limited partnerships, acquired certain assets and liabilities of CGS and the Majority-Owned Affiliates, and acquired all of the assets and liabilities of two private entities. The accounting acquirer 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 eight public limited partnerships approved the consolidation transaction with ASR pursuant to the Registration Statement on Form S-4 that was declared effective by the Securities and Exchange Commission on August 8, 2001. The closing of the consolidation transaction was effective on October 19, 2001. The assets and liabilities of each public partnership have been acquired in mergers with subsidiaries of ASR pursuant to which the limited partnership interests in each of the public limited partnerships have been exchanged for stock and promissory notes of ASR (see footnotes to ASR’s financial statements included in this Form 10-Q for further discussion on how notes arise). In addition, holders of interests in the private entities were issued operating partnership units in a newly formed operating partnership, that was initially wholly owned by ASR and will continue to be a consolidated subsidiary of ASR thereafter. The private entities and public limited partnerships are engaged in substantially the same business as the Company. The Company currently provides property management services to these entities. ASR intends to qualify as a real estate investment trust (REIT) for federal income tax purposes beginning in 2003.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS 133) as amended by SFAS 137 and 138, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative’s fair value be recognized currently in earning unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 was effective for the Company beginning with the 2001 fiscal year. SFAS 133 did not have a material impact on the financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which summarizes certain of the SEC staff’s views on applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted the accounting provisions of SAB 101 in 2000. The implementation of SAB 101 did not have a significant effect on the Company’s financial condition or results of operations.
In July 2001, FASB issued SFAS No. 141, “Business Combinations”, which is effective for business combinations initiated after June 30, 2001. SFAS No. 141 requires all business combinations to be accounted for under the purchase method and that the pooling-of-interest method is no longer allowed. The Company will account for the Transaction under the purchase method.
In July 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which is effective for fiscal years beginning after December 15, 2001. SFAS No. 142 requires, among other things, that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company is currrently analyzing the provisions of SFAS No. 142 and has not yet made a determination of the impact the adoption will have on its financial statements.
In June 2001, FASB issued SFAS 143, “Accounting for Asset Retirement”. SFAS No. 143 addresses financial accounting and reporting obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of SFAS No. 143 are required to be applied starting with fiscal years beginning after June 15, 2002. The Company believes the adoption of the provisions of SFAS 143 will not have a significant effect on its financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes Statement of Financial Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB 30 related to the disposal of a segment of a business. SFAS 144 will be effective for the Company beginning January 1, 2002, the first day of its 2002 fiscal year. The Company is currently assessing but has not yet determined the impact of adopting SFAS 144 on its financial position and results of operations.
8. LITIGATION
In December 1994, a subsidiary of CGS acquired the corporate general partner of certain public real estate investment funds (the “Funds”) in exchange for assumption of unsecured loans payable to the Funds (Unsecured Debt). Separately, the Company acquired property from a Fund in exchange for cash and a purchase money note payable to such Fund secured by the property acquired (Secured Debt). Pursuant to the terms of a litigation settlement agreement relating to the Unsecured Debt, the Secured Debt, and other matters, CGS agreed to repay both debts and cause the Funds to distribute the proceeds to the partners of the Funds. As of December 31, 2000 interest and principal due to the Funds with respect to the Unsecured Debt and Secured Debt totaled $7,218,000. All amounts due under the settlement agreement were included in the notes payable affiliate account on the accompanying balance sheet. The Company did not repay the amounts due in accordance with the settlement agreement. As a result, the settlement agreement was declared void. Therefore, litigation relating to the Unsecured Debt, Secured Debt, and other matters was reinstated. The Company intends to pay the amount due under the settlement agreement with proceeds from the refinancing of debt through the completion of the Transaction (see Note 4).
In December 1998, a related entity of the Company was named as a defendant in an action seeking compensatory and punitive damages related to a dispute over the management of an account that the related entity handled for the plaintiff. A settlement agreement was reached in May 2001 and the Company advanced the related entity approximately $1,400,000 to pay for the settlement. This advance was subsequently written off during the second quarter of 2001.
In March 2001, the Company was named as a defendant in an action brought by certain limited partners of a limited partnership, which will not be part of the consolidation, seeking damages in excess of $8,500,000. The claims arise out of allegations by the limited partners that an affiliate of the Company, as former general partner, breached various legal duties to the partnership for benefit of individuals and entities affiliated with the general partner. The Company is alleged to be one of the parties that benefited from the alleged breaches. The outcome of this matter is uncertain.
On August 29, 2001, Goldman Sachs Mortgage Company commenced a lawsuit in the United States District Court, Central District of California against the Company, seeking recovery of approximately $4,668,000 as a result of the Company’s alleged breach of its guaranty of a mortgage loan made by plaintiff to McDonnell Associates, LLC. The loan is secured by a second mortgage on the Northwest Corporate Center and came due on the maturity date. The plaintiff has not taken any action to foreclose on this property. The Company believes that it will be able to obtain financing from another lender to repay this loan. As a result, the Company does not expect that this lawsuit will have a material effect on its financial condition, position, or results of operations.
The Company is also party to various lawsuits and disputes that have arisen in the normal course of business. The liability, if any, arising from the unfavorable outcome of these other matters is presently unknown. In the opinion of management, the amount of ultimate liability, if any, with respect to these other actions will not materially affect the financial position or results of operations of the Company.
9. SUBSEQUENT EVENT
The limited partners of each of the eight public limited partnerships approved the consolidation transaction with ASR pursuant to the Registration Statement on Form S-4. The closing of the consolidation transaction was effective on October 19, 2001. The consolidation transaction is described in the Registration Statement on Form S-4 of ASR. Pursuant to the consolidation transaction, all of the assets and liabilities of the public limited partnerships have been transferred to subsidiaries of ASR pursuant to mergers.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
AMERICAN SPECTRUM REALTY, INC.
(a) OVERVIEW
American Spectrum Realty, Inc. (“ASR” or the “Company”) was established on August 8, 2000 to be the legal acquiror and registrant in a consolidation transaction. Pursuant to the consolidation transaction, assets and liabilities of existing related partnerships have been merged into or acquired by the Company or a subsidiary in a transaction in which the partners will either receive shares in the Company or units in American Spectrum Realty Operating Partnership, LP, an operating partnership that was formed for this purpose and initially wholly owned by the Company. Pursuant to October 19, 2001, ASR was a wholly owned subsidiary of CGS Real Estate Company, Inc. On October 19, 2001, pursuant to the consolidation, ASR merged with eight public limited partnerships, acquired the assets and liabilities of two private entities and, certain assets and liabilities of CGS and the Majority-Owned Affiliates. The accounting acquirer 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”.
CGS includes CGS Real Estate Company, Inc. and various other entities involved in real estate development, management, ownership and operation. CGS’ operations are located principally in Texas, the Midwestern and Western United States. CGS’ properties consist of 16 office, office/warehouse, apartment and shopping centers and one parcel of vacant land.
ASR will be a full-service real estate corporation. The Company’s primary business will be the ownership of office, office/warehouse, apartments and shopping center properties. The public limited partnerships own 18 office/warehouse and apartment properties. ASR will initially own 34 properties upon completion of the Transaction. The Company plans to expand its business by acquiring additional properties. The Company will focus primarily on office, office/warehouse and apartment properties located in Texas, the Midwestern and Western United States. ASR intends to qualify as a real estate investment trust (REIT) no later than 2003.
The following discussion should be read in conjunction with the Financial Statements of ASR, including the respective notes thereto, which are included in this Form 10-Q. This Form 10-Q also includes the Financial Statements, notes, and corresponding Management’s Discussion and Analysis for Sierra 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 operating results with the corresponding periods in the prior year are not entirely meaningful.
On August 30, 2001, CGS transferred its 100% Membership interest in Villa Redondo, LLC (“Villa Redondo”) to American Spectrum Realty Operating Partnership, LP (“the Operating Partnership”) in exchange for partnership units of the Operating Partnership. Villa Redondo is a 125 unit apartment complex in California, with mortgage debt of approximately $9,200,000. This transaction was between entities under common control, and was recorded at historical cost by the Operating Partnership and CGS. The financial statements of ASR as of and for the three-month and nine-month periods ended September 30, 2001 and 2000 contain the assets and liabilities and statements of operations of Villa Redondo as if the transfer to the Operating Partnership had occurred on January 1, 2000. Additionally, the balance sheet of ASR as of December 31, 2000 has been restated to include the unaudited financial position of Villa Redondo. Villa Redondo's deficit balance is included as an offset to ASR's equity in the accompanying financial statements as of September 30, 2001 and December 31, 2000.
The major activity affecting ASR’s books and records during the period from inception to September 30, 2001 were costs related to the Transaction and the 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 capitalized as debt issuance costs or stock issuance costs upon completion of the Transaction.
Total revenues represented rental income associated with the operations of Villa Redondo Apartments. Rental income for the nine and three months ended September 30, 2001 increased by approximately $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 an increase in occupancy from 90% at September 30, 2000 to 96% at September 30, 2001.
Property operating expenses, which represented costs associated with the 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 ended September 30, 2001, in comparison to the same periods in the prior year. These increases in operating expenses were principally due to, among other factors, higher leasing costs and utilities incurred during the year. Furthermore, rents deemed uncollectible were written -off to bad debt expense in the third quarter.
General and administrative expenses represented costs associated with the ASR. General and administrative expenses for the nine months and three months ended September 30, 2001 totaled approximately $630,000 and $208,000, respectively. No such costs were incurred in the corresponding periods in the prior year as ASR was only recently incorporated.
Depreciation and amortization expenses for the nine and three months ended September 30, 2001 rose by approximately $58,000 or 43%, and by approximately $20,000 or 43%, due to building improvements made at Villa Redondo Apartments and due to equipment purchases made by ASR.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company was in an illiquid position with cash and billed receivables of approximately $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 months ended September 30, 2001, the Company borrowed $2,634,743 from affiliates. These advances are payable to CGS and three of the public limited partnerships. The advances to the three public limited partnerships were guaranteed by CGS, the general partner of the limited partnerships. These funds were primarily used to pay for costs directly attributable to the Transaction, which were capitalized as transaction costs on the balance sheet or expensed, depending on the nature of the expense. These advances were eliminated upon consummation of the Transaction.
The consolidated entity that includes the Company expects to achieve consistent positive cash flow from the effective date of the Transaction forward. Management anticipates the entity created by the Transaction will be able to refinance properties in a favorable interest rate environment, thereby substantially lowering debt service costs. In addition, relatively expensive secondary financing will be retired from the refinancing proceeds, creating further savings. Reduction in the number of entities required to report to the Securities and Exchange Commission from eight prior to the Transaction to one following the Transaction will result in reduced internal staff costs and fees for independent audits. Finally, consolidation of administrative functions into one location is expected to reduce general and administrative costs.
Inflation:
The Company does not expect inflation to be a material factor in its operations in 2001.
SIERRA PACIFIC PENSION INVESTORS ‘84
(a) OVERVIEW
The following discussion should be read in conjunction with the Sierra Pacific Pension Investors ‘84’s (the Partnership) Consolidated Financial Statements and Notes thereto.
The Partnership currently owns one property, Sierra Valencia (the Property). In addition, the Partnership holds an 80.32% interest in Sierra Mira Mesa Partners (SMMP), which is maintained on the equity method of accounting.
(b) RESULTS OF OPERATIONS
Rental income for the nine months ended September 30, 2001 increased by approximately $60,000, or 14%, when compared to the corresponding period in the prior 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 was 100% occupied at September 30, 2001. Rental income for the three months ended September 30, 2001 remained relatively unchanged, increasing by approximately $2,000, or 1%, primarily due to the higher overall occupancy.
Operating expenses increased by approximately $40,000, or 11%, for the nine months ended September 30, 2001, in comparison to the same period in the prior year. This increase was in large part due to higher maintenance and repair costs associated with the increased occupancy of the Property. Further, data processing, insurance, and accounting and auditing costs rose during the period. This increase was partially offset due to write-offs in the third quarter of the prior year of rents receivable deemed uncollectible to bad debt expense. Operating expenses for the three months ended September 30, 2001 decreased by approximately $14,000 or 10%, principally as a result of the prior year bad debt expense. This decrease was partially offset by, among other factors, higher administrative costs incurred during the quarter.
Depreciation and amortization expenses for the nine months and three months ended September 30, 2001 rose by approximately $32,000, or 29%, and by approximately $4,000, or 12%, respectively, when compared to the same periods in 2000, principally due to increased depreciation and amortization on additional tenant improvements and lease costs associated with the increased occupancy of the Property.
The Partnership’s share of unconsolidated joint venture income increased 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 was primarily due to the recovery of rents previously written-off to bad debt and higher common area maintenance fee recovery revenue. SMMP’s increase in income was partially offset by, among other factors, 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 by approximately $82,000 in large part due to SMMP’s higher common area maintenance fee recovery revenue.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Partnership was in an illiquid position. Total cash amounted to approximately $7,000 compared to approximately $136,000 in current liabilities. Cash of approximately $104,000 was used in operating activities and approximately $87,000 was paid for property additions and lease costs during the nine months ended September 30, 2001. The Partnership loaned approximately $413,000 to an affiliate in 2001 relating to the consolidation transaction 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 consolidated entity as discussed in Note 5. The consolidated entity will generate positive cash flow.
Inflation:
The Partnership does not expect inflation to be a material factor in its operations in 2001.
CGS AND THE MAJORITY OWNED AFFILIATES
(a) OVERVIEW
The following discussion should be read in conjunction with the CGS and the Majority-Owned Affiliates (the Company) Combined Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q.
(b) RESULTS OF OPERATIONS
Comparison of the Nine Months and Three Months Ended September 30, 2001 to the Nine Months and Three Months Ended September 30, 2000, respectively.
Total revenues for the nine months ended September 30, 2001 increased by $23,000 or 0.1% to $18,638,000 as compared to $18,615,000 for the nine months ended September 30, 2000. Total revenues for the three months ended September 30, 2001 increased by $503,000 or 9.2% to $5,955,000 as compared to $5,452,000 for the three months ended September 30, 2000.
Revenue from property management operations decreased by $1,488,000 or 28.0% to $3,833,000 for the nine months ended September 30, 2001 as compared to $5,321,000 for the nine months ended September 30, 2000. Revenue from property management operations decreased by $6,000 or 0.7% to $824,000 for the three months ended September 30, 2001 as compared to $830,000 for the three months ended September 30, 2000.
Revenue from property management income decreased, for the nine and three months period ended September 30, 2001, due to the sale of the Company’s operations in California and discontinuance of operations in Arizona during the first quarter of 2001 along with a decrease in property management income in three other locations. The decrease in property management operations resulted from the Company’s decision to wind down 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 nine months ended September 30, 2000. Rental income for the three months ended September 30, 2001 increased by $345,000 or 8.2% to $4,551,000 as compared to $4,206,000 for the three months ended September 30, 2000. The increase in rental income resulted primarily from new tenants moving into the recently remodeled Northwest Corporate Center, higher market rental rates and an increase in overall 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 the Majority-Owned Affiliates will perform no third party management services after the Transaction is completed, all ongoing revenues will be derived from rental income. Substantially all such revenues are earned pursuant to fixed rent commitments since percentage rent income is immaterial. Rental income, as a percentage of total revenues, has increased due to increased occupancy and rent levels and the declining role of third party management and brokerage activities.
Total expenses excluding interest for the nine months ended September 30, 2001 increased by $1,204,000 or 7.5% to $17,197,000 as compared to $15,993,000 for the nine months ended September 30, 2000. Total expenses excluding 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 three months ended September 30, 2000.
Expenses excluding interest, impairment charges, depreciation and amortization for the nine months ended September 30, 2001 increased by $771,000 or 5.7% to $14,198,000 as compared to $13,427,000 for the nine months ended September 30, 2000. Expenses excluding interest, impairment charges, depreciation and amortization for the three months ended September 30, 2001 decreased by $970,000 or 19.3% to $4,050,000 as compared to $5,020,000 for the three months ended September 30, 2000.
Expenses, excluding interest, impairment charges, depreciation and amortization, as a percentage of total 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, impairment charges, depreciation and amortization, as a percentage of total revenues, decreased from 92.1% for the three months ended September 30, 2000 to 68.0% for the three months ended September 30, 2001.
Components of expenses excluding interest, depreciation, and amortization as a percentage of total revenues 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 of revenues, is a result of an increase in bad debt expense associated with the write-off of several uncollectable receivables.
Interest expense decreased by $427,000 or 4.4%, to $9,300,000 for the nine months ended September 30, 2001 as compared to $9,727,000 for the nine months ended September 30, 2000. Interest expense decreased by $92,000 or 2.8%, to $3,200,000 for the three months ended September 30, 2001 as compared to $3,292,000 for the three months ended September 30, 2000. The decrease was attributed to lower interest rates and the refinancing of several loans with more favorable terms.
Net loss increased by $1,239,000 or 16.2%, to $8,877,000 for the nine months ended September 30, 2001 as compared to $7,638,000 for the nine months ended 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 the three months ended September 30, 2001 as compared to $3,703,000 for the three months ended September 30, 2000, primarily due to a decrease in property taxes and in property management operation expenses.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 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. The Company had cash balances totaling $1,226,000 as of September 30, 2001. Cash and cash equivalents on hand as of September 30, 2001 decreased $561,000 when compared to the year ended December 31, 2000. We expect this level of cash flow to increase in the short and long term as a result of the consolidation of the Company with the other entities as described in Note 6 of the financial statements.
Inflation:
The Company does not expect inflation to be a material factor in its operations in 2001.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure or loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. ASR’s exposure to market risk at September 30, 2001 was limited since it had no floating rate debt or holdings of derivative financial or commodity instruments. The primary market risk to which ASR will be exposed upon completion of the Transaction is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond its control.
Sierra Pacific Pension Investors ’84’s exposure to market risk at September 30, 2001 was limited as it had no floating rate debt or holdings of derivative financial or commodity instruments.
CGS’ Qualitative and Quantitative Disclosures about Market Risk contained in ASR’s Form S-4 /A - Amendment No. 5 to Registration Statement filed under the Securities Act of 1933 discusses market rate risk upon consummation of the Transaction.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. These forward-looking statements, although made in good faith, are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in these forward-looking statements. Risks and other factors that might cause such a difference include, but are not limited to, the effect of economic and market conditions; the Company’s ability to refinance mortgage loans to meet its liquidity requirements; other financing risks, such as the ability to obtain debt or equity financing on favorable terms; risks relating to acquisition and development activities; uncertainties affecting real estate businesses in general; and market competition. As such, undue reliance should not be placed on these forward-looking statements. These risks are described in more detail in ASR’s Consent Solicitation Statement/Prospectus dated August 8, 2001. We assume no, and hereby disclaim any, obligation to update any of the foregoing or any other forward-looking statements.
None. However, a lawsuit was commenced against CGS Real Estate Company, Inc. on August 29, 2001 that relates to a mortgage loan secured 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 to litigation. ASR is not a party to the litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDINGS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report be signed on its behalf by the undersigned thereunto duly authorized.
| AMERICAN SPECTRUM REALTY, INC. |
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Date: November 19, 2001 | /s/ Thomas N. Thurber |
| Thomas N. Thurber |