<PAGE> 1
As filed with the Securities and Exchange Commission on November 13, 2000
Registration No. 333-43686
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-4/A
AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-4 UNDER THE SECURITIES
ACT OF 1933
-------------------------
AMERICAN SPECTRUM REALTY, INC.
(Exact name of Registrant as specified in its charter)
6798 52-2258674
(State or other (Primary North American (I.R.S. Employer
jurisdiction Industry Identification No.)
of organization) Classification Number)
1800 East Deere Avenue
Santa Ana, California 92705
949-585-7600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
William J. Carden
Chief Executive Officer
1800 East Deere Avenue
Santa Ana, California 92705
949-585-7600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Peter M. Fass, Esq.
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
(212) 969-3000
-------------------------
Approximate date of commencement of the proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. |_|
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=============================================================================================================
Title of each Class of Amount to be Proposed Maximum Amount of
Securities to be Registered Registered(1) Aggregate Offering Price Registration Fee
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share.... 5,050,014 $ 75,750,210 $ 19,998.06
Notes..................................... $ 55,259,175 $ 55,259,175 $ 0(3)
Total............................. $ 19,998.06(4)
=============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o), promulgated under the Securities Act of 1933, as
amended.
(2) Represents the maximum number of shares of common stock (the "American
Spectrum shares") issuable upon consummation of the transactions described
herein.
(3) Limited partners of the eight limited partnerships will receive American
Spectrum shares or, in certain specified circumstances, may receive notes.
To the extent notes are issued to certain limited partners in lieu of
American Spectrum shares, the proposed maximum aggregate offering price of
the American Spectrum shares will be proportionately reduced. Accordingly,
no further fee is due for the registration of the notes.
(4) The registration fee under this Registration Statement has been previously
paid by The Registrant in connection with the original filing on August
14, 2000.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Anna, California 92705
NOTICE OF CONSENT SOLICITATION TO LIMITED PARTNERS
___________, 2000
<TABLE>
<S> <C>
Sierra Pacific Development Fund Sierra Pacific Pension Investors '84
Sierra Pacific Development Fund II Nooney Income Fund Ltd., L.P.
Sierra Pacific Development Fund III Nooney Income Fund Ltd. II, L.P.
Sierra Pacific Institutional Properties V Nooney Real Property Investors-Two, L.P.
</TABLE>
The general partners of each of the eight limited partnerships listed above,
which we refer to as the limited partnerships or the funds, ask you by this
notice to consent to the following:
Proposed consolidation of your fund by American Spectrum Realty, Inc. As
described in the attached Prospectus/Consent Solicitation, American
Spectrum proposes a consolidation of the funds into American Spectrum.
American Spectrum will issue to each of the limited partners of the funds
a specified number of American Spectrum shares in exchange for their
partnership interests. After the series of transactions in which the funds
will be consolidated into American Spectrum, which we refer to as the
consolidation, American Spectrum will own, through a subsidiary, all of
the assets of the funds, the portion of CGS Realty Inc.'s property
management business which provides property management services to the
funds and the CGS privately held entities. Attached to the supplement for
each fund as Appendix B is the Agreement and Plan of Merger for each fund,
which describes the terms of the consolidation in detail.
Proposed amendments. In addition, limited partners are being asked to vote
on proposed amendments to their agreement of limited partnership. These
amendments are needed to permit the consolidation. A copy of the proposed
amendments is attached as Appendix C to each supplement accompanying this
consent solicitation.
Only the limited partners of the funds holding units at the close of business on
__________ __, 2000 are entitled to notice of and to vote for or against the
proposed consolidation.
By order of Thomas N. Thurber
Secretary
We invite you to vote using the enclosed consent form because it is important
that your interests in your fund be represented. Please sign, date and return
the enclosed consent card in the accompanying postage-paid envelope. You may
also revoke your consent at any time in writing before consents from limited
partners equal to more than 50% of the required vote are received by your fund.
We will mail this Prospectus/Consent Solicitation, which we refer to as the
consent solicitation, to limited partners on or about ___________ __, 2000.
The information in this consent solicitation is not complete and may change.
American Spectrum may not sell the securities described therein until the
registration statement filed with the Securities and Exchange Commission is
effective. This consent solicitation is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state that
prohibits the offer or sale of such securities.
<PAGE> 3
The information in this consent solicitation is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This consent solicitation is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED ___________ __, 2000
PROSPECTUS/CONSENT SOLICITATION STATEMENT
AMERICAN SPECTRUM REALTY, INC.
____shares of common stock, par value $.01 per share, and
___% callable notes, Due _________ __, ____
If you are a limited partner of any of the following funds, your vote is very
important:
<TABLE>
<S> <C>
Sierra Pacific Development Fund Sierra Pacific Pension Investors '84
Sierra Pacific Development Fund II Nooney Income Fund Ltd., L.P.
Sierra Pacific Development Fund III Nooney Income Fund Ltd. II, L.P.
Sierra Pacific Institutional Properties V Nooney Real Property Investors-Two, L.P.
</TABLE>
This document is formally called a Prospectus/Consent Solicitation Statement
because the prospectus also acts as a method through which we are asking for
your consent to transactions that are described in detail in the document. We
refer to this document as the consent solicitation. Through this consent
solicitation and the accompanying supplement for your fund, we, American
Spectrum Realty, Inc., are asking you, as the limited partners of each of the
funds, to vote on whether to approve the proposed consolidation into American
Spectrum of each of the funds listed above, the CGS privately held entities and
the CGS Management Company. In the consolidation, American Spectrum will issue
shares of common stock or, in specified situations, notes in exchange for your
limited partnership units. Limited partners holding in excess of 50% of the
outstanding units in each fund must vote "For" the consolidation on the enclosed
consent form in order for the consolidation of their fund to be consummated. The
general partners of the funds recommend that you vote "For" the consolidation.
This solicitation of consents expires at ___ p.m., Eastern time on
_____________, 2000, unless you are notified that it has been extended.
There are material risks and potential disadvantages associated with the
consolidation as described in "Risk Factors" beginning on page ___. In
particular, you should consider:
o American Spectrum's common stock may trade at prices below the $15
exchange value that we have arbitrarily assigned to the common stock for
purposes of the consolidation.
o After the consolidation, your investment will be subject to market risk
and the price of American Spectrum shares may decline.
o The general partners and their affiliates will receive American Spectrum
shares having a value of $31,396,905, based on the $15 per share Exchange
Value, for assets having a book value of $(35,739,000), and will receive
other benefits from the consolidation, and have interests that may
conflict with those of the limited partners of the funds.
o Limited partners may incur taxes in connection with the transaction.
o If the limited partners of a fund approve the consolidation, the fund can
no longer enter into alternatives to the consolidation, which include the
liquidation of the fund's properties and the distribution of the net
proceeds to the limited partners.
o The partnership agreement of each of the funds prohibits transactions with
affiliates, such as the consolidation with us, and the consolidation could
not close without amendments to the partnership agreement.
<PAGE> 4
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these Securities or passed upon the
accuracy or adequacy of this Prospectus/Consent Solicitation Statement. Any
representation to the contrary is a criminal offense.
This consent solicitation incorporates important business and financial
information about American Spectrum that is not included in or delivered with
this consent solicitation.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the consolidation or would like additional
copies of this consent solicitation or the supplement relating to your fund(s),
you should contact our solicitation firm:
Mackenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Telephone (toll free): (800) 322-2885
To obtain timely delivery, you should request this information no later than
________________, 2000.
The date of this consent solicitation is __________ ____, 2000.
<PAGE> 5
TABLE OF CONTENTS
Page
----
WHO CAN HELP ANSWER YOUR QUESTIONS?........................................vii
SUMMARY......................................................................1
Purpose of this Consent Solicitation...................................1
Description of American Spectrum and the Funds.........................1
American Spectrum................................................1
The Properties.........................................................2
The Funds........................................................2
Risk Factors.....................................................2
Conflicts of Interest and Benefits to General Partners and their
Affiliates...........................................................4
The Consolidation......................................................5
Principal Components of the Consolidation........................5
What You Will Receive if Your Fund Is Included in the
Consolidation..................................................5
American Spectrum Shares Allocated to Funds......................6
Your General Partners' Reasons for Proposing and Recommending
the Consolidation....................................................8
Benefits of Participation in the Consolidation...................8
Why Your General Partners Believe the Consolidation Is
Fair to You....................................................9
Appraisals.......................................................9
Fairness opinion.................................................9
Allocation of American Spectrum Shares..........................10
Alternatives to the Consolidation that Your General
Partners Considered...........................................10
Voting................................................................13
Voting Procedures...............................................13
Amendments to Your Fund's Partnership Agreement.................13
No Rights to Independent Appraisal..............................13
Consolidation Expenses................................................14
Conditions to the Consolidation.......................................14
Your Right to Investor Lists and to Communicate with Other
Limited Partners....................................................14
Federal Income Tax Considerations.....................................14
Qualification of American Spectrum as a REIT....................16
SUMMARY HISTORICAL AND PRO FORMA DATA.................................17
RISK FACTORS..........................................................31
Risk Factors Related to American Spectrum and Risks
Resulting from the Consolidation..............................31
Real Estate/Business Risks............................................36
Tax Risks.............................................................38
BACKGROUND OF AND REASONS FOR THE CONSOLIDATION.............................41
Background of the Funds...............................................41
Investment Objectives of Funds........................................42
Consideration of Liquidation of the Funds and the Decision to
Pursue the Consolidation............................................42
Chronology of the Consolidation.......................................45
Your General Partners' Reasons for Proposing the Consolidation........47
Exchange Value Allocation Of American Spectrum Shares.................49
Determination of Exchange Values......................................49
Allocation of American Spectrum Shares................................55
Allocation of American Spectrum Shares Between Limited
Partners and General Partners.......................................56
Alternatives to the Consolidation.....................................56
Comparison of Alternatives............................................58
i
<PAGE> 6
Page
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RECOMMENDATION AND FAIRNESS DETERMINATION...................................63
General...............................................................63
Material Factors Underlying Belief as to Fairness.....................64
Relative Weight Assigned to Material Factors..........................67
Fairness to Limited Partners Receiving American Spectrum Shares.......67
Fairness in View of Conflicts of Interest.............................67
REPORTS, OPINIONS AND APPRAISALS............................................68
General...............................................................68
Portfolio Appraisal...................................................68
Portfolio of Properties...............................................71
Fairness Opinion......................................................74
THE CONSOLIDATION...........................................................81
Principal Components of the Consolidation.............................81
Conditions to Consolidation.....................................86
Merger Agreements.....................................................86
Approval and Recommendation of the General Partners...................86
Vote Required for Approval of the Consolidation.......................86
Consideration.........................................................87
Estimated Exchange Value of American Spectrum Shares Issuable
to Funds............................................................87
No Fractional American Spectrum Shares................................88
Effect of the Consolidation on Limited Partners Who Vote Against
the Consolidation...................................................88
Effect of Consolidation on Funds Not Acquired.........................88
Consolidation Expenses................................................89
Accounting Treatment..................................................89
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS.....................................................90
CONFLICTS OF INTEREST.......................................................93
Affiliated General Partners...........................................93
Substantial Benefits to General Partners and their Affiliates.........93
Common General Partners...............................................94
Lack of Independent Representation of Limited Partners................94
Terms of the Consolidation with the CGS Privately Held Entities.......94
Non-Arm's-Length Agreements...........................................94
Conflicts of interest in voting limited partnership interests...94
Features Discouraging Potential Takeovers.............................94
COMPARISON OF OWNERSHIP OF UNITS, NOTES AND AMERICAN SPECTRUM SHARES........95
Form of Organization and Purpose......................................95
Length and Type of Investment.........................................96
Business and Property Diversification.................................96
Borrowing Policies....................................................97
Other Investment Restrictions.........................................97
Management Control....................................................98
Fiduciary Duties......................................................99
Management's Liability and Indemnification...........................100
Anti-takeover Provisions.............................................101
Sale ...............................................................101
Merger...............................................................102
Dissolution..........................................................102
ii
<PAGE> 7
Page
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Amendments...........................................................103
Compensation and Fees................................................103
Management Fees......................................................104
Real Estate Disposition Fee..........................................104
Reimbursement of Expenses.....................................105
Review of Investor Lists.............................................106
Nature of Investment.................................................107
Additional Equity/Potential Dilution.................................108
Liability of Investors...............................................109
Voting Rights........................................................109
Liquidity............................................................110
Expected Distributions and Payments..................................111
Taxation of Taxable Investors........................................112
Taxation of Tax-Exempt Investors.....................................113
VOTING PROCEDURES..........................................................114
Distribution of Solicitation Materials...............................114
Required Vote and Other Conditions...................................114
Selected Financial Statements........................................116
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AMERICAN SPECTRUM.............................135
American Spectrum Predecessor........................................135
Subsidiaries.........................................................135
Results of Operations................................................136
Analysis of Liquidity and Capital Resources..........................139
CGS Affiliates.......................................................140
Results of Operations................................................140
Analysis of Liquidity and Capital Resources..........................142
Cash Flows...........................................................142
The Funds............................................................144
Quantitative and Qualitative Disclosures about Market Risk...........144
Interest Rate Risk...................................................144
AMERICAN SPECTRUM'S BUSINESS...............................................145
General..............................................................145
Background and Strategy..............................................145
Credit Facility......................................................147
Acquisition and Investment Policies..................................147
Financing Policies...................................................148
Other Policies.......................................................149
The Properties.......................................................150
PROPERTY OVERVIEW....................................................155
TENANT INFORMATION...................................................159
SIGNIFICANT PROPERTIES...............................................160
MORTGAGE DEBT........................................................162
Environmental Matters................................................164
Insurance............................................................164
Competition..........................................................165
Employees............................................................165
Legal Proceedings....................................................165
iii
<PAGE> 8
Page
----
BUSINESS OF THE FUNDS......................................................165
General..............................................................165
Management Services..................................................165
Description of Properties............................................166
Description of Leases................................................166
Financing............................................................167
Sale of Properties...................................................167
Competition..........................................................168
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................168
AMERICAN SPECTRUM..........................................................168
Investment Policies..................................................168
Financing Policies...................................................169
Miscellaneous Policies...............................................169
Working Capital Reserves.............................................169
THE FUNDS..................................................................169
Investment Policies..................................................169
Financing............................................................170
MANAGEMENT.................................................................170
Directors and Executive Officers.....................................170
Board of Directors...................................................171
Executive Compensation...............................................172
Employment Agreements................................................173
Option and Restricted Share Plans....................................173
Incentive Compensation...............................................174
PRINCIPAL STOCKHOLDERS OF AMERICAN SPECTRUM................................175
RELATED PARTY TRANSACTIONS.................................................176
Transactions Relating to the Consolidation...........................176
Exchange Rights......................................................176
Registration Rights Agreement........................................176
Third Party Management Services......................................176
Other Transactions...................................................176
FIDUCIARY RESPONSIBILITY...................................................177
Directors and Officers of American Spectrum..........................177
General Partners of the Funds........................................178
DESCRIPTION OF CAPITAL STOCK...............................................179
Preferred Stock......................................................179
Ownership Limits and Restrictions on Transfer........................179
Registrar and Transfer Agent.........................................181
DESCRIPTION OF THE NOTES...................................................182
General..............................................................182
Principal and Interest...............................................183
Redemption...........................................................183
Proceeds from Sale of Properties Formerly Owned by the Funds.........184
Proceeds from Refinancings of Properties Formerly Owned by the Funds.184
Limitation on Incurrence of Indebtedness.............................184
Merger, Consolidation or Sale........................................185
Events of Default, Notice and Waiver.................................185
Modification of the Indenture........................................187
Satisfaction and Discharge...........................................188
iv
<PAGE> 9
No Conversion Rights.................................................188
Governing Law........................................................188
FEDERAL INCOME TAX CONSIDERATIONS..........................................189
Material Tax Differences between the Ownership of Units and
American Spectrum Shares...........................................189
Tax Consequences of the Consolidation................................190
Taxation of Noteholders..............................................192
Taxation of American Spectrum........................................193
Taxation of Stockholders.............................................199
State and Local Taxes................................................202
EXPERTS....................................................................202
LEGAL MATTERS..............................................................203
WHERE YOU CAN FIND MORE INFORMATION........................................203
Index to Financial Statements..............................................F-1
v
<PAGE> 10
QUESTIONS AND ANSWERS ABOUT
AMERICAN SPECTRUM REALTY, INC.'S
CONSOLIDATION OF THE FUNDS
Q: What is the proposed consolidation that I am being asked to vote upon?
A: You are being requested to approve the consolidation transaction in
which your fund will merge into American Spectrum. Your fund is one of
eight funds that will merge with us as part of the consolidation. As part
of the consolidation, we will also consolidate with privately held
entities owned or controlled by CGS Realty Inc. Through the consolidation,
we intend to combine the properties of the funds and the CGS privately
held entities . If the consolidation is approved by all of the funds, we
will own 35 office, office/warehouse, apartment and shopping center
properties. However, we do not know which funds will approve the
consolidation and the exact makeup of our properties.
Q: What will I receive if I vote in favor of the consolidation and it is
approved by my fund?
A: If you vote in favor of the consolidation and the consolidation is
approved by your fund and a minimum number of the other funds, you will
receive shares of American Spectrum common stock in exchange for the units
of limited partnership interest that you own in your fund.
Q: Why are we proposing the consolidation?
A. We and your general partners believe that the consolidation is the best
way for limited partners to achieve liquidity and maximize the value of
their investment in the funds. We believe that a consolidation is better
for limited partners than other alternatives including liquidation of your
fund and distribution of the net proceeds. The American Spectrum shares
will be listed for trading on _____________. There is no active trading
market for the limited partnership units in your fund. In addition,
limited partners will participate in future growth of American Spectrum.
Limited partners will also receive distributions on their American
Spectrum shares.
Q: How many American Spectrum shares will I receive if my fund is acquired by
American Spectrum?
A: The number of American Spectrum shares that will be allocated to each
fund in the consolidation is set forth in the chart on page ___ under the
caption "Summary--The Consolidation--American Spectrum Shares Allocated to
the Funds." You will receive your proportion of the shares allocated to
your fund based on the percentage of the limited partnership interests
held by you.
Q: If my fund consolidates with American Spectrum, may I choose to receive
something other than American Spectrum shares?
A: Yes, subject to the limitations described under the caption
"Description of the Notes". If you vote "Against" the consolidation, but
your fund is nevertheless consolidated with us, you may elect to receive
notes due ________ ___, _____. The principal amount of the notes will be
based on the estimated liquidation value of your fund. The notes will bear
interest at a fixed rate equal to ______%. The interest rate is equal to
120% of the applicable federal rate on ________ ___, 2000.The notes will
be prepayable by us at any time. You may only receive the notes if you
vote "Against" the consolidation and you elect to receive notes on your
consent form if the consolidation is approved.
Q: Who can vote on the consolidation? What vote is required to approve the
consolidation?
vi
<PAGE> 11
A: Limited partners of each fund who are limited partners at the close of
business on the record date of _____________ __, 2000 are entitled to vote
for or against the proposed consolidation.
Limited partners holding units constituting greater than 50% of the
outstanding units of a fund must approve the consolidation. Approval by
the required vote of your fund's limited partners in favor of the
consolidation will be binding on you even if you vote against the
consolidation.
Q: How do I vote?
A: Simply indicate on the enclosed consent form how you want to vote, then
sign and mail it in the enclosed return envelope as soon as possible so
that your units may be voted "For" or "Against" the consolidation of your
fund with us. If you sign and send in your consent form and do not
indicate how you want to vote, your consent will be counted as a vote in
favor of the consolidation. If you do not vote or you indicate on your
consent form that you abstain, it will count as a vote "Against" the
consolidation. If you vote for the consolidation, you will effectively
preclude other alternatives, such as liquidation of your fund.
Q: Can I change my vote after I mail my consent form?
A: Yes, you can change your vote at any time before consents from limited
partners equal to more than 50% of the required vote are received by your
fund. You can do this in two ways: you can send us a written statement
that you would like to revoke your consent, or you can send us a new
consent form. Any revocation or new consent form should be sent to
______________________, our vote tabulator.
Q: In addition to this consent solicitation, I received a supplement. What is
the difference between the consent solicitation and the supplement?
A: The purpose of this consent solicitation is to describe the
consolidation generally and to provide you with a summary of the
investment considerations generic to all of the funds. The purpose of the
supplement is to describe the investment considerations particular to your
fund.
After you read this consent solicitation, we urge you to read the
supplement. The supplement contains information unique to your fund. This
information is material in your decision whether to vote "For" or
"Against" the consolidation.
Q: When do you expect the consolidation to be completed?
A: We plan to complete the consolidation as soon as possible after the
receipt of your approval and the approval of the other limited partners of
the funds. It is expected that the consolidation will be consummated in
the _________ quarter of ____, and we have required that it be completed
no later than __________ __, ____. Your consent form must be received by
________________________, unless we extend the solicitation period. We
reserve the right to extend the solicitation period for a particular fund
even if a quorum has been obtained under the funds' partnership agreement.
We may extend the solicitation period if we have not received sufficient
consents to approve the consolidation.
vii
<PAGE> 12
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you have more questions about the consolidation or would like additional
copies of this Consent Solicitation or the Supplement relating to your fund(s),
you should contact our solicitation firm:
Mackenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Telephone (toll free): (800) 322-2885
viii
<PAGE> 13
--------------------------------------------------------------------------------
SUMMARY
This Summary highlights information contained elsewhere in this consent
solicitation, and may not contain all of the information regarding the
consolidation that is important to you. To understand the consolidation fully
and for a more complete description of the terms of and risks related to the
consolidation, you should read carefully this entire consent solicitation, the
accompanying supplement relating to your fund and the other documents to which
we have referred you, including documents incorporated into this consent
solicitation by reference. See "Where You Can Find More Information" on page
____.
Purpose of this Consent Solicitation
You are being requested to approve the consolidation transaction in which
your fund will merge into American Spectrum. Your fund is one of eight funds
that will merge with American Spectrum as part of the consolidation. In
addition, as part of the consolidation, American Spectrum will own properties
held by CGS and privately held entities organized by CGS, which we refer to as a
group as the CGS privately held entities. American Spectrum will also own the
portion of CGS's property management business which manages properties of the
funds and the CGS privately held entities, which we refer to as the CGS
Management Company. A fund will only participate in the consolidation if limited
partners holdings more than 50% of the limited partnership units vote in favor
of the consolidation.
Description of American Spectrum and the Funds
American Spectrum
We are a newly organized Maryland corporation. We will acquire the assets
of CGS and its affiliates. CGS Real Estate Company, Inc. was merged into us in
_________, 2000. CGS acquired interests in the general partners of your funds in
1994 and 1997 and manages the funds. In addition, CGS and privately-held
entities it organized invest in real estate. After the consolidation, we will be
managed by our officers and directors and will not have an outside advisor or
manager. We will own and operate 35 properties located in nine states upon
completion of the consolidation. The properties include 12 office properties, 11
office/warehouse properties, five apartment properties, five shopping centers,
one mixed use property and one parcel of development land. The information about
our properties assumes that all of the funds approve the consolidation. We plan
to expand our business by acquiring additional properties. We expect to focus
primarily on the acquisition of office, office/warehouse and apartment
properties located in the midwestern and western United States, Texas and the
Carolinas.
We intend to qualify as a real estate investment trust and elect to be
treated as a real estate investment trust, or REIT, beginning in 2002. In
general, a REIT is a company that owns or provides financing for real estate and
pays annual distributions to investors of at least 90% of its taxable income. A
REIT typically is not subject to federal income taxation on its net income,
provided applicable income tax requirements are satisfied. This tax treatment
substantially eliminates the double taxation that generally results from
investments in a corporation. Double taxation means that taxes are imposed both
at the corporate and stockholder level.
American Spectrum's address and telephone number are 1800 East Deere
Avenue, Santa Ana, California 92705, (949) 585-7600. Any questions regarding the
consolidation should be directed to the solicitation firm that is assisting us,
Mackenzie Partners, Inc., 156 Fifth Avenue, New York, New York 10010, telephone
(toll free): (800) 322- 2885.
--------------------------------------------------------------------------------
1
<PAGE> 14
--------------------------------------------------------------------------------
The Properties
The following table indicates the distribution by type and the
geographical distribution of the properties, assuming all of the funds approved
the consolidation. However, the actual properties that will be owned is unknown,
because we do not know which funds will vote for the consolidation:
<TABLE>
<CAPTION>
Total Estimated
Type of Property Number of Properties Property Value (1)
---------------------------------- -------------------- ------------------
<S> <C> <C>
Office buildings 12 $ 54,030,000
Office/warehouse buildings 12 141,630,000
Apartment properties 5 66,130,000
Shopping centers 5 17,120,000
Land Held for Development 1 3,800,000
-------------------- ------------------
TOTAL 35 $282,710,000
==================== ==================
</TABLE>
(1) Based on the appraisals prepared by Robert A. Stanger & Co. Inc. The
appraisals were prepared by Stanger as of March 31, 2000.
The Funds
The funds are limited partnerships formed from 1979 to 1985 to invest in
office, office/warehouse and shopping center properties. The funds originally
intended to dispose of their properties and liquidate between 1986 and 1989. CGS
acquired the general partners of the funds in 1994 and 1997. As of December 31,
1999, the funds owned 18 office, office/warehouse and shopping center properties
located in eight states. Subsidiaries of CGS manage the funds' properties. The
following is a list of the funds:
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors-Two, L.P.
Risk Factors
The following is a summary of some of the potential risks involved in the
consolidation. The risks are more fully discussed beginning on page __ in "Risk
Factors". You should consider these risks in determining whether to vote in
favor of the consolidation.
o Because there has not been a public market for the units in your
fund, upon their exchange for American Spectrum shares, your
investment will be subject to market risk and the trading price of
the American Spectrum shares may fluctuate significantly.
o We have arbitrarily selected an Exchange Value per share of $15 for
purposes of allocating the American Spectrum shares among the funds,
the CGS privately held entities, and the CGS Management Company in
the consolidation. Once listed on the _________, the American
Spectrum shares are likely to trade below $15.00.
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<PAGE> 15
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o REIT stocks have underperformed the broader equity market in 1998
and 1999. Future market conditions for REIT stocks could affect the
market price of American Spectrum shares.
o The consolidation of your fund into American Spectrum involves a
fundamental change in the nature of your investment. These changes
include the following:
o If your fund approves the consolidation, you will no longer
hold an interest in a fund that has a fixed portfolio of
properties.
o The funds are required to distribute the proceeds of any
property sales. We intend to reinvest the proceeds of any
future sales of our properties.
o We plan to raise additional funds through equity or debt
financings to make future acquisitions of properties. We may
invest in types of properties different from those in which
your fund invests.
o American Spectrum's predecessor incurred losses for 1997, 1998 and
1999 and the six months ending June 30, 2000. Additionally, we
incurred losses on a pro forma basis for 1999 and the first six
months of 2000. We cannot assure you that we will become profitable.
o We intend to continue CGS's strategy of investing in properties that
we believe are under-valued. Our success will depend on future
events that increase the value of the properties. As a result, this
strategy has greater risks than investing in properties with proven
cash flows.
o We will have more indebtedness and greater leverage than the funds.
We currently have a ratio of total indebtedness to total assets of
67% and we intend to increase this ratio. These higher debt levels
will subject American Spectrum to increased risk of default, which
could adversely affect American Spectrum's operating results and
distribution.
o The partnership agreement of each of the funds prohibits
transactions with affiliates, such as the consolidation with us, and
the consolidation could not close without amendments to the
partnership agreement.
o Stanger's fairness opinion only addressed the allocation of the
shares (i) between the funds as a group and the CGS privately held
entities and the CGS Management Company and (ii) among the funds.
The fairness opinion did not address the market value of the
American Spectrum shares or notes you receive or the fairness of all
combinations of funds.
o We do not intend to qualify as a REIT until 2002 and are not
required to qualify as a REIT. If we do not qualify as a REIT, we
will be subject to a corporate income tax, which could decrease cash
available for distribution.
o All of the funds other than Sierra Pacific Development Fund III and
Nooney Real Property Investors- Two, L.P. intend to report the
consolidation on the basis that no gain is recognized. We cannot
assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the
IRS prevails, your fund will recognize gain, you will be allocated
your share of the gain and you will not receive cash with which to
pay the liability. See "Tax Risks."
o Sierra Pacific Development Fund III and Nooney Real Property
Investors-Two, L.P. will recognize gain for tax purposes equal to
the amount by which the liabilities assumed in the consolidation
exceed the bases of the assets transferred. Limited partners in
these funds will be allocated their
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3
<PAGE> 16
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share of the gain. In addition, limited partners in these funds may
have the additional tax liability referred to in the preceding
paragraph if the IRS challenges the tax treatment of the
consolidation.
o We urge you to consult with your tax advisor to evaluate the taxes
that will be incurred by you as a result of your participation in
the consolidation.
o Your ability to utilize passive losses from your fund to offset
income derived from your investment in the fund and passive income
from other investments will no longer be available.
Conflicts of Interest and Benefits to General Partners and their Affiliates
As a result of the consolidation, the general partners of the funds will
receive benefits and may also have conflicts of interest as a result of the
consolidation. These conflicts and benefits include:
o The general partners and their affiliates will receive the following
if the consolidation is consummated:
o Affiliates of the general partner will receive 72% of the interests
in us in the form of limited partnership interests in a subsidiary
of American Spectrum. As a result, they will not have tax liability
without cash on the limited partnership interests they receive.
o 2,093,127 American Spectrum shares, including shares issuable
in exchange for limited partnership interests in a subsidiary
limited partnership representing a total of 30% of the
outstanding American Spectrum shares in exchange for their
interests in the CGS privately held entities, the CGS
Management Company and limited partnership interests in the
funds. The shares in American Spectrum have a value of
$31,396,900, based on the Exchange Value of $15 per share. The
assets contributed by them have a book value of $(35,739,000).
o Following the consolidation, some officers and directors of your
general partners will serve as officers and directors of American
Spectrum. They will be entitled to receive salary, bonuses and
restricted stock options. These benefits are likely to exceed the
benefits that they would derive from the funds if the consolidation
does not occur.
o Salaries initially equal to $480,000 per annum in the
aggregate and additional bonuses in amount not yet determined.
o Restricted stock grants having a value of $262,500 based on
the Exchange Value of $15 per share, and stock options to
purchase 25,000 shares at the Exchange Value of $15 per share
or the fair market price of the American Spectrum shares on
the date of grant.
o $11,713,000 of indebtedness payable by the general partners and
their affiliates, of which $10,800,000 is guaranteed by Messrs.
Carden and Galardi, will become our obligation. They will no longer
be responsible for paying these amounts.
o The CGS privately held entities owe approximately $200,000 to
a law firm of which one of the independent directors, Timothy
R. Brown, is a member. American Spectrum will be responsible
for this debt and will repay the debt following the
consummation of the consolidation.
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The Consolidation
Principal Components of the Consolidation
The consolidation will consist of the following principal components:
o The funds will merge into American Spectrum. As a result, we will
own each funds' properties and we will be responsible for each
fund's liabilities.
o Only funds which approve the merger will merge into American
Spectrum. If all funds approve the merger and participate, we will
own 18 properties currently owned by the funds.
o As part of the consolidation, the CGS privately held entities will
merge with us. The CGS privately held entities consist of the
following:
(i) various partnerships, corporations, and limited liability
companies in which William J. Carden, John N. Galardi and
members of their families hold more than 50% of the interests
which collectively own 14 properties; and
(ii) three other limited partnerships or limited liability
companies in which affiliates of CGS are the general partners
or managing members and which collectively own three
properties.
The CGS privately held entities own a total of four shopping center,
five office, two office/warehouse, and five apartment properties and
one parcel of land held for development.
o The assets acquired in the consolidation will be held by either a
subsidiary limited partnership, which we refer to as the Operating
Partnership, or a subsidiary of the Operating Partnership.
o We will own the portion of CGS's management company business which
provides management services to the funds and the CGS privately held
entities. We refer to this business as the CGS Management Company.
The balance of CGS's management company business provides management
services to third parties. We refer to this business as the Third
Party Management Company. The Third Party Management Company will
not be owned by us and will continue to be operated separately by
affiliates of CGS.
o We will issue either American Spectrum shares or limited partnership
interests in the Operating Partnership in exchange for the CGS
privately held entities and the CGS Management Company. Each limited
partnership interest in the Operating Partnership provides the same
rights to distributions as one American Spectrum share and is
exchangeable for an American Spectrum share.
We expect that the consolidation will be consummated in the ________
quarter of ____, and we and the general partners of the funds have required that
it be completed no later than ________________ ___, _____.
What You Will Receive if Your Fund Is Included in the Consolidation
If the consolidation is approved by the limited partners of your fund and
consummated, you will receive American Spectrum shares as consideration for your
units. However, if you vote against the consolidation of your fund with American
Spectrum, you can elect to receive notes instead of American Spectrum shares, as
described below.
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o American Spectrum Shares. You will receive American Spectrum shares
for your units unless you vote "Against" the consolidation and
specifically elect to receive notes.
We determined the number of American Spectrum shares that you will
receive as follows: We first determined the Exchange Value of each
of the funds, the CGS privately held entities and the CGS Management
Company. The Exchange Value of the funds and the CGS privately held
entities were determined based in part on an appraisal prepared by
Stanger. The appraised values were then adjusted for other assets
and liabilities of the entities and an allocation of the
consolidation expenses. The Exchange Value for the CGS Management
Company was determined by us based on valuation methods we believe
are reasonable. The sum of these values is the Exchange Value of all
of our assets and business. To allocate the shares, we arbitrarily
selected a $15 per share Exchange Value. We did not consult with any
independent third parties in selecting $15. We allocated to each
fund a number of American Spectrum shares equal to the Exchange
Value of its assets divided by $15. In accordance with each fund's
partnership agreement, all of the American Spectrum shares were
allocated to the limited partners. Thus, each American Spectrum
share represents $15 of Exchange Value, which is our estimate of
American Spectrum's net asset value. Since the market may not value
the American Spectrum Shares as having a value equal to our
estimated net asset value, the American Spectrum shares may trade at
price of less than $15 per share.
o Notes. If your fund approves the consolidation, you can receive
notes instead of American Spectrum shares. If you have voted
"Against" the consolidation, and you do not wish to own American
Spectrum shares, you can elect to receive your portion of the
consideration in the form of notes due __________ __, _____. The
notes issued to you will have a principal amount equal to the
estimated amount that the limited partners would receive upon an
orderly liquidation of your fund's properties under the partnership
agreement governing your fund. We based the liquidation value in
part upon an independent appraisal prepared by Stanger. The
principal amount of the notes equals 96.14% of your portion of the
Exchange Value of the American Spectrum shares that would otherwise
have been paid to your fund. The notes will bear interest at __% and
will mature on ____________ __, eight years after consummation of
the consolidation. The notes may be redeemed by us at any time. For
a discussion of the terms and conditions of the notes, see
"Description of the Notes," page __.
American Spectrum Shares Allocated to Funds
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares."
The following table sets forth for each fund: (i) the number of American
Spectrum shares to be allocated to that fund; (ii) the Exchange Value of
American Spectrum shares to be allocated to that fund; and (iii) the estimated
value of American Spectrum shares, based on the Exchange Value per share of $15,
you will receive for each $1,000 of your original investment; and (iv) the GAAP
book value of the assets contributed per $1000 of your original investment:
<TABLE>
<CAPTION>
Exchange Value GAAP Book
Number of of American Value June 30, Percentage
American Spectrum Shares 2000 per of Total
Spectrum Exchange Value per Average Average Percentage American
Shares of American $1,000 Original $1,000 of Total Spectrum
Allocated to Spectrum Limited Partner Original Exchange Shares
Fund(1) Shares Investment(2) Investment Value Issued(3)
----------------------------- ------------ -------------- --------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sierra Pacific Development
Fund 408,338 $ 6,125,068 $ 417.32 $ 84.42 5.89% 5.89%
Sierra Pacific Development
Fund II 803,077 12,046,149 554.43 525.13 11.58 11.58
</TABLE>
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<TABLE>
<CAPTION>
Exchange Value GAAP Book
Number of of American Value June 30, Percentage
American Spectrum Shares 2000 per of Total
Spectrum Exchange Value per Average Average Percentage American
Shares of American $1,000 Original $1,000 of Total Spectrum
Allocated to Spectrum Limited Partner Original Exchange Shares
Fund(1) Shares Investment(2) Investment Value Issued(3)
----------------------------- ------------ -------------- --------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sierra Pacific Development
Fund III 19,910 298,657 32.68 (39.50) 0.29% 0.29%
Sierra Pacific Institutional
Properties V 276,735 4,151,028 539.50 267.87 3.99 3.99
Sierra Pacific Pension
Investors '84 1,326,702 19,900,534 1,032.90 494.12 19.13 19.13
Nooney Income Fund Ltd.,
L.P. 699,267 10,489,005 690.98 368.25 10.08 10.08
Nooney Income Fund Ltd.
II, L.P. 1,049,093 15,736,391 818.71 451.42 15.13 15.13
Nooney Real Property 537,610 8,064,150 672.01 (33.19) 7.75 7.75
Investors-Two, L.P.
</TABLE>
----------
(1) The American Spectrum shares issuable to limited partners of each fund as
set forth in this chart will not change if American Spectrum acquires
fewer than all of the funds in the consolidation. This number assumes that
none of the limited partners of the fund has elected the notes option. We
determined the number of shares issued to each fund or entity by dividing
the Exchange Value for the fund or entity by $15, which is our estimate of
the net asset value per share of the American Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by us.
The Exchange Value of each of the funds is our estimate of net asset value
of the fund's assets. The Exchange Value equals (i) the appraised value of
each fund's real estate assets, as determined by Stanger; plus (ii) the
estimated realizable value of non- real estate assets of each fund; minus
(iii) mortgage and other indebtedness of each fund; and minus (iv) each
fund's allocable share of consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which the
American Spectrum shares will trade on the _________ may be at prices
below $15.
(3) Includes limited partnership interests issued to the owners of the CGS
privately held entities.
Why we are showing a $1,000 original investment. You may have originally
invested more or less than $1,000 in your fund. We used a $1,000 original
investment because it is easier to illustrate the values with a round number. In
order to determine the approximate value of American Spectrum shares you will
receive if your fund is acquired in the consolidation, you would multiply the
figure in the last column (titled "Exchange Value of American Spectrum Shares
per average $1,000 Original Limited Partner Investment") by the amount of your
original investment divided by $1,000. Thus, for example, if you originally
invested $5,000 in Sierra Pacific Development Fund, you would multiply $417.32
by 5 (equal to $5,000 divided by $1,000), which would result in your receiving
an estimated value of $2,086.60 in American Spectrum shares in the
consolidation.
Why the American Spectrum Shares may trade at prices below the Exchange
Value. The aggregate Exchange Value was determined based on the appraised value
of the real estate assets proposed to be included in the fund and our valuation
of the CGS Management Company. The Exchange Value per share of $15 is equal to
the aggregate Exchange Value divided by the number of outstanding American
Spectrum shares. The market may not view the value of the American Spectrum
shares as equal to the Exchange Value per share and the American Spectrum shares
may trade at a lower price.
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Affiliates of your general partners also will receive American Spectrum
shares in the consolidation. Affiliates of the general partners of your fund
also will receive American Spectrum shares or limited partnership interests in
the Operating Partnership in exchange for their limited partnership interests in
the funds.
Your General Partners' Reasons for Proposing and Recommending the Consolidation
Your general partners proposed the consolidation and recommend that you
vote "For" approval of the consolidation. They believe that the consolidation of
your fund into American Spectrum is the best way to maximize the value of your
investment. They believe that the consolidation will likely result, over time,
in higher values for limited partners of the funds than if the properties were
sold individually and the funds were liquidated. However, you should note that
affiliates of your general partners will receive substantial benefits from the
consolidation and, accordingly, your general partners have conflicts of
interest.
Benefits of Participation in the Consolidation
We believe that the consolidation will provide you with the following
benefits:
o Growth Potential. Unlike your fund, American Spectrum plans to make
additional investments and obtain additional financing. As a result,
we believe that there is greater potential for increases in the
price of your American Spectrum shares over time and increased
distributions to you as an American Spectrum stockholder. We believe
that opportunities exist to acquire properties and obtain debt
financing on favorable terms.
o Liquidity. We believe the consolidation may provide you with
increased liquidity. The market for the units that you own is very
limited. Your units are not listed on an exchange. American Spectrum
shares will be listed on the _________. You will be a stockholder of
a company that would be estimated to have total real estate assets
of approximately $283,000,000 and more than 15,000 stockholders,
assuming American Spectrum consolidates with all of the funds.
Therefore, you may have the ability to find more buyers for your
American Spectrum shares and the price you receive is more likely to
be the market price.
o Regular Cash Distributions. We expect to make regular cash
distributions to our shareholders. We believe that these
distributions will increase over time or as a result of future
acquisitions.
o Greater Access to Capital. We will have publicly-traded equity
securities, greater assets and a larger equity value than any of the
funds individually. As a result, American Spectrum expects to have
greater access to debt and equity financing to fund its operations
and make acquisitions.
o Risk Diversification. We will own a larger number of properties and
have a broader group of property types, tenants and geographic
locations than your fund. This increased diversification will reduce
the dependence of your investment upon the performance of a
particular property.
o Cost Savings. The combination of the funds under the ownership of
American Spectrum will result in cost savings. For example, because
the funds are public entities subject to the reporting requirements
of the U.S. Securities and Exchange Commission, or SEC, the
combination of the funds into a single public company in American
Spectrum would reduce the costs of compliance with SEC reporting
requirements. In addition, if your fund is acquired, we will no
longer have to supply a Schedule K-1 to you and each of the other
limited partners for your tax reporting.
o Greater Reduction of Conflicts of Interest. We will be managed by
our officers and directors. We will not have an outside advisor.
This structure eliminates fees paid to outside advisors, reduces
conflicts of interest and aligns the interests of the stockholders
and management.
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Why Your General Partners Believe the Consolidation Is Fair to You
Your general partners believe that the terms of the consolidation are
fair, and that they will maximize the return on your investment for the
following principal reasons:
o Your general partners believe that the expected benefits of the
consolidation to you outweigh the risks and potential detriments of
the consolidation to you. Some of those benefits are described
above. The risks and potential detriments are discussed beginning on
page ___.
o Your general partners reviewed the estimated value of the
consideration to be received by you if your fund is consolidated
with American Spectrum, and compared it to the consideration that
you might have received under the alternatives to the consolidation.
Your general partners considered the continuation of the funds
without change and the liquidation of the funds and the
distributions of the net proceeds to you (as described below). They
concluded that over time the likely value of American Spectrum
shares would be higher than the value of the consideration you would
receive if they selected one of the other alternatives.
o Your general partners considered that you may vote for or against
the consolidation, and, if you vote against it, you may elect to
receive either American Spectrum shares or notes if your fund
approves the consolidation.
o Your general partners considered the availability of the notes
option. The notes option gives limited partners increased procedural
fairness by providing an alternative to limited partners. The notes
provide greater security of principal, a certainty as to maturity
date, and regular interest payments. In contrast, the American
Spectrum shares permit the holders of the American Spectrum shares
to participate in American Spectrum's potential growth and are a
more liquid investment.
o Your general partners have adopted the conclusions of the fairness
opinion and appraisals rendered by Stanger, which are described
below.
Appraisals
Stanger has provided an appraisal of the portfolios of properties owned by
each of the funds and by the CGS privately held entities. The appraisal was
prepared on a limited scope basis. In performing the appraisals, Stanger
conducted investigations and inquiries as it deemed appropriate in establishing
its estimates of value and made assumptions and identified qualifications and
limitations that it considered necessary in its findings. The portfolio
appraisal represents Stanger's opinion of the estimated value of the portfolios
of properties owned by each of the funds and by the CGS privately held entities
as of March 31, 2000. They do not necessarily reflect the sales prices of the
portfolios that would be realized in actual sales of the portfolios. These
prices could be higher or lower than the appraised value of the portfolios. Your
general partners determined the Exchange Values for each of the funds and the
CGS privately held entities by adding to the appraised value the realizable
value of non-real estate assets and deducting liabilities and each fund's share
of the costs of the consolidation. There is no separate appraisal of the CGS
Management Company's business or assets. See "Reports, Opinions and Appraisals."
Fairness opinion
Stanger has provided a written summary of its determination as to the
fairness, from a financial point of view, to the limited partners of the funds,
of the allocation of American Spectrum shares (i) between the funds and the CGS
privately held entities and the CGS Management Company, and (ii) among the
funds. The fairness opinion is attached as Appendix A to the supplement that
accompanies this consent solicitation. You should read Stanger's opinion in its
entirety with respect to the assumptions made, matters considered and limits of
the reviews undertaken by Stanger in rendering its opinion.
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Based on the analysis more fully described under "Reports, Opinions, and
Appraisals -- Fairness opinion," and subject to the assumptions, limitations and
qualifications discussed in this consent solicitation and in its fairness
opinion, Stanger concluded that the allocation of American Spectrum shares (i)
between the funds and the CGS privately held entities and the CGS Management
Company, and among the funds, is fair to the limited partners of the funds from
a financial point of view.
You should note, however, that Stanger did not express any opinion as to:
o the relative value of American Spectrum shares and notes to be
issued in the consolidation;
o the impact, if any, on the trading price of American Spectrum shares
resulting from the decision of limited partners to select notes or
American Spectrum shares or sell the American Spectrum shares in the
market following consummation of the consolidation; and
o the prices at which the American Spectrum shares or notes may trade
following the consolidation or the trading value of American
Spectrum shares or notes to be received compared with the current
fair market value of the fund's portfolios and other assets if
liquidated.
o alternatives to the consolidation or any other terms of the
consolidation other than the allocations.
Allocation of American Spectrum Shares
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (i) between the funds, the CGS
privately held entities and the CGS Management Company, and (ii) among the
funds, based upon the Exchange Values of each of the funds, the CGS privately
held entities and the CGS Management Company. The general partners believe that
the Exchange Values of the funds, the CGS privately held entities and the CGS
Management Company, represent fair estimates of the value of their assets, minus
liabilities and allocable expenses of the consolidation, as of June 30, 2000.
The general partner believes that the Exchange Values are a reasonable basis for
allocating the American Spectrum shares in the consolidation.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares."
Under the partnership agreement, the general partners are not entitled to
any of the American Spectrum shares issuable to the funds. Accordingly, all of
the American Spectrum shares issuable to the funds are allocated to the limited
partners.
Alternatives to the Consolidation that Your General Partners Considered
In determining whether to propose and recommend the consolidation
proposal, your general partners considered two principal alternatives to the
consolidation that could have been pursued by each fund: (i) continuation of
each fund pursuant to its existing partnership agreement and (ii) liquidation of
each fund.
Benefits and Disadvantages of Continuation Alternative. Continuing each
fund without change would have the following potential benefits:
o Your fund would not be subject to the risks associated with the
ongoing operations of American Spectrum. Instead each fund would
remain a separate entity with its own assets and liabilities;
o You would continue to be entitled to the safeguards of your
partnership agreement;
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o Your fund's performance would not be affected by the performance of
the other funds and assets that American Spectrum will acquire in
the consolidation;
o Eventually, your fund would liquidate its holdings and distribute
the net proceeds in accordance with the terms of your fund's
partnership agreement;
o There would be no change in your voting rights or your fund's
operating policies;
o Your fund would not incur its share of the expenses of the
consolidation, ranging from approximately $15,029 to $423,840,
depending on the size of the fund;
o For federal income tax purposes, income from your fund may, under
certain circumstances, be offset by passive activity losses
generated from your other investments; you will not lose the ability
to deduct passive losses from your investment in American Spectrum;
and
o You would not be subject to any immediate federal income taxation
that might otherwise be incurred by you from the consolidation.
We believe that maintaining the funds as separate entities would have the
following disadvantages:
o The majority of the funds' administrative expenses are fixed, and as
the properties are sold, we do not expect the funds to make
distributions out of operating cash flow;
o Since the funds are not authorized to make additional investments,
the funds will not benefit from investing in new properties;
o Your investment would continue to be illiquid because the units are
not freely transferable and there is no established public trading
market or market valuation for units;
o Your fund's properties are less diversified than those of American
Spectrum. Therefore, the loss of a major tenant or an economic
downturn in the region where a property is located would have a
greater impact on your fund's ability to make distributions than it
would on American Spectrum; and
o Your fund would continue to be managed by an outside advisor. Your
fund would also continue to pay a management fee.
Benefits and Disadvantages of Liquidation Alternative. As an alternative
to the consolidation, each fund could dissolve and liquidate by selling its
properties and other assets, paying off its existing liabilities not assumed by
the buyer and distributing the net sales proceeds to you and the other partners.
The liquidation alternative would have the following potential benefits:
o Liquidation provides liquidity to you as properties are sold. You
would receive the net liquidation proceeds received from the sale of
your fund's assets.
o The amount that you would receive would not be dependent on the
stock market's valuation of American Spectrum.
o You would avoid the risks of continued ownership of your fund and
ownership of American Spectrum.
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Your general partners do not believe that liquidation would be as
beneficial to you as the consolidation for the following reasons:
o Your general partners believe that an aggressive liquidation of
individual properties could result in sales prices significantly
below appraised values. Your general partners believe that a gradual
sale of the properties likely would involve higher administrative
costs and greater uncertainty. Either of these would reduce the
portion of net sales proceeds available for distribution to you;
o You would not participate in increases in value resulting from
American Spectrum's future acquisitions;
o Your general partners believe that, over time, the value of the
American Spectrum shares will exceed the net proceeds that you would
receive from a liquidation of your funds' properties. However, you
should note that REIT stocks have underperformed the broader equity
market in 1998 and 1999 and in some cases REIT shares are trading at
a discount to the REIT's net asset value.
In order to assist you in evaluating these alternatives, please review the
supplement. The supplement contains estimates of the value of your investment if
your fund continues in operation without change and of the net liquidation
proceeds that might be available if your fund were liquidated. The methodology
and assumptions used to determine these estimated values are explained in the
supplements.
The following table summarizes the results of the general partners'
comparison of alternatives:
Comparison of Alternatives
(Per $1,000 Investment)
<TABLE>
<CAPTION>
Estimated
Estimated Going- Liquidation Exchange Principal Amount
Concern Value(1) Value(2) Value(3) of Notes
-------------------------- ------------------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C>
Sierra Pacific
Development Fund $340.00 - $370.00 $386.00 $400.27 $386.00
Sierra Pacific
Development Fund II 456.00 - 536.00 548.00 581.17 548.00
Sierra Pacific
Development Fund III 27.80 - 30.08 44.56 47.08 44.56
Sierra Pacific
Institutional Properties V 436.00 - 516.00 620.00 639.51 620.00
Sierra Pacific
Pension Investors '84 808.00 - 900.00 920.00 944.78 920.00
Nooney Income
Fund Ltd., L.P. 520.00 - 585.00 661.00 675.28 661.00
Nooney Income
Fund Ltd. II, L.P. 663.00 - 758.00 764.00 796.82 764.00
Nooney Real Property
Investors-Two, L.P. 566.00 - 624.00 638.00 681.81 638.00
</TABLE>
----------
(1) We determined the Estimated Going Concern Value by estimating the cash
flow from each entity, applying a range of discount rates to the cash flow
and assuming that the properties are sold after 10 years.
--------------------------------------------------------------------------------
12
<PAGE> 25
--------------------------------------------------------------------------------
(2) We determined the Estimated Liquidation Values by assuming that the real
estate assets of each entity were sold at the appraised value and that the
non-real assets were sold at their estimated realizable value and
deducting liabilities and estimated costs of sale equal to 5% of the
appraised value.
(3) Values are based on the Exchange Value established by American Spectrum
for your fund. The Exchange Value equals the estimated net asset value of
your fund's assets minus liabilities and your fund's share of expenses of
the consolidation. Upon listing the American Spectrum shares on the
_________, the actual values at which the American Spectrum shares will
trade on the _________ may be significantly below their Exchange Value of
$15 per share.
Voting
Voting Procedures
We are asking you to consider voting "For" or "Against" the consolidation.
If you own interests in more than one fund, you will receive one copy of this
consent solicitation, a supplement relating to your fund and a consent form for
each fund in which you hold units. Each fund will vote separately on whether or
not to approve the consolidation. Accordingly, you must complete one consent
form for each fund in which you are an investor.
If you vote "For" approval of the consolidation, you will be effectively
voting against the alternatives to the consolidation. These alternatives include
liquidation of your fund and distribution of the net proceeds.
If the consolidation is not approved by any fund, your general partner
plans to liquidate that fund's properties.
If you vote "Against" the consolidation and your fund approves the
consolidation and consolidates with American Spectrum, you will still receive
American Spectrum shares unless you elect the notes option. If your fund
approves the consolidation, you will receive American Spectrum shares if you do
not vote. If your fund approves the consolidation and you wish to receive notes,
you must vote "Against" the consolidation and elect the notes option on the
consent form.
Your consent form must be received by [ ] by 5:00 p.m. Eastern time
on _____________ ___, 2000 unless we extend the solicitation period.
We may extend the solicitation period for a particular fund even if a
quorum has been obtained under the fund's partnership agreement. We may extend
the solicitation period if we have not received approval for the proposal on
expiration of the consent solicitation period.
If you do not submit a consent form, you will also be counted as having
voted "Against" the consolidation. If you submit a properly signed consent form
but do not indicate how you wish to vote, you will be counted as having voted
"For" the consolidation. You may withdraw or revoke your consent form at any
time before consents from limited partners equal to more than 50% of outstanding
limited partnership interests in your fund are received by your fund.
Affiliates of CGS own limited partnership interests in five of the funds. These
interests range from 4.91% to 13.6% and will be voted by affiliates of CGS in
favor of the consolidation.
Amendments to Your Fund's Partnership Agreement
For some of the funds, if you vote "For" the consolidation, you will also
be required to cast a separate vote in favor of amendments to the partnership
agreement of such funds. These amendments will authorize certain actions that
are necessary to complete American Spectrum's acquisition of your fund. If the
amendments are applicable to
--------------------------------------------------------------------------------
13
<PAGE> 26
--------------------------------------------------------------------------------
your fund, the supplement relating to your fund will describe the amendments.
You should carefully read the supplement.
No Rights to Independent Appraisal
If your fund approves the consolidation, but you voted "Against" the
consolidation, you will not have any right to have an independent valuation of
your fund paid for by American Spectrum or by your general partners. An
appraisal of the portfolio of properties owned by your fund has been prepared by
Stanger. However, you will not have the right to be paid the value of your stock
in cash.
Consolidation Expenses
American Spectrum and each fund will bear their share of expenses incurred
in connection with the consolidation. If your fund approves the consolidation
and your fund is acquired by American Spectrum, we will deduct the consolidation
expenses in determining your fund's Exchange Value. For a breakdown of the
expenses estimated to be paid in the consolidation, please see the supplement.
If the consolidation is rejected by your fund, then your fund will bear
the portion of its consolidation expenses based upon the percentage of "For"
votes and the general partners of the fund will bear the portion of such
consolidation expenses based upon the percentage of "Against" votes and
abstentions.
Conditions to the Consolidation
The following conditions must be satisfied to consummate the
consolidation:
o The American Spectrum shares must be approved for listing on the
_________ prior to or concurrently with the consummation of the
consolidation.
o We must own real properties having an appraised value of at least
$200 million. At March 31, 2000, the appraised value of the real
properties owned by CGS privately held entities was $177,390,000.
Accordingly, the consolidation must be approved by funds owning real
properties with an appraised value of at least $23,000,000.
Your Right to Investor Lists and to Communicate with Other Limited Partners
Under federal securities laws, upon written request from you, we will
deliver the following information to you: (i) a statement of the approximate
number of limited partners in your fund; and (ii) the estimated cost of mailing
a consent statement, form of consent or other similar communication to those
limited partners. You have the right, at our option, either to: (a) at your
expense, have us mail copies of any consent statement, consent form or other
soliciting material furnished by you to any of your fund's limited partners that
you designate; or (b) have us deliver to you (at a cost to you of $0.25 per page
for mailing and duplication), within five business days of when we receive your
request, a reasonably current list of the names, addresses and number of units
held by the limited partners in your fund.
Federal Income Tax Considerations
The Consolidation may be a Partially Taxable Transaction for Limited Partners
Subject to Federal Income Taxation
The consolidation will have different tax consequences to you depending
upon whether you elect to receive shares or notes. Currently, the funds are
organized as limited partnerships and treated as partnerships for federal income
tax purposes. As partnerships, they are not subject to federal taxation as
entities, but instead function as
--------------------------------------------------------------------------------
14
<PAGE> 27
--------------------------------------------------------------------------------
conduits, with the tax results of their operations required to be reflected in
the personal tax returns of you, the other limited partners and the general
partners.
If you elect to receive shares, the consolidation will be reported on the
basis that no gain is recognized except in the case of Sierra Pacific
Development Fund III and Nooney Real Property Investors - Two, L.P. These funds
will recognize gain equal to the amount by which the liabilities assumed exceed
the bases of the assets transferred, and your share of the gain will be
allocated to you. The estimated amount of gain is set forth in the table below.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the bases of the assets transferred, and your share of the gain
will be allocated to you. See "Tax Risks" and "Federal Income Tax Considerations
-- Tax consequences of the consolidation." If you elect to receive notes you
will recognize gain. Your gain will be equal to the amount by which the
principal of the notes received exceeds the bases of your interest in your fund
(adjusted for your share of liabilities). If you elect to receive notes you may
be able to report income on the basis of the installment method which permits
you to pay tax as the principal amount is paid on your notes. If you are an
individual or a taxpaying entity, it is possible that you may be required to pay
tax on any gain recognized but will not receive any cash in the consolidation in
order to pay those taxes. If you are required to recognize any gain as a result
of the consolidation, you may be able to offset that gain with unused passive
activity losses from this investment as well as from your other investments.
The tax consequences of the consolidation for you will depend on the facts
of your own situation, so we urge you to consult your tax advisor for a full
understanding of the tax consequences to you of the consolidation.
Taxable gain and loss estimates per average $1,000 original limited partner
investment
<TABLE>
<CAPTION>
ESTIMATED GAIN/(LOSS) $1,000
ORIGINAL LIMITED PARTNER
FUND INVESTMENT (1)(2)
------------------------------------------- ---------------------------------------------
Limited Partner Limited Partner
Receives Shares Receives Notes (3)
--------------- ------------------
<S> <C> <C>
Sierra Pacific Development Fund $ 0 $ 166
Sierra Pacific Development Fund II $ 0 $ 114
Sierra Pacific Development Fund III $ 37 $ 86
Sierra Pacific Institutional Properties V $ 0 $ 536
Sierra Pacific Pension Investors '84 $ 0 $ 288
Nooney Income Fund Ltd., L.P. $ 0 $ 271
Nooney Income Fund Ltd. II, L.P. $ 0 $ 359
Nooney Real Property Investors-Two, L.P. $ 35 $ 561
</TABLE>
(1) Values are based on the Exchange Value established by American Spectrum.
Upon listing the American Spectrum shares on the _______, the actual
values at which the American Spectrum shares will trade on the _______ may
be significantly below the Exchange Value.
(2) The estimated gain/(loss) is calculated based upon presumed tax treatment
of the funds as a result of the proposed consolidation. Those estimates
are subject to certain risks as discussed in "Risk Factors -- Tax Risks".
--------------------------------------------------------------------------------
15
<PAGE> 28
--------------------------------------------------------------------------------
(3) Based upon your own tax situation, you may be eligible for installment
sale treatment for your tax gain.
Qualification of American Spectrum as a REIT
For the _____ month period of __________ through December 31, ____,
American Spectrum will be taxable as a C corporation. During that period
American Spectrum will be subject to tax on its net income and shareholders will
pay a second level tax on any dividends distributed. American Spectrum will be
taxed at the corporate level and any distributions made to American Spectrum
stockholders also will be taxed at their respective income tax rates.
If your fund is acquired by American Spectrum, you will cease to be a
partner in a partnership. This change in status will affect the character and
amount of income and loss reportable by you in the future. For instance, income
generated by your fund could be offset against passive activity losses from your
other investments. Income that you receive from American Spectrum as a
stockholder cannot be similarly offset.
For the taxable year commencing January 1, 2002, American Spectrum intends
to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the
Code). For taxable years beginning after December 31, 2000, American Spectrum
must pay distributions to investors of at least 90% of its taxable net income. A
REIT typically is not subject to federal income taxation on its taxable net
income, provided certain income tax requirements are satisfied. This
substantially eliminates the corporate level of the "double taxation" that
generally results from investments in a corporation. Double taxation occurs when
tax is imposed at both the corporate and stockholder levels.
However, a REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
American Spectrum is not required to elect REIT status. If American
Spectrum fails to qualify as a REIT, it will be taxed as an ordinary C
corporation.
--------------------------------------------------------------------------------
16
<PAGE> 29
SUMMARY HISTORICAL AND PRO FORMA DATA
The following presents summary information for the following:
(i) American Spectrum Predecessor (1) - historical data
(ii) Funds - pro forma data to reflect the combination of the historical
amounts of the individual funds under both minimum (2) and maximum (3)
scenarios
(iii) Other Affiliates (4) - pro forma data to reflect the combination of the
historical amounts of the individual entities
(iv) American Spectrum - pro forma data to reflect the application of
adjustments necessary to reflect the Consolidation of American Spectrum
Predecessor, the Funds and Other Affiliates.
(1) American Spectrum Predecessor is a combination of various properties
and operations 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 mainly
of office, office/warehouse, shopping center, and multi-family
apartment properties.
These properties all (1) have majority ownership interests held by Mr.
William J. Carden and Mr. John Galardi and/or their affiliates and (2)
have agreed to participate in a consolidation transaction
"Consolidation" with other entities in which Mssrs. Carden and Galardi
have interests.
(2) Includes the following funds:
- Sierra Pacific Development Fund II -
- Sierra Pacific Development Fund III
- Sierra Pacific Institutional Properties V
- Nooney Real Property Investors - Two L.P.
17
<PAGE> 30
These funds are included because they represent the funds with the
lowest amount of cash flow from operations for the most recent fiscal
year that would result in appraised value for at least $23 million (The
minimum participation in order to complete the consolidation).
(3) Includes pro forma combined historical financial data for all 8 funds
and the accounts of Sierra Mira Mesa Partners LP, a partnership
wholly-owned by two of the Funds. All significant inter-fund
transactions and balances have been eliminated in the pro forma
presentation:
- Nooney Income Fund Ltd., II L.P.
- Nooney Income Fund Ltd., L.P.
- Nooney Real Property Investors - Two L.P.
- Sierra Pacific Development Fund I
- Sierra Pacific Development Fund II
- Sierra Pacific Development Fund II
- Sierra Pacific Pension Investors `84
- Sierra Pacific Institutional Properties V
(4) Includes the following Entities:
- Meadow Wood Village Apartments, Ltd., L.P.
- Nooney Rider Trail, LLC
- Nooney-Hazelwood Associates, L.P.
18
<PAGE> 31
SUMMARY PRO FORMA DATA FOR AMERICAN SPECTRUM
The following table summarizes certain data included in the "Unaudited Summary
Pro Forma Financial Information" contained elsewhere in this consent
solicitation. The more detailed information contained therein should be read in
conjunction with this summary. Pro forma amounts have been presented under
minimum and maximum scenarios. The minimum scenario assumes only certain of the
Funds sufficient to consummate the Consolidation participate. The maximum
scenario assumes all funds agree to participate in the Consolidation.
<TABLE>
<CAPTION>
(Minimum Scenario) (Maximum Scenario)
($ amounts, except per share data, in
000's)
SIX SIX
YEAR ENDED MONTHS YEAR MONTHS
ENDED ENDED ENDED
OPERATING DATA: 31-DEC-99 30-JUNE-00 31-DEC-99 30-JUNE-00
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental and reimbursement income $ 25,194 $ 13,682 $ 35,180 $ 18,819
Interest and other 1,867 563 1,661 216
-------- -------- -------- --------
Total 27,061 14,245 36,841 19,035
======== ======== ======== ========
Expenses:
Property operating and management 15,759 5,992 20,444 7,598
Depreciation and amortization 5,867 3,413 10,001 5,081
Impairment charges 3,440 44 3,440 44
Interest 14,155 8,365 15,541 9,191
Other -- 159 -- 377
Gain on sale of property -- (1,328) (83) (1,328)
-------- -------- -------- --------
Total 39,221 16,645 49,343 20,963
======== ======== ======== ========
</TABLE>
19
<PAGE> 32
<TABLE>
<CAPTION>
(Minimum Scenario) (Maximum Scenario)
($ amounts, except per share data, in
000's)
SIX SIX
YEAR ENDED MONTHS YEAR MONTHS
ENDED ENDED ENDED
31-DEC-99 30-JUNE-00 31-DEC-99 30-JUNE-00
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Loss before extraordinary items (12,160) (2,400) (12,502) (1,928)
Equity in income (loss) of
noncombined partnership (24) (156) -- --
Minority Interest in (loss) 31 (89) -- --
Extraordinary item -- extinguishment
of debt (214) (1,861) (214) (1,907)
-------- -------- -------- --------
Net loss before reorganization costs (12,367) (4,506) (12,716) (3,835)
Reorganization costs (a) (3,997) (3,997) (2,462) (2,462)
-------- -------- -------- --------
Net loss after reorganization costs $(16,364) $ (8,503) $(15,178) $ (6,297)
========= ========= ========= =========
Pro forma net loss per share (b) $ (4.03) $ (2.09) $ (2.06) $ (0.85)
Number of shares outstanding 4,060 4,060 7,368 7,368
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ (5,751) $ 2,867 $ (3,068) $ 3,947
Investing activities (7,550) (4,405) (9,837) (3,663)
Financing activities 26,640 12,161 26,986 10,492
</TABLE>
20
<PAGE> 33
<TABLE>
<CAPTION>
(Minimum Scenario) (Maximum Scenario)
($ amounts, except per share data, in
000's)
SIX SIX
YEAR ENDED MONTHS YEAR MONTHS
ENDED ENDED ENDED
31-DEC-99 30-JUNE-00 31-DEC-99 30-JUNE-00
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Number of properties at end of period 28 26 39 37
BALANCE SHEET DATA:
Real estate held for investment, net $163,589 $219,551
Total assets 192,046 255,162
Total Liabilities 187,985 206,285
Equity (352) 48,877
</TABLE>
(a) Total transaction fees are estimated to be approximately $4.8 million,
of which approximately $1.8 million was paid as of June 30, 2000.
Approximately $2.3 million of the transaction fees is attributable to
the acquisition of the Funds and the Other Affiliates under the maximum
scenario. The transaction costs have been reflected as a reduction in
cash and an increase in the purchase price allocated to these entities
in the pro forma balance sheet. The remaining amount of approximately
$2.5 million has been reflected as a cost of the reorganization of
American Spectrum Predecessor in the statement of operations under the
maximum scenario. Under the minimum scenario the excess of the
transaction fees over amounts related to the purchase of the Funds and
Other Affiliates were assumed to relate to the reorganization and were
reflected as additional reorganization costs in the statement of
operations.
(b) Loss per share has been presented on a pro forma basis to reflect the
anticipated shares of American Spectrum to be issued in the
consolidation.
21
<PAGE> 34
SUMMARY HISTORICAL DATA FOR AMERICAN SPECTRUM PREDECESSOR (1)
The following table summarizes certain data included in the "Selected Historical
Financial Information" contained elsewhere in this consent solicitation. The
more detailed information contained therein should be read in conjunction with
this summary. The historical amounts are derived from the combined financial
statements of American Spectrum Predecessor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
($ amounts, except per share data, in
000's) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 10,421 $ 12,545 $ 16,359 $ 24,122 $ 22,417
Interest and other 541 1,610 141 265 205
-------- -------- -------- -------- --------
Total 10,962 14,155 16,500 24,387 22,622
-------- -------- -------- -------- --------
Expenses:
Property operating and management 6,087 8,701 10,003 16,573 15,759
Depreciation and amortization 2,212 2,202 2,203 3,313 3,259
Impairment charges -- -- -- 126 5,164
Interest 4,644 5,801 7,901 9,585 9,982
Gain on sale of property -- -- -- -- --
Equity in losses (earnings) of
non combined partnerships -- -- 127 (224) 330
-------- -------- -------- -------- --------
Total 12,943 16,704 20,234 29,373 34,494
-------- -------- -------- -------- --------
Loss before extraordinary items (1,981) (2,549) (3,734) (4,986) (11,872)
Extraordinary item -- extinguishment
of debt -- -- 50 163 (214)
-------- -------- -------- -------- --------
Net loss $(1,981) $(2,549) $(3,684) $(4,823) $(12,086)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
($ amounts, except per share data, in
000's) 1999 2000
---- ----
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 11,985 $ 12,537
Interest and other 966 964
-------- --------
Total 12,951 13,501
-------- --------
Expenses:
Property operating and management 7,898 8,475
Depreciation and amortization 1,835 1,723
Impairment charges 20 --
Interest 4,530 6,435
Gain on sale of property -- (1,328)
Equity in losses (earnings) of
non combined partnerships 454 270
-------- --------
Total 14,737 15,575
-------- --------
Loss before extraordinary items (1,786) (2,074)
Extraordinary item -- extinguishment
of debt (574) (1,861)
-------- --------
Net loss $(2,360) $(3,935)
======== ========
</TABLE>
22
<PAGE> 35
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
($ amounts, except per share data, in
000's) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pro forma net loss per share
before extraordinary item $ (1.27) $ (1.64) $ (2.40) $ (3.20) $ (7.62)
Extraordinary item -- -- 0.03 0.10 (0.14)
--------- --------- --------- --------- ---------
Pro forma net loss per share (b) $ (1.27) $ (1.64) $ (2.37) $ (3.10) $ (7.76)
========= ========= ========= ======== =========
Pro forma number of shares 1,557 1,557 1,557 1,557 1,557
OTHER DATA:
Cash flows provided by (used in):
operating activities $ (889) $ (2,971) $ (6,192)
Number of properties at end of period 8 14 16 17
BALANCE SHEET DATA:
Real estate held for investment, net $ 47,209 $ 62,016 $ 78,676 $ 90,348 $ 95,588
Total assets 55,834 84,771 107,205 104,828 108,435
Total liabilities 60,982 89,803 115,601 120,094 133,411
Equity (deficit) (5,148) (5,032) (8,396) (15,266 (24,976)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
($ amounts, except per share data, in
000's) 1999 2000
---- ----
<S> <C> <C>
Pro forma net loss per share
before extraordinary item $ (1.15) $ (1.33)
Extraordinary item (0.37) (1.20)
--------- ---------
Pro forma net loss per share (b) $ (1.52) $ (2.53)
========= =========
Pro forma number of shares 1,557 1,557
OTHER DATA:
Cash flows provided by (used in):
operating activities $ (379) $ 1,285
Number of properties at end of period 17 16
BALANCE SHEET DATA:
Real estate held for investment, net $ 95,720 $ 92,070
Total assets 113,117 107,816
Total liabilities 127,944 134,190
Equity (deficit) (14,827) (27,419)
</TABLE>
(1) The combined historical financial statements of American Spectrum
Predecessor include the accounts of various entities which have (a)
majority ownership interest(s) held by Mssrs. Carden, Galardi and/or
their affiliates, and (b) agreed to transfer their properties to
American Spectrum in exchange for shares of American Spectrum or
limited partnership units in the operating partnership in a private
transaction. Such historical amounts have been derived from the
historical audited and unaudited combined financial statements of
American Spectrum Predecessor included elsewhere in this consent
solicitation. These financial statements reflect all entities at
carry-over basis due to the high degree of common and controlling
interests held by Mssrs. Carden and Galardi. See also
23
<PAGE> 36
Note 1 to the combined financial statements of American Spectrum
Predecessor for information regarding the planned reorganization of
American Spectrum Predecessor.
(2) Loss per share has been presented on a pro forma basis to reflect the
anticipated shares of American Spectrum to be issued in the
consolidation to the investors in the entities comprising American
Spectrum Predecessor.
24
<PAGE> 37
SUMMARY PRO FORMA DATA FOR THE FUNDS
The following table summarizes certain data included in the "Selected Pro
Forma Financial Information" of the Funds contained elsewhere in this consent
solicitation. The more detailed information contained therein should be read
in conjunction with this summary. Pro forma amounts for the Funds have been
presented under minimum and maximum scenarios. The minimum scenario assumes
only certain of the Funds sufficient to consummate the Consolidation
participate. The maximum scenario assumes all funds agree to participate in
the Consolidation. These amounts reflect solely the combination of certain
funds and do not reflect the application of other effects of the
Consolidation. Such additional disclosures are presented in Summary Pro Forma
Data for American Spectrum.
<TABLE>
<CAPTION>
MAXIMUM PARTICIPATION (3)
-------------------------
YEAR ENDED DECEMBER 31,
-----------------------
($ amounts, except per share data, in
000's) 1995 1996 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 11,601 $ 14,119 $ 14,080 $ 14,371
Interest and other 872 773 758 919
-------- -------- -------- --------
Total 12,473 14,892 14,838 15,290
======== ======== ======== ========
Expenses:
Property operating and management 7,154 8,495 8,486 8,282
Depreciation and amortization 4,149 4,781 4,806 4,268
Interest 2,209 2,965 2,930 2,579
Loss (gain) on sale of property (151) -- 967 --
-------- -------- -------- --------
Total 13,361 16,241 17,189 15,129
======== ======== ======== ========
Income (loss) before extraordinary
items (888) (1,349) (2,351) 161
Extraordinary item - gain or (loss) on
extinguishment of debt -- 1,200 -- --
-------- -------- -------- --------
Net income (loss) $(888) $(149) $(2,351) $161
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
($ amounts, except per share data, in
000's) 1999 1999 2000
-------- -------- --------
<S> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 15,178 $ 7,465 $ 8,199
Interest and other 904 404 604
-------- -------- --------
Total 16,082 7,869 8,803
======== ======== ========
Expenses:
Property operating and management 10,156 4,460 4,231
Depreciation and amortization 4,144 2,064 2,063
Interest 2,503 1,221 1,508
Loss (gain) on sale of property (83) (83) --
-------- -------- --------
Total 16,720 7,662 7,802
======== ======== ========
Income (loss) before extraordinary
items (638) 207 1,001
Extraordinary item - gain or (loss) on
extinguishment of debt -- -- (46)
-------- -------- --------
Net income (loss) $ (638) $ 207 $ 955
======== ======== ========
</TABLE>
25
<PAGE> 38
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
($ amounts, except per share data, in
000's) 1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows provided by:
Operating activities $ 55 $ 2,798 $ 837 $ 3,209 $ 2,279
Number of properties at end of period 19 19 18 18 18
BALANCE SHEET DATA:
Real estate held for investment, net $63,758 $65,220 $57,899 $56,198 $54,680
Total assets 82,425 82,251 75,147 73,942 76,447
Debt 36,840 38,363 34,272 33,701 36,836
Equity 45,585 43,888 40,875 40,241 39,611
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
($ amounts, except per share data, in
000's) 1999 2000
---- ----
<S> <C> <C>
OTHER DATA:
Cash flows provided by:
Operating activities $ 680 $ 797
Number of properties at end of period 18 18
BALANCE SHEET DATA:
Real estate held for investment, net $55,586 $53,960
Total assets 69,378 78,191
Debt 32,954 38,212
Equity 36,424 39,979
</TABLE>
26
<PAGE> 39
<TABLE>
<CAPTION>
MINIMUM PARTICIPATION (2)
-------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------ ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 5,605 $ 5,807 $ 5,802 $ 5,531 $ 5,699 $ 2,830 $ 3,253
Interest and other 356 365 350 475 460 217 298
------- ------- ------- ------- ------- ------- -------
Total 5,961 6,172 6,152 6,006 6,159 3,047 3,551
======= ======= ======= ======= ======= ======= =======
Expenses:
Property operating and management 3,567 3,687 3,811 3,583 4,822 1,811 1,754
Depreciation and amortization 1,904 2,144 2,221 1,867 1,802 896 940
Interest 1,611 1,505 1,478 1,145 1,116 550 682
Loss on sales of properties -- -- 967 -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total 7,082 7,336 8,477 6,595 7,740 3,257 3,376
======= ======= ======= ======= ======= ======= =======
Income (loss) before equity in earnings
(losses) of non-consolidate
partnership and minority interest (1,121) (1,164) (2,325) (589) (1,581) (210) 175
Equity in earnings (losses) of
non-consolidated partnerships (572) 575 (276) 1 152 89 94
Minority interest 225 285 840 109 30 33 (89)
------- ------- ------- ------- ------- ------- -------
Net income (loss) $(1,468) $ (304) $(1,761) $ (479) $(1,399) $ (88) $ 180
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Cash flows provided by (used in):
Operating activities (758) 1090 (1,368) 1,021 (412) 32 (283)
Number of properties at end of period 9 9 8 8 8 8 8
</TABLE>
27
<PAGE> 40
<TABLE>
<CAPTION>
MINIMUM PARTICIPATION (2)
-------------------------
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate held for investment, net $30,448 $30,485 $24,052 $23,303 $22,582 $23,086 $22,448
Total assets 41,306 41,642 34,617 34,066 36,509 33,846 34,756
Debt 18,922 19,544 15,437 15,419 18,321 15,319 17,632
Equity 22,384 22,098 19,180 18,647 18,188 18,527 17,124
</TABLE>
28
<PAGE> 41
SUMMARY PRO FORMA DATA FOR THE OTHER AFFILIATES (4)
The following table summarizes certain data included in the "Selected Pro
Forma Financial Information" of the Other Affiliates contained elsewhere in
this consent solicitation. The more detailed information contained therein
should be read in conjunction with this summary. These amounts reflect solely
the combination of the entities comprising the Other Affiliates and do not
reflect the application of other effects of the Consolidation. Such additional
disclosures are presented in Summary Pro Forma Data for American Spectrum.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
($ amounts, except per share, in 000's) 1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 4,909 $ 5,078 $ 5,156 $ 2,542 $ 2,722
Interest and other 97 29 40 16 29
------- ------- ------- ------- -------
Total 5,006 5,107 5,196 2,558 2,751
======= ======= ======= ======= =======
Expenses:
Property operating and management 2,449 2,334 2,405 1,181 1,238
Depreciation and amortization 791 856 891 424 427
Interest 2,076 2,031 1,942 961 1,018
------- ------- ------- ------- -------
Total 5,316 5,221 5,238 2,566 2,683
======= ======= ======= ======= =======
Net income (loss) $ (310) $ (114) $ (42) $ (8) $ 68
======= ======= ======= ======= =======
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ 1,064 $ 739 $ 639 $ 327 $ 849
Number of properties at end of period 3 3 3 3 3
</TABLE>
29
<PAGE> 42
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
($ amounts, except per share, in 000's) 1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate held for investment, net $ 9,292 $16,310 $16,549 $15,856
Total assets 10,296 19,225 19,560 19,277
Debt 16,031 29,459 29,620 28,030
Deficit (5,735) (10,234) (10,060) (10,295)
</TABLE>
30
<PAGE> 43
RISK FACTORS
Before you decide how to vote on the consolidation, you should be aware
that there are various risks involved in the consolidation, including those
described below. In addition to the other information included in this consent
solicitation, you should carefully consider the following risk factors in
determining whether to vote in favor of the consolidation.
We also caution you that this consent solicitation contains forward
looking statements. These forward-looking statements are based on our beliefs
and expectations, which may not be correct. Important factors that could cause
such actual results to differ materially from the expectations reflected in
these forward-looking statements include those set forth below, as well as
general economic, business and market conditions, changes in federal and local
laws and regulations, costs or difficulties relating to the consolidation and
related transactions and increased competitive pressures.
Risk Factors Related to American Spectrum and Risks Resulting from the
Consolidation
The trading price of American Spectrum shares following listing on the _______
is uncertain. The American Spectrum shares could trade at a lower price than
anticipated.
The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of American
Spectrum and other factors that generally influence the market prices of
securities, including the market perception of REITs in general. Such
fluctuations may depress the market price of American Spectrum shares
independent of the financial performance of American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could affect the market price of the
American Spectrum shares.
American Spectrum shares may trade at prices below the Exchange Value per share
of $15.
There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share of $15.
The Exchange Value per share of $15 represents our estimate of the net asset
value per share of American Spectrum. However, the market may value American
Spectrum shares at less than their net asset value per share. The investment of
any limited partners of the funds who become stockholders will change into
freely tradable American Spectrum shares. Consequently, some of these
stockholders may choose to sell American Spectrum shares upon listing at a time
when demand for American Spectrum shares is relatively low. As a result,
American Spectrum shares may trade at prices substantially less than their
Exchange Value per share.
There will be a fundamental change in the nature of your investment if the
consolidation is consummated.
The consolidation involves a fundamental change in the nature of your
investment. As a result, you may be subject to increased risks. These changes
include the following:
o Your investment currently consists of an interest in one or more
funds, each of which has a fixed portfolio of properties. After the
consolidation, you will hold common stock of American Spectrum, an
operating company, that will own and lease as many as 35 properties
and expects to make additional investments.
o Your fund intended to sell its properties and liquidate and distribute
the net proceeds to the partners. We intend to reinvest the proceeds
from property sales. The risks inherent in investing in an operating
company such as American Spectrum include the risk that American
Spectrum may invest in new properties that are not as profitable as
anticipated.
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<PAGE> 44
o Upon consummation of the consolidation, we will have greater leverage
than the funds. American Spectrum may also incur substantial
indebtedness to make future acquisitions of properties that it may be
unable to repay.
o In addition, it is possible that properties acquired in the
consolidation may not be as profitable as the properties your fund
owns.
o Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in
which you may realize the value of your investment only through the
sale of your American Spectrum shares.
American Spectrum will have more indebtedness and will have a lower
capitalization, than many REITs. This could adversely affect the market price of
the American Spectrum shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REITs. This ratio is frequently referred to as the leverage ratio. American
Spectrum will have a ratio of total indebtedness of assets of 60%, assuming all
funds participate in the consolidation and intends to increase its leverage to
70%. American Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for American
Spectrum shares.
If American Spectrum fails to elect REIT status or qualify as a REIT for tax
purposes, American Spectrum will pay federal income taxes at corporate rates.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a C corporation. As a C
corporation, it would be subject to federal income tax at regular corporate
rates. In addition to these taxes, American Spectrum may be subject to the
federal alternative minimum tax and various state income taxes.
There are conflicts of interest inherent in the structure of the consolidation,
and related parties will receive substantial benefits if it is consummated.
Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS privately
held entities and from their interests in the funds if the consolidation were
not consummated. Your general partner is a subsidiary of CGS. Assuming that all
of the funds are included in the consolidation, the general partners of the
funds and their affiliates of the general partners will receive an estimated
aggregate of 2,093,127 American Spectrum shares, including shares issuable in
exchange for units in the Operating Partnership. In addition, American Spectrum
and its subsidiaries will employ some of the officers and employees of CGS and
its privately held entities. As a result of these benefits, the general partners
of your fund have a conflict of interest in connection with the consolidation.
Stanger's fairness opinion relied on information that we provided.
Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on information
prepared by the general partners of the funds, the CGS privately held entities
and the CGS Management Company. The general partners are controlled by CGS,
which, in turn, controls American Spectrum. Because Stanger will not update its
fairness opinion, changes may occur from the date of the fairness opinion that
might affect the conclusions expressed in such opinion.
Your general partner has engaged Stanger to render both the fairness opinion and
the portfolio appraisal.
By engaging Stanger to render both the fairness opinion and the portfolio
appraisal, limited partners do not have the potential benefit of a separate
review of the portfolio appraisal by the fairness opinion provider.
32
<PAGE> 45
Stanger's fairness opinion is limited, and only addresses the allocation of
American Spectrum shares.
Stanger's fairness opinion addresses solely the allocation of the American
Spectrum shares. The opinion does not address the allocation of shares for all
possible combinations of participating funds. In addition, the opinion does not
address any other terms of the transaction, the trading value of the shares, or
alternatives to the transaction. Accordingly, there are matters which are
significant to limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The CGS privately-held entities incurred losses in 1997 of $3,684,000, in 1998
of $4,832,000, in 1999 of $12,086,000 and in the six months ending June 30, 2000
of $3,935,000. Additionally, we incurred losses on a pro forma basis for 1999
and the first six months of 2000. We cannot assure you that we will succeed and
that we will become profitable. If we are not successful, it will reduce the
distributions that you receive from us.
American Spectrum is responsible for liabilities of entities included in the
consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will merge with the CGS privately held entities and the
CGS Management Company. These companies are engaged in the business of serving
as general partners of limited partnerships and investing in and managing real
properties. As a result of the consolidation, American Spectrum will be
responsible for liabilities arising out of the prior operations of these
entities. These liabilities may include unknown contingent liabilities and these
liabilities may exceed those shown on the balance sheets. As a result, we may
expend cash to pay these liabilities. Any payments would reduce cash available
for distribution.
There have been no arm's-length negotiations.
American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's- length negotiations. Accordingly, the
Exchange Value may not reflect the value that you could realize upon a sale of
your units or a liquidation of your fund's assets.
If an independent representative had been retained on behalf of you and the
other limited partners in structuring and negotiating the consolidation, the
terms of the consolidation may have been more favorable to you and the other
limited partners.
The general partner of your fund did not retain an independent
representative to act on behalf of any of the limited partners, in structuring
and negotiating the terms and conditions of the consolidation. These terms
include the consideration which you will receive. The funds did not give limited
partners the power to negotiate the terms of the consolidation or to determine
what procedures to use to protect the rights and interests of the limited
partners. In addition, no investment banker, attorney, financial consultant or
expert was engaged to represent the interests of the limited partners. We and
your managing general partner were the parties responsible for structuring all
the terms and conditions of the acquisition of your fund. We engaged legal
counsel to assist with the preparation of the documentation for the
consolidation, including the consent solicitation. This legal counsel did not
serve, or purport to serve, as legal counsel for the fund or the limited
partners. If each general partner had retained an independent representative for
each of the funds, it could have resulted in different terms of the
consolidation, which may have benefitted the limited partners.
Majority vote of the limited partners of a fund binds all limited partners of
that fund.
American Spectrum will acquire each fund if the limited partners of that
fund who hold a majority in interest of the outstanding units vote in favor of
the consolidation. Affiliates of CGS own interests as limited partners in all of
the funds. These interests range from 4.89% to 32.13% and will be voted by
affiliates of CGS in favor of the
33
<PAGE> 46
consolidation. The approval of the limited partners holding a majority in
interest of a fund will bind all of the limited partners in the fund, including
you or any other limited partners who voted against or abstained from voting
with respect to the consolidation.
Partners have no cash appraisal rights.
The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund approves
the consolidation and you voted "Against" it. You only have the right to elect
to receive notes as your portion of the consideration received by your fund. The
amount of notes that you receive is based upon the estimated proceeds that you
would receive in an orderly liquidation of your fund in accordance with the
terms of your fund's partnership agreement. We determined the estimated proceeds
based in part on an appraisal of our properties by Stanger. As a holder of
notes, you are likely to receive the full face amount of the notes only if you
hold the notes to maturity. The notes will mature approximately eight years
after the consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to the extent
that American Spectrum is required to prepay the notes in accordance with their
terms.
At the time of the vote, there will be uncertainties as to the size of American
Spectrum after the consolidation.
At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you from
making a complete evaluation of the transaction. Most importantly, you will not
know which funds will approve the consolidation, and thus, which properties
American Spectrum will acquire. These factors will affect the post-consolidation
size and scope of American Spectrum. You also will not know how many limited
partners of the funds will elect to receive notes or the capital structure of
American Spectrum.
Interest rate fluctuations will impact the price of American Spectrum shares.
It is likely that the public valuation of American Spectrum shares will be
based primarily on the earnings derived by American Spectrum from rental income
with respect to the properties and not from the underlying appraised value of
the properties themselves. As a result, interest rate fluctuations and capital
market conditions can affect the value of your American Spectrum shares,
assuming that there is an active trading market in the American Spectrum shares.
For instance, if interest rates rise, it is likely that the price of an American
Spectrum share will decrease because potential investors may not wish to invest
in American Spectrum shares that would yield less than the market rates on
interest-bearing securities, such as bonds.
There is the potential for litigation associated with the consolidation. We may
incur costs from these litigations.
There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary duties
to their limited partners or that the consolidation violates the relevant
partnership agreements and that they may commence litigation against American
Spectrum. As a result, American Spectrum may incur costs associated with
defending or settling such litigation or paying any judgment if it loses. As of
the present time, no limited partner of the funds has initiated any lawsuit on
such grounds.
The potential liability of the officers and directors of American Spectrum is
limited.
As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the general partners of your fund. Our articles of incorporation and
bylaws provide that an officer's or director's liability to American Spectrum,
its stockholders or third parties for monetary damages may be limited.
Generally, under the articles of incorporation and bylaws, American Spectrum
will indemnify its officers and directors against specified liabilities that may
be incurred in connection with their service to American Spectrum. These
provisions could limit the legal remedies available to American Spectrum, to you
and to other stockholders after the consolidation against any officers or
directors of American Spectrum.
34
<PAGE> 47
Noteholders will not participate in American Spectrum profits.
Participating limited partners who elect to receive notes will not hold an
equity interest in American Spectrum and will not be able to participate in
earnings or benefit from increases in the equity value, if any.
The notes are likely to be illiquid.
An active secondary market for the notes will not likely develop, making
it difficult for noteholders to sell their notes prior to maturity, or
subjecting them to the risk of selling the notes at substantial discounts to
facilitate their sale. Thus, a noteholder will likely not be able to liquidate
his investment in the event of an emergency, and the notes may not be readily
acceptable as loan collateral. Limited partners electing to receive notes are
likely to receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of the
consolidation. Accordingly, the notes should be considered a long-term, illiquid
investment.
The notes will not be subject to a sinking fund. As a result, we may not have
funds to repay the notes.
The notes will not be subject to a sinking fund. The notes do not require
American Spectrum to set aside funds for the retirement of or to retire the
notes at any time prior to maturity except in the case of sales of our
properties.
American Spectrum's ability to incur additional debt may reduce the value of the
notes issued by former limited partners of the funds.
American Spectrum may increase its level of debt. Payments on any notes
issued by American Spectrum in connection with the consolidation would be
subordinated to any secured debt incurred by American Spectrum. Also, any
secured debt would have a priority claim of repayment over the notes in the
event that American Spectrum defaulted under its obligations and the recovery of
noteholders after a default could be reduced or even eliminated.
Noteholders have limited recourse. This could affect noteholder recovery on the
notes.
The noteholders have no right of personal recourse against officers,
directors, stockholders, employees or agents for payment of principal or
interest, or for attorneys' fees and costs which they, as prevailing parties,
may be entitled to recover.
American Spectrum may have to raise cash on unattractive terms to repay notes or
to meet other obligations. This could adversely affect our results of
operations, our ability to satisfy the notes, distributions to stockholders and
the price of American Spectrum stock.
American Spectrum believes that it can satisfy its cash payment
obligations and note service payment obligations to noteholders from available
resources, including cash reserves and operating revenues. However, if American
Spectrum lacks sufficient funds to satisfy these obligations, it would need to
find funds from other sources. As a result, it may be required to sell one or
more of its properties on unattractive terms, which could impair American
Spectrum's ability to achieve budgeted levels of operating income, further
impairing American Spectrum's ability to satisfy its obligations to noteholders.
These sales could also affect distributions to stockholders which could depress
the trading value of American Spectrum stock.
Maryland law could restrict change in control. This could deter favorable
transactions.
Maryland law provides that "control shares" of a Maryland corporation
obtained in a "control share acquisition" have no voting rights, except to the
extent approved by two-thirds of the votes entitled to be cast on the matter.
Any shares of stock owned by the acquirer of "control shares," or by American
Spectrum's officers or directors who are also its employees, may not be counted
in the two-thirds required for approval. Control shares are voting
35
<PAGE> 48
shares of stock which, when added with all other shares owned or subject to the
voting control of the acquirer, would result in the acquirer having specified
ranges of voting power in electing American Spectrum's board of directors. A
control share acquisition means the acquisition of control shares. If voting
rights for the control shares are properly approved by American Spectrum's
stockholders, and the acquirer then controls the voting of a majority of the
shares entitled to vote, then all other stockholders may exercise appraisal
rights to receive the fair market value of their shares.
These provisions of Maryland law could delay or prevent a change in
control even if such change is in the stockholders' best interest due to: (1)
the potential for the absence of voting rights for control shares; and (2) the
potential cost of the exercise of appraisal rights if voting rights are approved
for control shares. However, this law does not apply to shares acquired in a
merger, consolidation or share exchange in which American Spectrum is a party.
Distribution payments are subordinate to payments on debt. This could affect
your receipt of dividends.
Distributions to stockholders will be subordinate to the prior payment of
American Spectrum's current debts and obligations, including payments on the
notes. If American Spectrum has insufficient funds to pay its debts and
obligations, future distributions to stockholders will be suspended pending the
payment of such debts and obligations.
Real Estate/Business Risks
American Spectrum's increased leverage increases our risk of default. This could
adversely affect our results of operations and our ability to make
distributions.
Upon consummation of the consolidation, American Spectrum will have more
indebtedness and leverage than the funds. In addition to the issuance of
American Spectrum shares or the sale of units of the Operating Partnership,
American Spectrum intends to fund acquisitions through short-term borrowings
and, when market conditions are appropriate, by financing or refinancing its
indebtedness on such properties on a longer-term basis. American Spectrum
expects to increase its indebtedness to 70% of the appraised value of its
assets. Any increase in American Spectrum's leverage could increase American
Spectrum's risk of default on its obligations and adversely affect American
Spectrum's funds from operations and its ability to make required distributions
to its stockholders.
There are risks inherent in American Spectrum's acquisition and development
strategy. American Spectrum may not make profitable investments.
American Spectrum plans to pursue its growth strategy through the
acquisition and development of additional properties. To the extent that
American Spectrum pursues this growth strategy, we do not know that it will
succeed. American Spectrum may have difficulty finding new properties,
negotiating with new or existing tenants or securing acceptable financing. In
addition, investing in additional properties is subject to many risks. For
instance, if an additional property is in a market in which American Spectrum
does not invest, American Spectrum will have relatively little experience in and
may be unfamiliar with that new market. Also, American Spectrum's acquisition
strategy of investing in under-valued assets subjects American Spectrum to
increased risks. American Spectrum may not succeed in turning around these
properties. American Spectrum may not make a profit on its investments.
American Spectrum's properties may not be profitable, may not result in
distributions and/or may depreciate.
Properties acquired by American Spectrum:
(1) may not operate at a profit;
(2) may not perform to American Spectrum's expectations;
(3) may not appreciate in value;
36
<PAGE> 49
(4) may depreciate in value;
(5) may not ever be sold at a profit;
(6) may result in the loss of a portion of your investment; and
(7) may not result in dividends.
The marketability and value of any properties will depend upon many
factors beyond American Spectrum's control.
The results of future property purchases are uncertain.
Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future. You also
will not have the ability as a stockholder or noteholder of American Spectrum to
approve or disapprove of American Spectrum's investments. American Spectrum may
not buy properties on financially attractive terms. It may not make a profit on
its investments.
American Spectrum may invest in joint ventures, which adds another layer of risk
to its business.
American Spectrum may acquire properties through joint ventures which
could subject American Spectrum to certain risks which may not otherwise be
present if investments were made directly by American Spectrum. These risks
include:
o the potential ability of American Spectrum's joint venture partner
to perform;
o the joint venture partner may have economic or business interests or
goals which are inconsistent with or adverse to those of American
Spectrum;
o the joint venture partner may take actions contrary to the requests
or instructions of American Spectrum or contrary to American
Spectrum's objectives or policies; and
o the joint venturers may not be able to agree on matters relating to
the property they jointly own.
American Spectrum also may participate with other investors, including,
possibly investment programs or other entities affiliated with management, in
investments as tenants-in-common or in some other joint venture. The risks of
such joint ownership may be similar to those mentioned above for joint ventures
and, in the case of a tenancy-in-common, each co-tenant normally has the right,
if an unresolvable dispute arises, to seek partition of the property, which
partition might decrease the value of each portion of the dividend property.
Upon expiration of current leases, American Spectrum may not enter into
favorable leases.
The leases of American Spectrum's existing properties expire on dates
ranging from 2000 to approximately 2010. For example, approximately 24% of the
leases will expire in the year 2000, approximately 16% will expire in 2001 and
approximately 16% will expire in 2002. Upon the expiration of a lease, American
Spectrum may not enter into new leases at comparable lease rates, or without
incurring additional expenses.
Real property investments entail risk. These risks could adversely affect
American Spectrum's distributions.
Like your investment in the funds, if you become a stockholder in American
Spectrum, your investment will be subject to the risks of investing in real
property. In general, a downturn in the national or local economy, changes in
the zoning or tax laws or the availability of financing could affect the
performance and value of the properties. Also, because real estate is relatively
illiquid, American Spectrum may not be able to respond promptly to adverse
economic or other conditions by varying its real estate holdings.
37
<PAGE> 50
American Spectrum may incur unforeseen environmental liabilities.
Various federal, state and local laws subject property owners or operators
to liability for the costs of removal or remediation of certain hazardous
substances on a property. These laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the release of
hazardous substances. The presence of, or the failure to properly remediate,
hazardous substances may adversely affect the ability of American Spectrum to
operate the properties. In addition, these factors may hinder American
Spectrum's ability to borrow against contaminated properties. Also, the presence
of hazardous substances on a property could result in personal injury or similar
claims by private plaintiffs. Future laws or regulations or actions of
regulators could also impose unanticipated material environmental liabilities on
any of the properties.
The costs of complying with these environmental laws for American
Spectrum's properties may adversely affect American Spectrum's operating costs
and the value of the properties. In order to comply with the various
environmental laws, American Spectrum intends to obtain satisfactory Phase I
environmental site assessments or have environmental insurance in place for all
of the properties that it purchases in and following the consolidation.
American Spectrum faces intense competition in all of its markets.
Numerous properties compete with our properties in attracting tenants to
lease space. Additional properties may be built in the markets in which our
properties are located. The number and quality of competitive properties in a
particular area will have a material effect on our ability to lease space at the
properties or at newly acquired properties and on the rents charged. Some of
these competing properties may be newer or better located than our properties.
There are a significant number of buyers of properties, including institutional
investors and other publically traded REITs. Many of these competitors have
significantly greater financial resources and experience than us. This has
resulted in increased competition in acquiring attractive properties. This
competition can adversely affect our ability to acquire properties and increase
our distributions.
Tax Risks
If American Spectrum fails to elect REIT status or qualify as a REIT for tax
purposes, American Spectrum will pay federal income taxes at corporate rates.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an effective REIT election,
American Spectrum will be taxed as a C corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirements of Code and Regulations applicable to REITs. American Spectrum has
not requested, and does not plan to request, a ruling from the Internal Revenue
Service that it qualifies as a REIT. It has received an opinion, however, from
its tax counsel, Proskauer Rose LLP, that it will meet the requirements for
qualification as a REIT. Proskauer Rose LLP's opinion is based upon
representations made by American Spectrum regarding relevant factual matters,
existing Code provisions, applicable regulations issued under the Code, reported
administrative and judicial interpretations of the Code and regulations,
Proskauer Rose LLP's review of relevant documents and the assumption that
American Spectrum will operate in the manner described in this consent
solicitation. However, you should be aware that opinions of counsel are not
binding on the Internal Revenue Service or any court. Furthermore, the
conclusions stated in the opinion are conditioned on, and American Spectrum's
continued qualification as a REIT will depend on, American Spectrum's management
meeting various requirements discussed in more detail under the heading "Federal
Income Tax Considerations -- Taxation of American Spectrum" beginning on page
____.
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<PAGE> 51
A REIT is subject to an entity level tax on the sale of certain property
it held before electing REIT status. During the 10-year period following its
qualification as a REIT, American Spectrum will be subject to an entity level
tax on the income it recognizes upon the sale of assets including all the assets
transferred to it as part of the consolidation it held before electing REIT
status in an amount up to the amount of the built-in gains at the time American
Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum fails to qualify as a REIT or
loses its REIT status, the funds available for distribution to you, as a
stockholder, would be reduced substantially for each of the years involved.
The transfer of assets to American Spectrum may fail to qualify as a transaction
where no gain is recognized to the transferor.
Each transferor fund intends to report the consolidation on the basis that
it will not result in gain or loss to any limited partner who elects to receive
shares except to the extent liabilities assumed by American Spectrum exceed the
basis of the assets contributed to American Spectrum. See "Funds listed have
liabilities in excess of the tax basis of the contributed assets. Limited
partners in these funds will recognize additional gain from the consolidation."
below. We cannot assure you that the IRS will not challenge this treatment of
the transaction. If the IRS asserts a challenge, it may prevail. If the IRS
prevails your fund will recognize gain. Such gain will be equal to the amount by
which the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred. Your share of the gain
will be allocated to you.
To qualify as a REIT, American Spectrum must meet asset requirements. If
American Spectrum fails to meet these asset requirements, it will pay tax as a
corporation.
For taxable years beginning after December 31, 2000, in order to qualify
as a REIT, at least 75% of the value of American Spectrum's assets must consist
of investments in real estate, investments in other REITs, cash and cash
equivalents and government securities.
In addition, American Spectrum may not have more than 25% of the value of
its assets represented by securities other than government securities and not
more than 20% of the value of its total assets represented by the securities of
one or more taxable REIT subsidiaries. Additionally, with the exception of
securities held in a taxable REIT subsidiary, American Spectrum may not own: (i)
securities in any one company (other than a REIT) which have, in the aggregate,
a value in excess of 5% of the value of American Spectrum's total assets; (ii)
securities possessing more than 10% of the total voting power of the outstanding
securities of any one issuer and (iii) securities having a value of more than
10% of the total value of the outstanding securities of any one issuer.
The 75% and 5% tests are determined at the end of each calendar quarter.
If at the end of any calendar quarter (plus a 30-day cure period), American
Spectrum fails to satisfy either test, it will cease to qualify as a REIT.
To qualify as a REIT, American Spectrum must meet distribution requirements. If
it fails to do so, it will pay tax as a corporation.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a
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<PAGE> 52
result, American Spectrum could have taxable income in excess of cash available
for distribution. In that case, American Spectrum may have to borrow funds or
liquidate some of its assets in order to make sufficient distributions and
maintain its status as a REIT or obtain approval from its stockholders in order
to make a consent dividend.
American Spectrum must meet limitations on share ownership to qualify as a REIT.
These limitations may deter parties from purchasing American Spectrum shares.
In order to protect its REIT status, the articles of incorporation include
limitations on the ownership by any single stockholder of any class of American
Spectrum capital stock. The amended and restated articles of incorporation also
prohibit anyone from buying shares if the purchase would cause American Spectrum
to lose its REIT status. These restrictions may discourage a change in control
of American Spectrum, deter any attractive tender offers for American Spectrum
shares or limit the opportunity for you or other stockholders to receive a
premium for American Spectrum shares.
Funds listed have liabilities in excess of the tax basis of contributed assets.
Limited partners in these funds will recognize additional gain from the
consolidation.
Sierra Pacific Development Fund III and Nooney Real Property
Investors-Two, L.P. have liabilities in excess of their tax basis in the assets
contributed to American Spectrum. If your fund has these liabilities, it may
realize gain upon the transfer of its assets to American Spectrum in return for
American Spectrum shares or notes as part of the consolidation. As a partner of
your fund, you will bear a pro rata portion of your fund's income tax liability
resulting from any gain on the consolidation.
American Spectrum has acquired assets from CGS privately held entities in
exchange for Operating Partnership units. The privately held entities will
recognize gain upon the Operating Partnership's sale of these assets. This could
delay the sale of these assets.
Privately held entities of CGS Real Estate Company, Inc. will transfer
their assets to the Operating Partnership in exchange for limited partnership
units in the Operating Partnership. These assets have a book value of
$(35,738,836) and an exchange value of $27,229,539. If, as of the date of the
consolidation, an asset contributed by such privately held entity to the
Operating Partnership has a fair market value in excess of its tax basis, the
amount by which the asset's fair market value exceeds its tax basis will
constitute built-in gain. If a contributed asset with built-in gain is sold by
the Operating Partnership, a portion of the gain recognized by the Operating
Partnership in an amount equal to the built-in gain must be allocated to the
partners of the contributing CGS privately held entity. As a result, American
Spectrum has generally agreed not to sell these properties for five to ten years
without the consent of the partners of the CGS privately held entities. This
reduces American Spectrum's flexibility in the future.
American Spectrum will pay tax as a corporation prior to qualifying as a REIT.
As a result, American Spectrum will pay additional taxes.
Prior to American Spectrum's election to be taxed as a REIT, American
Spectrum will be taxed as a C corporation. Therefore, American Spectrum will be
subject to tax at the entity level and any distributions to its stockholders as
dividends will be subject to tax at the stockholders' respective income tax
rates. Any income generated by American Spectrum may be offset by its net
operating loss carry-forwards to the extent they have not previously been
utilized or are otherwise limited in their use. In general, the use of net
operating losses is limited in the case where there has been a greater than 50%
change in the ownership of a corporation in any three-year period. It is
anticipated that due to the consolidation, such change will occur and any net
operating losses that American Spectrum currently has will be limited after the
date of the consolidation. The maximum annual amount of the net operating losses
that American Spectrum will have available for use will be equal to the value of
American Spectrum on the date of the 50% or more change in the ownership
multiplied by the long-term tax exempt rate.
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<PAGE> 53
Even if American Spectrum qualifies as a REIT, it may be subject to
federal, state and local taxes on its income and property that could reduce its
operating cash flow and distributable funds. For example, American Spectrum
would be subject to federal income tax at the entity level on gain realized from
the sale of assets it held before electing REIT status in an amount up to the
built-in gains at the time it becomes a REIT.
In addition, American Spectrum's use and carry-forward of its net
operating losses may be limited upon its election to REIT status.
Future changes in tax law could adversely impact American Spectrum's
qualification as a REIT.
American Spectrum's treatment as a REIT for federal income tax purposes is
based on the tax laws that are currently in effect. We are unable to predict any
future changes in the tax laws that would adversely affect American Spectrum's
status as a REIT. In the event that there is a change in the tax laws that
prevents American Spectrum from qualifying as a REIT or that requires REITs to
pay corporate level federal income taxes, American Spectrum may not be able to
make the same level of distributions to its stockholders. In addition, such
change may limit American Spectrum's ability to invest in additional properties.
BACKGROUND OF AND REASONS FOR THE CONSOLIDATION
Background of the Funds
Formation of the Funds. From 1979 through 1985, parties unrelated to CGS
sponsored eight limited partnerships that were formed to acquire primarily
office and office/warehouse properties. The funds raised capital of $119 million
in eight public offerings registered with the SEC, and as of December 31, 1999
had more than 13,800 limited partners. The general partners of each of the funds
were not affiliates of CGS at the time of their formation. In 1994, CGS acquired
the capital stock of the general partners and managers of Sierra Pacific
Development Fund, Sierra Pacific Development Fund II, Sierra Pacific Development
Fund III, Sierra Pacific Institutional Properties V and Sierra Pacific Pension
Investors '84. In 1997, CGS acquired the capital stock of the general partners
and managers of Nooney Income Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P.
and Nooney Real Property Investors-Two, L.P.
The table below sets forth the number of properties owned capital raised
and date of last admission of the original limited partners of the funds:
<TABLE>
<CAPTION>
Total Date of Last
Number of Admission of
Properties Total Capital Original Partners
Fund Owned(1) Raised (Mo./Yr.)
----------------------------------------------------- ---------------- ------------------- --------------------
<S> <C> <C> <C>
Sierra Pacific Development Fund 1 $ 14,677,000 June, 1983
Sierra Pacific Development Fund II 3 21,726,899 August, 1984
Sierra Pacific Development Fund III 1 9,137,495 February, 1986
Sierra Pacific Institutional Properties V 1 7,694,250 October, 1987
Sierra Pacific Pension Investors '84 2 19,266,629 February, 1986
Nooney Income Fund Ltd., L.P. 2 15,180,000 October, 1984
Nooney Income Fund Ltd. II, L.P. 4 19,221,000 October, 1986
Nooney Real Property Investors-Two, L.P. 4 12,000,000 October, 1980
</TABLE>
----------
(1) Nooney Income Fund Ltd., L.P. and Nooney Income Fund Ltd. II, L.P. own a
76% interest and a 24% interest, respectively, in an office building as
tenants in common. For purposes of this table, Nooney Income Fund Ltd.,
L.P. is deemed to own the property since it owns a greater interest
therein.
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<PAGE> 54
Investment Objectives of Funds
For the funds, the primary investment objectives were generally to invest
in properties which would:
o preserve, protect and return the fund's invested capital;
o have the potential for long-term capital gains through appreciation in
value;
o provide the limited partners with cash distributions from operations;
o provide federal income tax deductions; and
o have the potential to be sold for cash after an approximate three to five
year holding period.
There was no assurance that such objectives would be achieved. Substantially all
of the net proceeds from the offerings of the units have been invested in real
estate, except for amounts used as working capital.
With respect to each fund, we have set forth in the following table the
age of the fund relative to: (i) the original term of the fund as set forth in
the applicable partnership agreement, and (ii) the anticipated holding period of
the fund's investments as set forth in the original offering materials.
<TABLE>
<CAPTION>
Original
Anticipated
Legal Life of Partnership Formed Holding Period
Fund Fund (Years) (Mo./Yr.) (Years)
----------------------------------------------- -------------------- ---------------------- ----------------
<S> <C> <C> <C>
Sierra Pacific Development Fund 49 February/1981 5
Sierra Pacific Development Fund II 30 April/1983 3 - 5
Sierra Pacific Development Fund III 36 June/1984 3 - 5
Sierra Pacific Institutional Properties V 40 October/1985 3 - 5
Sierra Pacific Pension Investors '84 36 June/1984 3 - 5
Nooney Income Fund Ltd., L.P. 100 October/1983 5 - 10
Nooney Income Fund Ltd. II, L.P. 100 February/1985 5 - 10
Nooney Real Property Investors-Two, L.P. 40 September/1979 5 - 10
</TABLE>
Consideration of Liquidation of the Funds and the Decision to Pursue the
Consolidation
Since CGS assumed control of the general partners of the funds, the
general partners have been evaluating each fund's business prospects, especially
with respect to the feasibility of providing liquidity to limited partners. It
was originally anticipated that the funds would sell their properties within
approximately five to ten years after their acquisition. This period expired
before CGS acquired control of the general partners of the Sierra funds in 1994
and the Nooney funds in 1997. However, the funds were not liquidated prior to
the acquisition of the general partners by affiliates of CGS primarily due to
the depression of real estate values experienced nationwide from 1988 through
1993.
Following their acquisition of the controlling interests in the general
partners, CGS first evaluated each fund and the best way to maximize the value
of the funds and produce liquidity for the partners in the funds. Initially,
after acquisition of control of the Sierra funds in 1994, CGS determined that
there were properties which needed to improve their operating results before it
would be in the interests of the partners to dispose of the properties or enter
into a consolidation transaction. CGS did not acquire control of the Nooney
funds until November 1997. Since that time,
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<PAGE> 55
the general partners have been considering alternatives which could produce
liquidity to the partners. These alternatives included:
o sale of the properties individually followed by a distribution of the net
cash proceeds to the partners;
o other means of producing liquidity for the partners, such as cash tender
offers;
o sale of the properties of the funds as a group to a REIT or other entity;
and
o a consolidation transaction, such as the transaction currently proposed.
Your general partners concluded that, due to the uncertain timing of a
liquidation and the associated costs and expenses, liquidation would not be as
desirable as a consolidation transaction. Your general partners believe that a
consolidation of funds into American Spectrum will enable the limited partners
to realize the value of the funds' properties without reduction for selling
costs and additional winding up expenses of the funds. In addition, the limited
partners will have the ability to realize additional value through future growth
that would not be realized upon a liquidation of the funds.
Further, based on communications with limited partners, the general
partners believe that a primary concern for the limited partners is the
illiquidity of their investment in the funds. The general partners believe that
the consolidation is the most attractive alternative for providing limited
partners with liquidity. Additionally, the consolidation provides the limited
partners with tax planning alternatives not available in a liquidiate. The
general partner believes that the consolidation is more beneficial to the
limited partners than a liquidation of the funds' assets which is discussed
below under "Alternatives Considered." Based on the general partners' evaluation
of the alternatives to the consolidation, the desire of the limited partners for
liquidity, and the benefits of the consolidation that are not available under
any of the alternatives, the general partners concluded that the proposed
consolidation is the best means of most closely meeting the funds' original
investment objectives.
The general partner is aware of the following tender offers for the period from
January 1, 1998 through July 31, 2000:
o During April 1998 John N. Galardi made a tender offer for all units of
Sierra Pacific Pension Investors '84 at a price of $100.00 per unit ($400
per $1,000 investment). 9444 units were acquired as a result of this
tender.
o During August 1999 John N. Galardi made a tender offer for all units of
Sierra Pacific Development Fund at a price of $60.00 per unit ($120 per
$1,000 investment). 3657 units were acquired as a result of this tender.
o During September 1999 Everest Properties II, LLC and its affiliates
("Everest") made a tender offer for 4.9% of units of Sierra Pacific
Development Fund II at a price of $100.00 per unit ($400 per $1,000
investment). 2246 units were acquired as a result of this tender.
o During April 2000 Everest made a tender offer for 4.9% of units of Sierra
Pacific Development Fund II at a price of $100.00 per unit ($400 per
$1,000 investment). 1214 units were acquired as a result of this tender.
Affiliates of CGS, as part of the settlement of certain law suits and
other disputes between CGS, Bond Purchase, L.L.C. and certain of their
affiliates, and in consideration of the sale by affiliates of CGS of a
controlling interest in Nooney Realty Trust, Inc., a publicly-held real estate
investment trust, and Nooney Capital Corp., the corporate general partner of a
publicly-held limited partnership, on November 9, 1999 purchased from Bond
Purchase, L.L.C.:
o Fifty-nine (59) units of Nooney Income Fund II, L.P. (NIFII) at a price
per unit of $450;
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<PAGE> 56
o 1,802 units in Nooney Income Fund Ltd., L.P. (NIF) at $600 per unit;
o 199 units in Nooney Real Property Investors-Two, L.P. (NRPI) at $360 per
unit; and
o 8 units in Sierra Pacific Pension Investors '84 at $125 per unit.
In addition, in connection with the settlement and as a condition thereto, CGS
purchased from Everest:
o 1,062 units in NIFII at a price per unit of $450;
o 260 units in NIF at $600 per unit; and
o 449 units in NRPI at $360 per unit.
The prices paid by CGS for the units in the funds set forth above were
negotiated in the context of an overall settlement of claims between the parties
and are not necessarily representative of the market value of the units
purchased.
In addition, affiliates of CGS made the following purchases of units in the fund
since January 1, 1998:
o In 1998, affiliates of CGS purchased a total of 599 units in Sierra
Pacific Development Fund at a weighted average of $92.30 per unit ($184.60
per $1,000 investment).
o In 1999, affiliates of CGS purchased a total of 73 units in Sierra Pacific
Development Fund at a weighted average of $40.44 per unit ($80.88 per
$1,000 investment).
o In 2000, affiliates of CGS purchased a total of 38 units in Sierra Pacific
Development Fund at a weighted average of $63.95 per unit ($127.90 per
$1,000 investment).
o In 1998, affiliates of CGS purchased a total of 516 units in Sierra
Pacific Development Fund II at a weighted average of $105.28 per unit
($421.12 per $1,000 investment).
o In 1999, affiliates of CGS purchased a total of 1,499 units in Sierra
Pacific Development Fund II at a weighted average of $125.37 per unit
($501.48 per $1,000 investment).
o In 2000, affiliates of CGS purchased a total of 788 units in Sierra
Pacific Development Fund II at a weighted average of $128.27 per unit
($513.08 per $1,000 investment).
o In 1998, affiliates of CGS purchased a total of 300 units in Sierra
Pacific Development Fund III at a weighted average of $25.00 per unit
($100.00 per $1,000 investment).
o In 1998, affiliates of CGS purchased a total of 4,159 units in Sierra
Pension Fund '84 at a weighted average of $25.67 per unit ($102.68 per
$1,000 investment).
o In 1999, affiliates of CGS purchased a total of 1,117 units in Sierra
Pension Fund '84 at a weighted average of $124.18 per unit ($496.72 per
$1,000 investment).
o In 2000, affiliates of CGS purchased a total of 315 units in Sierra
Pension Fund '84 at a weighted average of $117.98 per unit ($471.92 per
$1,000 investment).
o In 1998, affiliates of CGS purchased a total of 16 units in Sierra Pacific
Development Fund V at a weighted average of $47.00 per unit ($188 per
$1,000 investment.
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<PAGE> 57
o In 1999, affiliates of CGS purchased a total of 58 units in Sierra Pacific
Development Fund V at a weighted average of $61.03 per unit $244.12 per
$1,000 investment).
o In 2000, affiliates of CGS purchased a total of 269 units in Sierra
Pacific Development Fund V at a weighted average of $61.14 per unit
($244.56 per $1,000 investment).
CGS owned the land on which a building was owned by one of the funds. The
land was leased to the fund. In February 2000, the affiliate sold the land to a
joint venture partnership, in which two of the funds held an interest, for $3.5
million.
Chronology of the Consolidation
The corporate general partners of the funds and CGS, which controls the
corporate general partners, have a relatively small number of executive
officers. The corporate general partners have only one director, William J.
Carden. As a result, most of the decision-making with respect to the funds is
done by a relatively small group of persons through an informal process.
Accordingly, most of the consideration of the consolidation and alternatives to
the consolidation were done through a series of informal discussions during 1998
and 1999. The principal participants in these discussions were William J.
Carden, Thomas Thurber , Harry Mizrahi, and Paul Perkins. These discussion were
generally informal in nature and took place in person and by telephone. We do
not have a record of the dates on which the discussions took place. During the
course of these discussions, various alternatives were discussed. The principal
alternatives addressed during these discussions were acquisition of the assets
of the fund by a REIT, consolidation transaction, tender offers for limited
partnership units to provide liquidity and sales of the properties of the funds
either individually or in their entirety. The participants in these discussions
did not retain an outside advisor or seek outside advice during this period or
prepare any formal financial studies of the alternatives. They relied on their
familiarity with the properties and the market for the properties.
Following these informal discussions, the corporate general partners of
the funds determined that consolidation was the most desirable alternative. They
made the decision to retain counsel, accountants and an investment banker to
consider the feasibility of the proposed consolidation transaction and the steps
necessary to implement the consolidation transaction.
In January 1999 and May 1999, representatives of the general partners and
CGS met with two publicly held REITs to discuss the possibility of a transaction
in which the CGS privately held entities would merge with or be acquired by a
public real estate investment trust. They determined not to pursue this
alternative.
In January 1999, we and the general partners retained an investment banker
in connection with a transaction in which the CGS privately held entities,
including management company affiliates of CGS, would be combined to form a
single entity.
In January 1999 representatives of the general partners and CGS met with
representatives of Stanger, an investment banker. The meeting was informal and
explored generally the feasibility of a consolidation and the possibility of
retaining Stanger to provide a fairness opinion in connection with a
consolidation transaction.
In January 1999, representatives of the general partners met with
representatives of Lehman Brothers to discuss generally their ideas with respect
to transactions involving the funds and the CGS privately held entities. No
specific transactions were discussed.
Also in January 1999, representatives of the general partners held a
similar meeting with representatives of Goldman Sachs. They discussed generally
their ideas with respect to transactions involving the funds and the CGS
privately held entities. They did not discuss Goldman Sach's retention as
investment banker in connection with the consolidation.
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<PAGE> 58
In May 1999, representatives of the general partners and CGS met with
representatives of Stanger and began to discuss the possibility of retaining
Stanger in connection with a transaction in which the CGS privately held
entities, including management company affiliates of CGS and the funds, would be
combined to form a single entity. They discussed the logistics of a transaction
and Stanger's role in the transaction.
In May 1999, we began considering retention of counsel to advise us with
respect to the consolidation and preparation of Registration Statement on Form
S-4. We met with Battle Fowler LLP and another law firm.
In June 1999, CGS and the funds retained Stanger as investment banker to
render an opinion as to the fairness from a financial point of view to the funds
of the allocations of the American Spectrum shares pursuant to the
consolidation. In May 2000, CGS and the funds retained Stanger to prepare
appraisals of the property portfolios of the funds and the CGS privately held
entities.
In June 1999, we retained the law firm of Battle Fowler LLP to advise us
with respect to the consolidation and to assist us in the preparation of a
Registration Statement on Form S-4.
In October-December 1999, representatives of the general partners met with
representatives of the independent accountants of the funds and two other
accounting firms, to discuss the possibility of retaining the accountants to
render advice as to the accounting and income tax implications of the
consolidation.
In December 1999, representatives of the general partners met with
representatives of Arthur Andersen LLP, the independent accountants of the CGS
privately held entities, to discuss the possibility of retaining Arthur Andersen
LLP to render advice as to the accounting and income tax implications of the
consolidation.
In January 2000, we considered bids from Arthur Andersen LLP and other
accounting firms to render advice as to the accounting and income tax
implications of the consolidation.
In January 2000, representatives of the general partners and American
Spectrum met with representatives of Stanger to discuss the appraisals of the
assets and the fairness opinion.
In February 2000, representatives of the general partners and us met with
representatives of Arthur Andersen LLP and Battle Fowler LLP to review the
structure of the consolidation and the financial and tax consequences of the
consolidation. This discussion primarily reviewed the steps to be taken in
connection with the consolidation. The discussion was informal.
In February 2000, we retained the accounting firm of Arthur Andersen LLP
to provide us with financial and tax advice with respect to the consolidation,
and to audit financial statements required in connection with the consolidation.
During this period, we had various discussions with Stanger concerning
their progress in connection with the fairness opinion and appraisal. We
discussed Stanger's preliminary valuation of our assets including the management
companies.
In July 2000, after reviewing the value of the Third Party Management
Company and its profitability, we determined to exclude the Third Party
Management Company from the consolidation.
In July 2000, we retained the law firm of Proskauer Rose LLP to advise us
with respect to the consolidation and to continue the preparation of a
Registration Statement on Form S-4 and the consolidation transaction. Certain
persons affiliated with Battle Fowler LLP who were involved in the preparation
of the Registration Statement on Form S-4 became affiliated with Proskauer Rose
LLP.
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<PAGE> 59
At various times during the period from January 2000 through July 2000,
representatives of the general partners and we met Stanger, Arthur Andersen LLP,
Battle Fowler LLP and Proskauer Rose LLP to discuss matters relating to the
status of consolidation, the impact of market conditions for REITs, legal and
accounting issues, Stanger's appraisals and fairness opinion, the consolidation
and the Registration Statement on Form S-4. The discussions generally involved
William J. Carden and Thomas Thurber on behalf of the general partners and us.
The discussions generally involved consideration of the consolidation and the
steps needed to complete the consolidation. No formal process was undertaken
during this period to review the alternatives to the consolidation.
Your General Partners' Reasons for Proposing the Consolidation
We are proposing the consolidation at this time because we believe that
the expected benefits of the consolidation outweigh the risks of the
consolidation, as set forth in "Risk Factors" above, and we believe that it is
the best way for you to maximize returns on your investment. The expected
benefits include the following:
o Growth Potential. We believe that there is greater potential for
increased distributions to you as a stockholder and for appreciation
in the price of American Spectrum shares than there would be for you
as a limited partner of your fund holding units. This growth
potential results primarily from potential future acquisitions of
additional properties and engaging in financing activities. We
believe that substantial opportunities currently exist to acquire
additional properties at attractive prices. Your fund cannot take
advantage of such opportunities because its partnership agreement
generally restricts it from making additional acquisitions and
developing properties. In addition, because American Spectrum can
use cash, American Spectrum shares or indebtedness to acquire
additional properties, American Spectrum will have a greater degree
of flexibility in making future acquisitions on advantageous
economic terms. American Spectrum may also take advantage of its
structure as an umbrella partnership REIT, or an UPREIT, to acquire
additional portfolios of properties by using, as consideration,
limited partnership interests in its Operating Partnership. The use
of limited partnership interest in its Operating Partnership enables
American Spectrum to make acquisitions in a structure that permits
the seller to defer the federal taxes due on the sale while
providing to sellers the same opportunities to participate in
American Spectrum's growth as the stockholders have. This ability
gives American Spectrum a tremendous advantage over other potential
acquirors who do not have the option of using partnership units, but
instead may only acquire these portfolios in a taxable manner using
cash or capital stock, particularly in instances where the sellers
would have to recognize a substantial amount of taxable gain as a
result of the transaction. Also, American Spectrum's ability to
acquire portfolios in a manner that is tax-deferred for the seller
may allow American Spectrum to pay less consideration than would
otherwise be necessary in a taxable transaction due to the seller's
ability to control the timing of its gain recognition.
o Risk Diversification. The combination of the properties owned by the
funds and the CGS privately held entities under the ownership of
American Spectrum will result in a more diversified investment than
your investment in the fund. American Spectrum will have a larger
number of properties and a broader group of property types and
tenants and geographic locations. This diversification will reduce
the dependence of your investment upon the performance of, and the
exposure to the risks associated with, the particular group of
properties currently owned by your fund.
o Operational Economies of Scale. The combination of the funds under
the ownership of American Spectrum will result in administrative and
operational economies of scale and cost savings for American
Spectrum. Particularly because the funds are public entities subject
to the SEC's reporting requirements, the combination of the funds
into a single public company in American Spectrum would save
compliance costs. In addition, if your fund is acquired, we will no
longer have to supply a Schedule K-1 to you and each of the other
limited partners for your tax reporting which generally was provided
to you each February. You will instead receive a Form 1099-DIV, a
much simpler reporting form, which will be provided each January.
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<PAGE> 60
o Liquidity. We believe the consolidation will provide you with
increased liquidity for two reasons. First, the market for the units
you own is very limited because the units are not listed on an
exchange and, therefore, a potential buyer has only a limited basis
upon which to value the units. Because your fund's partnership
agreement contains limitations on the transfer of your units, you
may not be able to sell your units even if you were able to locate a
willing buyer. As a stockholder, you will own American Spectrum
shares which will be listed on the _________, and therefore publicly
valued, and there will be no restrictions on your ability to sell
the American Spectrum shares you own. Second, as a unitholder that
are non-tradable, the pool of potential buyers for your units is
limited and, to the extent that there is a willing buyer, the buyer
would likely acquire your units at a substantial discount. As a
holder of American Spectrum shares, and assuming American Spectrum
acquires all of the funds, you will be a stockholder of a company
that will have total real estate assets of approximately $283
million and more than 15,000 stockholders.
o Public Market Valuation of Assets. We believe that the public market
valuations of the equity securities of many publicly-traded real
estate companies, including REITs, have historically exceeded the
net book values of their real estate assets. You should be aware,
however, that the American Spectrum shares may not trade at a
premium to the net asset values of the funds, and, to the extent
that the American Spectrum shares do trade at a premium, that the
relative pricing differential may change or be eliminated in the
future. The market for REIT stocks has underperformed the broader
market in 1998 and 1999, and the prices for REIT stocks have fallen
below the issuer's net asset value in some instances.
o Regular Quarterly Cash Distributions. We expect that American
Spectrum will make regular quarterly cash distributions to its
stockholders. None of the funds made distributions in 1999 and the
first quarter of 2000. While some of the funds had cash flow in 1999
and the first two quarters of 2000 and could make distributions in
the future, we believe you are likely to receive higher
distributions from America Spectrum than the funds. Additionally,
the ability to receive distributions quarterly and in regular
amounts would be enhanced, because, unlike the funds, American
Spectrum will have the ability to increase its portfolio of assets
from which income will be derived.
o Greater Access to Capital. With publicly-traded equity securities,
access to debt financing, a larger base of assets and a greater
equity value than any of the funds individually, American Spectrum
expects to have greater access to the capital necessary for funding
its operations and consummating acquisitions on more attractive
terms than would be available to any of the funds individually.
Also, American Spectrum's intended UPREIT structure with the
Operating Partnership provides it with additional potential access
to capital through the issuance of the Operating Partnership's
units. This greater access to capital should provide greater
financial stability to American Spectrum and provide funding for
future acquisitions. American Spectrum currently intends to maintain
a ratio of total indebtedness to the appraised value of its total
assets of not more than 70%.
o Greater Reduction of Conflicts of Interest. American Spectrum will
be managed by its Board of Directors and officers. This will
eliminate fees paid to outside advisors, reducing various conflicts
of interest and creating an alignment of the interests of the
stockholders and management. The persons engaged to manage American
Spectrum will be employees of American Spectrum. They will not be
employees of a separate management company or investment advisor
whose activities could be determined by objectives and goals
inconsistent with American Spectrum's financial objectives.
Management will owe its duty of loyalty only to American Spectrum.
The incorporation of all aspects of the REIT's management and
property management into American Spectrum assures a commitment to
hands-on management. By contrast, externally-advised limited
partnerships and REITs may have no such commitment from a management
team to focus exclusively on their portfolios.
48
<PAGE> 61
Therefore, your general partners believe that the consolidation, rather
than a liquidation, will result in the greatest possible value for your
investment for you and the other limited partners.
Exchange Value Allocation Of American Spectrum Shares
General. The Exchange Value of all of American Spectrum's assets was
determined as of June 30, 2000 to establish a consistent method of allocating
American Spectrum shares for purposes of the consolidation. The Exchange Value
represents our estimates of the net asset value of each fund, the CGS privately
held entities and the CGS Management Company. The number of American Spectrum
shares to be issued to each fund upon consummation of the consolidation will
equal the fund's aggregate Exchange Value divided by $15. The Exchange Value per
share of $15 was an arbitrary amount chosen for the sole purpose of allocating
American Spectrum shares. Thus, each share will have an Exchange Value which is
our estimate of the net asset value per share of $15. However this is not
intended to imply that the American Spectrum shares will trade at a price of $15
per share. See "Risk Factors." No fractional American Spectrum shares will be
issued by American Spectrum in connection with the consolidation. See "No
Fractional American Spectrum Shares" on page __. As of the date of this consent
solicitation, the general partners do not know of any material change in the
financial performance or condition of any of the funds and the CGS privately
held entities, including the CGS Management Company, that will materially affect
the Exchange Values.
Adjustments to Exchange Value and Allocation of American Spectrum Shares.
All determinations of the Exchange Value for purposes of allocating the American
Spectrum shares (i) between the funds, the CGS privately held entities and the
CGS Management Company, and (ii) among the funds, other than the final
computation of the expenses of the consolidation, were determined as of June 30,
2000 in the manner described below under "Determination of Exchange Value." Each
fund, CGS privately held entity; and the CGS Management Company, will operate
and make distributions prior to the closing date of the consolidation such that
its Exchange Value relative to the Exchange Value of the other parties to the
consolidation remains substantially the same as the relative Exchange Value
shown in this consent solicitation. No adjustment will be made to these
allocations unless a material change in the value of an asset or a liability is
discovered after June 30, 2000 and before the effective date of the
consolidation which cannot be adjusted through the funds', CGS privately held
entities' or CGS Management Company's distributions.
If a material change in the value of an asset or liability or potential
liability is discovered with respect to a fund, or CGS privately held entity
(including the CGS Management Company) participating in the consolidation
between June 30, 2000 and prior to the effective date of the consolidation which
was not included in the computation of Exchange Value and the relative Exchange
Value of the parties cannot be maintained through adjusting distributions that
would reduce the corresponding value of the assets contributed by the other
funds, the CGS privately held entities and the CGS Management Company, an
adjustment may be made to the Exchange Value of that fund, the CGS privately
held entities or the CGS Management Company.
Determination of Exchange Values
Exchange Values have been determined for the funds, the CGS privately held
entities (other than the CGS Management Company) and the CGS Management Company,
as described below.
o The funds and the CGS privately held entities -- The Exchange Value of
each fund and the CGS privately held entities (other than the CGS Management
Company) is computed as: (A) the sum of: (i) the estimated fair market value of
the real estate portfolio as determined by the independent appraisal as of March
31, 2000; and (ii) the realizable values of the non-real estate assets as of
June 30, 2000; (B) reduced by (i) the mortgage debt balance as of June 30, 2000,
as adjusted to reflect the market value of such debt, (ii) other balance sheet
liabilities as of June 30, 2000 and (iii) the fund's or CGS privately held
entities' share of the expenses related to the consolidation.
49
<PAGE> 62
o The CGS Management Company -- To determine the estimated value of the CGS
Management Company, we utilized an earnings multiple approach. We estimated the
pro forma earnings in accordance with GAAP of the CGS Management Company before
deducting interest, taxes, depreciation and amortization ("EBITDA"). Our
estimate reflects only those property management assets and businesses of CGS
and its privately held entities which would be contributed to American Spectrum
in the consolidation. While EBITDA is not a substitute for net income determined
in accordance with GAAP, it is derived from financial statements prepared in
accordance with GAAP, and is a commonly used measurement of a company's
operating profitability. We believe that the CGS Management Company, like most
service companies, should be evaluated in terms of the profitability of its
operations and therefore focused our analysis on the CGS Management Company's
EBITDA. Historical revenues and expenses for the fiscal year ending December 31,
1999 and the six-month period ending June 30, 2000 were adjusted to exclude the
revenues and expenses associated with assets and businesses which will not be
included in the consolidation, to eliminate intercompany items and to reflect
only the revenues and expenses associated with the CGS Management Company on a
going forward basis. The revenues and expenses included in the pro forma amounts
reflect only those associated with the management of the properties of the funds
and the CGS privately held entities. We also estimated revenues and expenses for
the year ending March 31, 2001 based on an adjustment methodology consistent
with that utilized to determine the historical pro forma financial results of
the CGS Management Company.
We then applied a multiple of 5.0 to the estimated year ending March 31,
2001 adjusted EBITDA for the CGS Management Company to arrive at an estimated
value of $4 million for the CGS Management Company. Based on our experience in
the real estate industry and with real estate management companies, and our
expectations regarding the future revenues, expenses and profitability of the
CGS Management Company, we considered the multiple reasonable for establishing
the value of the assets and businesses of the CGS Management Company. The
following table summarizes our estimate of the value of the CGS Management
Company.
50
<PAGE> 63
Estimated Value of the CGS Management Company
<TABLE>
<S> <C>
Estimated Revenues $2,566
Estimated Operating Expenses $1,760
Estimated EBITDA $ 806
Valuation Multiple 5.0x
Value (Rounded) $4,000
</TABLE>
The Exchange Value of the CGS Management Company was then computed as: (A)
the sum of (i) the estimated value of the business being contributed to American
Spectrum in the consolidation utilizing the earnings multiple analysis and (ii)
the realizable value of its other assets as of June 30, 2000; (B) reduced by (i)
debt balances as of June 30, 2000, reflecting the market value of such debt;
(ii) other balance sheet liabilities as of June 30, 2000 and (iii) the CGS
Management Company's share of the expenses related to the consolidation.
51
<PAGE> 64
The determination of the Exchange Values of each fund and the CGS
privately held entities, including the CGS Management Company, is summarized in
the following table:
Derivation of Exchange Values
<TABLE>
<CAPTION>
Appraised Value
of Real Estate
Portfolios/ Net Other Mortgage and Estimated
Management Assets and Other Debt Consolidation Exchange
Fund Business (1) Liabilities (2) (3)(4) Expenses Value
------------------------------------------ --------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 8,070,000 $ 2,250,778 $ 4,040,218 $ 155,492 $ 6,125,068
Sierra Pacific Development Fund II 20,773,274 (863,253) 7,458,828 405,043 12,046,149
Sierra Pacific Development Fund III 505,467 5,778 197,575 15,013 298,657
Sierra Pacific Institutional Properties V 4,188,043 40,567 -- 77,582 4,151,028
Sierra Pacific Pension Investors '84 23,543,216 2,686,671 5,905,522 423,831 19,900,534
Nooney Income Fund Ltd., L.P. 10,570,800 1,226,640 1,119,603 188,832 10,489,005
Nooney Income Fund Ltd. II, L.P. 22,079,200 847,598 6,813,723 376,684 15,736,391
Nooney Real Property Investors-Two, L.P. 15,590,000 2,131,620 9,376,576 280,894 8,064,150
CGS privately held entities 177,390,000 (7,666,850) 140,323,711 2,812,460 26,586,979
CGS Management Company 4,000,000 (930,766) 2,357,505 69,169 642,560
------------ ------------ ------------ ------------ ------------
Total $286,710,000 $ 271,217 $177,593,261 $ 4,805,000 $104,040,522
</TABLE>
----------
(1) Reflects the independent appraisal of the value of the funds' and the CGS
privately held entities' real estate portfolios as of March 31, 2000. The
value of the CGS Management Company was determined by us. Stanger has
given its fairness opinion that the allocation of the American Spectrum
shares between the funds and the CGS privately held entities, including
the CGS Management Company, is fair to the limited partners of the funds
from a financial point of view.
(2) Net Other Assets and Liabilities are reflected in the table below.
(3) The mortgage and other debt shown in the table has been adjusted, where
applicable, to reflect the market value of above or below market debt. The
mortgage debt of the CGS privately held entities includes $4,369,217 due
to Sierra Pacific Development Fund II pursuant to a settlement agreement.
See note 5 to the table below.
(4) The other debt consists of the following debt of the CGS Management
Company: (i) $1,872,000 of bank indebtedness, the proceeds of which were
used primarily for the purchase of the general partners of the funds and
limited partnership interests in the funds, (ii) $420,000 of indebtedness
used to finance property insurance policies and (iii) $65,000 of other
indebtedness. The funds and the CGS privately held entities do not have
any debt other than mortgage debt and debt consisting of: (i) $58,931
payable to contractors, (ii) $380,000 payable to an officer of the
Company, and (iii) $65,000 of other indebtedness.
Net Other Assets and Liabilities Table. The following table sets forth the
components of Net Other Assets and Liabilities which, apart from the appraised
value of real estate resulting from the independent appraisal and the valuation
of the CGS Management Company, comprise the greatest components of Exchange
Value for the funds. In general, the Net Other Assets and Liabilities were
derived from the unaudited financial statements as of June 30, 2000 as adjusted
for each fund's interest in the assets and liabilities in joint ventures.
52
<PAGE> 65
Net Other Assets and Liabilities
<TABLE>
<CAPTION>
Rent
Deposits,
Net Accounts Accounts
Receivable Payable and
and Other Other
FUND Cash(1) Assets(2) Liabilities(3) Total
----------------------------------------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 130,875 $ 2,230,004 $ 110,101 $ 2,250,778
Sierra Pacific Development Fund II 344,660 6,661,631 7,869,544 (863,253)
Sierra Pacific Development Fund III 6,078 1,749 2,049 5,778
Sierra Pacific Institutional Properties V 13,366 36,460 9,259 40,567
Sierra Pacific Pension Investors '84 285,498 4,311,910 1,910,737 2,686,671
Nooney Income Fund Ltd., L.P. 1,489,966 149,084 412,410 1,226,640
Nooney Income Fund Ltd. II, L.P. 1,354,006 316,895 823,303 847,598
Nooney Real Property Investors-Two, L.P. 1,929,831 912,661 710,872 2,131,620
CGS privately held entities(6) 1,880,498 1,971,798 11,519,146(5) (7,666,850)
CGS Management Company 39,974 1,200,147 2,170,887 (930,766)
</TABLE>
----------
(1) Cash and cash equivalents (including lender and escrow funds).
(2) Net Accounts Receivable and other assets includes tenant and insurance
receivables, accrued interest and rents receivable, reserve for
uncollected rent, and accounts receivable from affiliates.
(3) Rent Deposits and Net Accounts Payable and Other Liabilities consist of
accrued interest payable, escrow liabilities, accounts payable and accrued
expenses, prepaid rental income, security deposits and accounts and
accounts payable to affiliates.
(4) The assets of Sierra Pacific Development Fund II have been reduced by
$6,391,222 to reflect cash distributions to be made to the limited
partners of Sierra Pacific Development Fund II pursuant to a settlement
agreement.
(5) With respect to the CGS privately held entities, the liabilities consist
of $2,022,005 due from CGS privately held entities to Sierra Pacific
Development Fund II, which, pursuant to a settlement agreement, will be
paid by American Spectrum to holders of units in Sierra Pacific
Development Fund II promptly following the consummation of the
consolidation. An additional $4,369,217 due from one of the CGS privately
held entities to Sierra Pacific Development Fund II under the settlement
agreement is secured by a mortgage on one of the properties and is
included in the column "Mortgage and Other Debt" in the table on the
previous page.
(6) Excludes the CGS Management Company.
53
<PAGE> 66
Expenses of the consolidation were allocated to each of the funds, the CGS
privately held entities and the CGS Management Company based on the type of
expense. The general partners believe that the method selected was fair and
reasonable.
The determination of expenses related to the consolidation is summarized
in the following table:
Derivation of Consolidation Expenses
<TABLE>
<CAPTION>
SPDF SPDF II SPDF III SPIP V SPIP 84 NIF NIF II
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidation Expenses:
Legal (1) $ 22,516 $ 57,963 $ 1,410 $ 11,686 $ 65,692 $ 29,495 $ 61,607
Appraisals (2) 4,286 15,257 514 1,671 12,557 7,543 18,171
Fairness Opinion (1) 15,481 39,850 970 8,034 45,163 20,278 42,355
Solicitation (3) 3,589 7,687 1,922 3,288 6,139 2,571 2,824
Printing & Mailing (3) 6,973 19,218 4,806 8,219 15,348 6,427 7,061
Accounting (4) 60,163 160,276 2,962 24,451 162,382 70,447 137,030
Title, Transfer & Recording (1) 11,259 28,982 705 5,843 32,846 14,748 30,804
Legal Closing Fees (4) 6,667 17,809 329 2,717 16,040 7,827 15,226
Pre-formation Costs (1) 22,518 57,963 1,410 11,686 65,692 29,495 61,607
---------- ---------- ---------- ---------- ---------- ---------- ----------
155,491 405,007 15,029 77,595 423,840 186,831 376,664
========== ========== ========== ========== ========== ========== ==========
<CAPTION>
Public
Partnership CGS Privately CGS Management
NRPI 2 Subtotal Held Entities Company Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidation Expenses:
Legal (1) $ 43,500 $ 293,872 $ 494,967 $ 11,161 $ 800,000
Appraisals (2) 17,143 77,143 72,857 -- 150,000
Fairness Opinion (1) 29,907 202,037 340,290 7,673 550,000
Solicitation (3) 1,979 30,000 -- -- 30,000
Printing & Mailing (3) 4,949 75,000 -- -- 75,000
Accounting (4) 106,349 724,061 1,045,705 30,234 1,800,000
Title, Transfer & Recording (1) 21,750 146,936 247,484 5,581 400,000
Legal Closing Fees (4) 11,617 80,451 116,189 3,359 200,000
Pre-formation Costs (1) 43,500 293,872 494,967 11,161 800,000
---------- ---------- ---------- ---------- ----------
280,894 1,923,372 2,812,459 69,169 4,805,000
========== ========== ========== ========== ==========
</TABLE>
Notes: - Method of allocation of consolidation expenses
1. Allocated over: Funds, CGS privately held entities, and CGS Management
Company-based on appraised value.
2. Allocated based on number of properties (or portions thereof) contained in
the: Funds and CGS privately-held entities.
3. Allocate to: the Funds based on number of limited partners in each fund.
4. Allocated to: Funds, CGS privately held entity properties and CGS
Management Company based on total assets.
54
<PAGE> 67
Allocation of American Spectrum Shares
The method utilized to allocate American Spectrum shares is as follows:
o Level 1 Allocation: American Spectrum shares will be allocated (i)
between the funds and the CGS privately held entities, and the CGS Management
Company, and (ii) among the funds, based upon the Exchange Values of each of the
funds, the CGS privately held entities and the CGS Management Company, relative
to the aggregate estimated Exchange Value of all of the funds, the CGS privately
held entities and the CGS Management Company. The Exchange Values are our
estimates of the net asset values of each of these entities. The general
partners believe that the Exchange Value of the funds, the CGS privately held
entities and the CGS Management Company, represent fair estimates of the value
of their assets, net of liabilities and allocable expenses of the consolidation,
as of June 30, 2000, and constitute a reasonable basis for allocating the
American Spectrum shares (i) between the funds the CGS privately held entities
and the CGS Management Company, and (2) among all the funds.
o Level 2 Allocation: Within each fund, the American Spectrum shares
allocable to that fund will be allocated between the limited partners and the
general partner in accordance with the provisions of such fund's limited
partnership agreement relating to distributions on liquidation of the fund.
Under the terms of the partnership agreements, no American Spectrum shares will
be allocated to the general partners.
The following paragraphs describe the allocations.
Allocation of American Spectrum Shares Between the Funds and the CGS privately
held entities, including the CGS Management Company
The number of American Spectrum shares allocable in the consolidation will
be equal to the aggregate Exchange Value of the funds, and the CGS privately
held entities, including the CGS Management Company, divided by $15. We chose
$15 arbitrarily solely for the purpose of allocating the American Spectrum
shares and determining the number of outstanding American Spectrum shares. While
$15 represents the estimated net asset value per share of the American Spectrum
shares, we do not intend to imply that the American Spectrum shares will trade
at a price equal to $15 per share. The number of American Spectrum shares
allocable to each fund will be determined by multiplying the total number of
American Spectrum shares allocable in the transaction by a fraction the
numerator of which is the Exchange Value of the fund and the denominator of
which is the aggregate Exchange Value of all the funds, the CGS privately held
entities and the CGS Management Company.
The general partners and the CGS Management Company have used the
estimated Exchange Values to determine the allocation of American Spectrum
shares between the funds, the CGS privately held entities and the CGS Management
Company, based on the assumption that the Exchange Values as computed will
reasonably approximate the Exchange Values as of the closing.
The table below shows the allocation of American Spectrum shares between
each of the funds, the CGS privately held entities and the CGS Management
Company assuming: (1) that all funds participate in the consolidation and (2)
that all investors in each fund select American Spectrum shares. The actual
number of American Spectrum shares allocated to each fund upon consummation of
the consolidation will be reduced by an amount equal to the principal amount of
the notes issued to the limited partners in the funds divided by $15.
55
<PAGE> 68
Allocation of American Spectrum Shares Between
the Funds and the CGS Privately Held Entities, and the CGS
Management Company (1)
<TABLE>
<CAPTION>
Percentage of
Total American
Percentage of Share Spectrum
Exchange Value Exchange Value Allocation (1) Shares Issued
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 6,125,068 5.89% 408,338 5.89%
Sierra Pacific Development Fund II 12,046,149 11.58% 803,077 11.58%
Sierra Pacific Development Fund III 298,657 0.29% 19,910 0.29%
Sierra Pacific Institutional Properties V 4,151,028 3.99% 276,735 3.99%
Sierra Pacific Pension Investors '84 19,900,534 19.13% 1,326,702 19.13%
Nooney Income Fund Ltd., L.P. 10,489,005 10.08% 699,267 10.08%
Nooney Income Fund Ltd. II, L.P. 15,736,391 15.13% 1,049,093 15.13%
Nooney Real Property Investors-Two, L.P. 8,064,150 7.75% 537,610 7.75%
CGS privately held entities 26,586,979 25.55% 1,772,465 25.55%
CGS Management Company 642,560 0.62% 42,837 0.62%
Totals $104,040,522 100.00% 6,936,035 100.00%
============ ====== ============ ======
</TABLE>
(1) Some of the holders of interests in the CGS privately held entities may be
allocated Operating Partnership units. Each Operating Partnership unit
provides the same rights to distributions as one share of common stock in
American Spectrum and, subject to limitations, is exchangeable for
American Spectrum shares on a one-for-one basis after a twelve month
period.
Allocation of American Spectrum Shares Between Limited Partners and General
Partners
The American Spectrum shares to be received by each fund will be allocated
between the limited partners and the general partner of each fund based on the
provisions of such fund's limited partnership agreement applicable to
distributions on liquidation of the fund. In accordance with the provisions of
the fund's partnership agreements, all of the American Spectrum shares will be
allocated to the limited partners.
Alternatives to the Consolidation
Before deciding to recommend the consolidation, the general partners
considered alternatives in an effort to achieve maximum limited partner return
and give a choice of investment to limited partners. These alternatives were:
(i) liquidation of the funds; (ii) continued management of the funds as
currently structured; (iii) conversion of the funds into multiple REITs; and
(iv) listing of each fund's units on a national securities exchange or
designation of the units as Nasdaq National Market System securities. Set forth
below are the conclusions of the general partners regarding their belief that
the consolidation is more beneficial to the limited partners than the
alternatives. The general partners are unable to quantify the consideration that
would be received pursuant to all the alternatives discussed below.
Liquidation of the funds. One of the alternatives available to the general
partners is to proceed with a liquidation of each fund in the normal course and
distribute the net liquidation proceeds to the general and limited partners.
Through these liquidations, limited partners' investments in the funds would be
concluded.
The liquidation alternative would have the following potential benefits:
o Liquidation provides liquidity to you as properties are sold. You
would receive the net liquidation proceeds received from the sale of
your fund's assets.
56
<PAGE> 69
o The amount that you would receive would not be dependent on the
stock market's valuation of American Spectrum.
o You would avoid the risks of continued ownership of your fund and
ownership of American Spectrum.
The general partners concluded that there would be several disadvantages
to using this strategy to liquidate the funds. A complete liquidation of the
funds would deprive those limited partners who do not desire to liquidate their
investment from participating in the benefits of future performance and possible
property value improvements. In addition, liquidation of the funds' properties
does not have certain of the other benefits of the consolidation, including: (i)
permitting limited partners to hold their investment until the time when
liquidation is appropriate for their individual investment strategy; and (ii)
the opportunity to participate in the risks and rewards of American Spectrum's
plans for growth.
The transaction costs associated with the consolidation are expected to be
less than those which would be incurred in a liquidation of the funds' assets.
In addition, if the assets of the funds were liquidated over a short period of
time, the general partners believe that the purchase price would be
significantly less than the properties' appraised value. If the assets of the
funds were liquidated over time, not only would higher transaction costs likely
be incurred, but the funds' cash flow from operations may be reduced since the
funds' fixed costs, such as general and administrative expenses, would not be
proportionately reduced with the liquidation of assets.
Continuation of the Funds. An alternative to the consolidation would be to
continue the funds. The funds would remain separate legal entities with their
own assets and liabilities, governed by their existing partnership agreements.
While the disclosure documents used to offer the units for sale to the public
disclosed the intentions of the funds to liquidate their assets within three to
ten years after acquisition, each of the funds has a stated life of
approximately 36 to 100 years, and the limited partners were advised that the
liquidation of the funds would depend on market conditions as they might change
from time to time. The funds do not need to liquidate to satisfy debt
obligations or other current liabilities or to avert defaults, foreclosures or
other adverse business developments.
A number of advantages would be expected to arise from the continued
operation of the funds. The limited partners would possibly receive in the
future regular quarterly distributions of net cash flow arising from operations.
In addition, eventually, your fund would liquidate its holdings and distribute
the proceeds received in liquidation in accordance with the terms of the fund's
partnership agreement. Furthermore, continuing the Partnership without change
avoids whatever disadvantages may be inherent in the consolidation. See "RISK
FACTORS."
The general partners rejected this alternative because they concluded that
maintaining the funds, as separate entities, may have the following potentially
negative results when compared with the benefits that the general partners
perceive may be derived from the consolidation: (i) a less efficient and cost
effective exit strategy for limited partners wishing to liquidate their
investment at a future date; (ii) illiquidity of units on a current basis due to
the lack of a large and established secondary market; (iii) difficulty in
valuing the investment due to the limited secondary market for units; (iv) less
flexibility in actively managing the portfolio; (v) less diversification; and
(vi) limitations on new investments.
Conversion of Funds into REITs. The general partners considered the
possibility of converting each fund into a separate REIT that would list its
shares on a national securities exchange. The general partners concluded that
separate, relatively small REIT's advised by an outside advisor would not be
well-received by traditional purchasers of REIT common stock. The general
partners, therefore, determined that this alternative would not fulfill the
objectives of the funds.
Listing of the Units on a National Securities Exchange, Designation of the
Units as Nasdaq National Market System Securities or Support of Secondary
Market. The general partners explored the possibility of having units of each
fund listed on a national securities exchange or having units designated as
Nasdaq National Market System (or, Nasdaq) securities. The general partners
concluded that there would be limited trading interest in the units due to the
limitations on the funds' growth contained in their partnership agreements and
the size of some of the funds and that there would
57
<PAGE> 70
be limited interest in the units due to the fund form and the relative lack of
corporate democracy attributes. The general partners concluded that this may
result in minimal increases in liquidity.
Another alternative which may create liquidity for limited partners
desiring to dispose of their investments in the funds is the creation or support
of the secondary market for the units through limited cash or repurchase
programs sponsored by the funds. While the general partners did not perform
detailed financial analysis and cannot predict with any degree of certainty the
possible impact of this alternative on the value of units, the terms of the
partnership agreements and federal tax law effectively prohibit this alternative
from being available with respect to a majority of the units.
Comparison of Alternatives
General. To assist limited partners in evaluating the consolidation, the
general partners compared the consideration to be received by limited partners
of each fund in the consolidation to: (i) estimates of the value of the units on
a liquidation basis assuming that the assets of each fund were sold at their
appraised value, or estimated realizable value for non-real estate assets, and
the net proceeds after satisfaction of fund liabilities and estimated
liquidation costs distributed to the limited partners in accordance with the
limited partnership agreements; and (ii) estimates of the value of each fund on
a going- concern basis assuming that the fund were to continue as a stand-alone
entity and its assets sold at the end of a ten-year period. Due to the
uncertainty in establishing these values, the general partners have established
a range of estimated values for certain of the alternatives, representing a high
and low estimated value for the potential consideration. The value of the
consideration for alternatives to the consolidation is dependent upon varying
market conditions. Accordingly, no assurance can be given that the range of
estimated values indicated establishes the highest or lowest possible values.
However, the general partners believe that the analysis of alternatives
described below establishes a reasonable framework for comparing alternatives.
The results of this comparative analysis are summarized in the following
table. Limited partners should bear in mind that the estimated values assigned
to the alternate forms of consideration are based on a variety of assumptions
that have been made by the general partners. These assumptions relate, among
other things, to:
o expectations as to each fund's future income, expense, cash flow and
other significant financial matters,
o the capitalization rates that will be used by prospective buyers
when each fund's assets are liquidated,
o securities market conditions and factors affecting the value of
securities of real estate companies,
o the ultimate asset composition and capitalization of American
Spectrum and
o appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows that may be received
with respect to units of each fund.
In addition, these estimates are based upon information available to the general
partners at the time the estimates were computed, and no assurance can be given
that the same conditions analyzed by them in arriving at the estimates of value
would exist at the time of, or following, the consolidation. The assumptions
used have been determined by the general partners in good faith and, where
appropriate, are based upon current and historical information regarding the
funds and current real estate markets and have been highlighted below to the
extent critical to the conclusions of the general partners.
No assurance can be given that such consideration would be realized
through any of the designated alternatives; and limited partners should
carefully consider the following discussions to understand the assumptions,
qualifications and limitations inherent in the presented valuation estimates.
The estimated values presented in the following table are based upon assumptions
that relate among other things, to
58
<PAGE> 71
o expectations as to each fund's future revenue; expense; cash flow
and other significant financial matters;
o securities market conditions and factors affecting the value of
securities or real estate companies;
o the ultimate asset composition and capitalization of American
Spectrum;
o the capitalization rates that will be used by prospective buyers
when each fund's assets are liquidated;
o selling costs;
o appropriate discount rates to apply to expected cash flows in
computing the present value of the cash flows; and
o the manner of sale of each fund's properties.
Actual results may vary from those set forth below based on numerous factors,
including those above, interest rate fluctuations, conditions in securities
markets, tax law changes, supply and demand for properties similar to those
owned by the funds, the manner in which the properties are sold and changes in
availability of capital to finance acquisitions of properties. American
Spectrum's actual results could differ materially from those estimated in the
forward-looking statements as a result of several factors, including those
discussed in "RISK FACTORS." Each element of the table is described more fully
below.
Comparison of Alternatives
(Per $1,000 Investment)
<TABLE>
<CAPTION>
Estimated Going- Estimated
Concern Value Liquidation Exchange
Range Value Value(1)
--------------- ----------- ----------
<S> <C> <C> <C>
Sierra Pacific Development Fund $350.00-$370.00 $ 386.00 $ 417.32
Sierra Pacific Development Fund II $468.00-$536.00 $ 548.00 554.43
Sierra Pacific Development Fund III $15.84-$33.08 $ 44.56 32.68
Sierra Pacific Institutional Properties V $436.00-$516.00 $ 620.00 539.50
Sierra Pacific Pension Investors '84 $808.00-$900.00 $ 920.00 1,032.90
Nooney Income Fund Ltd., L.P. $523.00-$587.00 $ 669.00 690.98
Nooney Income Fund Ltd. II, L.P. $680.00-$775.00 $ 781.00 818.71
Nooney Real Property Investors-Two, L.P. $555.00-$612.00 $ 630.00 672.01
</TABLE>
----------
(1) Values are based on the Exchange Value established by American Spectrum.
The Exchange Value shown in the table is our estimate of the net asset
value of American Spectrum allocable to an original $1,000 investment.
Upon listing the American Spectrum shares on the _________, the actual
values at which the American Spectrum shares will trade on the _________
may be significantly below the Exchange Value. The prices at which the
American Spectrum shares initially trade may be affected, among other
things, by: (i) potential pent-up selling pressures as a result of the
historic illiquidity of investments in the funds; (ii) American Spectrum's
lack of an operating history; (iii) the unfamiliarity of institutional
investors, financial analysts and broker-dealers with American Spectrum
and its prospects as an investment when compared with other equity
securities; and (iv) the historical financial performance of the funds. It
is impossible to predict how these factors will impact the price of
American Spectrum shares.
Estimated Going-Concern Values. The general partners have estimated the
going-concern values of each fund by analyzing projected cash flows and
distributions assuming that each fund was operated as an independent stand-alone
59
<PAGE> 72
entity during an assumed holding period of ten years. The analysis incorporated
estimates of revenues, operating expenses, and entity level general and
administrative costs, debt service, capital expenditures and leasing costs for
the properties, operating cash flow, and distributions to limited partners. This
analysis also incorporated net proceeds from sale of the properties and the net
other assets and liabilities of the fund. The net other assets and liabilities
are shown in "Determination of Exchange Values" Page __. The general partners
assumed the property portfolio is liquidated at the end of the assumed holding
period in private real estate markets at a residual value equal to the residual
value utilized in the portfolio appraisal, and the net proceeds resulting from
the liquidation of the properties after repayment of mortgage debt and estimated
liquidation expenses are paid out to limited partners in a liquidating
distribution in accordance with the provisions of each Fund's limited
partnership agreement. Among the factors influencing the discount rates utilized
for each fund were leverage, quality and location of the portfolio, lease rates
and turnover, and other factors.
The estimated value of each fund on a going-concern basis is not intended
to reflect the distributions payable to limited partners if the assets of each
fund were to be sold at their current fair market values.
The estimated initial year financial information resulting from our
analysis of the going-concern value of the funds is included in the table below:
Going-Concern Analysis Summary
<TABLE>
<CAPTION>
Sierra
Sierra Pacific Sierra Pacific Sierra Pacific Pacific Sierra Pacific Nooney
Development Development Development Institutional Pension Income Fund
Fund Fund II Fund III Properties V Investors 84 Ltd., L.P.
-------------- -------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 1,015,765 $ 3,293,446 $ 38,985 $ 485,071 $ 3,081,094 $ 2,097,998
Property (526,538) (1,801,749) (28,746) (255,057) (1,163,583) (1,157,319)
Operating
Expenses and
Entity G&A
Capital (36,246) (192,509) (753) (5,114) (140,810) (267,046)
Expenditures and
Leasing Costs
Debt Service (401,229) (667,004) (18,004) -- (729,259) (118,168)
Fund Operating 51,752 632,184 (8,518) 224,900 1,047,442 555,465
Cash Flow
Distribution to 51,752 632,184 -- 224,900 1,047,442 499,919
Limited Partners
Distributions Per 3.53 29.18 -- 29.23 54.41 32.93
$1000 Investment
Annual Discount 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%
Rate-Low Value
Annual Discount 12.00% 12.00% 12.00% 12.00% 12.00% 12.00%
Rate - High Value
Compound 4.57% 4.45% 8.49% 4.25% 3.71% 3.02%
Revenue Growth
Rate Per Annum
Compound 3.00% 3.18% 3.36% 2.97% 2.94% 3.00%
Expense Growth
Rate Per Annum
<CAPTION>
Nooney Real
Nooney Property
Income Fund Investors-
Ltd. II, L.P. Two, L.P.
------------- -----------
<S> <C> <C>
Revenues $ 4,117,377 $ 2,463,877
Property (2,148,604) (1,136,193)
Operating
Expenses and
Entity G&A
Capital (710,024) (163,596)
Expenditures and
Leasing Costs
Debt Service (816,343) (1,073,873)
Fund Operating 442,406 90,215
Cash Flow
Distribution to 418,074 89,313
Limited Partners
Distributions Per 21.75 7.44
$1000 Investment
Annual Discount 14.00% 17.00%
Rate-Low Value
Annual Discount 12.00% 15.00%
Rate - High Value
Compound 3.60% 3.43%
Revenue Growth
Rate Per Annum
Compound 3.07% 3.05%
Expense Growth
Rate Per Annum
</TABLE>
60
<PAGE> 73
Estimated Liquidation Values. Since one of the alternatives available is
to proceed with a liquidation of the funds and the corresponding distribution of
the net liquidation proceeds to limited partners, the general partners have
estimated the liquidation value of each fund. In estimating the liquidation
value, the general partners assumed that the real estate of each fund would be
sold at appraised value. In calculating the estimated liquidation value, the
general partners assumed that selling and liquidation costs (real estate
commissions and legal and other closing costs) would equal 5% of the appraised
real estate portfolio value. This alternative also assumes that non-real estate
assets are sold at their estimated realizable value. The net liquidation
proceeds are then distributed among the limited partners of each fund in
accordance with the provisions of each fund's limited partnership agreement.
The liquidation analysis assumes that the portfolio of each fund is sold
in a single transaction at its appraised portfolio value. Should the assets be
liquidated over time, even at prices equal to those projected, distributions to
limited partners out of the cash flow from operations of the fund might be
reduced because the relatively fixed costs of the fund, such as general and
administrative expenses, are not proportionately reduced with the liquidation of
assets. However, for simplification purposes, the sales are assumed to occur
concurrently.
Applying these procedures, the general partners arrived at the liquidation
values set forth in the table above. The real estate portfolio appraisal sets
forth, subject to the specified assumptions, limitations and qualifications, the
independent appraiser's professional opinion as to the market value of the real
estate portfolio of each fund as of March 31, 2000. However, while the portfolio
appraisal is not necessarily indicative of the price at which the assets would
sell, the real estate portfolio appraisal assumes that the assets of each fund
are disposed of in an orderly manner and are not sold in forced or distressed
sales where sellers might be expected to dispose of their interests at
substantial discounts to their actual value. See "Appraisals and Fairness
Opinion."
Secondary Market Prices. Limited partnership interests in the funds are
not traded on national securities exchange or listed for quotation on Nasdaq.
There is no established trading market for units and it is not anticipated that
any market will develop for the purchase and sale of the units. Pursuant to the
Partnership Agreements, units may be transferred only with the written consent
of the managing general partners of the funds.
Sales transactions for the units have been limited and sporadic. The funds
receive some information regarding the prices at which secondary sale
transactions in the units have been effectuated. However, the managing general
partners do not maintain comprehensive information regarding the activities of
all broker/dealers and others known to facilitate from time to time, or on a
regular basis, secondary sales of the units. It should be noted that some
transactions may not be reflected on the records of the funds. It is not known
to what extent unit sales transactions are between willing buyers and willing
sellers, each having access to relevant information regarding the financial
affairs of the funds, expected value of their assets, and their prospects for
the future. Many unit sales transactions are believed to be distressed sales
where sellers are highly motivated to dispose of the units and willing to accept
substantial discounts from what might otherwise be regarded as the fair value of
the interest being sold, to facilitate the sales. Accordingly, no comparative
information as to secondary market prices is provided.
Assumptions, Limitations and Qualifications. The prices at which the
American Spectrum shares initially trade may be affected, among other things,
by:
o potential pent-up selling pressures as a result of the historic
illiquidity of investments in the funds;
o American Spectrum's lack of an operating history;
o the unfamiliarity of institutional investors, financial analysts and
broker/dealers with American Spectrum and its prospects as an investment
when compared with other equity securities; and
o the historical financial performance of the funds.
61
<PAGE> 74
It is impossible to predict how these factors will impact the price of the
American Spectrum shares. The price may be either lower or higher than those in
the range of estimated values.
Distribution Comparison. The general partners have considered the
potential impact of the consolidation upon distributions that would be made to
the limited partners who exchange their units for American Spectrum shares. The
following table compares distributions that will be received by stockholders of
American Spectrum assuming all of the funds and CGS privately held entities
participate in the consolidation (maximum participation).
Comparison of Distributions
by Funds and American Spectrum Per $1000 Investment
<TABLE>
<CAPTION>
Dividends From American
Spectrum Shares Issued
Distribution by Fund (1) In the Consolidation (2)
------------------------ ------------------------
<S> <C> <C>
Sierra Pacific Development Fund 0 $ 18.69
Sierra Pacific Development Fund II 0 24.83
Sierra Pacific Development Fund III 0 1.46
Sierra Pacific Institutional Properties V 0 24.16
Sierra Pacific Pension Investors '84 0 46.26
Nooney Income Fund Ltd., L.P. 0 30.95
Nooney Income Fund Ltd. II, L.P. 0 36.67
Nooney Real Property Investors-Two, L.P. 0 30.10
</TABLE>
----------
(1) Some of the funds had cash flow during the year, but did not make
distributions even though they have cash flow. These funds retained their
cash flow to meet future requirements.
(2) Assumes an annual distribution of $0.67 per American Spectrum share in
2001. We determined the annual distribution by annualizing the pro-forma
cash flow from operations for the six-month period ending June 30, 2000
and multiplying the result by 80%, reserving the remaining 20% for
contingencies. Pro-forma cash flow from operations was determined by
annualizing net income for the six-month period ending June 30, 2000 and
adding back annualized non-cash items for the same period. Historically,
we have funded capital improvements out of cash flow from operations.
After the consolidation, we plan to fund the capital improvements to the
properties of refinancing of existing real estate. Excess cash flows from
financing activities will be retained by the company to fund future
property acquisitions and capital improvements. The calculations below
assume that we will be successful in obtaining such financing. Cash flow
from financing activities are not expected to be significant. The number
of shares was determined based on the number of shares, including shares
issuable on exchange of Operating Partnership units, which will be
outstanding immediately following the closing of the consolidation,
assuming maximum participation. A summary of the calculations follows:
<TABLE>
<S> <C>
Net income (loss) before extraordinary item $ (1,208)
Deduct gain on sale of property (1,328)
Add back non-cash expenses:
Impairment charges 44
Depreciation and amortization 5,081
--------
Pro-forma cash provided by operating activities 2,589
Annualized pro forma cash provided by operating activities 5,178
Percentage of cash flow distributed to shareholders 90.0% 4,660
</TABLE>
62
<PAGE> 75
<TABLE>
<S> <C>
Total exchange value 104,041
Number of shares (exchange value divided by $15) 6,936
Distribution per share $0.67
</TABLE>
In addition, we expect cash flow to increase in 2002 as a result of anticipated
improvement in operating results in connection with properties owned by CGS
privately held entities. We believe that our cash flow is likely to improve as a
result of several factors. First, some of the properties have significant
unoccupied space. We expect to lease this space in the future, generating
additional rental income. Second, we expect to realize increased rental income
from scheduled increases in rentals under existing leases or renewals. Third,
39.48% of the leases on the properties expire prior to the end of 2002. Many of
these leases are below market and we expect to be able to enter into new leases
or renewals at higher rents. As a result of these factors, we believe that the
amount of cash available for distribution will increase over time. However, the
distributions are based on assumptions as to our future performance and we
cannot assure you that we will achieve these distribution levels.
In evaluating this estimate, the limited partners should bear in mind that
a number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, capital expenditure levels, American Spectrum's policy with
respect to cash distributions and the capitalization and asset composition of
American Spectrum, which will vary based on the funds which ultimately
participate in the consolidation. A comparison of the possible distribution
levels of American Spectrum with those of each fund does not show how the
consolidation might affect a limited partner's distribution level over a number
of years. There can be no assurance that the distribution rates of the funds can
be maintained if the consolidation does not occur.
RECOMMENDATION AND FAIRNESS DETERMINATION
General
The general partners of the funds believe the consolidation to be fair to,
and in the best interests of each of the funds and their respective limited
partners. After careful evaluation, the general partners of the funds concluded
that the consolidation is the best way to maximize the value of your investment.
The general partners of the funds recommend that you and the other limited
partners approve the consolidation and receive American Spectrum shares.
Based upon their analysis of the consolidation, the general partners of
the funds believe that:
o the terms of the consolidation are fair to you and the other limited
partners;
o the American Spectrum shares offered to the limited partners were
allocated fairly and constitute fair consideration for their units;
and
o after comparing the potential benefits and detriments of the
consolidation with those of several alternatives, the consolidation
is more economically attractive to you and the other limited
partners than such alternatives.
The beliefs of the general partners of the funds are based upon their
analysis of the terms of the consolidation, an assessment of its potential
economic impact upon you and the other limited partners, a consideration of the
combinations that may result from the various options available to you and the
other limited partners, a comparison of the potential benefits and detriments of
the consolidation and certain alternatives to the consolidation and a review of
the financial condition and performance of American Spectrum, the funds and the
terms of critical agreements.
The general partners of the funds also believe that the consolidation is
procedurally fair. First, with respect to each participating fund, the
consolidation is required to be approved by the limited partners holding a
majority of the
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<PAGE> 76
outstanding units of such fund and is subject to certain conditions. Second, all
limited partners of funds that approve the consolidation and who vote against
the consolidation will be given the option of receiving American Spectrum shares
or notes. Third, the general partners believe that the Exchange Value of the
funds has been determined according to a process that is fair because the
process involved appraisals of all of the fund's property portfolios and the
property portfolio of the CGS privately held entities by the same appraisal
firm, Stanger, thereby maximizing consistency among the valuation of the
property portfolio. Fourth, Stanger, a recognized independent investment banking
firm, has determined that, subject to the assumptions, limitations and
qualifications contained in its opinion, the allocation of American Spectrum
shares to each of the funds in the consolidation is fair to the limited partners
of the fund from a financial point of view.
Although the general partners of the funds believe the terms of the
consolidation are fair to you and the other limited partners, they have
conflicts of interest with respect to the consolidation. These conflicts
include, among others, their realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to the general partners,
see "Conflicts of Interest -- Substantial Benefits to Related Parties." To see
the actual benefits that your general partner will receive if your fund is
acquired, please review your supplement.
Notwithstanding the recommendation of the funds' general partners, each
limited partner must make his own determination as to whether to select American
Spectrum shares or notes based upon his personal situation, and such decision
should be based upon a careful examination of personal finances, investment
objectives, liquidity needs, tax situation and expectations as to American
Spectrum's future growth.
Material Factors Underlying Belief as to Fairness
The following is a discussion of the material factors underlying your
general partner's belief that the terms of the consolidation are fair to you and
the other limited partners.
1. Consideration Allocated. Your general partner and its affiliates will
be allocated the same form of consideration in the consolidation as the limited
partners with respect to their capital interest in the funds and their interests
in the CGS privately held entities. In the alternative, affiliates of the
general partners will receive 72%, of their consideration in the form of
Operating Partnership units, which will provide the same economic rights as the
American Spectrum shares being issued to limited partners but will not be
publicly traded until they are exchanged for American Spectrum shares. The
general partners of the funds believe that the form and amount of consideration
offered to the funds and the limited partners, including dissenting limited
partners who elect the notes option, constitute fair value. The allocation of
the American Spectrum shares to limited partners is based on the same valuation
methodology which was consistently applied to each of the funds and the CGS
privately held entities. The allocation of the American Spectrum shares with
respect to the CGS Management Company was based on a multiple of earnings which
the general partner believes is appropriate for valuing a service company.
Therefore, the general partners believe that the Exchange Values adequately
takes into account the relative values of each of the funds,the CGS privately
held entities and the CGS Management Company. In addition, your general partners
compared the estimated values of the consideration which would have been
received by you and the other limited partners in alternative transactions and
concluded that the consolidation is fair and is the best way to maximize return
on your investment in light of the values of such consideration.
2. Similarity of funds. The general partners of the funds do not believe
that there are any material differences among the funds that would affect the
fairness of the consolidation to you or the other limited partners.
Substantially all of the assets of the funds are office, office/warehouse, or
retail properties and the funds have substantially the same capital structures.
In addition, the investment objectives of each of the funds are substantially
the same. These factors make it easier to compare the value of the funds
relative to each other, and to allocate the American Spectrum shares among the
funds and among the limited partners and the general partners.
64
<PAGE> 77
The primary differences among the funds are:
o Size and Diversity. Some of the funds have purchased fewer
properties and are less diverse with respect to the number of
tenants, geographic location and type of properties.
o Date of Formation. The funds were formed at different times and,
therefore, the funds formed earlier have already sold some
properties.
o Fund Structure. Although the funds' partnership agreements have
slightly different provisions with respect to allocations,
distributions and fees, the differences in such provisions are not
substantial.
o Types of Properties. Some of the funds have purchased different
types of properties.
o Indebtedness. One of the funds has no debt and the other funds have
differing degrees of leverage.
3. Market Value. To the extent that there is trading in the units, such
trading takes place in an informal secondary market. A direct comparison of the
current or historic prices of the American Spectrum shares and the units cannot
be made because there is no current or historic market price information
available with respect to the American Spectrum shares, which will not be issued
or traded prior to the consolidation. Therefore, the determination of the
consideration to be received by investors is based upon the valuation of the
funds as described under "Background of and Reasons for the Consolidation --
Determination of Exchange Value" and is not based upon the current or historic
market prices of the units. Because there is no active trading market for the
units, the general partners believe that historic sales prices of the units in
the secondary market are not indicative of the value of the underlying assets.
For example, during fiscal year 1999, less than three percent of all the
outstanding units in the funds traded in the secondary market.
4. Limited Partner's Choice of Investment -- Shares or Notes. Offering
limited partners a choice to exchange their units for American Spectrum shares
or notes does not ensure that the offered consideration is fair vis-a-vis the
value of the consideration available to limited partners through the
alternatives to the consolidation, but enhances the procedural fairness of the
consolidation by giving all limited partners the opportunity to elect American
Spectrum shares or notes. Through this element of the consolidation, the general
partners are attempting to accommodate the possibly different investment
objectives of the limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular interest payments. In
contrast, the American Spectrum shares represent equity securities in American
Spectrum, permitting the holders of the American Spectrum shares to participate
in American Spectrum's potential growth and to have a more liquid investment.
Each limited partner must make his own determination as to the form of
consideration best suiting his personal situation. Such decision should be based
upon a careful examination of the limited partner's personal finances,
investment objectives, liquidity needs, tax situation and expectations as to
American Spectrum's future growth.
5. Independent Appraisal and Fairness Opinion. The belief of the general
partners of the funds as to the fairness of the consolidation as a whole and to
the limited partners and the statements above regarding the material terms
underlying their belief as to fairness are partially based upon the appraisal of
each fund's property portfolio prepared by Stanger and upon the fairness opinion
provided by Stanger. The general partners attributed significant weight to the
appraisal and the fairness opinion of Stanger, which they believe support their
conclusion that the consolidation is fair to the limited partners. The general
partners do not know of any factors that would materially alter the conclusions
made in the appraisal or the fairness opinion of Stanger, including developments
or trends that have materially affected or are reasonably likely to materially
affect their conclusions. The general partners believe that the engagement of
Stanger to provide the appraisal of each fund's property portfolio and to
provide the fairness opinion assisted them in the fulfillment of their fiduciary
duties to the funds and the limited partners, notwithstanding that Stanger
received fees for its services. See "Reports, Opinions and Appraisals --
Fairness opinion."
65
<PAGE> 78
In rendering its opinions with respect to the fairness to the funds, from
a financial point of view, the allocation of the American Spectrum shares (i)
between the funds, the CGS Management Company and the other CGS privately held
entities; and (ii) among the funds, Stanger did not address or render any
opinion with respect to any other aspect of the consolidation, including:
o the value or fairness of the notes option;
o the prices at which the American Spectrum shares may trade following
the consolidation, or the trading value of the American Spectrum
shares to be offered compared with the current fair market value of
the funds' portfolios or assets if liquidated in real estate
markets;
o the tax consequences of any aspect of the consolidation;
o the fairness of any terms of the consolidation, other than the
fairness to the funds of the allocation of the American Spectrum
shares if all of the funds participate (the maximum participation)
and for participation of the minimum number of funds in the
consolidation, comprised of Sierra Pacific Development Fund II,
Sierra Pacific Development Fund III, Sierra Pacific Institutional
Properties V and Nooney Real Property Investors-Two, L.P. (the
minimum participation), which were the funds used for determining
the minimum in the pro forma financial statements;
o the allocation of American Spectrum shares among the limited and
general partners of the funds;
o the fairness of the amounts or allocation of the consolidation costs
or the amounts of the consolidation costs allocated to the limited
partners;
o alternatives to the consolidation; or
o any other matters with respect to any specific individual partner or
class of partners.
In addition, Stanger was not requested to, and did not, solicit the
interest of any other party in acquiring the funds or assets. Stanger's opinion
also does not compare the relative merits of the consolidation with those of any
other transaction or business strategy which were or might have been considered
by the general partners as alternatives to the consolidation.
Stanger's fairness opinion does not constitute a recommendation to you as
to how to vote on the consolidation or as to whether you should elect to receive
the American Spectrum shares or notes.
6. Valuation of Alternatives. Based in part on the appraisal of each
fund's property portfolio prepared by Stanger, the general partners estimated
the value of the funds as going concerns and if liquidated. On the basis of
these calculations, the general partners believe that the ultimate value of the
American Spectrum shares will exceed the going concern value and liquidation
value of each fund.
7. Cash Available for Distribution Before and After the Consolidation. The
general partners believe the consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other limited partners. However, the effect of the
consolidation and the cash available for distribution will vary from fund to
fund. In addition to the receipt of cash available for distribution, you and the
other limited partners whose funds are acquired will be able to benefit from the
potential growth of American Spectrum as an operating company and will also
receive investment liquidity through the public market in American Spectrum
shares.
8. Net Book Value of the Funds. The general partners calculated the book
value of each of the funds under generally accepted accounting principles, or
GAAP, as of June 30, 2000 per average $1,000 original investment. Since the
calculation of the book value was done on a GAAP basis, it is primarily based on
historical cost and, therefore,
66
<PAGE> 79
is not indicative of true fair market value of the funds. This figure was
compared to the Exchange Value per average $1,000 investment.
Summary of Valuations
(per average $1,000 original investment)
<TABLE>
<CAPTION>
GAAP Book Value
Fund June 30, 2000 Exchange Value
---------------------------------------------- ----------------- --------------
<S> <C> <C>
Sierra Pacific Development Fund $ 84.42 $ 417.32
Sierra Pacific Development Fund II 525.13 544.43
Sierra Pacific Development Fund III (39.50) 32.68
Sierra Pacific Institutional Properties V 267.87 539.50
Sierra Pacific Pension Investors '84 494.12 1,032.90
Nooney Income Fund Ltd., L.P. 368.25 690.98
Nooney Income Fund Ltd. II, L.P. 451.42 818.71
Nooney Real Property Investors-Two, L.P. (33.19) 672.01
CGS privately held entities (1) (1)
CGS Management Company (1) (1)
</TABLE>
(1) There are no comparable $1,000 original investment values for the CGS
privately held entities or the CGS Management Company. The aggregate book
values are $(33,860,765) for the CGS privately held entities, and $(1,878,071)
for the CGS Management Company. The aggregate Exchange Values are $26,586,979
for the CGS privately held entities and $642,560 for the CGS Management Company.
We do not know of any factors that may materially affect: (i) the value of
the consideration to be received by the funds that are acquired in the
consolidation; (ii) the value of the units for purposes of comparing the
expected benefits of the consolidation to the potential alternatives considered
by the general partners; or (iii) the analysis of the fairness of the
consolidation.
Relative Weight Assigned to Material Factors
Your funds' general partners gave greatest weight to the factors set forth
in paragraphs one through three and five and six above in reaching their
conclusions as to the fairness of the consolidation.
Fairness to Limited Partners Receiving American Spectrum Shares
American Spectrum shares represent equity securities in American Spectrum
permitting the stockholders to participate in American Spectrum's potential
growth. Thus, you, as a holder of American Spectrum shares, will share in both
the benefits and risks of an investment of American Spectrum. In addition, the
American Spectrum shares will be listed on the _________. As a result, an
investment in the American Spectrum shares will be a more liquid investment than
an investment in the units. See "Comparison of Units, Notes and American
Spectrum Shares." On balance, your general partners have concluded that the
consolidation is fair to the limited partners of each fund who receive American
Spectrum shares because such investment has substantially more growth potential
than an investment in the units and the American Spectrum shares will be a more
liquid investment than an investment in the units.
Fairness in View of Conflicts of Interest
The general partners of the funds have fiduciary duties to you and the
other limited partners. They are expected, in handling the affairs of the funds,
to exercise good faith, to use care and prudence and to act with a duty of
loyalty to the limited partners. Under these fiduciary duties, they are
obligated to ensure that the funds are treated fairly and equitably in
transactions with third parties, especially where consummation of such
transactions may result in their interests being opposed to, or not totally
aligned with, the interests of you and the other limited partners. To assist the
general partners in fulfilling their fiduciary obligations, we obtained the
fairness opinion and the independent appraisal from Stanger.
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<PAGE> 80
In considering the consolidation, the general partners gave full
consideration to these fiduciary duties. However, the consolidation affords them
a number of benefits. The general partners may be viewed as having a potential
conflict of interest with you and the other limited partners. Furthermore, the
general partners will not have any personal liability for American Spectrum
obligations and liabilities which occur after the consolidation. See "Conflicts
of Interest -- Substantial Benefits to Related Parties" and "Reports, Opinions
and Appraisals."
REPORTS, OPINIONS AND APPRAISALS
General
The Exchange Values were determined as of June 30, 2000 and have been
assigned to each of the funds, the CGS privately held entities and the CGS
Management Company, solely to establish a consistent method of allocating the
American Spectrum shares among the participating entities for purposes of the
consolidation. The Exchange Values were determined by CGS and the general
partners based primarily on an appraisal of the portfolios of real estate assets
of the funds and the CGS privately held entities and a valuation of the CGS
Management Company.
Stanger, an independent investment banker, was engaged by the funds and
CGS to appraise the portfolios of real properties owned by the funds and the CGS
privately held entities and to render its opinion as to the fairness to the
funds, from a financial point of view, of the allocation of American Spectrum
shares (i) between the funds and the CGS privately held entities, including the
CGS Management Company, and (ii) among the funds. Stanger has delivered a
written summary of its analysis, based upon the review, analysis, scope,
assumptions, qualifications and limitations described therein, as to the
estimated fair market value of the portfolios as of, March 31, 2000 (the
Portfolio Appraisal). The Portfolio Appraisal, which contains a description of
the assumptions and qualifications made, matters considered and limitations on
the review and analysis, is set forth in Appendix A and should be read in its
entirety. Some of the material assumptions, qualifications and limitations to
the Portfolio Appraisal are described below. The general partners have not made
any contacts, other than as described in this consent solicitation, with any
outside party regarding the preparation by the outside party of an opinion as to
the fairness of the consolidation, an appraisal of the funds, or the CGS
Management Company or their assets or any other report with respect to the
consolidation.
Experience of Stanger. Since its founding in 1978, Stanger has provided
information, research, appraisals, investment banking and consulting services to
clients throughout the United States, including major New York Stock Exchange
member firms and insurance companies and over 70 companies engaged in the
management and operation of partnerships and real estate investment trusts. The
investment banking activities of Stanger include financial advisory services,
asset and securities valuations, industry and company research and analysis,
litigation support and expert witness services, and due diligence investigations
in connection with both publicly registered and privately placed securities
transactions.
Stanger, as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers,
acquisitions, reorganizations and for estate, tax, corporate and other purposes.
Stanger's valuation practice principally involves partnerships, partnership
securities and the assets typically held through partnerships, such as real
estate, oil and gas reserves, cable television systems and equipment leasing
assets. The funds selected Stanger to provide the Portfolio Appraisal because of
its experience and reputation in connection with real estate partnerships, real
estate investment trusts, real estate assets, and mergers and acquisitions.
Portfolio Appraisal
Summary of Methodology. At the request of the funds and CGS, Stanger
evaluated each fund's portfolio of real estate and the real estate portfolio
owned by the CGS privately held entities on a limited scope basis utilizing the
income approach to valuation, and in the case of developable land, the sales
comparison approach. Appraisers typically use up to three approaches in valuing
real property: (i) the cost approach, (ii) the income approach and (iii) the
sales comparison approach. The type and age of a property, lease terms, market
conditions and the quantity and quality of data affect the
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<PAGE> 81
applicability of each approach in a specific appraisal situation. The value
estimated by the cost approach incorporates separate estimates of the value of
the unimproved site and the value of improvements, less observed physical wear
and tear and functional or economic obsolescence. The income approach estimates
a property's capacity to produce income through an analysis of the rental
stream, operating expenses, net income and estimated residual value. Net income
may then be processed into a value through either direct capitalization or
discounted cash flow analysis, or a combination of these two methods. The sales
comparison approach involves a comparative analysis of the subject property with
other similar properties that have sold recently or that are currently offered
for sale in the market.
Due to the type of real estate assets owned by the funds and the CGS
privately held entities, Stanger was engaged to value the portfolios based on
the income approach, utilizing a discounted cash flow analysis or income
capitalization analysis, as appropriate and to value the developable land parcel
pursuant to the sales comparison approach. For the non- developable land
properties the cost and sales comparison approaches were considered to be less
reliable than the income approach given the primary criteria used by buyers of
the type of property appraised in the appraisal. The general partners believe
that use of the income approach in estimating the market value of portfolios
other than developable land is the most appropriate way of assessing value of
the real estate assets owned by the funds and the CGS privately held entities
because that is the method generally used by purchasers valuing income-producing
property. The general partners also believe that the use of the sales comparison
approach is the most appropriate way to estimate the value of the developable
land parcel. The appraiser concluded that the use of the income approach, with
the use of sales comparison approach for the developable land parcel, was
reasonable and appropriate.
In conducting the Portfolio Appraisal, representatives of Stanger reviewed
and relied upon, without independent verification, information supplied by the
property managers, general partners, the funds and the CGS privately held
entities. This information includes:
o schedules of current lease rates and terms, income, expenses,
capital expenditures, cash flow and related financial information;
o property descriptive information and rentable square footage; and
o information relating to the condition of each property, including
any deferred maintenance, status of ongoing or newly planned
property additions, reconfigurations, improvements and other factors
affecting the physical condition of the property improvements.
Representatives of Stanger also performed site inspections of the
properties during July through August, 1999. In the course of these site visits,
the physical facilities of the properties were inspected, and information on the
local market and the subject property was gathered. Information on the local
market was also gathered via telephonic surveys and reviews of published
information. Stanger updated such information via telephone surveys and reviews
of available published information in May and June 2000.
In addition, Stanger discussed with management of the properties and the
funds the condition of each property, including any deferred maintenance,
renovations, reconfigurations and other factors affecting the physical condition
of the improvements, competitive conditions in the property markets, tenant
trends affecting the properties, certain lease terms, and historical and
anticipated lease revenues and expenses. Stanger also reviewed historical
operating statements and the year 2000 operating budgets for the properties.
Stanger reviewed the acquisition criteria and parameters used by real
estate investors utilizing published information and information derived from
interviews with buyers, owners and managers of real property portfolios.
Stanger then estimated the value of each portfolio of properties based on
the income approach to valuation, with the developable land parcel valued
pursuant to the sale comparison approach. Specifically, in applying the income
approach, the discounted cash flow or income capitalization method was used to
determine property value. The value
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<PAGE> 82
indicated by the income approach represents the amount an investor would
probably pay for the expectation of receiving the net cash flow from the
property and the proceeds from the ultimate sale of the property.
In applying the discounted cash flow method, pro forma statements of
operations reflecting the leases which currently encumber the properties were
utilized. Property-level rental revenue projections were developed based on the
terms of existing leases and expected market conditions and assuming a ten-year
holding period. Property operating expenses, property management fees and
capital expense reserves were factored into the analysis. Where tenant
improvements, leasing commissions, deferred maintenance or extraordinary capital
expenditures were required, the cash flows (and value) were adjusted
accordingly. Expenses identified as relating solely to investor reporting and
other entity-level expenses were excluded from the analysis.
The reversion value of each property to be realized upon sale was
estimated based on the current economic rental rate and expenses which would be
reasonable for the subject property, escalated at a rate indicative of current
expectations in the marketplace and local market conditions. The estimated net
operating income of the property in the 12 months following the sale was then
capitalized at a rate deemed appropriate to determine the reversionary value of
the property. Net proceeds of the sale were determined by deducting estimated
costs of sale.
The operating cash flow projections and the reversion values were then
discounted to present value. The selection of the appropriate discount rate for
determining the present value of future cash flow streams from each property was
based upon acquisition criteria and projection parameters for various property
types (e.g., office/ warehouse, shopping center, office) in use in the
marketplace by real estate investors, after adjusting for individual property
related factors.
In the case of stabilized apartment properties, Stanger employed a direct
capitalization technique, where the property's estimated net operating income
after replacement reserves was capitalized at a rate deemed appropriate based
upon acquisition criteria in use in the marketplace by apartment property
investors.
The resulting property values were adjusted for any joint venture
interests based on information provided by the general partners, the funds and
the CGS privately held entities and were then added to determine each estimated
portfolio valuation.
Conclusion as to Value. Based on the valuation methodology described
above, Stanger estimated the value of the portfolio of properties owned by each
fund and CGS privately held entities as follows:
<TABLE>
<CAPTION>
REAL ESTATE
PORTFOLIO VALUE
PARTNERSHIP NAME CONCLUSION(1)
------------------------------------------------------- ---------------
<S> <C>
SP Development Fund $ 8,070,000
SP Development Fund II $ 20,773,274
SP Development Fund III $ 505,467
SP Institutional Properties V $ 4,188,043
SP Pension Investors '84 $ 23,543,216
Nooney Income Fund Ltd., L.P. $ 10,570,800
Nooney Income Fund Ltd. II, L.P. $ 22,079,200
</TABLE>
70
<PAGE> 83
<TABLE>
<CAPTION>
REAL ESTATE
PORTFOLIO VALUE
PARTNERSHIP NAME CONCLUSION(1)
------------------------------------------------------- ---------------
<S> <C>
Nooney Real Property Investors-Two, L.P. $ 15,590,000
CGS privately held entities $ 177,390,000
-------------
TOTAL $ 282,710,000
=============
</TABLE>
(1) Reflects each fund's pro rata interest in properties owned by joint
ventures, which results in unrounded dollar amounts for certain funds.
Assumptions, Limitations and Qualifications. The appraisal report has been
prepared on a limited summary basis. As such, the report differs from a
self-contained appraisal report in that: the data is limited to the summary
data and conclusions presented and the cost (for all properties) and sales
comparison (for all properties except the developable land parcel) approaches
were excluded and the conclusions were based on the income approach. The
developable land parcel was valued pursuant to the sale comparison approach.
Stanger utilized assumptions to determine the appraised value of the portfolios.
See Appendix A for a complete description of the assumptions, limiting
conditions and qualifications applicable to the portfolio appraisal.
The portfolio appraisal represents Stanger's opinion of the estimated
value of the portfolios of properties owned by the funds and the CGS privately
held entities as of March 31, 2000 based on information available on such date
and does not necessarily reflect the prices that would be realized in an actual
sale of the portfolios. Actual prices could be higher or lower than the
appraised value of the portfolios. Events occurring after the valuation date and
before the closing of the consolidation could affect the properties or the
assumptions used in preparing the portfolio appraisal. Stanger has no obligation
to update the portfolio appraisal on the basis of subsequent events. In
connection with the preparation of the portfolio appraisal, Stanger did not
prepare a written report or compendium of its analysis for internal or external
use by the funds or the CGS privately held entities beyond the analysis set
forth in Appendix A. Stanger will not deliver any additional written summary of
the analysis.
Compensation and Material Relationships. The funds and the CGS privately
held entities paid Stanger an aggregate fee of $244,000 for preparing the
portfolio appraisal. In addition, Stanger is entitled to reimbursement for
reasonable legal, travel and out-of-pocket expenses incurred in making site
visits and preparing the portfolio appraisal and the fairness opinion, subject
to an aggregate maximum of $40,200. Stanger is also entitled to indemnification
against liabilities, including liabilities under federal securities laws. The
fee was negotiated between the funds, CGS and Stanger and payment thereof is not
dependent upon completion of the consolidation. The funds and CGS also have
engaged Stanger to render a fairness opinion (see "Appraisals and Fairness
Opinion -- fairness opinion"). The CGS privately held entities and the funds
have not previously retained Stanger to perform services, although affiliates of
the general partners have paid certain nominal amounts to Stanger for
subscriptions to Stanger-prepared national publications.
Portfolio of Properties
The following table provides descriptive information regarding the properties
proposed to be included in the consolidation.
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<PAGE> 84
Properties Proposed For Inclusion In Consolidation
<TABLE>
<CAPTION>
Appraised
Value as of
Property Property Location Property Owner March 31, 2000
-------------------------- ----------------- -------------------------------------------------- --------------
FUNDS
-----
<S> <C> <C> <C>
Sierra Mira Mesa San Diego CA Sierra Pacific Development Fund II - 22.77% $ 15,020,000
Sierra Pacific Pension Investors '84 - 77.23%
San Felipe Houston TX Sierra Pacific Development Fund II 6,500,000
Sierra Sorrento II San Diego CA Sierra Pacific Development Fund II - 13.96% 10,820,000
Sierra Pacific Institutional Properties V - 38.71%
Sierra Pacific Pension Investors '84 - 47.34%
Sierra Creekside San Ramon CA Sierra Pacific Development Fund 8,070,000
Sierra Sorrento I San Diego CA Sierra Pacific Development Fund II - 20.12% 4,340,000
Sierra Pacific Development Fund III - 11.65%
Sierra Pacific Pension Investors '84 - 68.24%
Sierra Southwest Point Houston TX Sierra Pacific Development Fund II 3,460,000
Sierra Valencia Tucson AZ Sierra Pacific Pension Investors '84 3,860,000
Sierra Westlakes San Antonio TX Sierra Pacific Development Fund II 5,010,000
Maple Tree Shopping Ctr Elisville MO Nooney Real Property Investors Two 3,290,000
Countryside Executive Ctr Palatine IL Nooney Income Fund Two 6,070,000
Leawood Fountain Plaza Leawood KS Nooney Income Fund - 76.00% 6,580,000
Nooney Income Fund Two - 24.00$
NorthCreek Office Park Cincinnati OH Nooney Income Fund Two 8,420,000
Park Plaza I and II Indianapolis IN Nooney Real Property Investors Two 3,380,000
Jackson Industrial A Indianapolis IN Nooney Real Property Investors Two 5,440,000
Morenci Professional Park Indianapolis IN Nooney Real Property Investors Two 3,480,000
Northeast Commerce Ctr Loveland OH Nooney Income Fund Two 4,550,000
Oak Grove Commons Downers Grove IL Nooney Income Fund 5,570,000
Tower Industrial Bldg Mundelein IL Nooney Income Fund Two 1,460,000
<CAPTION>
Property Year
Property Property Location Property Type Size (1) Constructed
-------------------------- ----------------- ----------------- ------------- -----------
FUNDS
-----
<S> <C> <C> <C> <C>
Sierra Mira Mesa San Diego CA Office 89,560 sq ft 1987
San Felipe Houston TX Office 100,898 sq ft 1977
Sierra Sorrento II San Diego CA Office 88,073 sq ft 1986
Sierra Creekside San Ramon CA Office 47,800 sq ft 1985
Sierra Sorrento I San Diego CA Office/warehouse 43,100 sq ft 1986
Sierra Southwest Point Houston TX Office/warehouse 100,758 sq ft 1972
Sierra Valencia Tucson AZ Office/warehouse 82,520 sq ft 1987
Sierra Westlakes San Antonio TX Office/warehouse 95,370 sq ft 1985
Maple Tree Shopping Ctr Elisville MO Shopping Center 72,148 sq ft 1974
Countryside Executive Ctr Palatine IL Office 91,975 sq ft 1972
Leawood Fountain Plaza Leawood KS Office 85,955 sq ft 1982-1983
NorthCreek Office Park Cincinnati OH Office 92,026 sq ft 1984 -1986
Park Plaza I and II Indianapolis IN Office/warehouse 95,080 sq ft 1975 & 1979
Jackson Industrial A Indianapolis IN Bulk/warehouse 320,000 sq ft 1976 & 1980
Morenci Professional Park Indianapolis IN Office/warehouse 105,600 sq ft 1975 & 1979
Northeast Commerce Ctr Loveland OH Office/warehouse 99,560 sq ft 1985
Oak Grove Commons Downers Grove IL Office/warehouse 137,678 sq ft 1972-1976
Tower Industrial Bldg Mundelein IL Office/warehouse 42,120 sq ft 1983
</TABLE>
(1) Net Rentable area.
72
<PAGE> 85
<TABLE>
<CAPTION>
Appraised
Value as of
Property Property Location Property Owner March 31, 2000 Property Type
-------------------------------- ----------------- --------------------------- -------------- ----------------
CGS Privately Held Entities
---------------------------
<S> <C> <C> <C> <C>
Beach & Lampson, Pad D Stanton CA CGS privately held entities 1,310,000 Shopping Center
Columbia NE Shopping Center Columbia SC CGS privately held entities 2,470,000 Shopping Center
Marketplace Shopping Center Columbia SC CGS privately held entities 5,120,000 Shopping Center
Richardson Plaza Shopping Center Columbia SC CGS privately held entities 4,930,000 Shopping Center
Bristol Bay Building Newport Beach CA CGS privately held entities 9,190,000 Office
Chrysler Building Irvine CA CGS privately held entities 48,600,000 Office
Northwest Corporate Center II Hazlewood MO CGS privately held entities 6,420,000 Office
Pacific Spectrum Phoenix AZ CGS privately held entities 8,430,000 Office
Parkade Center Columbia MO CGS privately held entities 7,510,000 Mixed Use
(Office/Retail)
Business Center St. Louis MO CGS privately held entities 3,410,000 Office/warehouse
Technology Austin TX CGS privately held entities 10,070,000 Office/warehouse
Autumn Ridge Pasadena TX CGS privately held entities 9,200,000 Apartment
Creekside Riverside CA CGS privately held entities 7,050,000 Apartment
Villa Redondo Long Beach CA CGS privately held entities 14,500,000 Apartment
Meadow Wood Long Beach CA CGS privately held entities 20,230,000 Apartment
The Lakes Hazelwood MO CGS privately held entities 15,150,000 Apartment
Phoenix Van Buren Phoenix AZ CGS privately held entities 3,800,000 Dev. Land
<CAPTION>
Year
Property Property Location Property Size Constructed
-------------------------------- ----------------- -------------- -----------
CGS Privately Held Entities
---------------------------
<S> <C> <C> <C>
Beach & Lampson, Pad D Stanton CA 13,017 sq ft 1989
Columbia NE Shopping Center Columbia SC 56,515 sq ft 1975
Marketplace Shopping Center Columbia SC 100,709 sq ft 1951
Richardson Plaza Shopping Center Columbia SC 108,138 sq. ft 1982
Bristol Bay Building Newport Beach CA 50,371 sq ft 1988
Chrysler Building Irvine CA 207,272 sq ft 1989
Northwest Corporate Center II Hazlewood MO 87,944 sq ft 1983
Pacific Spectrum Phoenix AZ 70,511 sq ft 1986
Parkade Center Columbia MO 221,772 sq ft 1965
Business Center St. Louis MO 64,383 sq ft 1985
Technology Austin TX 109,012 sq ft 1986
Autumn Ridge Pasadena TX 366 units 1965
Creekside Riverside CA 152 units 1991
Villa Redondo Long Beach CA 125 units 1990
Meadow Wood Long Beach CA 206 units 1985
The Lakes Hazelwood MO 408 units 1985
Phoenix Van Buren Phoenix AZ 737,471 sq ft N/A
</TABLE>
73
<PAGE> 86
Fairness Opinion
Stanger was also engaged by the funds and CGS to deliver a written summary
of its determination as to the fairness, from a financial point of view, to the
funds of the allocation of American Spectrum shares in connection with the
consolidation (i) between the funds and the CGS privately held entities,
including the CGS Management Company, and (ii) among the funds. The full text of
the fairness opinion, which contains a description of the assumptions made,
matters considered and limitations on the review and analysis, is attached as
Appendix B to this consent solicitation and should be read in its entirety.
Certain of the material assumptions and limitations to the fairness opinion are
described below, but does not purport to be a complete description of the
analyses used by Stanger in rendering the fairness opinion. Arriving at a
fairness opinion is a complex analytical process not necessarily susceptible to
partial analysis or amenable to summary description.
Except for assumptions described more fully below which the funds and the
CGS privately held entities, CGS and the CGS Management Company, advised Stanger
that it would be reasonable to make, the funds, the general partners, the CGS
privately held entities, CGS and the CGS Management Company, imposed no
conditions or limitations on the scope, methods or procedures of Stanger's
investigation or the methods and procedures to be followed in rendering the
fairness opinion. The funds and CGS have agreed to indemnify Stanger against
certain liabilities arising out of Stanger's engagement to prepare and deliver
the fairness opinion. Upon consummation of the consolidation, such indemnity
obligations will become obligations of American Spectrum.
Selection of the Fairness Opinion Provider. The funds selected Stanger
because of its experience in providing similar services in connection with
transactions comparable to the consolidation, and Stanger's reputation in
connection with real estate partnerships, real estate investments trusts, real
estate assets, and merger and acquisitions. The compensation payable by the
funds and the CGS privately held entities, including CGS, to Stanger in
connection with the rendering of the fairness opinion is not contingent on the
approval or completion of the consolidation.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the allocations utilized in the consolidation,
Stanger:
o reviewed a draft of this consent solicitation in substantially the
form intended to be filed with the Securities and Exchange
Commission and provided to limited partners;
o reviewed the funds' financial statements contained in Forms 10-K
filed with the SEC for the funds' fiscal years ended December 31,
1997, 1998 and 1999, or for the fiscal years ended November 30,
1997, 1998 and 1999 for Nooney Real Property Investors Two, L.P.,
which reports on a different fiscal year basis, and the funds'
quarterly reports on Form 10-Q for the six-months ended June 30,
2000 or for the six- months ending May 31, 2000 for Nooney Real
Property Investors Two, L.P.;
o reviewed operating and financial information including
property-level financial data relating to the business, financial
condition and results of operations of the funds, the CGS privately
held entities' properties and the CGS Management Company;
o reviewed the CGS Predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
o performed an appraisal of the portfolio of properties owned by each
of the funds and the CGS privately held entities as of March 31,
2000;
o reviewed information regarding purchases and sales of properties by
CGS, the funds or any CGS privately held entities during the prior
year and other information available relating to acquisition
criteria for similar properties;
74
<PAGE> 87
o conducted discussions with management of the funds and the CGS
privately held entities regarding the conditions in property
markets, conditions in the market for sales or acquisitions of
properties similar to those owned by the funds and the CGS privately
held entities, current and projected operations and performance,
financial condition, and future prospects of the properties, the
funds, and the CGS Management Company;
o reviewed financial information relating to real estate management
companies;
o reviewed the methodology utilized by the general partners to
determine the allocation of American Spectrum shares between the
funds, the CGS privately held entities and the CGS Management
Company and among the funds, in connection with the consolidation;
and
o conducted such other studies, analyses, inquiries and investigations
as Stanger deemed appropriate.
Summary of Analysis. The following is a summary of financial analyses
conducted by Stanger in connection with, and in support of, its fairness
opinion. The summary of the opinion and analysis of Stanger set forth in this
consent solicitation is qualified in its entirety by reference to the full text
of such opinion.
The general partners of the funds requested that Stanger opine as to the
fairness to the limited partners of the funds, from a financial point of view,
of the allocation of American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among the
funds, assuming that all funds elect to participate in the consolidation and
assuming the minimum participation.
Portfolio Appraisal. In preparing its opinion, Stanger:
o performed an independent appraisal of each fund's portfolio of
properties and the property portfolio of the CGS privately held
entities;
o performed site inspections of each property in July through August
1999;
o conducted inquiries into local market conditions affecting each
property;
o reviewed summaries of current leases and historical and budgeted
operating statements of each property;
o conducted interviews with the management of the funds, the CGS
privately held entities and the properties;
o reviewed acquisition criteria in use in the marketplace by investors
and owners of real estate;
o reviewed information concerning transactions involving similar
properties; and
o estimated the market value of each portfolio utilizing the income
approach to value and the sales comparison approach for the
developable land parcel.
For a more complete description of the Portfolio Appraisals, see "Portfolio
Appraisal, Management Company Valuation and Fairness Opinion -- Portfolio
Appraisal."
75
<PAGE> 88
Review of CGS Management Company Allocation. In the course of preparing to
render its opinion, Stanger reviewed the Exchange Value ascribed to the CGS
Management Company assets and businesses to be contributed to American Spectrum
in the consolidation. In particular, in evaluating the allocation of shares,
Stanger considered the implied earnings multiple ascribed to the CGS Management
Company and the present value range of discounted cash flows.
For purposes of its analysis, Stanger relied upon internal schedules of
anticipated fees, reimbursements and other revenues and expenses of the CGS
Management Company as provided by CGS. In performing its analysis, Stanger
reviewed a "Base Case" scenario prepared by the management of CGS and a "Growth
Case" scenario, whereby assumptions regarding operating results were increased
from the Base Case. Unless otherwise indicated, the analyses described below are
based on the Base Case scenarios.
o Implied Earnings Multiple -- Stanger believes that the CGS Management
Company, like most service businesses, should be evaluated in terms of the
profitability of its operations. Therefore, Stanger compared the valuation
ascribed to the CGS Management Company (before balance sheet adjustments) for
the purpose of establishing Exchange Value to the CGS Management Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA").
Stanger noted that the implied EBITDA multiple was approximately 5.0 x based on
year ending March 31, 2001 EBITDA. Stanger analyzed private and public
transactions in which real estate companies or partnerships have acquired or
merged with an external real estate management company. These transactions
included: Franchise Finance Corporation of America's acquisition of FFCA
Management Company, L.P. as part of a consolidation; Realty Income Corporation's
acquisition of R.I.C. Advisor, Inc.; Shurgard Storage Centers, Inc's acquisition
of Shurgard, Incorporated; Storage Equities, Inc.'s acquisition of Public
Storage Management, Inc.; CRIIMI MAE's acquisition of C.R.I., Inc.; the
acquisition of external advisors affiliated with Security Capital Group, Inc. by
Security Capital Atlantic Trust, Security Capital Industrial Trust and Security
Capital Pacific Trust; Commercial Net Lease Realty's acquisition of CNL Realty
Advisors, Inc.; U.S. Restaurant Properties' acquisition of QSV Properties, Inc.;
Glenborough Realty Trusts' acquisition of Glenborough, Inc. as part of a
consolidation; Municipal Mortgage & Equity LLC's acquisition of the businesses
of SCA Realty I, Inc. and SCA Associates 86, LP as part of a consolidation;
Equity Office Properties Trust's acquisition of the management and advisory
businesses of Equity Office Properties LLC and Equity Office Holdings LLC as
part of a consolidation and public offering; the consideration ascribed to
Imperial Credit Commercial Mortgage Investment Corp.; and Starwood Financial
Trust's acquisition of Starwood Financial Advisors.
Stranger compared the purchase price paid in each of the comparable real estate
management company transactions with the reported EBITDA at the time of the
transaction, and calculated the multiple of the purchase price to the acquired
company's EBITDA. The observed multiples are summarized in the table below.
EBITDA Multiple Statistics
<TABLE>
<S> <C>
Low EBITDA Multiple 5.0x
High EBITDA Multiple 11.5x
Mean EBITDA Multiple 7.8x
Median EBITDA Multiple 7.7x
</TABLE>
Stanger observed that the CGS Management Company's implied EBITDA multiple
of 5.0 was at the low end of the range of the EBITDA multiples ascribed to real
estate advisory and management businesses in acquisitions and mergers reviewed
by Stanger. Stanger also noted that the CGS Management Company's EBITDA for the
year ending March 31, 2001 does not fully reflect future management fees from
assets currently managed due to the potential leaseup of certain un- stabilized
properties.
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<PAGE> 89
o Present Value Range Of Discounted Cash Flows -- Discounted cash flow
analysis is based on the premise that the intrinsic value of any business
reflects the present value of the future cash flows that the business will
generate for its owners. To establish a current implied value under this
approach, future cash flows must be estimated and an appropriate discount rate
determined.
Stanger used the Base Case Scenario and other information provided by CGS,
which included annual pro forma cash flows provided by CGS for the four-year
period ending March 31, 2004. To establish an estimated residual value, residual
EBITDA multiples from 5.0x to 7.0x were applied to pro forma cash flows provided
by CGS for the year ending March 31, 2004. The resulting cash flows were then
discounted to present value using discount rates ranging from 17.5% to 22.5%.
These discount rates reflect an assessment of the risks of equity investments in
general and the specific risks of the real estate management business, in
particular. These calculations resulted in a range of implied discounted present
values of the CGS Management Company of $5.3 million to $4.5 million, with a
mean of $3.9 million, as shown in the table below. The following table shows the
estimated range of values of the CGS Management Company using this methodology.
<TABLE>
<CAPTION>
Discount Rate
--------------------------------------------------------------------------------
Residual Multiple 17.5% 20.0% 22.5%
----------------- ---------------------- --------------------- ----------------------
<S> <C> <C> <C>
5.0 $4,450,000 $4,160,000 $3,910,000
6.0 $4,880,000 $4,560,000 $4,270,000
7.0 $5,320,000 $4,960,000 $4,640,000
</TABLE>
Stanger observed that had the CGS Management Company Growth Case Scenario been
utilized, the resulting implied present value indicators would have been
higher.
Given that the implied Exchange Value EBITDA multiple of the CGS
Management Company is at the low end of the range of EBITDA multiples ascribed
to real estate management companies in acquisitions and mergers reviewed by
Stanger, and the value ascribed to the CGS Management Company for the purpose of
establishing the Exchange Value is within the range of implied present values
derived from the discounted cash flow analysis, Stanger concluded that these
analyses support the fairness to the funds of the allocation of shares between
the funds and the CGS privately held entities and the CGS Management Company.
Review of Allocations. Stanger's evaluation of the fairness from a
financial point of view of the allocations of the American Spectrum shares
pursuant to the consolidation employed comparisons of the Exchange Value to be
contributed to American Spectrum by each fund, the CGS privately held entities
and the CGS Management Company, to the aggregate Exchange Value of the funds and
the CGS privately held entities, including the CGS Management Company, as a
group.
In its evaluation of the fairness of the allocation of the American
Spectrum shares between the funds and the CGS privately held entities, including
the CGS Management Company, and among the funds, Stanger observed that the
Exchange Values were assigned to the funds and the CGS privately held entities,
including the CGS Management Company, by the general partners based, in part,
on:
the independent appraisal provided by Stanger of the estimated value of
each real estate portfolio as of March 31, 2000;
valuations made by the general partners of other fund and CGS privately
held entities' assets and liabilities as of June 30, 2000 to be
contributed to American Spectrum;
77
<PAGE> 90
the estimated value of the CGS Management Company as of June 30, 2000
including valuations of other assets and liabilities to be contributed to
American Spectrum by the CGS Management Company; and
adjustments made by the general partners to the foregoing values to
reflect the estimated costs of the consolidation to be allocated among the
funds and the CGS privately held entities and the CGS Management Company.
Stanger also observed that the general partners intend to make such
pre-consolidation cash distributions to the limited partners in each fund
and/or partners/shareholders in the CGS privately held entities and the
CGS Management Company, as may be necessary to cause the relative Exchange
Values of the funds, the CGS privately held entities and the CGS
Management Company as of the closing date to be substantially equivalent
to the relative estimated Exchange Values as shown in this consent
solicitation.
Relying on these Exchange Values, Stanger observed that the allocation of
American Spectrum shares between the funds and the CGS privately held entities
and the CGS Management Company, reflects the net value of the assets contributed
to American Spectrum by each fund and the CGS privately held entities, including
the CGS Management Company, after deducting a pro rata share of the costs
associated with the consolidation. Stanger believes that basing such allocations
on the value of net assets contributed to American Spectrum is fair from a
financial point of view.
Conclusions. Based on the foregoing, Stanger concluded that, based upon
its analysis and the assumptions, limitations and qualifications thereto, and as
of the date of the information considered in the fairness opinion, the
allocation of American Spectrum shares offered pursuant to the consolidation (i)
between the funds and the CGS privately held entities, including the CGS
Management Company, and (ii) among the funds in the maximum participation and
minimum participation scenarios is fair, from a financial point of view, to the
funds.
Assumptions. In rendering its opinion, Stanger relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in this consent solicitation, or that was otherwise
publicly available or furnished or otherwise communicated to Stanger. Stanger
has not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the funds, the CGS
privately held entities and the CGS Management Company. Stanger relied upon the
balance sheet value determinations for the funds, the CGS privately held
entities and the CGS Management Company, and the adjustments made by the general
partners to the real estate portfolio appraisals to arrive at the Exchange
Values. Stanger also relied upon the assurance of the funds, the general
partners, the CGS privately held entities and the CGS Management Company, that:
- the calculations made to determine allocations between joint venture
participants and within each of the funds between the general partner and
limited partners are consistent with the provisions of each joint venture
agreement and each fund's limited partnership agreement;
- any financial projections, pro forma statements, budgets, value estimates
or adjustments provided to Stanger were reasonably prepared or adjusted on
bases consistent with actual historical experience and reflect the best
currently available estimates and good faith judgments;
- no material changes have occurred in the fund's, the CGS privately held
entities' or the CGS Management Company's values subsequent to June 30,
2000, or in the real estate portfolio values subsequent to March 31, 2000
which are not reflected in the Exchange Values herein; and
- the funds, the general partners and the CGS privately held entities,
including the CGS Management Company, are not aware of any information or
facts regarding the funds, the CGS privately held entities, the real
estate portfolios or the CGS Management Company that would cause the
information supplied to Stanger to be incomplete or misleading.
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<PAGE> 91
Limitations and Qualifications of Fairness Opinion. Stanger was not asked
to and therefore did not perform an analysis with respect to any combinations of
fund participation other than those noted above. Further, Stanger is not opining
as to whether any specified combination will result from the consolidation.
Stanger did not:
o select the method of determining the allocation of American Spectrum
shares or notes or establish the allocations;
o make any recommendations to the limited partners, the general partners or
the funds with respect to whether to approve or reject the consolidation,
or whether to select the American Spectrum shares or notes offered in the
consolidation; or
o express any opinion as to:
o the impact of the consolidation with respect to combinations
of participating funds other then those specifically
identified in the fairness opinion;
o the tax consequences of the consolidation for limited
partners, the general partners or the funds;
o the potential impact of any preferential return to noteholders
on the cash flow received from, or the market value of
American Spectrum shares received by the limited partners;
o the potential capital structure of American Spectrum or its
impact on the financial performance of the American Spectrum
shares or the notes;
o the potential impact on the fairness of the allocations of any
subsequently discovered environmental or contingent
liabilities;
o the terms of employment agreements or other compensation
between American Spectrum and its officers; the terms of
existing joint venture agreements; or
o whether or not alternative methods of determining the relative
amounts of American Spectrum shares and notes to be issued
would have also provided fair results or results substantially
similar to those of the allocation methodology used.
Further, Stanger did not express any opinion as to:
o the fairness of any terms of the consolidation other than the fairness of
the allocations for the combinations of funds as described above, the
amounts or allocations of the consolidation costs or the amounts of the
consolidation costs borne by the limited partners at various levels of
participation in the consolidation;
o the relative value of American Spectrum shares and notes to be issued in
the consolidation;
o the impact, if any, on the trading price of American Spectrum shares
resulting from the decision of limited partners to select notes or
American Spectrum shares or liquidate such American Spectrum shares in the
market following consummation of the consolidation;
o the prices at which the American Spectrum shares or notes may trade
following the consolidation or the trading value of the American Spectrum
shares or notes to be received compared with the current fair market value
of the funds' portfolios and other assets if liquidated;
o the business decision to effect the consolidation or alternatives to the
consolidation;
79
<PAGE> 92
o the ownership percentage of American Spectrum held by parties affiliated
with CGS as a result of the consolidation and their consequent ability to
influence voting decisions of American Spectrum;
o whether or not American Spectrum will qualify as a REIT; and
o any other terms of the consolidation other than the allocations.
The fairness opinion is based on business, economic, real estate and
securities markets and other conditions as they existed and could be evaluated
as of the date of the fairness opinion and does not reflect any changes in those
conditions that may have occurred since that date. In connection with preparing
the fairness opinion, Stanger did not prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Appendix B. Stanger will not deliver any additional written summary of the
analysis.
Compensation and Material Relationships. Stanger has been paid a fee by
the funds, the CGS privately held entities and CGS of $500,000 for preparing the
fairness opinion. In addition, in connection with its preparation of the
fairness opinion and Portfolio Appraisal, Stanger will be reimbursed for all
reasonable out-of-pocket expenses, including legal fees, subject to an aggregate
maximum limit of $40,200. Stanger will also be indemnified against liabilities,
including liabilities under the federal securities laws. The fee was negotiated
between the funds, the general partners, CGS and Stanger. Payment of the fee to
Stanger is not dependent upon completion of the consolidation. CGS privately
held entities and the funds have not previously retained Stanger to perform
services, although affiliates of the general partners have paid certain nominal
amounts to Stanger for subscriptions to Stanger-prepared national publications.
Stanger also was compensated for preparing the Portfolio Appraisal. See
"Appraisals & Fairness Opinion -- Portfolio Appraisal."
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<PAGE> 93
THE CONSOLIDATION
In order to effect the consolidation, the funds that vote in favor of the
consolidation will be merged with and into American Spectrum. As described
above, you will receive American Spectrum shares in connection with the
consolidation. The following is an overview of the principal components and
other key aspects of the consolidation. We note, however, that following the
description herein is a summary, and refer you to the Agreements and Plans of
Merger by and between American Spectrum and each of the funds (the Merger
Agreements). A copy of the Merger Agreement(s) for your fund(s) is or are
attached to the supplement accompanying this consent solicitation as Appendix B.
By this reference to the Merger Agreements, we are incorporating each of the
Merger Agreements into this consent solicitation as required by the federal
securities laws.
Principal Components of the Consolidation
The consolidation will consist of the following principal components:
o The funds will consolidate into American Spectrum. The funds in
which limited partners holding in excess of 50% of the fund's units
approve the consolidation will consolidate into American Spectrum.
Consequently, American Spectrum will own the acquired funds'
properties and other assets after the completion of the
consolidation. In addition, American Spectrum will be subject to all
of the liabilities of the funds. The consolidation will be
accomplished by merging the funds into American Spectrum, the
Operating Partnership or a subsidiary of the Operating Partnership.
The assets of the funds will be held by either the Operating
Partnership or a subsidiary. The number of funds which will approve
the consolidation is currently unknown.
o CGS privately held entities will consolidate into American Spectrum.
We will merge with partnerships, corporations and limited liability
companies in which Messrs. Carden, Galardi and members of their
families hold more than 50% of the equity and which collectively own
14 properties. There are two to 7 other holders of equity in these
entities. In addition, we will merge with three other limited
partnerships in which affiliates of the general partners own 0.17 -
42% of the equity interests and the remaining equity interests are
owned by three - 101 persons which own collectively three
properties. The CGS privately held entities own in the aggregate
five office properties, two office warehouse properties, five
apartment properties, four shopping centers and one parcel of
development land. We will issue either American Spectrum shares or
limited partnership units in the Operating Partnership in these
mergers. Each limited partnership unit in the Operating Partnership
provides the same rights to distributions as one American Spectrum
share and is exchangeable into shares of American Spectrum on a
one-for-one basis after 12 months. There are some limitations on
exchange described under "AMERICAN SPECTRUM -- Miscellaneous
Policies-- Restrictions on Related Party Transactions". We have
agreed to file a registration statement to register the resale of
these American Spectrum shares.
o American Spectrum will own the CGS Management Company. CGS's
management company subsidiaries are engaged in both the business of
providing real estate management, leasing and brokerage services to
third parties and providing property management, brokerage and
leasing services to the funds and the CGS privately-held entities'
properties. While investigating the consolidation, we determined
that the third party management business, which we refer to as the
CGS Management Company, was not operating at a profit and that
providing property management and brokerage services was not our
principal focus. Accordingly, we determined not to include the Third
Party Management Company in the consolidation. Accordingly, the
management company subsidiaries formed a new subsidiary, the CGS
Management Company, and contributed to the CGS Management Company
the assets of the management companies relating to the business of
providing property management services to the funds and the CGS
privately held entities' properties. We will own the CGS Management
Company. In connection with the consolidation, the Third Party
Management Company
81
<PAGE> 94
will be distributed to the stockholders of CGS prior to the
consolidation. The CGS Management Company includes 72 of the 212
employees of CGS's management company subsidiaries. The Third Party
Management Company will continue to be operated separately by
affiliates of CGS.
o American Spectrum lists the American Spectrum shares on the
_________. American Spectrum will provide liquidity and a trading
market for the American Spectrum shares by listing the American
Spectrum shares for trading on the _________ concurrently with the
consummation of the consolidation.
o The following chart reflects the organizational structure of and the
relationship among Messrs. Carden and Galardi, the funds, the CGS
privately held entities and the management company subsidiaries of
CGS before the consolidation:
82
<PAGE> 95
[Chart showing the ownership of the CGS privately held
entities and the fund before the consolidation]
83
<PAGE> 96
o The following chart shows the organization of American Spectrum
following the consolidation reflecting the results of the following:
The funds that have approved the consolidation have merged into American
Spectrum and their assets have been contributed to the Operating Partnership.
The CGS privately held entities have merged into American Spectrum and
their assets have been contributed to the Operating Partnership.
The CGS Management Company is owned by American Spectrum.
84
<PAGE> 97
[Chart showing the ownership structure of American Spectrum
after the consolidation]
85
<PAGE> 98
Conditions to Consolidation
We have established certain conditions that must be satisfied in order for
the consolidation to be consummated, including the following:
o The American Spectrum shares must be listed on the _________ prior
to or concurrently with the consummation of the consolidation; and
o We condition the consummation of the consolidation upon the
ownership of real properties having an appraised value of at least
$200 million, including real properties owned by CGS privately held
entities, upon consummation of the consolidation. At June 30, 2000,
the appraised value of the real properties owned or controlled by
the CGS privately held entities was $177,390,000. If real properties
with an aggregate appraisal value of at least $22,610,000 are not
acquired pursuant to mergers with the funds in the proposed
consolidation, we will not acquire any of the funds in the
consolidation. The funds have an aggregate appraised value of
$105,320,000.
Merger Agreements
If your fund approves the consolidation, that approval also constitutes
consent to the merger of the fund with and into American Spectrum pursuant to
the terms and conditions of your fund's Merger Agreement. Each of the Merger
Agreements provides that in accordance with its terms, the applicable state
limited partnership laws governing such fund and the Maryland General
Corporation Law (or MGCL), at the time of filing of a merger certificate in each
state, the funds that approve the consolidation will be merged with and into
American Spectrum, and American Spectrum will continue as the surviving entity.
At the time the merger occurs, all of the properties and other assets and the
liabilities of each participating fund will be deemed to have been transferred
to American Spectrum. American Spectrum will contribute the properties to the
Operating Partnership or a subsidiary of the Operating Partnership after the
consummation of the consolidation.
If your fund approves the consolidation, it will also have consented to
all actions necessary or appropriate to accomplish the consolidation. In
addition, with respect to some of the funds, a separate vote will be required to
approve any required amendments to the partnership agreement governing that
fund. For information regarding whether your fund's partnership agreement is
being amended in connection with approval of the consolidation, we encourage you
to read the supplement pertaining to your fund that accompanies this consent
solicitation.
Approval and Recommendation of the General Partners
The general partners of the funds have unanimously approved the
consolidation. They believe that the terms of the consolidation provide
substantial benefits and are fair to you. As such, the general partners
recommend that you vote "For" approval of the consolidation. For a specific
description of our analysis in reaching this recommendation, see "Our
Recommendation and Fairness Determination." You are, however, urged to consider
the risks described in "Risk Factors" and the comparison of an investment in the
funds versus an investment in American Spectrum in "Comparison of Ownership of
Units, Notes and American Spectrum Shares." If your fund elects to be acquired
in the consolidation and you are subject to federal income tax, you will have
tax consequences. Accordingly, we recommend that you consult with your tax
advisor prior to casting your vote.
Vote Required for Approval of the Consolidation
In order for American Spectrum to acquire your fund, limited partners
holding a majority of the outstanding units of the fund must vote in favor of
the consolidation. As noted above, the consolidation is conditioned upon
acquisition of properties having an appraised value of $200 million. The
properties owned or contributed to American Spectrum by CGS privately held
entities have a total value of approximately $177 million. In addition, the
conditions to the consolidation referred to above must be satisfied.
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<PAGE> 99
Consideration
If your fund is consolidated with American Spectrum, you will be allocated
American Spectrum shares unless you vote against the consolidation and
affirmatively elect the notes option. If your fund votes against the
consolidation, your fund will continue as an independent entity which will
contract with American Spectrum to provide property management services.
American Spectrum Shares. The number of American Spectrum shares that you
will receive upon the consummation of the consolidation will be in accordance
with your fund's partnership agreement which specifies how consideration is
distributed to partners in the event of a liquidation of your fund. In addition,
in the event that your fund approves the consolidation, the aggregate number of
American Spectrum shares allocated to your fund will be reduced by your fund's
pro rata share of expenses of the consolidation.
Notes Option. If your fund votes in favor of and you have voted "Against"
the consolidation, but you do not wish to own American Spectrum shares, you can
elect the notes option. The principal amount of the note received by you or
other limited partners who elect the notes option will be equal to the estimated
amount that the fund would receive upon an orderly liquidation of the properties
pursuant to the partnership agreement governing your fund, as determined by the
general partners which represents 96.14% of the Exchange Value of the American
Spectrum shares that would otherwise have been allocated to your fund. See
"BACKGROUND OF AND REASONS FOR THE CONSOLIDATION -- Comparison of Alternatives
-- Estimated Liquidation Values." We determined the liquidation value based in
part on the portfolio appraisal prepared by Stanger. The liquidation value will
be lower than the Exchange Value of the American Spectrum shares, based on the
Exchange Value, offered to your fund in the consolidation. Notes will bear
interest at __% annually and will mature on _________ ___, ______. The notes
will be redeemable at any time.
General Partners. The general partners of the funds will not receive any
American Spectrum shares as a result of their general partner interests in the
funds. Under the terms of the partnership agreement for each fund, the general
partners are not entitled to have any of the American Spectrum shares allocated
to them. American Spectrum shares were allocated among the partners of each of
the funds in the same manner as net liquidation proceeds would be distributed
under your fund's partnership agreement as if your fund's properties and other
assets were sold for an amount equal to the value (based on the Exchange Value)
of the number of American Spectrum shares issued to the limited partners of each
fund by American Spectrum.
Estimated Exchange Value of American Spectrum Shares Issuable to Funds
The following table sets forth for each fund: (1) the estimated total
number of American Spectrum shares to be allocated to that fund; (2) the
Exchange Value of American Spectrum shares allocated to that fund; (3) the
Exchange Value of American Spectrum shares, per $1,000 of original investment by
you and the other limited partners of your fund and (4) the GAAP book value per
$1,000, in accordance with GAAP, of the assets contributed by your fund.
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<PAGE> 100
<TABLE>
<CAPTION>
Exchange Value GAAP Book
of American Value of Assets
Spectrum Contributed at
Shares per June 30, 2000
Exchange Value Average $1,000 per Average
Number of American of American Original $1,000 Original
Spectrum Shares Spectrum Limited Partner Limited Partner
Fund Allocated to Fund (1) Shares (2) Investment (2) Investment
----------------------------------------- -------------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund 408,338 $ 6,125,068 $ 417.32 $ 84.42
Sierra Pacific Development Fund II 803,077 12,046,149 554.43 525.13
Sierra Pacific Development Fund III 19,910 298,657 32.68 (39.50)
Sierra Pacific Institutional Properties V 276,735 4,151,028 539.50 267.87
Sierra Pacific Pension Investors '84 1,326,702 19,900,534 1,032.90 494.12
Nooney Income Fund Ltd., L.P. 699,267 10,489,005 690.98 368.25
Nooney Income Fund Ltd. II, L.P. 1,049,093 15,736,391 818.71 451.42
Nooney Real Property Investors-Two, L.P. 537,610 8,064,150 672.01 (33.19)
</TABLE>
----------
(1) The American Spectrum shares allocated to each fund as set forth in this
chart will not change if American Spectrum acquires fewer than all of the
funds in the consolidation. This number assumes that none of the limited
partners of the fund has elected the notes option.
(2) Values are based on the Exchange Value established by American Spectrum.
Upon listing the American Spectrum shares on the _________ actual values
at which the American Spectrum shares will trade on the _________ may be
significantly below the Exchange Value.
No Fractional American Spectrum Shares
No fractional American Spectrum shares will be issued by American Spectrum
in the consolidation. Each limited partner who would otherwise be entitled to
fractional American Spectrum shares will receive one American Spectrum share for
each fractional American Spectrum share of 0.5 or greater. No American Spectrum
shares will be issued for fractional American Spectrum shares of less than 0.5.
The maximum amount which a limited partner could forfeit if such limited
partner's fractional share was 0.49 is approximately $7.35, based on the
Exchange Value of $15 per share.
Effect of the Consolidation on Limited Partners Who Vote Against the
Consolidation
If you vote "Against" the consolidation, you do not have a statutory right
to elect to be paid the appraised value of your interest in the fund. If you
vote "Against" the consolidation, you have the right to elect the notes option
if your fund otherwise approves the consolidation. Under the notes option you
would receive notes, the principal amount of which would be equal to the amount
that you would be paid upon an orderly liquidation of the fund's properties
which is equal to 96.14% of your portion of the Exchange Value of the American
Spectrum shares that would otherwise have been paid to your fund. The terms of
the notes are described in more detail under "Description of Notes" on page ___.
The Exchange Value of the American Spectrum shares that would otherwise have
been paid to your fund is the amount estimated by American Spectrum as set forth
in the supplement accompanying this consent solicitation. Noteholders will be
entitled to receive only the principal and interest payments required by the
terms of the notes and will not have the rights of stockholders to participate
in American Spectrum's dividends and distributions or in any growth in the value
of American Spectrum's stockholders' equity.
Effect of Consolidation on Funds Not Acquired
If American Spectrum does not acquire your fund in the consolidation, it
will continue to operate as a separate limited partnership with its own assets
and liabilities. There will be no change in the fund's investment objectives and
it will remain subject to the terms of its partnership agreement. The general
partners plan to promptly list the fund's property for sale with brokers and
commence the process of liquidating the fund's property. The general partners
believe that it could take an extended time to complete the sale of the fund's
property and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
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<PAGE> 101
Consolidation Expenses
If American Spectrum acquires your fund in the consolidation, your fund
will pay a portion of the transaction costs as reflected in the supplement
attached to this consent solicitation. The number of American Spectrum shares
that you receive will reflect a reduction for your fund's expenses of the
consolidation.
Accounting Treatment
The merger of the privately-held entities included in the combined
financial statements of those entities in which William J. Carden, John N.
Galardi and CGS own a majority of the equity interests as part of the
consolidation will be accounted for as a reorganization in which carry-over
basis is applicable. These entities are referred to as the American Spectrum
Predecessor in the financial statements. This accounting reflects the majority
ownership and control of these entities by Messrs. Carden and Galardi. The
purchases of the funds and the privately-held entities referred to as the Other
Affiliates in the financial statements will be accounted for as purchases under
Generally Accepted Accounting Principles.
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<PAGE> 102
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
The following information has been prepared to compare the amounts of
compensation paid and distributions made by the funds to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of the funds and
their affiliates are entitled to receive fees in connection with managing the
affairs of each fund. The partnership agreements also provide that the general
partners are to be reimbursed for their expenses for administrative services
performed for each fund, such as legal, accounting, transfer agent, data
processing and duplicating services.
American Spectrum intends to operate as a REIT which is managed by its
Board of Directors and officers. It will not pay fees to an outside advisor or
manager. As part of the consolidation, all participating funds will share in the
overall cost of managing the consolidated portfolio of properties owned by
American Spectrum. As stockholders, you and the other former limited partners of
the funds will receive distributions in proportion with your ownership of
American Spectrum shares. This cost participation and dividend payment are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six months
ended June 30, 2000, the aggregate amounts accrued or actually paid by the funds
to the general partner are shown below under "Historical" and the estimated
amounts of compensation that would have been paid had the consolidation been in
effect for the years presented as a "C" corporation or as a REIT are shown below
under "Pro Forma as a "C" Corporation" and "Pro Forma as a REIT," respectively:
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<PAGE> 103
Compensation, Reimbursements and Distributions
To The General Partners
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------ June 30,
1997 1998 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Historical(1):
Management Fees $ 780,080 $ 789,171 $ 808,656 $ 449,153
Administrative Fees 676,009 647,457 741,617 347,893
Leasing Fees 360,379 230,545 56,621 46,960
Construction Supervision Fees 151,001 46,801 30,332 --
Broker Fees 61,000 -- -- --
General Partner Distributions 46,369 64,239 -- --
Limited Partner Distributions(2)
========== ========== ========== ==========
Total historical $2,074,838 $1,778,213 $1,637,226 $ 844,006
========== ========== ========== ==========
Pro Forma as a "C" Corporation:(3) (4)
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests(5) 16,343 -- 463,495 --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company(6) 5,445 -- 152,554 --
Restricted Stock and Stock Options(7) 373,125 373,125 373,125 186,563
Salary, bonuses and reimbursements(8) 1,158,690 1,158,690 1,158,690 579,345
========== ========== ========== ==========
Total pro forma or a "C" corporation $1,553,802 $1,531,815 $2,147,864 $ 765,908
========== ========== ========== ==========
Pro Forma as a REIT: (3) (4)
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests(5) 16,543 -- 463,495
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company(6) 5,445 -- 152,554 --
Restricted Stock and Stock Options(7) 373,125 373,125 373,125 186,563
Salary, bonuses and reimbursements(8) 1,158,690 1,158,690 1,158,690 579,345
========== ========== ========== ==========
Total pro forma or a REIT $1,153,802 $1,531,815 $2,147,864 $ 765,908
========== ========== ========== ==========
</TABLE>
----------
(1) The compensation, reimbursements and distributions paid to the funds'
general partners and their affiliates were calculated based upon the
compensation, reimbursements and distributions that the general partners
and their affiliates received under the funds' partnership agreements. For
a description of the compensation structure and the applicable formulae,
see "Comparison of Ownership of Units, Notes and American Spectrum
Shares."
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<PAGE> 104
(2) Represents distributions received in respect of the limited partnership
interests in the funds owned by the general partners and their affiliates.
(3) Following the consolidation, American Spectrum will not pay fees and
expense reimbursement of the types paid by the funds. Instead, American
Spectrum will pay compensation to officers and directors who were
affiliates to the general partners and will make distributions on American
Spectrum shares including shares issuable to affiliates of the general
partners. A portion of the compensation payable to the general partners
and their affiliates by the funds was used to pay expenses of the funds
borne by the general partners and their affiliates. Since American
Spectrum will not have an outside manager, expenses of this type will be
borne by American Spectrum after the consolidation.
(4) No taxes would have been payable by American Spectrum if the combined
entities had operated as a "C" Corporation during the period. Accordingly,
the distributions to the general partner and its affiliates would have
been the same whether it was a "C" Corporation or a REIT.
(5) Represents distributions which would have been received in respect of
American Spectrum shares issued to the general partners and their
affiliates in exchange for limited partnership interests in the funds
owned by the general partners and their affiliates. The amount of
distributions which would have been received is determined by multiplying
the estimated cash flow available for distribution from all of the funds
during the relevant periods by the percentage of the American Spectrum
shares issued to all of the partners in the funds represented by the
shares issued to the general partners and their affiliates.
(6) The general partners and their affiliates were issued 266,667 American
Spectrum shares on account of their interest in the CGS Management
Company. For purposes of this table we assumed that all of the
distributions on these shares related to the funds. The amount of
distributions which would have been received is determined by multiplying
the estimated cash flow available for distribution from all of the funds
during the relevant periods by the percentage of the aggregate number of
American Spectrum shares issued to all of the partners in the funds
represented by such shares issued in respect of the CGS Management
Company.
(7) The value of the restricted stock granted is based on the Exchange Value
per share of $15 and the number of shares initially issued which vest in
one year. No value is attributed to the stock options to be granted
because we do not know what prices the American Spectrum shares will trade
at after the closing of the consolidation.
(8) Represents our estimate of the annual cash compensation which will be
payable to affiliates of the general partner following the consolidation
allocated based on the percentage of the Exchange Value of American
Spectrum represented by the funds.
If you would like more detailed information regarding the general
partners' compensation and distributions on a pro forma and historical basis for
each fund, please read the supplement for your fund under the heading
"Compensation, Reimbursements and Distributions to the General Partner."
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<PAGE> 105
CONFLICTS OF INTEREST
Affiliated General Partners
The general partners of the funds have an independent obligation to assess
whether the terms of the consolidation are fair and equitable to the limited
partners of each fund without regard to whether the consolidation is fair and
equitable to any of the other participants, including the limited partners in
other funds. The general partners of the funds are affiliates of American
Spectrum. While your general partners have sought faithfully to discharge their
obligations to your fund, there is an inherent conflict of interest in serving,
directly or indirectly, in a similar capacity with respect to all of the other
funds. In addition, officers and directors of the general partners and their
affiliates also serve on American Spectrum's Board of Directors.
Substantial Benefits to General Partners and their Affiliates
As a result of the consolidation, your general partners and their
affiliates expect to receive certain benefits. These benefits include:
o If the consolidation is consummated, your general partners and their
affiliates are expected to receive approximately 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership or 30% of the outstanding American Spectrum shares,
assuming exchange of all limited partnership interests in the
Operating Partnership, in exchange for their interests in the funds
and the contribution of the CGS privately held entities and the CGS
Management Company. Based on the Exchange Value per share of $15,
the American Spectrum shares issuable to affiliates of general
partners had a value of $31,396,905. The book value of the
contributed assets was $(35,739,000).
o Some of the officers and directors of your general partners will
also serve as officers and directors of American Spectrum. They will
be entitled to receive performance-based incentives, including stock
options and restricted stock grants under American Spectrum's 2000
Performance Incentive Plan and any other plan approved by the
stockholders. The benefits that may be realized by them are likely
to exceed the benefits that they would expect to derive from the
funds if the consolidation does not occur.
o Affiliates of the general partner will receive 72% of their
interests in us in the form of limited partnership interests in a
subsidiary of American Spectrum. As a result, they will not have tax
liability without cash on the limited partnership interests they
receive.
o CGS privately held entities owe approximately $11,712,991 to the
funds and third parties which will become obligations of American
Spectrum following the consolidation. These amounts include
approximately $7,250,000 payable to Sierra Pacific Development Fund
Ltd. II, L.P. as part of a settlement of claims brought by limited
partners. $10,837,444 of this debt is guaranteed by William J.
Carden or John N. Galardi. If the consolidation is consummated, the
CGS privately held entities and Messrs. Carden and Galardi will not
be obligated to make these payments and the payments will become
obligations of American Spectrum. These liabilities will result in a
reduction in the number of American Spectrum shares allocated to the
CGS privately held entities.
o The CGS privately held entities owe approximately $200,000 to a law
firm of which one of the independent directors, Timothy R. Brown, is
a member. American Spectrum will be responsible for this debt as
part of the consolidation and will repay the debt following the
consummation of the consolidation.
o After the consolidation Mr. Carden, who is our Chief Executive
Officer, will continue to own and operate the CGS Third Party
Management Company and one small shopping center in Boise, Idaho.
There may be conflicts of interest in the allocation of his time
between us and his other interests.
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<PAGE> 106
Common General Partners
The general partners of each fund have an independent obligation to ensure
that such fund's participation in the consolidation is fair without regard to
whether the consolidation is fair to any of the other participants. The general
partners have sought to discharge faithfully this obligation to each of the
funds, but it should be borne in mind that each of the general partners or their
affiliates serves in a similar capacity with respect to the other funds. If each
of the funds had separate general partners who did not serve in a similar
capacity for any of the other funds, these general partners would have had a
totally independent perspective, which might have led them to advocate positions
during the negotiations and structuring of the consolidation differently from
those taken by the general partners.
Lack of Independent Representation of Limited Partners
While Stanger has provided an independent appraisal and fairness opinion,
the funds have not retained any outside representatives to act on behalf of the
limited partners in negotiating the terms and conditions of the consolidation.
If an independent representative had been retained for the funds, either
collectively or on an individual basis, the fees and expenses of the
consolidation would have been higher. No group of limited partners was empowered
to negotiate the terms and conditions of the consolidation or to determine what
procedures should be in place to safeguard the rights and interests of the
limited partners. If another representative or representatives had been retained
for the limited partners, the terms of the consolidation might have been
different and, possibly, more favorable to the limited partners.
Terms of the Consolidation with the CGS Privately Held Entities
Affiliates of the general partners determined the terms of the mergers
with the CGS privately held entities. The general partners believe that these
terms are fair and reasonable and that the number of American Spectrum shares
allocable in respect of the CGS privately held entities was determined on the
same basis and using the same methodology as the determination of the number of
shares issuable to the funds. However, the general partners and their affiliates
had a conflict of interest in making the determination as to the terms of the
transactions with the CGS privately held entities and the transaction was not
the result of arm's-length negotiations.
Non-Arm's-Length Agreements
All agreements and arrangements, including those relating to compensation
and the mergers with the CGS privately held entities, were determined by the
general partners and their affiliates. They were not the result of arm's-length
negotiations.
Conflicts of interest in voting limited partnership interests
Affiliates of the general partners will have a conflict of interest in
voting their limited partnership interests in the funds. American Spectrum will
acquire each fund if the limited partners of that fund who hold a majority in
interest of the outstanding units vote in favor of the consolidation. Affiliates
of the general partners own interests as limited partners in all of the funds.
These interests range from 4.89% to 32.13% and will be voted by affiliates of
CGS in favor of the consolidation.
Features Discouraging Potential Takeovers
Provisions of American Spectrum's organizational documents could be used
by American Spectrum's management to delay, discourage or thwart efforts of
third parties to acquire control of, or a significant equity interest in,
American Spectrum.
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<PAGE> 107
COMPARISON OF OWNERSHIP OF UNITS, NOTES AND AMERICAN SPECTRUM SHARES
The information below highlights a number of the significant differences
between the funds and American Spectrum relating to, among other things, form of
organization, investment objectives, policies and restrictions, asset
diversification, capitalization, management structure, compensation and fees and
investor rights, and compares certain legal rights associated with the ownership
of units, notes and American Spectrum shares. We have included these comparisons
to assist you in understanding how your investment will be changed if, as a
result of the consolidation, your units are exchanged for American Spectrum
shares or notes. This discussion is only a summary and does not constitute a
complete discussion. We strongly encourage you to review the balance of this
consent solicitation, as well as the accompanying supplement for additional
information.
Form of Organization and Purpose
Funds
--------------------------------------------------------------------------------
Each of the funds is a limited partnership. The funds' primary business is
to acquire, own, develop, improve, lease, manage and otherwise invest in office,
office/warehouse and/or shopping center properties.
American Spectrum
--------------------------------------------------------------------------------
American Spectrum is a Maryland corporation. American Spectrum intends to
qualify as a REIT under the Code in 2002. American Spectrum's primary business
will be the ownership and management of office, office/warehouse, shopping
center and apartment properties.
American Spectrum will have broader business opportunities than your fund
and will have access to financing opportunities that are currently not
accessible to your fund. Inherent in several of the additional financing
opportunities are certain risks which do not exist in the case of your fund, and
we encourage you to review "Risk Factors" for a detailed description of such
risks.
95
<PAGE> 108
Length and Type of Investment
Funds
--------------------------------------------------------------------------------
Each fund is a finite-life entity with a stated term that expires between
2019 and 2085. It was originally anticipated that each fund would be liquidated
between the fifth and tenth year after acquiring its properties. However, the
depression of real estate values experienced nationwide from 1988 to 1993
lengthened this time frame in order to achieve the funds' goal of capital
appreciation. As a limited partner of your fund, you are entitled to receive
cash distributions out of your fund's net operating income, if any, and to
receive cash distributions, if any, upon liquidation of your fund's real estate
investments.
American Spectrum
--------------------------------------------------------------------------------
American Spectrum will have a perpetual term and intends to continue its
operations for an indefinite time period. To the extent American Spectrum sells
or refinances its assets, the net proceeds therefrom will generally be
reinvested in additional properties or retained by American Spectrum for working
capital and other corporate purposes, except to the extent distributions thereof
must be made to permit American Spectrum to continue to qualify as a REIT for
tax purposes and that, pursuant to the terms of the notes, repayments of notes
must be made to certain former limited partners as a result of sales of
properties formerly held by their funds.
It was the original intention of a majority of the funds to have begun
liquidation proceedings between the fifth and tenth year after acquiring their
respective properties. However, the depression of real estate values experienced
nationwide from 1988 to 1993 lengthened this time frame in order to achieve the
funds' goal of capital appreciation. In contrast, American Spectrum generally
will be an operating company and will reinvest the proceeds of asset
dispositions, if any, in new properties or other appropriate investments
consistent with American Spectrum's investment objectives.
Business and Property Diversification
Funds
--------------------------------------------------------------------------------
The investment portfolio of each fund currently consists of between one
and five properties and certain related assets.
American Spectrum
--------------------------------------------------------------------------------
Assuming all of the funds are acquired by American Spectrum, American
Spectrum will own an interest in, directly or indirectly through the Operating
Partnership, a portfolio of up to 35 properties.
The investment portfolio of each fund currently consists of between one
and five properties. Through the consolidation, and through additional
investments that may be made by American Spectrum from time to time, American
Spectrum intends to maintain an investment portfolio substantially larger and
more diversified than the assets of any of the funds individually. The larger
portfolio will diversify your investment over a broader group of properties with
multiple market segments and will reduce the dependence of your investment upon
the performance of, and the exposure to the risks associated with, any
particular group of properties currently owned by an individual fund.
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<PAGE> 109
Borrowing Policies
Funds
--------------------------------------------------------------------------------
Your fund's policy is not to borrow to make new acquisitions and as a
practical matter the amount which your fund can borrow is limited by its size.
The fund's partnership agreements generally limit their borrowing to 50% to 80%
of the appraised value of their properties.
American Spectrum
--------------------------------------------------------------------------------
American Spectrum is not restricted under its articles of incorporation
from incurring debt. At the time of the consolidation, American Spectrum will
have a policy of incurring debt only if immediately following such incurrence
the debt-to-total assets (based on appraised value) ratio would be 70% or less.
American Spectrum's Board of Directors has the ability to alter or eliminate
this policy at any time.
Upon consummation of the consolidation, American Spectrum will have
greater leverage than the funds. As a stockholder, you will become an investor
in an entity that may incur debt in the ordinary course of business and that
invests proceeds from borrowings. The ability of American Spectrum to incur
indebtedness in the ordinary course of business increases the risk of your
investment in American Spectrum shares. At the time of the consolidation,
American Spectrum will have a policy of incurring debt only if immediately
following such occurrence the debt-to-total assets ratio would be 70% or less
(based on appraised value).
Other Investment Restrictions
Funds
--------------------------------------------------------------------------------
The partnership agreements of the funds contain provisions that prohibit
or place significant restrictions on: (i) the reinvestment in the fund of cash
available for distribution; (ii) the purchase or lease of any real property
without the support of an appraisal report of an independent appraiser of
properties; (iii) the acquisition of any property in exchange for interests in
the fund; or (iv) the acquisition of securities of other issuers. The funds are
generally not authorized to: (i) raise additional funds for new investments,
absent amendments to their partnership agreements; and (ii) reinvest net sales
or refinancing proceeds in new investments or redeem or repurchase units.
American Spectrum
--------------------------------------------------------------------------------
Neither the articles of incorporation nor General the bylaws impose any
restrictions upon the types Corporations of investments that may be made by
American Law Spectrum, except that under the articles of ("MGCL"),
incorporation, the Board of Directors is however, prohibited from taking any
action that would requires terminate American Spectrum's status as a REIT that:
unless a majority of the members of the Board of (i) Directors vote to terminate
such status. The the articles of incorporation and bylaws do not fact impose any
restrictions upon the vote to terminate of such status. The articles of
incorporation and the bylaws do not impose any restrictions on dealings common
between American Spectrum and directors, directorship officers and affiliates
thereof. The Maryland or interest is disclosed or known to: (a) the board of
directors or the committee, and the board or committee authorizes, approves or
ratifies the contract or transaction by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors constitute less
than a
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<PAGE> 110
Funds
--------------------------------------------------------------------------------
American Spectrum
--------------------------------------------------------------------------------
quorum; or (b) the stockholders entitled to vote, and the contract or
transaction is authorized, approved or ratified by a majority of the votes cast
by the stockholders entitled to vote other than the votes of shares owned of
record or beneficially by the interested director or corporation, firm, or other
entity; or (ii) the contract or transaction is fair and reasonable to the
corporation. In addition, American Spectrum has adopted a policy which requires
that all contracts and transactions between American Spectrum and directors,
officers or affiliates thereof must be approved by the affirmative vote of a
majority of the disinterested directors.
Some of the funds' partnership agreements contain provisions which
prohibit or hinder further investment by the funds. The organizational documents
of American Spectrum, however, provide American Spectrum with wide latitude in
choosing the type of investments it may pursue.
Management Control
Funds
--------------------------------------------------------------------------------
The general partners of the funds are, subject to certain policies and
restrictions set forth in the various partnership agreements, generally vested
with the exclusive right and power to conduct the business and affairs of the
funds and may appoint, contract or otherwise deal with any person, including
employees of our affiliates, to perform any acts or services for the funds
necessary or appropriate for the conduct of the business and affairs of the
funds. As a limited partner of a fund, you have no right to participate in the
management and control of your fund and have no voice in your fund's affairs
except on certain limited matters that may be submitted to a vote of the limited
partners under the terms of your fund's partnership agreement. Under each fund's
partnership agreement and subject to certain procedural requirements set forth
therein, limited partners have the right to remove the general partners by a
majority vote in interest with or without cause. In certain cases, however, a
general partner's removal can only occur if the limited partners find a
successor general partner.
American Spectrum
--------------------------------------------------------------------------------
The Board of Directors will direct the management of American Spectrum's
business and affairs subject to restrictions contained in American Spectrum's
amended and restated articles of incorporation and amended and restated bylaws
and applicable law. The Board of Directors, the majority of which will be
independent directors, will be elected at each annual meeting of the
stockholders. The policies adopted by the Board of Directors may be altered or
eliminated without a vote of the stockholders. Accordingly, except for their
vote in the elections of directors and their vote in certain major transactions,
stockholders will have no control over the ordinary business policies of
American Spectrum. Any director may be removed with or without cause only by the
stockholders upon the affirmative vote of at least 75% of all the shares of
common stock outstanding and entitled to vote in the election of the directors.
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<PAGE> 111
Under the partnership agreements for the funds, the general partners
generally are vested with the exclusive right and power to conduct the business
and affairs of the funds. As a limited partner, you have no voice in the affairs
of the funds except on certain limited matters. All of the funds permit a
general partner's removal by the limited partners without cause. Under the
articles of incorporation and bylaws, the Board of Directors directs management
of American Spectrum. Except for their vote in the elections of directors and
their vote in certain major transactions, stockholders have no control over the
management of American Spectrum.
Fiduciary Duties
Funds
--------------------------------------------------------------------------------
The funds are limited partnerships organized under the laws of either
Missouri or California. Both Missouri and California law provides that the
funds' general partners are accountable as fiduciaries to the funds and owe the
funds and its limited partners a duty of loyalty and a duty of care, and are
required to exercise good faith and fair dealing in conducting the affairs of
the funds. The duty of good faith requires that the funds' general partners deal
fairly and with complete candor toward the limited partners. The duty of loyalty
requires that, without the limited partners' consent, the general partners may
not have business or other interests that are adverse to the interests of the
funds. The duty of fair dealing also requires that all transactions between the
general partners and the funds be fair in the manner in which the transactions
are effected and in the amount of the consideration received by the general
partners.
American Spectrum
--------------------------------------------------------------------------------
Under the MGCL, the directors must perform their duties in good faith, in
a manner that they reasonably believe to be in the best interests of American
Spectrum and with the care of an ordinary prudent person under similar
circumstances. Directors of American Spectrum who act in such a manner generally
will not be liable by reason of being or having been a director of American
Spectrum.
The general partners of the funds and the Board of Directors of American
Spectrum, respectively, owe fiduciary duties to their constituent parties. Some
courts have interpreted the fiduciary duties of the Board of Directors in the
same way as the duties of a general partner in a limited partnership. Other
courts, however, have suggested that the funds' general partners' duties to you
and the other limited partners may be greater than the fiduciary duties of the
directors of American Spectrum to American Spectrum's stockholders. It is
unclear, however, whether, or to what extent, there are actual differences in
such fiduciary duties.
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<PAGE> 112
Management's Liability and Indemnification
Funds
--------------------------------------------------------------------------------
Under Missouri and California law, the general partners of the funds are
liable for the repayment of fund obligations and debts, unless limitations upon
such liability are expressly stated in the document or instrument evidencing the
obligation (for example, a loan structured as a nonrecourse obligation). Each
fund's partnership agreement generally provides that the general partners will
not be held liable for any costs arising out of their action or inaction that
the general partners reasonably believed to be in the best interests of a fund
except that they will be liable for any costs which arise from their own fraud,
negligence, misconduct or other breach of fiduciary duty. In cases in which the
general partners are indemnified, any indemnity is payable only from the assets
of the fund.
American Spectrum
--------------------------------------------------------------------------------
The articles of incorporation provide that the liability of American
Spectrum's directors and officers to American Spectrum and its stockholders for
money damages is limited to the fullest extent permitted under the MGCL. The
articles of incorporation and the MGCL provide broad indemnification to
directors and officers, whether serving American Spectrum or, at its request,
any other entity. American Spectrum will indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities, unless it is established that: (a) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (b) the director or officer actually received an improper
personal benefit in money, property or services; or (c) in the case of any
criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. Under the MGCL, however, American
Spectrum may not indemnify for an adverse judgment in a suit by, or in the right
of, American Spectrum. The bylaws require that American Spectrum, as a condition
to advancing indemnification expenses, obtain (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by American Spectrum as authorized by the
bylaws and (b) a written statement by, or on his behalf, to repay the amount
paid or reimbursed by American Spectrum if it shall ultimately be determined
that the standard of conduct was not met.
In each of the funds, the general partners will only be held liable for
costs which arise from their own fraud, negligence, misconduct or other breach
of fiduciary duty, and may be indemnified in certain cases. The liability of
American Spectrum's directors and officers is limited to the fullest extent
permitted under the MGCL and such directors and officers are indemnified by
American Spectrum to the fullest extent permitted by the MGCL.
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<PAGE> 113
Anti-takeover Provisions
Funds
--------------------------------------------------------------------------------
For each fund, a change in management may be effected only by the removal
of the general partners of the fund. See "Management Control" above for a
discussion regarding the removal of the general partners of a fund. In addition,
the partnership agreements of the funds restrict transfers of your units. An
assignee of units may not become a substitute limited partner, entitling him,
her or it to vote on matters that may be submitted to the partners for approval,
unless the general partners consent to such substitution.
American Spectrum
--------------------------------------------------------------------------------
The articles of incorporation and bylaws contain a number of provisions
that may have the effect of delaying or discouraging a change in control of
American Spectrum, even if the change in control might be in the best interests
of stockholders. These provisions include, among others: (i) authorized capital
stock that may be classified and issued as a variety of equity securities in the
discretion of the Board of Directors, including securities having voting rights
superior to the American Spectrum shares; (ii) restrictions on business
combinations with persons who acquire more than a certain percentage of American
Spectrum shares; (iii) a requirement that directors be removed only for cause
and only by a vote of stockholders holding at least a majority of all of the
shares entitled to be cast for the election of directors; and (iv) certain
ownership limitations designed to protect American Spectrum's status as a REIT
under the Code. See "Description of Capital Stock."
Certain provisions of the governing documents of the funds and American
Spectrum could be used to deter attempts to obtain control of the funds or
American Spectrum in transactions not approved by the funds' general partners or
by American Spectrum's Board of Directors, respectively.
Sale
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement Directors requires the consent of
limited partners holding a majority of the outstanding units for the sale of all
or substantially all of the assets of the fund.
American Spectrum
--------------------------------------------------------------------------------
Under the MGCL, the Board of is required to obtain approval of the
stockholders by affirmative vote of two-thirds of all the votes the entitled to
be cast on the matter in order to sell all or substantially all of the assets of
American Spectrum. No approval of the stockholders is required for the sale of
less than substantially all of American Spectrum's assets.
Under each of the fund's partnership agreements and the articles of
incorporation, the sale of assets may be effected with various specified levels
of limited partner or stockholder consent. Under the partnership agreements and
the articles of incorporation, the sale of assets which do not amount to all or
substantially all of the assets of the funds or American Spectrum does not
require any consent of the limited partners or stockholders, respectively.
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<PAGE> 114
Merger
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement is silent with respect to the vote
required for a fund to participate in a merger. Under Maryland and California
law, a merger may be effected upon the general partners' approval and the
approval of the limited partners holding a majority of the outstanding units,
and the satisfaction of certain other procedural requirements. Under Missouri
law, a merger requires the unanimous consent of the limited partners unless the
partnership agreement otherwise provides. As described in the applicable
supplement, one of the proposed amendments will amend the partnership agreement
to permit the fund to merge with the approval of the managing general partner
and a majority of the outstanding units.
American Spectrum
--------------------------------------------------------------------------------
Under the MGCL, the Board of Directors is required to obtain approval of
the stockholders by the affirmative vote of two-thirds of all the votes entitled
to be cast on the matter in order to merge or consolidate American Spectrum with
another entity not at least 90% controlled by it.
Under applicable law and the articles of incorporation, mergers by the
respective funds or American Spectrum are permitted subject to a certain level
of limited partner or stockholder consent, respectively and in the case of
Missouri limited partnerships, approval of an amendment to the partnership
agreement.
Dissolution
Funds
--------------------------------------------------------------------------------
Each fund may be dissolved with the consent of the limited partners
holding a majority of the outstanding units.
American Spectrum
--------------------------------------------------------------------------------
Under the MGCL, the Board of Directors is required to obtain approval of
the stockholders by the affirmative vote of two-thirds of all votes entitled to
be cast on the matter in order to dissolve American Spectrum.
Under each fund's partnership agreement and the articles of incorporation,
the respective entities may be dissolved with the consent of a certain
percentage of the outstanding units or American Spectrum shares, as applicable.
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<PAGE> 115
Amendments
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement permits amendment of most of its
provisions with the consent of limited partners holding a majority of the
outstanding units. Amendments to the funds' partnership agreements that require
unanimous consent include: (i) converting the interest of a limited partner into
a general partner's interest; (ii) any act adversely affecting the liability of
a limited partner; (iii) altering the interest of a limited partner in net
profits, net losses, gain, loss, or distributions of cash available for
distribution, sale proceeds or refinancing proceeds; (iv) reducing the
percentage of partners required to consent to any action in the partnership
agreements; or (v) limiting in any manner the liability of the general partners.
The general partners may amend a fund's partnership agreement without the
consent of the limited partners to reflect a ministerial amendment, and,
specifically with respect to certain funds, amendment required by state law.
American Spectrum
--------------------------------------------------------------------------------
Generally, amendments to the articles of incorporation must be approved by
the Board of Directors and by holders of a majority of the outstanding American
Spectrum shares entitled to be voted.
Amendment to each fund's partnership agreement may be made with the
consent of a majority in interest of the limited partners. Amendment of the
articles of incorporation requires the consent of both the Board of Directors
and a certain percentage of the votes entitled to be cast at a meeting of
stockholders.
Compensation and Fees
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement provides that the general partners are
entitled to receive a percentage of the net cash available for distribution to
the partners of the fund.
American Spectrum
--------------------------------------------------------------------------------
American Spectrum will pay all management expenses, including salaries and
other compensation payable to employees of American Spectrum, which may include
performance-based bonuses. As an internally-advised REIT, American Spectrum will
not otherwise pay a portion of net cash flow or allocations to management,
except to the extent they are entitled to such as a result of owning American
Spectrum shares. Such management expenses will reduce the funds available for
distribution by American Spectrum.
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<PAGE> 116
Under each fund's partnership agreement, general partners receive a
percentage of net cash available for distribution. American Spectrum pays all
management expenses such as salaries. As a REIT, management would receive cash
flow only as they are entitled due to owning American Spectrum shares.
Management Fees
Funds
--------------------------------------------------------------------------------
The Nooney Funds' partnership agreements provide that each Nooney Fund is
authorized to enter into a management contract with Nooney Company. The maximum
management fee for any classification of property owed by a Nooney Fund is 6% of
the gross revenues from such property.
The Sierra Funds' partnership agreements provide that each Sierra Fund
shall employ a property management company (which may be an affiliate of a
general partner) to perform professional property management services for such
fund. The majority of the Sierra Funds' partnership agreements provide that in
the event that such management company is an affiliate of a general partner, the
management fee shall not exceed 6% of the gross revenue of each property managed
by such affiliate. Regardless of whether the property manager is an affiliate of
a general partner, such management fee shall be competitive in price with that
which would be charged by persons who are not affiliated with a general partner.
American Spectrum
--------------------------------------------------------------------------------
The officers and directors of American Spectrum will receive compensation
for their services as described herein under "Management." American Spectrum
will not otherwise pay any management fees.
Under each fund's partnership agreement, each fund may enter management
contracts under which management fees up to 6% of the gross revenues from
managed properties are payable. American Spectrum will not pay management fees,
but will compensate its officers and directors for their services.
Real Estate Disposition Fee
Funds
--------------------------------------------------------------------------------
The Nooney Fund's partnership agreement provides for the payment to either the
general partners, Nooney Co. or an affiliate of a real estate disposition fee
upon the sale of a property equal to the lesser of: (i) 50% of a competitive
real estate brokerage commission; or (ii) up to 4% of the sales price of the
property or properties. In each of the funds, general partners' right to receive
this fee is subordinated to your right to receive a
American Spectrum
--------------------------------------------------------------------------------
None. Certain employees of American Spectrum may receive incentive
compensation based upon American Spectrum's profitability.
104
<PAGE> 117
Funds
--------------------------------------------------------------------------------
cumulative (but not compounded) preferred return on your investment plus your
aggregate adjusted capital contributions. The real estate disposition fee is not
applicable to the Sierra Funds.
Under the partnership agreements of the Nooney Funds, a real estate
disposition fee is payable to general partners on the sale of a property,
subordinate to the payment rights of the limited partners. Neither the Sierra
Funds nor American Spectrum pay a real estate disposition fee.
Distributions of Net Sales Proceeds (Not in Liquidation)
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement provides for the payment to the general
partners of a portion of distributable net sales proceeds following the payments
to the limited partners of preferred returns and returns of capital required by
the partnership agreements. Each fund's partnership agreement provides a formula
by which net sales proceeds are to be distributed among the partners prior to
dissolution.
American Spectrum
--------------------------------------------------------------------------------
None. Distributions made by American Spectrum to its stockholders will be
based solely on the profitability of American Spectrum and will not be based on
asset dispositions.
Under each fund's partnership agreement, a portion of net sales proceeds
will be distributed to the partners in accordance with a formula. However,
American Spectrum will make distributions based only upon its profitability.
Reimbursement of Expenses
Funds
--------------------------------------------------------------------------------
Each fund's partnership agreement provides that operating expenses will be
reimbursed at a lower rate than which comparable services could have been
obtained by the fund in the same geographical area. In general, operating
expenses are those expenses relating to the administration of the fund by the
general partners or their affiliates.
American Spectrum
--------------------------------------------------------------------------------
As a corporation, and upon election, as a full-service REIT, American
Spectrum's expenses will be paid from its revenues as expenses are incurred.
Under each fund's partnership agreement, operating expenses are
reimbursed at a rate lower than which similar services could have been obtained.
American Spectrum will pay its expenses from its revenues as they are incurred.
105
<PAGE> 118
Review of Investor Lists
Funds
--------------------------------------------------------------------------------
Under your fund's partnership agreement, you are entitled, at your expense
and upon reasonable request, to obtain a list of the other limited partners in
your fund. However, if you are a limited partner of Sierra Pacific Institutional
Properties V, you may receive this information free of charge.
American Spectrum
--------------------------------------------------------------------------------
Under the MGCL, as a stockholder you must hold at least five percent of
the outstanding American Spectrum shares, and have done so for at least six
months, before you have the right to request a list of stockholders. If you meet
this requirement, you may, upon written request, inspect and, at your expense,
copy during normal business hours the list of stockholders.
Subject to limitations in the partnership agreement, the limited
partners of funds and the stockholders are entitled to inspect and, at their own
expense (except as noted above), make copies of investor lists.
The following discussion describes the investment attributes and legal
rights associated with your ownership of units, notes and American Spectrum
shares.
106
<PAGE> 119
Nature of Investment
Units
--------------------------------------------------------------------------------
The units you hold constitute equity interests entitling you to your pro
rata share of cash distributions made to the partners of your fund. The
partnership agreement for each fund specifies how the cash available for
distribution, whether arising from operation or sales or refinancing, is to be
shared among the general partners of your fund, you and the other limited
partners of your fund. The distributions payable by your fund to its partners
are not fixed in amount and depend upon the operating results and net sales or
refinancing proceeds available from the disposition of your fund's assets.
Notes
--------------------------------------------------------------------------------
The notes will be senior, unsecured obligations of American Spectrum and
will be issued pursuant to an indenture qualified under the Trust Indenture Act
of 1939, as amended (the "Indenture"). American Spectrum may issue additional
senior debt, only in compliance with the covenants contained in the notes and
the Indenture for the issuance of senior debt. Such senior debt may be secured.
The notes will bear interest at __% annually and will mature on _______ __,
____. Prior to maturity, interest only payments will be made to you, on a
semi-annual basis, and on ________ __, ____, the outstanding principal balance,
plus interest accruing since the last payment, will be payable to you. In
addition, you will be prepaid principal out of 80% of the net proceeds of any
sale or refinancing of any of our properties owned by your fund.
American Spectrum Shares
--------------------------------------------------------------------------------
The American Spectrum shares constitute equity interests in American
Spectrum. As a stockholder, you will be entitled to your pro rata share of any
dividends or distributions paid with respect to the American Spectrum shares.
The dividends payable to you are not fixed in amount and are only paid if, when
and as declared by the Board of Directors. Once qualified as a REIT, in order to
continue to maintain such qualification, American Spectrum must distribute at
least 90% of its taxable income (excluding capital gains), and any taxable
income (including capital gains) not distributed will be subject to corporate
income tax.
The units and the American Spectrum shares constitute equity interests.
As a limited partner of your fund, you are entitled to your pro rata share of
the cash distributions of your fund, and as a stockholder of American Spectrum,
you will be entitled to your pro rata share of any dividends or distributions of
American Spectrum which are paid with respect to the American Spectrum shares.
Distributions and dividends payable with respect to units and American Spectrum
shares depend on the performance of the funds and American Spectrum,
respectively. In contrast, the notes constitute an unsubordinated unsecured debt
obligations of American Spectrum providing for semi-annual payments of interest
only until the notes mature, at which time accrued interest and the principal
balance must be paid and prepayment out of the net proceeds of certain sales and
refinancings of our properties.
107
<PAGE> 120
Additional Equity/Potential Dilution
Units
--------------------------------------------------------------------------------
Since your fund is not authorized to issue additional equity securities,
there can be no dilution of distributions to you and the other limited partners.
Notes
--------------------------------------------------------------------------------
Since notes will be unsecured debt obligations of American Spectrum, their
payment will have priority over dividends or distributions payable to American
Spectrum's stockholders. However, there are no restrictions on American
Spectrum's authority to grant secured debt obligations, such as mortgages, liens
or other security interests in American Spectrum's real and personal property,
and such security interests, if granted, would permit the holders thereof to
have a priority claim against such collateral in the event of American
Spectrum's default under the secured obligations. Also, such secured obligations
would have payment priority over notes and other unsecured indebtedness of
American Spectrum.
American Spectrum Shares
--------------------------------------------------------------------------------
At the discretion of the Board of Directors, American Spectrum may issue
additional equity securities, including American Spectrum shares and shares
which may be classified as one or more classes or series of common or preferred
shares and contain certain preferences. The issuance of additional equity
securities by American Spectrum will result in the dilution of your percentage
ownership interest in American Spectrum.
As a stockholder, your percentage ownership interest will be diluted if American
Spectrum issues additional American Spectrum shares. Furthermore, American
Spectrum may issue preferred stock with priorities or preferences with respect
to dividends and liquidation proceeds. Payment of the notes will have priority
over distributions on the American Spectrum shares you hold or any class of
equity securities that might be issued by American Spectrum. Any senior secured
obligations issued by American Spectrum, however, will have prior claims against
the collateral given for security in the event American Spectrum defaults in the
payments of those secured obligations and will have payment priority over the
notes and other unsecured indebtedness of American Spectrum.
108
<PAGE> 121
Liability of Investors
Units
--------------------------------------------------------------------------------
Under your fund's partnership agreement and under Missouri and California
law, your liability for your fund's debts and obligations is generally limited
to the amount of your investment in the fund, together with an interest in
undistributed income, if any.
Notes
--------------------------------------------------------------------------------
As a noteholder, you will not be personally liable for the debts and
obligations of American Spectrum.
American Spectrum Shares
--------------------------------------------------------------------------------
Under the MGCL, you will not be personally liable for the debts or
obligations of American Spectrum.
As a holder of units, your liability for the debts and obligations of your
fund is limited to the amount of your investment. As a noteholder or
stockholder, you generally would have no liability for the debts and obligations
of American Spectrum.
Voting Rights
Units
--------------------------------------------------------------------------------
Generally, with some exceptions, you and the other limited partners of
your fund have voting rights only on significant fund transactions to the extent
provided in your fund's partnership agreement. Such voting rights include
incurrence of debt, sale of all or substantially all of the assets of your fund,
certain amendments to the partnership agreement or the general partners'
removal.
Notes
--------------------------------------------------------------------------------
Under the Indenture, you will not be entitled to voting rights.
American Spectrum Shares
--------------------------------------------------------------------------------
American Spectrum is managed and controlled by a Board of Directors
elected by the stockholders at the annual meeting of American Spectrum. The MGCL
requires that certain major transactions, including most amendments to the
articles of incorporation, may not be consummated without the approval of a
majority-in-interest of the stockholders. You will have one vote for each
American Spectrum share you own. The articles of incorporation permits the Board
of Directors to classify and issue shares of capital stock in one or more series
having voting power which may differ from that of your American Spectrum shares.
See "Description of Capital Stock."
As a limited partner of your fund, you have limited voting rights. As a
stockholder, you will have voting rights that permit you to elect the Board of
Directors and to approve or disapprove certain major transactions. As a
noteholder, you will not have voting rights.
109
<PAGE> 122
Liquidity
Units
--------------------------------------------------------------------------------
The units that represent your ownership interest in your fund are
relatively illiquid investments with a limited resale market. The trading volume
of the units in the resale market is limited and the prices at which certain
funds' units trade are generally not equal to their net book value. Applicable
federal income tax rules and the partnership agreements of the funds effectively
prevent the development of a more active or substantial market for these units.
Neither you nor any other limited partner, individually, can require a fund to
dispose of its assets or redeem your or any other limited partner's interest in
the fund.
Notes
--------------------------------------------------------------------------------
While the notes you hold will be freely transferable, American Spectrum
will not list the notes, and no market for the notes is expected to develop. You
should not elect to receive notes unless you are prepared to hold the notes
until their maturity which is approximately eight years from the date that the
consolidation occurs. You should note that, due to the lack of market in the
notes and their consequent lack of liquidity, your tax liability as a result of
the consolidation may exceed the liquid assets you receive if you have elected
the notes option.
American Spectrum Shares
--------------------------------------------------------------------------------
The American Spectrum shares will be freely transferable upon registration
under the Securities Act. The American Spectrum shares will be listed on the
_________, and American Spectrum expects a public market for the American
Spectrum shares to develop. The breadth and strength of this market will depend
upon, among other things, the number of American Spectrum shares outstanding,
American Spectrum's financial results and prospects, and the general interest in
American Spectrum's dividend yield and growth potential compared to that of
other debt and equity securities. See "The Consolidation -- Consideration."
Your units have a limited resale market. If American Spectrum acquires
your fund in the consolidation and you receive American Spectrum shares,
however, the American Spectrum shares you receive will be freely transferable
upon registration under the Securities Act and listing on the _________. As a
stockholder of American Spectrum, you will have the opportunity to achieve
liquidity by trading the American Spectrum shares in the public market. If you
elect the notes option, however, your ability to achieve liquidity in the notes
will be much more limited since the notes will not be listed on any exchange.
110
<PAGE> 123
Expected Distributions and Payments
Units
--------------------------------------------------------------------------------
Your fund makes quarterly distributions to the extent of available cash
flow, if any. Amounts distributed to you are derived from your pro rata share of
cash flow from operations or cash flow from sales or financings. See "Selected
Financial Information of the Funds" for a presentation of the cash distributions
to you and the other limited partners of the funds over the five most recent
calendar years.
Notes
--------------------------------------------------------------------------------
As a noteholder, you will generally be entitled to receive only the
principal and interest payments required under the notes. You will have no right
to participate in any profits derived from operations of any of American
Spectrum's assets, including properties acquired as part of the consolidation.
American Spectrum Shares
--------------------------------------------------------------------------------
American Spectrum intends to make quarterly dividend and distribution
payments to its stockholders. The amount of such dividends and distributions
will be established by the Board of Directors, taking into account the cash
needs of American Spectrum, funds from operations, yields available to
stockholders, the market price for the American Spectrum shares and the
requirements of the Code for qualification as a REIT. Under the Code, American
Spectrum is required to distribute at least 90% of REIT taxable income. REIT
taxable income generally includes taxable income from operations (including
depreciation and deductions) but excludes gains from the sale or distributions
from refinancing of properties. Unlike the funds, American Spectrum is not
required to distribute net proceeds from the sale or refinancing of properties.
Dividends will be paid if, as and when declared by the Board of Directors
in its discretion out of funds legally available therefor. If you become a
stockholder, you will receive your pro rata share of the dividends and
distributions made with respect to the American Spectrum shares. The amount of
such dividends and distributions will depend upon American Spectrum's revenues,
operating expenses, debt service payments, capital expenditures, and funds set
aside for expansion. Interest payments made on the notes will be paid prior to
any distributions with respect to the American Spectrum shares, and will reduce
the amount otherwise distributable to stockholders.
111
<PAGE> 124
Taxation of Taxable Investors
Units
--------------------------------------------------------------------------------
Your fund, as a partnership for federal income tax purposes, is not
subject to tax, but you must report your allocable share of partnership income
and loss on your tax return, whether or not cash distributions are made to you.
Income from your fund generally constitutes "passive income" to you, which can
generally be offset by "passive losses" from your other investments. Generally,
by February 15 of each year, you receive an annual Schedule K-1 with respect to
information about your fund for inclusion on your federal income tax returns.
You must file state income tax returns and incur state income tax in most
states in which your fund has properties.
Notes
--------------------------------------------------------------------------------
Interest payments made on the notes will constitute portfolio income which
cannot be offset by "passive losses" from other investments. During January of
each year, holders of notes will receive from American Spectrum IRS Form
1099-INT to show the interest payments made by American Spectrum during the
prior calendar year. The amount of gain or loss recognized at the time of the
payments on the notes will be equal to the amount of the payment multiplied by a
fraction, the denominator of which is the face amount of the note and the
numerator of which is the remainder of the face amount of the note at the time
of the payment less the noteholder's basis on the note.
American Spectrum Shares
--------------------------------------------------------------------------------
For the taxable year commencing January 1, 2002, American Spectrum intends
to qualify and be taxed as a REIT. As a REIT, American Spectrum generally would
be permitted to deduct distributions to its stockholders, which effectively
eliminates the corporate level of the "double taxation" (imposed at the
corporate and stockholder levels) that typically results when a corporation
earns income and distributes that income to stockholders in the form of
dividends. Dividends received by you as a stockholder would constitute portfolio
income, which cannot be offset by "passive losses" from other investments. The
distributions from American Spectrum might, in certain circumstances, constitute
a larger portion of taxable income than in the case of your fund. This is
because a partnership's operating income is sheltered from current taxation by
the partnership's depreciation deductions, while the amount of a REIT
distribution that is taxable as a dividend is computed under less favorable
rules. During January of each year, stockholders (including you) will be mailed
the less complex Form 1099-DIV used by corporations that pay dividends to their
stockholders. American Spectrum stockholders are not required to file state
income tax returns and/or pay state income taxes outside of their state of
residence with respect to American Spectrum's operations. American Spectrum will
be required to pay state
112
<PAGE> 125
Units
--------------------------------------------------------------------------------
Notes
--------------------------------------------------------------------------------
American Spectrum Shares
--------------------------------------------------------------------------------
income taxes in certain states where it is qualified to do business.
Each fund is a pass-through entity whose income and loss is not taxed at
the entity level, but instead allocated to the general partners, the other
limited partners and you. You are taxed on income or loss allocated to you
whether or not cash distributions are made to you. In contrast, American
Spectrum intends to qualify as a REIT allowing it to deduct dividends paid to
its stockholders. To the extent American Spectrum has taxable income after
taking into account the "dividends paid" deduction, such income is taxed at
American Spectrum's level at the standard corporate tax rates. Dividends paid to
stockholders will constitute portfolio income and not passive income.
Noteholders will recognize portfolio income on the interest payments received on
the notes. Although distribution from American Spectrum will generally be
characterized as dividends, corporate stockholders will not be able to claim the
dividends received deduction.
Taxation of Tax-Exempt Investors
Units
--------------------------------------------------------------------------------
None of the type of income distributed by the funds is characterized as
unrelated business taxable income, or UBTI, if the tax-exempt investor did not
finance its acquisition of the units with indebtedness.
Notes
--------------------------------------------------------------------------------
Interest income received by certain tax-exempt investors will not be
characterized as UBTI so long as the tax-exempt investor does not hold its notes
subject to acquisition indebtedness.
American Spectrum Shares
--------------------------------------------------------------------------------
Dividends received from American Spectrum by tax-exempt investors should
not constitute UBTI if the tax-exempt American Spectrum stockholder did not
finance its acquisition of the American Spectrum shares with indebtedness.
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest. To
the extent a tax-exempt entity owns units in the funds, the income received by
the funds must not constitute UBTI in order for the tax-exempt investor to avoid
taxation. In general, income attributable to the American Spectrum shares is not
UBTI. Similarly, as a general matter, interest income received under the notes
is not UBTI.
113
<PAGE> 126
VOTING PROCEDURES
Distribution of Solicitation Materials
This consent solicitation, together with the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain their votes "For" or "Against" your fund's participation in the
consolidation. We refer, collectively, to the power of attorney and limited
partner consent as the consent form.
In order for American Spectrum to acquire your fund, the limited partners
holding units greater than 50% of the outstanding units of your fund must
approve the consolidation. Your fund will be acquired by a merger with American
Spectrum, in the manner described below and in the supplement relating to your
fund. If you vote "For" the consolidation, you will be effectively voting
against alternatives to the consolidation, including liquidation of your fund's
properties and distribution of the net proceeds to the limited partners. If the
consolidation is not approved by any fund, your general partner plans to
liquidate that fund's properties. You should complete and return the consent
form before the expiration of the solicitation period which is the time period
during which limited partners may vote "For" or "Against" the consolidation. The
solicitation period will commence upon delivery of the solicitation materials to
you which is on or about ________ ___, 2000, and will continue until the later
of: (a) _________ ____, 2000; or (b) such later date as we may select and as to
which we give you notice. At our discretion, we may elect to extend the
solicitation period. We reserve the right to extend the solicitation period even
if a quorum has been obtained pursuant to the partnership agreement of the
various funds. Under no circumstances will the solicitation period be extended
beyond ____________, _____. Any consent form received by _________, which we
hired to tabulate your votes prior to ________________ time, on the last day of
the solicitation period will be effective provided that such consent form has
been properly completed and signed. If you fail to return a signed consent form
by the end of the solicitation period, your units will be counted as voting
"Against" the consolidation and you will receive American Spectrum shares if
your fund is acquired.
The consent form consists of two parts. Part A seeks your consent to the
consolidation and certain related matters. The exact matters which a vote in
favor of the consolidation will be deemed to approve differ for each fund and
are explained in detail in the individual supplement for each fund. Some funds
are required to have amendments to their partnership agreements in order to
permit American Spectrum to acquire such funds in the consolidation. You should
review the supplement to see if your fund's partnership agreement requires
amendment. If you have interests in more than one fund, you will receive
multiple consent solicitations, supplements and consent forms which will provide
for separate votes for each fund in which you own an interest. If you return a
signed consent form but fail to indicate whether you are voting "For" or
"Against" any matter (including the consolidation), you will be deemed to have
voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints William J. Carden and Harry A.
Mizrahi, or either of them, as your attorney-in-fact for the purpose of
executing all other documents and instruments advisable or necessary to complete
the consolidation. The power of attorney is intended solely to ease the
administrative burden of completing the consolidation without needing to obtain
your signature on multiple documents.
Required Vote and Other Conditions
In order for American Spectrum to acquire your fund, limited partners of
your fund holding greater than 50% of the outstanding units and the general
partners of your fund must approve the consolidation and, with respect to
certain funds, approve the amendments to the fund's partnership agreement. For a
more detailed discussion relating to your fund and whether any amendment is
required, please review the accompanying supplement. Affiliates of CGS own
interests as limited partners in five of the funds. These interests range from
4.89% to 32.13% and will be voted by affiliates of CGS in favor of the
consolidation. See "The Consolidation."
114
<PAGE> 127
Record Date and Outstanding Partnership Units. The record date is ________
___, 2000 for all funds. As of __________ __, _____, the following number of
units were held of record by the number of limited partners indicated below:
<TABLE>
<CAPTION>
Number of Units
Number of Number of Units for Approval of
Fund Limited Partners Held of Record Consolidation
------------------------------------------ ----------------- --------------- ---------------
<S> <C> <C> <C>
Sierra Pacific Development Fund 1,572 29,354 14,678
Sierra Pacific Development Fund II 3,367 86,653 43,327
Sierra Pacific Development Fund III 842 36,521 18,260
Sierra Pacific Institutional Properties V 1,440 30,777 15,389
Sierra Pacific Pension Investors '84 2,689 77,000 38,501
Nooney Income Fund Ltd., L.P. 1,126 15,180 7,591
Nooney Income Fund Ltd. II, L.P. 1,237 19,221 9,611
Nooney Real Property Investors-Two, L.P. 867 12,000 6,001
</TABLE>
You are entitled to one vote for each unit held. Accordingly, the number
of units entitled to vote with respect to the consolidation is equivalent to the
number of units held of record at the record date.
Investor Lists. Under Rule 14a-7 of the Securities Exchange Act of 1934,
as amended (the Exchange Act), your fund is required, upon your written request,
to provide to you: (i) a statement of the approximate number of limited partners
in your fund; and (ii) the estimated cost of mailing a proxy statement, form of
proxy or other similar communication to your fund's limited partners. In
addition, you have the right, at the general partners' option, either: (a) to
have your fund mail (at your expense) copies of any consent statement, consent
form or other soliciting materials to be furnished by you to the other limited
partners of your fund; or (b) to have the fund deliver to you, within five
business days of the receipt of the request, a reasonably current list of the
names, addresses and units held by the limited partners of your fund. The right
to receive the list of limited partners is subject to your payment of the cost
of mailing and duplication at a rate of $0.25 per page.
Tabulation of Votes. An automated system administered by [ ] will
tabulate the votes. Abstentions will be tabulated with respect to the
consolidation and related matters. Abstentions will have the effect of a vote
against the consolidation, as will the failure to return a consent form and
broker nonvotes. Broker nonvotes are where a broker submits a consent but does
not have authority to vote a limited partner's units on one or more matters.
Revocability of Consent. You can change your vote at any time before
consents from limited partners equal to more than 50% of the required vote are
received by your fund. You can send us a written statement that you would like
to revoke your consent, or you can send us a new consent form.
115
<PAGE> 128
SELECTED HISTORICAL COMBINED FINANCIAL DATA FOR AMERICAN SPECTRUM PREDECESSOR
(1)
The following table sets forth certain selected historical financial data of the
Company. The selected operating and financial position data as of and for each
of the five years ended December 31, 1999 have been derived from the audited
financial statements of the Company. The selected operating and financial
position data as of June 30, 2000 and for the six months ended June 30, 2000 and
1999 have been derived from the unaudited financial statements of the Company.
This information should be read in conjunction the Combined Financial Statements
and Notes thereto which follow.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------- --------------------
($ amounts, except
per share data, in 000's) 1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 7,600 $ 9,281 $10,004 $13,386 $14,608 $ 6,940 $ 7,708
Interest and other income 541 1,610 141 265 205 966 964
Property management 2,821 3,264 6,355 10,736 7,809 5,045 4,829
------ ------ ------ ------ ------ ------ ------
Total revenues 10,962 14,155 16,500 24,387 22,622 12,951 13,501
====== ====== ====== ====== ====== ====== ======
EXPENSES:
Property operating 5,137 7,443 1,683 2,886 3,396 1,794 2,502
Property management 55 92 7,472 12,164 10,766 5,735 5,329
Real estate and other taxes 894 1,166 848 1,523 1,597 369 644
Depreciation and amortization 2,213 2,202 2,203 3,313 3,259 1,835 1,723
Interest expense 4,644 5,801 7,901 9,585 9,982 4,530 6,435
Impairment charges -- -- -- 126 5,164 20 --
------ ------ ------ ------ ------ ------ ------
Total expenses 12,943 16,704 20,107 29,597 34,164 14,283 16,633
====== ====== ====== ====== ====== ====== ======
</TABLE>
116
<PAGE> 129
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------- -------------------
($ amounts, except
per share data, in 000's) 1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss before gain on sale of property,
equity in earnings (losses) of
non-combined partnerships and
extraordinary item (1,981) (2,549) (3,607) (5,210) (11,542) (1,332) (3,132)
Gain on sale of property -- -- -- -- -- -- 1,328
Equity in earnings (losses) of non combined
partnerships -- -- (127) 224 (330) (454) (270)
------ ------ ------ ------ ------- ------ ------
Net loss before extraordinary item (1,981) (2,549) (3,734) (4,986) (11,872) (1,786) (2,074)
Extraordinary item - extinguishment of
debt -- -- 50 163 (214) (574) (1,861)
------ ------ ------ ------ ------- ------ ------
Net loss $(1,981) $(2,549) $(3,684) $(4,823) $(12,086) $(2,360) $(3,935)
====== ====== ====== ====== ======= ====== ======
</TABLE>
117
<PAGE> 130
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Proforma weighted average number
of shares of common stock
outstanding during period 1,557 1,557 1,557 1,557 1,557 1,557 1,557
Pro forma net loss per share
before extraordinary item $ (1.27) $ (1.64) $ (2.40) $ (3.20) $ (7.62) $ (1.15) $ (1.33)
Extraordinary item -- -- 0.03 0.10 (0.14) (0.37) (1.20)
------- ------- ------- ------- ------- ------- -------
Pro forma net loss per share $ (1.27) $ (1.64) $ (2.37) $ (3.10) $ (7.76) $ (1.52) $ (2.53)
======= ======= ======= ======= ======= ======= =======
Deficiency of earnings to cover
fixed charges (2) (3) 1,981 2,549 3,684 4,823 12,086 2,360 3,935
Total properties owned at end of
period 8 14 16 17 17 16
</TABLE>
(1) The combined historical financial statements of American Spectrum
Predecessor include the accounts of various entities which have (a)
majority ownership interest(s) held by Mssrs. Carden, Galardi and/or
their affiliates, and (b) agreed to transfer their properties to
American Spectrum in exchange for shares of American Spectrum or
limited partnership units in the operating partnership in a private
transaction. Such historical amounts have been derived from the
historical audited and unaudited combined financial statements of
American Spectrum Predecessor included elsewhere in this consent
solicitation. These financial statements reflect all entities at
carry-over basis due to the high degree of common and controlling
interests held by Mssrs. Carden and Galardi. See also Note 1 to the
combined financial statements of American Spectrum Predecessor for
information regarding the planned reorganization of American Spectrum
Predecessor.
118
<PAGE> 131
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
the amortization of debt issuance costs and that portion of operating
rental expense representing interest.
(3) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges
of 1.0
119
<PAGE> 132
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------------------- --------
($ amounts, except per
share data, in 000's) 1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 282 $ 404 $ 670 $ 522 $ 458 $ 760 $ 776
Real estate held for investment, net 47,209 62,016 78,676 90,348 95,588 95,720 92,070
Accounts receivable, net 1,035 1,000 1,437 1,161 1,241 2,580 1,693
Accounts receivable from affiliates 4,376 16,121 17,072 4,539 3,970 6,698 3,610
Investment in/due from
partnerships 357 2,053 1,840 1,517 3,297 1,547 3,493
Other assets 2,575 3,177 7,510 6,741 3,881 5,812 6,174
Total assets, at book value 55,834 84,771 107,205 104,828 108,435 113,117 107,816
Total assets, at valued assigned for
the consolidation 146,559
Total liabilities 60,982 89,803 115,601 120,094 133,411 127,944 134,190
Total equity (deficit) (5,148) (5,032) (8,396) (16,311) (26,021) (14,827) (27,419)
</TABLE>
120
<PAGE> 133
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
----------------------- ----------------
JUNE 30,
--------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 266 (148) (64) 238 318
Cash provided by (used in) operating
activities (889) (2,971) (5,894) (379) 2,301
</TABLE>
121
<PAGE> 134
A. SELECTED PRO FORMA COMBINED DATA OF THE FUNDS - MAXIMUM PARTICIPATION(1)
The following table sets forth certain selected pro forma combined financial
data of the Funds. The selected operating and financial position data have been
derived from the pro forma combined financial statements of the Funds. These
amounts reflect solely the combination of the entities indicated in (1) and do
not reflect the application of any effects of the Combination. Such additional
disclosures are presented elsewhere in this Consent Solicitation. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto for each of the Funds, included elsewhere in this
Consent Solicitation.
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $11,601 $14,119 $14,080 $14,371 $15,178 $ 7,465 $ 8,199
Interest and other income 872 773 758 919 904 404 604
------- ------- ------- ------- ------- ------- --------
Total revenues 12,473 14,892 14,838 15,290 6,082 7,869 8,803
======= ======= ======= ======= ======= ======= ========
EXPENSES:
Property operating 4,306 5,213 5,274 5,168 6,913 3,220 3,283
Management and advisory
fees 629 767 795 803 823 268 297
Ground Lease 383 383 382 374 410 187 29
Real estate and other taxes 1,836 2,132 2,035 1,937 2,010 785 622
Depreciation and
amortization 4,149 4,781 4,806 4,268 4,144 2,064 2,063
Interest expense 2,209 2,965 2,930 2,579 2,503 1,221 1,508
------- ------- ------- ------- ------- ------- --------
</TABLE>
122
<PAGE> 135
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total expenses 13,512 16,241 16,222 15,129 16,803 7,745 7,802
====== ====== ====== ====== ====== ===== =====
Net income (loss) before
gain (loss) on sale of
property and extraordinary
item (1,039) (1,349) (1,384) 161 (721) 124 1,001
Gain (loss) on sale of
property 151 -- (967) -- 83 83 --
Extraordinary item-
Extinguishments of debt -- 1,200 -- -- -- -- (46)
------ ------ ------ ------ ------ ----- -----
Net income (loss) $ (888) $ (149) $(2,351) $ 161 $ (638) $ 207 $ 955
====== ====== ====== ====== ====== ===== =====
</TABLE>
123
<PAGE> 136
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed
charges (2) -- -- -- 1.06 -- 1.16 1.63
Deficiency of earnings to cover
fixed charges (3) $ 888 149 $ 2,351 -- $ 638 -- --
Cash distributions to minority
investors 1,355 1,803 3,110 1,177 105 -- 2,749
Total properties owned at end of
period (4) 20 20 19 19 19 19 19
BALANCE SHEET DATA:
Cash and cash equivalents $ 5,030 $ 2,970 $ 3,158 $ 2,723 $ 5,884 $ 2,954 $ 5,138
Real estate held for investment, net 63,758 65,220 57,899 56,198 54,680 55,586 53,960
Accounts receivable, net 2,758 3,290 2,642 2,596 2,763 4,348 3,336
Other assets 10,879 10,771 11,448 2,425 13,120 6,490 15,757
Total assets, at book value 82,425 82,251 75,147 73,942 76,447 69,378 78,191
Total assets, at valued assigned for
the consolidation 127,625
</TABLE>
124
<PAGE> 137
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total liabilities $ 36,840 $ 38,363 $ 34,272 $ 33,701 $ 36,836 $ 32,954 $ 38,212
General partners equity 8,561 8,876 9,189 9,034 9,427 9,834 8,087
Limited partners equity 34,024 32,012 28,686 28,207 27,184 23,590 31,892
Other equity 3,000 3,000 3,000 3,000 3,000 3,000 --
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net 605 (2,106) 190 (437) 3,162 233 (745)
Cash provided by operating
activities 55 2,798 837 3,209 2,279 680 797
</TABLE>
(1) Includes the accounts of all Funds and Sierra Mira Mesa Partners LP, a
partnership wholly-owned by two of the Funds. All significant inter-fund
transactions and balances have been eliminated in the pro forma
presentation.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
(3) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges of
1.0
(4) Five of the funds own interests in other partnerships, in addition to
properties wholly owned. Sierra Pacific Pension Investors '84 and Sierra
Pacific Development Fund II collectively own a 100% interest in Sierra Mira
Mesa Partners (SMMP), which owns Sierra Mira Mesa, an office building in
San Diego, California. Through their ownership interest in SMMP and Sierra
125
<PAGE> 138
Pacific Development Fund III, the funds also own a 100% interest in a
partnership that owns an office warehouse property known as Sorrento I in
San Diego, California. Nooney Income Fund Ltd. II owns a 24% interest in a
partnership that owns LeaWood Fountain Plaza. Nooney Income Fund Ltd., an
affiliate of Nooney Income Fund Ltd. II, owns the remaining 76% partnership
interest.
126
<PAGE> 139
A. SELECTED PRO FORMA COMBINED DATA OF THE FUNDS - MINIMUM PARTICIPATION (1)
The following table sets forth certain selected pro forma combined financial
data of the Funds. The selected operating and financial position data have been
derived from the pro forma combined financial statements of the Funds. These
amounts reflect solely the combination of the entities indicated in (1) and do
not reflect the application of any effects of the Combination. Such additional
disclosures are presented elsewhere in this Consent Solicitation. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and Notes thereto for each of the Funds included elsewhere in this
Consent Solicitation. (In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement
income $5,605 $5,807 $5,802 $5,531 $5,699 $2,830 $3,253
Interest and other income 356 365 350 475 460 217 298
------ ------ ------ ------ ------ ------ ------
Total revenues 5,961 6,172 6,152 6,006 6,159 3,047 3,551
====== ====== ====== ====== ====== ====== ======
EXPENSES:
Property operating 1,956 2,131 2,257 2,095 3,256 1,375 1,454
Management and advisory
fees 288 298 314 291 286 68 79
Ground Lease 383 383 382 374 410 187 29
Real estate and other taxes 940 875 858 823 870 181 192
Depreciation and
amortization 1,904 2,144 2,221 1,867 1,802 896 940
Interest expense 1,611 1,505 1,478 1,145 1,116 550 682
------ ------ ------ ------ ------ ------ ------
Total expenses 7,082 7,336 7,510 6,595 7,740 3,257 3,376
====== ====== ====== ====== ====== ====== ======
</TABLE>
127
<PAGE> 140
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before
equity in earnings (losses)
of non-combined
partnerships and loss of
sale of property (1,121) (1,164) (1,358) (589) (1,581) (210) 175
Equity in earnings (losses) of
non-consolidated
partnership (572) 575 (276) 1 152 89 94
Loss on sale of property -- -- (967) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss) before
minority interest (1,693) (589) (2,601) (588) (1,429) 121 269
Minority interest 225 285 840 109 30 33 (89)
------- ------- ------- ------- ------- ------- -------
Net income (loss) $(1,468) $ (304) $(1,761) $ (479) $(1,399) $ (88) $ 180
======= ======= ======= ======= ======= ======= =======
</TABLE>
128
<PAGE> 141
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed
charges (2) -- -- -- -- -- -- 1.26
Deficiency of earnings to cover
fixed charges (3) $1,468 304 1,761 479 1,399 88 --
Cash distributions to minority
investors 281 491 2,464 195 18 -- 282
Total properties owned at end of
period (4) 9 9 8 8 8 8 8
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 914 $ 725 $ 557 $ 561 $ 2,972 $ 416 $ 2,074
Real estate held for
investment, net 30,448 30,485 24,052 23,303 22,582 23,086 22,448
Accounts receivable, net 1,010 1,184 965 969 1,026 1,182 1,303
Investments in/due from
partnerships 4,682 4,839 3,417 3,194 3,023 3,281 2,142
Other assets 4,252 4,409 5,626 6,039 6,906 5,884 6,789
Total assets, at book value 41,306 41,642 34,617 34,066 36,509 33,846 34,756
Total assets, at valued assigned for the
consolidation 54,792
</TABLE>
129
<PAGE> 142
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------- --------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total liabilities $ 18,922 $ 19,544 $ 15,437 $ 15,419 $ 18,321 $ 15,319 $ 17,632
General partners deficit (83) (83) (456) (419) (428) (339) (477)
Limited partners equity 16,909 16,305 14,868 14,350 12,961 14,183 13,188
Other equity 5,558 5,876 4,768 4,716 5,655 4,683 4,413
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net (1,237) (189) 168 4 2,411 (145) (898)
Cash (used in) provided by
operating activities 758 1,090 (1,368) 1,021 (412) 32 (283)
</TABLE>
130
<PAGE> 143
(1) Includes the accounts of the following Funds, which would generate the
lowest amount of net cash provided by operating activities for the most
recent fiscal year and that would result in at least $23 million of real
estate (at appraised value) being included in the consolidation:
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Nooney Real Property Investors Two, L.P.
All significant interfund transactions and balances have been eliminated in
the pro forma presentation.
(2) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
(3) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges of
1.0
(4) Five of the funds own interests in other partnerships, in addition to
properties wholly owned. Sierra Pacific Pension Investors '84 and Sierra
Pacific Development Fund II collectively own a 100% interest in Sierra Mira
Mesa Partners (SMMP), which owns Sierra Mira Mesa, an office building in
San Diego, California. Through their ownership interest in SMMP and Sierra
Pacific Development Fund III, the funds also own a 100% interest in a
partnership that owns an office warehouse property known as Sorrento I in
San Diego, California. Nooney Income Fund Ltd. II owns a 24% interest in a
partnership that owns LeaWood Fountain Plaza. Nooney Income Fund Ltd., an
affiliate of Nooney Income Fund Ltd. II, owns the remaining 76% partnership
interest.
131
<PAGE> 144
A. Selected Pro Forma Combined Financial Data of Other Affiliates (1)
The following table sets forth certain selected pro forma combined financial
data of the Other Affiliates. The selected operating and financial position data
have been derived from the financial statements of the Other Affiliates. These
amounts reflect solely the combination of the entities indicated in (1) and do
not reflect the application of any effects of the Consolidation. Such additional
disclosures are presented elsewhere in this Consent Solicitation. This
information should be read in conjunction with the Financial Statements and
Notes thereto for each of the Other Affiliates included elsewhere in this
Consent Solicitation.
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED JUNE 30,
------------------------ ----------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 4,909 $ 5,078 $ 5,156 $ 2,542 $ 2,722
Interest and other income 97 29 40 16 29
------- ------- ------- ------- -------
Total revenues 5,006 5,107 5,196 2,558 2,751
------- ------- ------- ------- -------
EXPENSES:
Property operating 1,875 1,821 1,881 933 979
Management and advisory fees 135 134 132 -- --
Real estate and other taxes 368 379 392 248 259
Depreciation and amortization 791 856 891 424 427
Interest expense 2,076 2,031 1,942 961 1,018
------- ------- ------- ------- -------
Total expenses 5,245 5,221 5,238 2,566 2,683
------- ------- ------- ------- -------
Net income (loss) before
extraordinary item (239) (114) (42) (8) 68
Extraordinary item -
extinguishment of debt 71 -- -- -- --
------- ------- ------- ------- -------
Net income (loss) (310) (114) (42) (8) 68
======= ======= ======= ======= =======
</TABLE>
132
<PAGE> 145
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED JUNE 30,
------------------------ ----------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges (2) -- -- -- 1.07
Deficiency of earnings to cover fixed
charges (3) $ 114 $ 43 $ 8 --
Cash distributions 240 258 120 $ 130
Total properties owned at end of period 3 3 3 3
BALANCE SHEET DATA:
Cash and cash equivalents 221 364 534 456
Real estate held for investment, net 9,292 16,310 16,549 15,856
Mortgages/notes receivable, net -- 394 211 592
Accounts receivable, net 100 111 71 150
Other assets 683 2,046 2,195 2,223
Total assets, at book value 10,296 19,225 19,560 19,277
Total assets, at valued assigned for the
consolidation 40,478
Total liabilities 16,031 29,459 29,620 29,572
Total equity (deficit) (5,735) (10,234) (10,060) (10,295)
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net $ (231) $ (116) 54 18
Cash provided by operating activities 739 639 414 775
</TABLE>
133
<PAGE> 146
1) Includes the accounts of Meadow Wood Apartments Ltd., Nooney-Hazelwood
Associates, LP and Nooney Rider Trails. There were no significant
inter-fund transactions or balances.
2) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
3) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges of
1.
134
<PAGE> 147
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AMERICAN SPECTRUM
American Spectrum Predecessor
The following discussion should be read in conjunction with the "Selected
Historical and Pro Forma Financial and Operating Data" and the historical and
pro forma financial statements appearing elsewhere in this consent solicitation.
This discussion is based primarily on the combined financial statements of
American Spectrum Predecessor for periods prior to completion of the Offering
and related consolidation. The pro forma condensed balance sheet is presented as
if the consolidation had occurred on June 30, 2000 and the pro forma results of
operations are presented as if the consolidation occurred on January 1, 1999.
Pro forma amounts reflect the maximum scenario under which all funds participate
in the consolidation. Except where otherwise indicated, the comments that follow
refer to the American Spectrum Predecessor.
American Spectrum owns and operates office, office/warehouse, land, and
apartment properties in the Midwest, Texas, Arizona, and California. It also
owns and operates three shopping centers in South Carolina. American Spectrum
receives real estate operating revenues from wholly owned properties. American
Spectrum also receives service revenues from its property management, leasing,
and construction management operations for owned properties and, prior to the
consolidation, from properties owned by unrelated parties. After completion of
the consolidation, American Spectrum will not provide such services to unrelated
parties. To better understand the organizational structure of and the
relationship among the funds, the CGS privately held entities and the management
company subsidiaries of CGS before the consolidation, see the organizational
chart under "THE CONSOLIDATION -- Principal Components of the Consolidation."
Prior to the consolidation, for the six months ended June 30, 2000,
American Spectrum Predecessor generated approximately 57.1% of its revenues from
rental income and the balance of its revenues came from property management
operations and income from affiliates. The funds generated 100% of their
revenues from rental income. On a pro forma basis, after giving effect to the
consolidation, American Spectrum will also generate 100% of its revenues from
rental income.
Subsidiaries
Operating Partnership
The structure of American Spectrum is generally referred to as an "UPREIT"
structure. Substantially all of our assets will be held through the Operating
Partnership. This structure will enable us to acquire assets from other
partnerships in a partnership merger format that will not trigger the
recognition of gain to the partners of the acquired partnerships assuming
certain conditions are met.
We will be the sole general partner of the Operating Partnership. As the
sole general partner of the Operating Partnership, we generally have the
exclusive power under the Partnership Agreement to manage and conduct the
business of the Operating Partnership.
The limited partnership interests in the Operating Partnership will be
owned by us and any persons who transfer interests in properties to the
Operating Partnership in exchange for units in the Operating Partnership. We
will own one unit in the Operating Partnership for each outstanding American
Spectrum share. Initially we will own ____ units or ___% of the Operating
Partnership. Our interest in the Operating Partnership will entitle us to share
in cash distributions from, and in profits and losses of, the Operating
Partnership. In general, holders of limited partnership units in the Operating
Partnership will have the same rights to distributions as holders of common
stock in American Spectrum. In addition, each limited partnership unit will be
redeemable at the option of the holder for cash at the then fair market value
or, at the option of American Spectrum, one share of common stock in American
Spectrum.
135
<PAGE> 148
Management Company
American Spectrum will conduct its real estate management business through
the CGS Management Company. The CGS Management Company will manage all of our
properties. The CGS Management Company will generally not manage properties on
behalf of unaffiliated third parties. Additionally, American Spectrum, through
the CGS Management Company, generally expects to manage each property acquired
in the future following its acquisition thereof. The CGS Management Company will
also manage the properties of any of the funds which do not approve the
consolidation. Prior to the consolidation, CGS's property management affiliates
also provided property management services to third parties. The portions of the
property management business relating to third party property management will be
distributed to CGS's controlling shareholders prior to the consolidation.
Results of Operations
Comparison of the Six Months Ended June 30, 2000 to the Six Months Ended
June 30, 1999
Total revenues for the six months ended June 30, 2000 increased by
$550,000 or 4.2% to $13,501,000 as compared to $12,951,000 for the six months
ended June 30, 1999. Revenue from property management operations decreased by
$216,000 or 4.3% to $4,829,000 for the six months ended June 30, 2000 as
compared to $5,045,000 for the six months ended June 30, 1999. Revenue from
property management operations decreased due to the sales of properties by third
party clients of the American Spectrum Predecessor. Purchasers of the properties
involved elected to self-manage or appoint a manager other than the American
Spectrum Predecessor. Rental income for the six months ended June 30, 2000
increased by $768,000 or 11.1% to $7,708,000 as compared to $6,940,000 for the
six months ended June 30, 1999. The increase in rental income resulted primarily
from the acquisition of the Autumn Ridge apartments in May 1999.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C> <C> <C>
Rental income $ 7,708,000 57.1% $ 6,940,000 53.5%
Property management operations 4,829,000 35.8 5,045,000 39.0
Income from affiliates 964,000 7.1 966,000 7.5
----------- ------ ----------- ------
Total revenues $13,501,000 100.0% $17,951,000 100.0%
=========== ====== =========== ======
</TABLE>
Because American Spectrum will perform no third party management
services, all ongoing revenues will be derive from rental income. Substantially
all such revenues are earned pursuant to fixed rent commitments since average
or percentage rent income is immaterial. Rental income, as a percentage of
total revenues has increased due to the addition of the Autumn Ridge property
and other leasing activities and the declining role of third party management
activities.
Total expenses for the six months ended June 30, 2000 increased by
$261,000 or 2.6% to $10,468,000 as compared to $10,207,000 for the six months
ended June 30, 1999. Expenses excluding interest, depreciation, and amortization
for the six months ended June 30, 2000 increased by $373,000 or 4.5% to
$8,745,000 as compared to $8,372,000 for the six months ended June 30, 1999.
Expenses, excluding interest, depreciation, and amortization, as a percentage of
total revenues, increased slightly from 64.6% for the six months ended June 30,
1999 to 64.6% for the six months ended June 30, 2000. Components of expenses
excluding interest, depreciation, and amortization as a percentage of total
revenues were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $2,502,000 18.5% $1,794,000 13.9
Real estate taxes 644,000 4.8 369,000 2.8
Property management operations 5,329,000 39.5 5,735,000 44.3
Impairment charges 20,000 0.1
Other (income) expense 270,000 2.0 454,000 3.5
---------- ----- ---------- -----
Total cost and expenses $8,745,000 64.8% $8,372,000 64.6%
========== ===== ========== =====
</TABLE>
The increases in property operating and maintenance and real estate taxes,
as a percentage of revenues, is a result of the increase in rental income as a
percentage of total revenues.
136
<PAGE> 149
Interest expense increased by $1,905,000 or 42.1%, to $6,435,000 for the
six months ended June 30, 2000 as compared to $4,530,000 for the six months
ended June 30, 1999 due to $9,800,000 in additional debt service at June 30,
2000 (approx $500,000 in interest expense). Additionally, interest expense for
the McDonnell property increased $710,000 for the six months ended June 30,
2000, as interest charges are no longer being capitalized. Lastly, the Autumn
Ridge property acquired in May, 1999 incurred interest charges for a full six
months in the first half of 2000 versus just over one month in the first half of
1999 ($360,000 variance).
Net loss increased by $1,575,000 or 66.7%, to $3,935,000 for the six
months ended June 30, 2000 as compared to $2,360,000 for the six months ended
June 30, 1999. Non-operational variances included $1,861,000 in extraordinary
charges related to the refinancing of the Chrysler Building. Excluding this
transaction, the net loss for the six months ended June 30, 2000 would have
compared favorably to the six months ended June 30, 1999 by $286,000.
Comparison of the Year Ended December 31, 1999 with the Year Ended December 31,
1998
Total revenues for the year ended December 31, 1999, decreased by
$1,765,000 or 7.2% to $22,622,000 as compared to $24,387,000 for the year ended
December 31, 1998.
Rental income for the year ended December 31, 1999, increased by $1,162,000 or
8.5% to $14,813,000 as compared to $13,651,000 for the year ended December 31,
1998.
Management fee income decreased $3,237,000 or 37.3% to $5,452,000 for the
year ended December 31, 1999, as compared to $8,689,000 for the year ended
December 31, 1998. The decrease is a result of sales of property by unrelated
clients to purchasers who elected to self-manage the properties or appoint a
manager other than the American Spectrum Predecessor.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Rental income $14,813,000 65.5% $13,651,000 56.0%
Property management operations 5,452,000 24.1 8,689,000 35.6
Income from affiliates 2,357,000 10.4 2,047,000 8.4
----------- ----- ----------- -----
Total revenues $22,622,000 100.0% $24,387,000 100.0%
=========== ===== =========== =====
</TABLE>
Total costs and expenses for the year ended December 31, 1999, increased
by $4,724,000 or 23.9% to $24,512,000 as compared to $19,788,000 for the year
ended December 31, 1998. Expenses excluding interest, depreciation, and
amortization for the year ended December 31, 1999, increased by $4,778,000 or
29.0% to $21,253,000 as compared to $16,475,000 for the year ended December 31,
1998. Expenses, excluding interest, depreciation, and amortization, as a
percentage of total revenues, increased from 67.6% for the year ended December
31, 1998, to 94.0% for the year ended December 31, 1999, due primarily to
impairment charges $5,164,000 incurred in 1999 related to certain real estate
held for investment and acquired management company goodwill. Components of
expenses excluding interest, depreciation, and amortization as a percentage of
total revenues were as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $ 3,396,000 15.0% $ 2,886,000 11.8%
Real estate taxes 1,597,000 7.1 1,523,000 6.2
Property management operations 10,766,000 47.6 12,164,000 49.9
Impairment charges 5,164,000 22.8 126,000 0.5
Other (income) expense 330,000 1.5 (224,000) (0.9)
----------- ----- ----------- -----
Total cost and expenses $21,253,000 94.0% $16,475,000 67.6%
=========== ===== =========== =====
</TABLE>
137
<PAGE> 150
Interest expense increased by $397,000, or 4.2%, to $9,982,000 for the
year ended December 31, 1999 as compared to $9,585,000 for the year ended
December 31, 1998 due to debt incurred on new property acquisitions.
Net loss increased by $7,263,000 or 150.6%, to $12,086,000 for the year
ended December 31, 1999 as compared to $4,823,000 for the year ended December
31, 1998 due primarily to impairment charges on certain real property held for
sale and write off of goodwill associated with acquired management companies,
neither of which affected cash flow.
Comparison of the Year Ended December 31, 1998 with the Year Ended December 31,
1997
Total revenues for the year ended December 31, 1998 increased by
$7,887,000 or 47.8% to $24,387,000 as compared to $16,500,000 for the year ended
December 31, 1997. Rental income for the year ended December 31, 1998 increased
by $3,506,000 or 34.6% to $13,651,000 as compared to $10,145,000 for the year
ended December 31, 1997. The increase in total revenues stems from the increased
rental income and revenue from management company operations acquired in 1997.
Rental income increased as a result of property acquisitions and rent increases
in existing properties.
Management fee income increased $4,143,000 or 91.1% to $8,689,000 for the
year ended December 31, 1998 as compared to $4,546,000 for the year ended
December 31, 1997. The increase was due to revenue from two acquired management
company operations in 1997, the effect of which was only partially included in
1997.
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997
---- ----
<S> <C> <C> <C> <C>
Rental income $13,651,000 56.0% $10,145,000 61.5%
Property management operations 8,689,000 35.6 4,546,000 27.5
Income from affiliates 2,047,000 8.4 1,809,000 11.0
----------- ------ ----------- ------
Total revenues $24,387,000 100.0% $16,500,000 100.0%
=========== ====== =========== ======
</TABLE>
Total costs and expenses for the year ended December 31, 1998 increased by
$7,455,000 or 60.4% to $19,788,000 as compared to $12,333,000 for the year ended
December 31, 1997. Expenses excluding interest, depreciation, and amortization
for the year ended December 31, 1998 increased by $6,345,000 or 62.6% to
$16,475,000 as compared to $10,130,000 for the year ended December 31, 1997.
Expenses, excluding interest, depreciation, and amortization, as a percentage of
total revenues, increased from 61.4% for the year ended December 31, 1997 to
67.6% for the year ended December 31, 1998. The expense increases were primarily
attributable to two management company acquisitions that occurred late in 1997.
Components of expenses excluding interest, depreciation, and amortization as a
percentage of total revenues were as follows:
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1998 1997
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $ 2,886,000 11.8% $ 1,683,000 10.2%
Real estate taxes 1,523,000 6.2 848,000 5.1
Property management operations 12,164,000 49.9 7,472,000 45.3
Impairment charges 126,000 0.5
Other (income) expense (224,000) (0.9) 127,000 0.8
----------- ----- ----------- -----
Total cost and expenses $16,475,000 67.6% $10,130,000 61.4%
=========== ===== =========== =====
</TABLE>
138
<PAGE> 151
Interest expense increased by $1,684,000 or 21.3%, to $9,585,000 for the
year ended December 31, 1998 as compared to $7,901,000 for the year ended
December 31, 1997 due to borrowings associated with the acquisition of new real
estate properties and the refinancing of some of the existing debt.
Net loss increased by $1,139,000 or 30.9%, to $4,823,000 for the year
ended December 31, 1998 as compared to $3,684,000 for the year ended December
31, 1997 due to the increase in total expenses associated with the purchase of
two management companies and additional real estate properties in late 1997.
Analysis of Liquidity and Capital Resources
As of June 30, 2000 American Spectrum had cash balances totaling
$2,316,000 on a pro forma basis prior to the consolidation. Cash flow from
operations during the six months ended June 30, 2000 totaled $2,931,000. We
expect this level of cash flow to increase in the short and long term due to the
renewal of leases at the current market rates which exceed historical lease
rates, lease-up of two rehabilitation projects (Northwest Corporate Center and
Autumn Ridge), and future increases in lease rates created by an excess of
demand over supply.
We plan to refinance at least ten of our properties in the current
portfolio. We anticipate realizing total proceeds of the refinancing of
approximately $50 million. We anticipate realizing net proceeds of the
refinancing, after repaying current debt on the properties financed and other
secured debt, of approximately $21 million. These proceeds will be used to
fund the acquisition of additional properties and capital improvements to
properties in the existing portfolio and for payments required under the
settlement of litigation described in the following paragraph. During 2001 and
2002, we anticipate cash flow from operations that otherwise would be used for
capital improvements will instead be available for distribution to shareholders
or other uses. Capital expenditures budgeted for 2001 total $7.4 million. These
consist of comprised of general property improvements ($2.7 million), remodeling
of space for new or renewing tenants ($3.3 million), and lease commissions ($1.4
million). Of this amount, $600,000 is expected to be recovered from settlement
of a construction related lawsuit and $400,000 will be funded from reserves held
by lenders. The remaining $6.4 million will be funded by the refinancing
mentioned above.
In connection with litigation more fully described in Note 8 of the
financial statements of Sierra Pacific Development Fund II, that partnership is
required to distribute cash to its partners instead of issuance of American
Spectrum stock in order to retire specific loan receivables totaling $6.7
million at December 31, 1999.
In summary, we anticipate using the net refinancing proceeds as follows:
<TABLE>
<S> <C>
Capital expenditures for properties $6,400,000
Repayment of Sierra Pacific Development Fund II loans
receivable 6,700,000
Funds available for reserves and future acquisitions
of property 7,900,000
</TABLE>
We also expect to require additional amounts in the future, primarily for
property acquisitions. We intend to seek a credit facility to provide funds for
future acquisitions and we may also raise equity capital if market conditions
are favorable. American Spectrum has no current plans for further equity
offerings. However, we will be constantly monitoring the markets in seeking
opportunities to issue equity that will be used for debt reduction and
additional property acquisitions.
139
<PAGE> 152
CGS Affiliates
The following discussion should be read in conjunction with the Selected
Financial and Operating Data and the historical and pro forma financial
statements appearing elsewhere in this Consent Solicitation. The following
discussion is based primarily on the combined financial statements of CGS
Affiliates for periods prior to completion of the Consolidation. The pro forma
condensed balance sheet is presented as if the Consolidation had occurred on
June 30, 2000 and the pro forma results of operations are presented as if the
Consolidation had occurred on January 1, 1999.
The CGS Affiliates own and operate one apartment project in California,
one apartment project in Missouri, and one office/warehouse property in
Missouri.
Results of Operations
Comparison of the Six Months Ended June 30, 2000 to the Six Months Ended
June 30, 1999
Total revenues for the six months ended June 30, 2000 increased by
$193,000 or 7.5% to $2,751,000 as compared to $2,558,000 for the six months
ended June 30, 1999. Rental income for the six months ended June 30, 2000
increased by $180,000 or 7.1% to $2,722,000 as compared to $2,542,000 for the
six months ended June 30, 1999. The increase was caused by an increase in
occupancy in the first half of 2000.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C> <C> <C>
Rental income $2,722,000 98.9% $2,542,000 99.4%
Interest and other 29,000 1.1 16,000 0.6
---------- ------ ---------- ------
Total revenues $2,751,000 100.0% $2,558,000 100.0%
========== ====== ========== ======
</TABLE>
Total expenses for the six months ended June 30, 2000 increased by
$117,000 or 4.6% to $2,683,000 as compared to $2,566,000 for the six months
ended June 30, 1999. Expenses excluding interest, depreciation, and amortization
for the six months ended June 30, 2000 increased by $57,000 or 4.8% to
$1,238,000 as compared to $1,181,000 for the six months ended June 30, 1999.
Expenses, excluding interest, depreciation, and amortization, as a percentage of
total revenues, decreased from 46.2% for the six months ended June 30, 1999 to
45.0% for the six months ended June 30, 2000 due to an increase in occupancy in
the first half of 2000. Components of expenses excluding interest, depreciation,
and amortization changed as a percentage of total revenues as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $908,000 33.0% $868,000 33.9%
Real estate taxes 259,000 9.4 247,000 9.7
Property management operations 71,000 2.6 66,000 2.6
---------- ----- ---------- -----
Total cost and expenses $1,238,000 45.0% $1,181,000 46.2%
========== ===== ========== =====
</TABLE>
Interest expense increased by $57,000 or 5.9%, to $1,018,000 for the six
months ended June 30, 2000 as compared to $961,000 for the six months ended June
30, 1999 due to interest rate increases.
The net income of $68,000 for the six months ended June 30, 2000 compares
favorably to a net loss of $8,000 for the six months ended June 30, 1999. The
$76,000 increase in profitability is due primarily to higher rental revenues
resulting from an increase in occupancy.
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<PAGE> 153
Comparison of the Year Ended December 31, 1999 with the Year Ended December 31,
1998
Total revenues for the year ended December 31, 1999 increased by $89,000
or 1.7% to $5,196,000 as compared to $5,107,000 for the year ended December 31,
1998. Rental income for the year ended December 31, 1999 increased by $78,000 or
1.5% to $5,156,000 as compared to $5,078,000 for the year ended December 31,
1998. The increase resulted from higher occupancy rates occurring in the second
half of 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Rental income $5,157 99.2% $5,078 99.4%
Interest and other 39 0.8 29 0.6
------ ----- ------ -----
Total revenues $5,196 100.0% $5,107 100.0%
====== ===== ====== =====
</TABLE>
Total expenses for the year ended December 31, 1999 increased by $17,000
or 0.3% to $5,238,000 as compared to $5,221,000 for the year ended December 31,
1998. Expenses excluding interest, depreciation, and amortization for the year
ended December 31, 1999 increased by $71,000 or .03% to $2,405,000 as compared
to $2,334,000 for the year ended December 31, 1998. Expenses, excluding
interest, depreciation, and amortization, as a percentage of total revenues,
increased from 45.7% for the year ended December 31, 1998, to 46.3% for the year
ended December 31, 1999, due to an increase in property operating and
maintenance expenses. Components of expenses excluding interest, depreciation,
and amortization changed as a percentage of total revenues as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $1,895 36.5% $1,835 36.0%
Real estate taxes 378 2.5 365 7.1
Property management operations 132 7.3 134 2.6
------ ---- ------ ----
Total cost and expenses $2,405 46.3% $2,334 45.7%
====== ==== ====== ====
</TABLE>
Interest expense decreased by $89,000 or 4.4%, to $1,942,000 for the year
ended December 31, 1999 as compared to $2,031,000 for the year ended December
31, 1998 due to interest rate adjustments.
Net loss decreased by $72,000, or 63.2%, to $42,000 for the year ended
December 31, 1999 as compared to $114,000 for the year ended December 31, 1998
due to increases in rental revenues resulting from higher occupancy.
Comparison of the Year Ended December 31, 1998 with the Year Ended December 31,
1997
Total revenues for the year ended December 31, 1998 increased by $101,000
or 2.0% to $5,107,000 as compared to $5,006,000 for the year ended December 31,
1997. Rental income for the year ended December 31, 1998 increased by $169,000
or 3.4% to $5,078,000 as compared to $4,909,000 for the year ended December 31,
1997. The increase in rental income was primarily realized from Meadow Wood
Apartments where revenue increased $176,000.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C> <C> <C>
Rental income $5,078 99.4% $4,909 98.1%
Interest and other 29 0.6 97 1.9
------ ----- ------ -----
Total revenues $5,107 100.0% $5,006 100.0%
====== ===== ====== =====
</TABLE>
141
<PAGE> 154
Total expenses for the year ended December 31, 1998 decreased by $24,000
or 0.5% to $5,221,000 as compared to $5,245,000 for the year ended December 31,
1997. Expenses excluding interest, depreciation, and amortization for the year
ended December 31, 1998 decreased by $44,000 or 1.9% to $2,334,000 as compared
to $2,378,000 for the year ended December 31, 1997. Expenses, excluding
interest, depreciation, and amortization, as a percentage of total revenues,
decreased from 47.5% for the year ended December 31, 1997 to 45.7% for the year
ended December 31, 1998 due to a decrease in property operating expenses.
Components of expenses excluding interest, depreciation, and amortization
changed as a percentage of total revenues as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
---- ----
<S> <C> <C> <C> <C>
Property operating & maintenance $1,835 36.0% $1,894 37.8%
Real estate taxes 365 7.1 349 7.0
Property management operations 134 2.6 135 2.7
------ ---- ------ ----
Total cost and expenses $2,334 45.7% $2,378 47.5%
====== ==== ====== ====
</TABLE>
Interest expense decreased by $45,000 or 2.2%, to $2,031,000 for the year
ended December 31, 1998 as compared to $2,076,000 for the year ended December
31, 1997 due to interest rate adjustments.
Net loss decreased by $196,000 or 63.2%, to $114,000 for the year ended
December 31, 1998 as compared to $310,000 for the year ended December 31, 1997
due to higher rental revenue resulting from an increase in occupancy and lower
property operating expenses. A $71,000 charge for debt extinguishments in 1997
also contributed to the favorable variance.
Analysis of Liquidity and Capital Resources
The Affiliates believe that following the Consolidation, their financial
performance will improve due to their ability to reposition certain assets,
place favorable financing on others and reduce overhead due to consolidation
into one entity from the existing three entities. The Affiliates anticipate that
distributions will be paid from cash available for Distribution, which is
expected to exceed cash historically available for distribution as a result of
decreased overhead and improvement in property cash flows.
The Company believes that their principal short-term liquidity needs are
to fund normal operating expenses and debt service requirements. The Properties
require periodic investment of capital for tenant-related improvements and
general capital improvements
Cash Flows
Overview. The Affiliates incurred net losses in 1997, 1998, and 1999 but
generated a profit of $68,000 in the six months ended June 30, 2000. However,
the Affiliates generated positive earnings before depreciation and amortization
of $481,000, $742,000 and $849,000 for 1997, 1998, and 1999 respectively.
Comparison for the Six Months Ended June 30, 2000 to the Six Months Ended
June 30, 1999
The Affiliates' cash and cash equivalents were $382,000 and $534,000 at
June 30, 2000 and June 30, 1999, respectively. Cash and cash equivalents
increased $18,000 during the six months ended June 30, 2000 due to $775,000 of
cash flow provided by operating activities, $80,000 used in investing
activities, and $677,000
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<PAGE> 155
used in financing activities. The increase in cash from operating activities is
primarily due to an increase in collections from accounts receivables and an
increase in rental revenue. The decrease in cash from financing activities
results primarily from equity distributions and pay downs of notes payable.
Comparison for the Year Ended December 31, 1999 to the Year Ended December
31, 1998
The Affiliates' cash and cash equivalents were $363,000 and $479,000 at
December 31, 1999 and 1998, respectively. Cash and cash equivalents decreased
$116,000 during 1999 due to $639,000 of cash flow provided by operating
activities, $170,000 used in investing activities, and $585,000 used in
financing activities. The increase in cash from operating activities is
primarily due to an increase in collection from accounts receivables and an
increase in rental revenue. The decrease in cash from financing activities
results primarily from equity distributions and pay downs of notes payable.
Comparison for the Year Ended December 31, 1998 to the Year Ended December
31, 1997
The Affiliates' cash and cash equivalents were $479,000 and $710,000 at
December 31, 1998 and 1997, respectively. Cash and cash equivalents decreased
$231,000 during 1998 due to $738,000 of cash flow provided by operating
activities, $202,000 used in investing activities, and $767,000 used in
financing activities. The decrease in cash from operating activities is
primarily due to increases in accounts payable and accrued expenses. The
decrease in cash from financing activities results primarily from pay downs on
notes payable.
143
<PAGE> 156
The Funds
Management's Discussion and Analysis of Financial Condition and Results of
Operations for each of the Funds is set forth as part of the financial data
accompanying the financial statements for each Fund beginning at page
F-___________.
Quantitative and Qualitative 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. The
primary market risk to which we are exposed 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 our control.
Interest Rate Risk
In order to modify and manage the interest characteristics of our
outstanding debt and limit the effects of interest rates on our operations, we
may use a variety of financial instruments, including interest rate swaps.
Historically, we have used these on only a limited basis. We do not enter into
any transactions for speculative or trading purposes.
Some of our future earnings and cash flows are dependent upon prevailing
market rates of interest, such as LIBOR. Based on interest rates and outstanding
balances as of December 31, 1999, a 1% increase in interest rates on our $96
million of floating rate debt upon completion of the consolidation would
decrease annual future earnings and cash flows by approximately $1.0 million and
would not have an impact on the fair value of the floating rate debt. A 1%
decrease in interest rates on our $96 million of floating rate debt would
increase annual future earnings and cash flows by approximately $1.0 million and
would not have an impact on the fair value of the floating rate debt.
These amounts are determined by considering the impact of the hypothetical
interest rates on our borrowing cost. In the event of a significant change in
interest rates, we would consider taking actions to mitigate our exposure to the
change. Due to the uncertainty of the specific actions that would be taken and
their possible effects, however, this sensitivity analysis assumes no changes in
our capital structure.
144
<PAGE> 157
AMERICAN SPECTRUM'S BUSINESS
General
CGS Real Estate Company, Inc. was incorporated in December 1989. In
_______, __, 2000, CGS Real Estate Company, Inc. was merged with American
Spectrum Realty Inc., a newly organized Maryland corporation. Upon completion of
the consolidation, assuming that all of the funds approve the consolidation,
American Spectrum will own and operate a diversified portfolio of real property
comprised of 35 properties in nine states. The properties consist of 12 office
properties, 11 industrial properties, five shopping centers, five apartment
properties, one mixed-use property and one parcel of development land. The
properties to be acquired by American Spectrum have an aggregate appraised value
of approximately $282,710,000. Since American Spectrum does not know which funds
will approve the consolidation, the exact makeup of the American Spectrum's
properties is unknown.
American Spectrum intends to qualify as a REIT for federal income tax
purposes beginning in 2002, and will be managed by its Board of Directors and
officers. American Spectrum will not pay for the services of a REIT adviser or
property manager.
Background and Strategy
CGS has been engaged in the real estate business since 1989. William J.
Carden, its founder, has been engaged in the real estate business since December
1989. Since its founding, CGS has acquired properties and companies engaged in
the business of acquiring properties and organizing and managing real estate
limited partnerships. CGS has also acquired established real estate management
and brokerage businesses which it operates under the name "Coldwell Banker
Commercial - American Spectrum" in California, Colorado, Missouri, Texas and
Arizona. CGS managed a diversified portfolio throughout the United States.
CGS has managed each of the types of properties included in our
properties, and CGS senior officers have extensive experience in leasing,
construction management and real estate investment brokerage. The senior
officers of CGS and its subsidiaries have substantial experience in operating
and acquiring residential, office, office/warehouse, apartment and shopping
center properties throughout the United States. American Spectrum will own CGS's
property management business relating to management of its affiliated
properties. CGS's third party brokerage, property management and leasing
operations will not be acquired by American Spectrum in the consolidation. The
general partners of each of the funds were not affiliates of CGS at the time of
their formation. In 1994, CGS acquired the capital stock of the general partners
and managers of Sierra Pacific Development Fund, Sierra Pacific Development Fund
II, Sierra Pacific Development Fund III, Sierra Pacific Pension Investors '84
and Sierra Pacific Institutional Properties V. In 1997, CGS acquired the capital
stock of the general partners and managers of Nooney Income Fund Ltd., L.P.,
Nooney Income Fund Ltd. II, L.P. and Nooney Real Property Investors-Two, L.P.
American Spectrum will continue to operate and expand the principal
businesses of CGS and will continue to pursue CGS's business objectives and
acquisition strategies with the intent to increase our current asset level
substantially during the next five to seven years.
Financing American Spectrum's Growth Strategy. In order to provide the
funds necessary to fund our anticipated growth, we plan to refinance the
properties to a level of approximately 70% of indebtedness to total assets
(based on appraised value) which we anticipate will generate significant
refinancing proceeds. Additionally, we may seek to identify and work with joint
venture equity partners to provide the additional capital. Under the note terms,
American Spectrum's ratio of total indebtedness to total assets (based on
appraised value) is limited to 70%.
145
<PAGE> 158
Opportunities to Acquire Undervalued and Undermanaged Properties. American
Spectrum believes that it will be well positioned to invest in properties,
either individually or in portfolios, at attractive prices, often at a cost
lower than replacement cost. This will be accomplished using American Spectrum's
knowledge of diverse geographical markets and property types, as well as its
established capability to identify, and negotiate with, highly-motivated
sellers, which include individual developers as well as such institutions as
banks, insurance companies and pension funds. In addition, the economic
circumstances of such highly-motivated sellers present an opportunity for
American Spectrum to improve existing management by substituting its property
management policies and personnel, thereby creating real value in undermanaged
properties. American Spectrum will not set a maximum target purchase price but
rather we will tailor our acquisitions to underperforming properties which we
believe are attractively priced due to relative physical or operating
deficiencies. We believe that our real estate expertise will allow us to, when
necessary, reposition, renovate or redevelop these properties to make them
competitive in their local markets.
Competitive Advantages. American Spectrum believes it will have certain
competitive advantages that will enable it to be selective with respect to real
estate investment opportunities and allow it to successfully pursue its
acquisitive growth strategy. Based on CGS's experience, American Spectrum
expects that its presence in geographically diverse markets will increase its
exposure to opportunities to make attractive acquisitions of various types of
properties throughout the United States with a primary focus on the midwestern
and western regions and provide it with certain competitive advantages which
enhance its ability to do so, including:
strong local market expertise;
o long-standing relationships with tenants, real estate brokers and
institutional and other owners of real estate in each local market;
o fully integrated real estate operations which allow quick response to
acquisition opportunities;
o its access to capital markets at competitive rates as a public company
following the consolidation; and
o its ability to acquire properties in exchange for American Spectrum shares
or limited partnership interests in the Operating Partnership which may
make it a more attractive purchaser when compared to purchasers who are
not similarly structured or are unable to make similar use of equity to
purchase properties.
Geographic and Property Type Diversification. American Spectrum intends to
seek acquisitions of properties which have sufficient historical operating
income to assure that dividend distributions to stockholders will not be
diminished in the short-term and will be expected to increase in the long-term.
American Spectrum intends to focus its acquisition on office, office/warehouse,
apartment properties in the midwestern and western United States. However,
American Spectrum believes that it will be best able to take advantage of
attractive opportunities if it is not limited geographically or by property
type. Such an absence of limits will enable American Spectrum to acquire
diversified portfolios of properties, giving it a potential competitive
advantage over more highly focused real estate investment trusts. Moreover,
American Spectrum believes that geographic diversification of its properties
will better enable it to withstand economic downturns in particular regions, and
that diversification will help protect American Spectrum from possible adverse
factors (e.g., overbuilding) which from time to time may affect particular types
of properties.
Property Management Strategies. CGS and its subsidiaries have developed
procedures and expertise which will permit American Spectrum to manage
effectively a variety of types of properties throughout the United States. Its
decentralized structure with strong local management teams have enabled it to
operate efficiently.
146
<PAGE> 159
In seeking to maximize revenues, minimize costs and increase the value of
properties it manages, CGS and its subsidiaries have historically followed
aggressive property management policies. Among the property management
techniques CGS emphasizes are regular and comprehensive maintenance programs,
regular and comprehensive financial analyses, the use of a master property and
casualty insurance program, aggressive restructuring or conversion of properties
to more profitable uses, the establishment of aggressive leasing programs, the
building of relationships with tenants and frequent appearances before property
tax commissions, planning commissions and other local governmental bodies.
American Spectrum believes that its management of its properties will be a
substantial factor in its ability to realize its objective of maximizing
earnings from its properties.
Managing and Monitoring Investments. American Spectrum, will actively
manage the property portfolio and administer its investments. American Spectrum
will monitor property level issues including property sales, real estate taxes,
assessments and insurance payments and actively analyze diversification, review
tenant financial statements and restructure investments in the case of
underperforming and non-performing investments.
Credit Facility
American Spectrum expects to seek a credit facility that may be used to
finance acquisitions or, to a limited extent, for working capital purposes,
including capital improvements. As security for such borrowings, American
Spectrum expects to grant mortgage liens on its properties and on additional
properties acquired by American Spectrum, and may also pledge its equity
interests in the Operating Partnership units held by American Spectrum. We
expect such liens to be cross-collateralized and cross-defaulted with all other
liens on American Spectrum's properties which secure borrowings under the credit
facility. However, due to significant currently outstanding indebtedness
associated with certain of the properties and the general risks associated with
acquiring credit facilities, we cannot provide assurances that we will be
successful in obtaining a credit facility.
Acquisition and Investment Policies
American Spectrum will continue to pursue CGS's acquisition strategies. In
doing so, American Spectrum will target investments in properties in targeted
midwestern, western and other markets with the potential to provide stable,
favorable current cash returns in office, office/warehouse and apartment
properties. Building a diversified portfolio of properties with stable cash
flows and favorable appreciation potential reduces the overall risk of the
portfolio and enables American Spectrum to pursue additional opportunistic
acquisitions while maintaining an attractive overall risk/return profile.
American Spectrum believes it will be well-positioned to invest in
properties, either individually or in portfolios, at attractive prices, often at
a cost lower than replacement cost. This will be accomplished using American
Spectrum's knowledge of diverse geographical markets and property types, as well
as its established capability to identify, and negotiate with, highly-motivated
sellers, which include individual owners as well as such institutions as banks,
insurance companies and pension funds.
Based on CGS's experience, American Spectrum expects that its presence in
geographically diverse markets will increase its exposure to opportunities to
make attractive acquisitions of various types of properties primarily in the
Midwestern and western United States. American Spectrum intends to seek
acquisitions of properties which have sufficient historical operating income to
assure that dividend distributions to stockholders will not be diminished in the
short-term and will be expected to increase in the long-term. It believes that
it will be best able to take advantage of attractive opportunities if it is not
limited geographically or by property type, enabling it to acquire diversified
portfolios of properties. American Spectrum believes that this will provide a
potential competitive advantage over more focused purchasers, including other
real estate investment trusts. American Spectrum believes that geographic
diversification of its properties will better enable it to withstand
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economic downturns in particular regions, and that diversification by property
type will help protect it from adverse factors such as overbuilding.
American Spectrum's investment objectives are to maximize both current
cash flow and long-term growth in cash flow and to acquire established and
newly-developed income-producing properties with cash flow growth potential.
American Spectrum will continue its policy of selecting properties based on
their individual potentials rather than because they conform to a particular
type or are located in the same geographic area as existing properties.
Additionally, where prudent and possible, American Spectrum will seek to expand
to upgrade both existing properties and any newly-acquired properties. American
Spectrum's policy is to acquire assets primarily for generation of funds from
operations and long-term value appreciation; however, where appropriate,
American Spectrum will sell certain properties taking into account the tax
consequences of such sales, as well as refinement of American Spectrum's
geographic and property type focus. See "Federal Income Tax Considerations --
Taxation of American Spectrum."
American Spectrum also intends to engage in selective development projects
in its established markets, but it intends to do so only in situations which it
believes are driven by market demand and are therefore likely to bear less risk
than more speculative development projects.
Financing Policies
American Spectrum currently intends to maintain a ratio of debt-to-total
assets (based on appraised value) of less than 70%. American Spectrum may from
time to time re-evaluate its debt capitalization policy and decrease or increase
such ratio (subject to the terms of the notes) accordingly in light of
then-current economic conditions, relative costs to American Spectrum of debt
and equity capital, market values of its properties, growth and acquisition
opportunities and other factors. American Spectrum's articles of incorporation
do not provide a limit on the ratio of debt-to-total market capitalization and,
consequently, American Spectrum may in the future become more highly leveraged.
To the extent that the Board of Directors of American Spectrum decides to obtain
additional capital, American Spectrum may issue debt or equity securities, or
retain earnings (subject to provisions in the Code requiring distributions of
income to maintain REIT status), or a combination of these methods.
American Spectrum expects to seek a $50 million credit facility that may
be used to finance acquisitions or, to a limited extent, for working capital
purposes, including capital improvements. American Spectrum expects that any
credit facility it obtains will generally be secured by mortgages on its
properties, and that it may be required to pledge its equity interests in the
Operating Partnership units held by American Spectrum. These mortgages may be
recourse, nonrecourse or cross-collateralized and may contain cross-default
provisions. American Spectrum does not have a policy limiting the number or
amount of mortgages that may be placed on any particular property, but mortgage
financing instruments usually limit additional indebtedness on such properties.
Future credit facilities and lines of credit may be used for the purpose of
making acquisitions or capital improvements, providing working capital to
American Spectrum or meeting the taxable income distribution requirements for
REITs under the Code if American Spectrum has taxable income without receipt of
cash sufficient to enable American Spectrum to meet such distribution
requirements. There can be no assurance that American Spectrum's current amount
of leverage will not prevent it from incurring additional debt.
Equity investments may be subject to existing mortgage financing and other
indebtedness, or such financing or indebtedness may be incurred in connection
with acquiring investments. Any such financing or indebtedness will have
priority over American Spectrum's equity interest in the property.
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Other Policies
American Spectrum may consider offering purchase money financing in
connection with the sale of properties where the provision of such financing
will increase the value received by American Spectrum for the property sold.
Without the approval of a majority of American Spectrum's disinterested
directors, American Spectrum will not:
o acquire any property or other assets from or sell any property or
other assets to any director, officer or employee of American
Spectrum, or any entity in which a director, officer or employee of
American Spectrum owns directly or indirectly more than a 1% interest
or serves as a general partner or controls an entity which serves as a
general partner, or acquire any property or other assets from or sell
any property or other assets to any affiliate of any of the foregoing;
o make any loan to or borrow from any of the foregoing persons; or
o engage in any other material transaction with any of the foregoing
persons. Any transaction of the type described above will be in all
respects on such terms as are, at the time of the transaction and
under the circumstances then prevailing, fair and reasonable to
American Spectrum in the judgment of a majority of American Spectrum's
disinterested directors.
American Spectrum may, but does not currently intend to, make investments
other than as previously described. American Spectrum has authority to offer its
shares of common stock or other equity or debt securities in exchange for
property and to repurchase or otherwise reacquire its common stock or any other
securities and may engage in such activities in the future. American Spectrum
also may make loans to joint ventures in which it participates. American
Spectrum will not engage in trading, underwriting or the agency distribution or
sale of securities of other issuers. At all times, American Spectrum intends to
make investments in such a manner as to be consistent with the requirements of
the Code (or the Treasury Regulations promulgated thereunder), unless the Board
of Directors determines that it is no longer in its best interests to qualify as
a REIT. American Spectrum's policies with respect to such activities may be
modified by American Spectrum's directors without notice to, or the vote of,
stockholders.
American Spectrum expects to pursue its investment objectives through the
direct and indirect ownership of properties and the ownership of interests in
other entities. Future investments, including the activities described below,
will not be limited to any geographic area or to a specified percentage of
American Spectrum's assets. American Spectrum believes that opportunities exist
to acquire established under-performing properties, as well as to acquire
properties in various stages of development.
American Spectrum also may participate with other entities in property
ownership through joint ventures or other types of co-ownership, the
participation in which may be financed as discussed in "Financing Policies"
below.
While American Spectrum will emphasize equity real estate investments, it
may, in its discretion, invest in mortgages and other property interests.
American Spectrum does not currently intend to invest to a significant extent in
mortgages but may do so subject to the investment restrictions applicable to
REIT's. The mortgages in which American Spectrum may invest may be either first
mortgages or junior mortgages, and may or may not be insured by a governmental
agency.
Subject to the percentage ownership limitations and gross income tests
necessary for REIT qualification, American Spectrum may also invest in
securities of entities engaged in real estate activities or securities of other
issuers, including for the purpose of exercising control over such entities. See
"Federal
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<PAGE> 162
Income Tax Considerations -- Taxation of American Spectrum." American Spectrum
may acquire all or substantially all of the securities or assets of other REIT's
or similar entities where such investments would be consistent with American
Spectrum's investment policies. In any event, American Spectrum does not intend
that its investments in securities will require it to register as an "investment
company" under the Investment Company Act of 1940, and American Spectrum would
divest securities before any such registration would be required.
It is the policy of CGS to acquire assets both for income, and for capital
gains.
We do not have any limits on the number or amount of mortgages which may
be placed on any one piece of property.
We do not have any policy with respect to percentage of assets to be
invested in any one property.
The Properties
The properties consist of 12 office buildings properties, 12
office/warehouse properties, 5 apartment properties, 5 shopping centers, and 1
parcel of vacant land.
Office Properties. American Spectrum will own 12 office building
properties located in 8 states. Certain of these properties also include
warehouse space. The following are brief descriptions of each of the office
properties:
Leawood Fountain Plaza is a three-building office complex in Leawood,
Kansas. Constructed in two phases in 1982 and 1983, the buildings contain
approximately 30,000, 29,000 and 26,000 net rentable square feet respectively,
or an aggregate of approximately 85,000 net rentable square feet of office
space. The buildings are located on a 7.9-acre site which provides paved parking
for 403 cars. The complex was 89% leased by 36 tenants at September 30, 2000.
Countryside Office Park is a single story office building located at
1210-1270 W. Northwest Highway in Palatine, Illinois, a suburb of Chicago. Built
in 1972, the building contains approximately 91,000 net rentable square feet and
is situated on an 8.6-acre site which provides parking spaces for 467 cars, some
of which spaces are shared with adjoining properties pursuant to a mutual
easement agreement which also provides for the sharing of certain expenses. The
building was 93% leased by 32 tenants at September 30, 2000.
NorthCreek Office Park is a three building office complex located at 8220,
8240 and 8260 NorthCreek Drive in Cincinnati, Ohio. Constructed in phases in
1984 and 1986, the three-story buildings contain 19,900, 24,000 and 48,000 net
rentable square feet respectively, or an aggregate of approximately 92,000 net
rentable square feet. The buildings are located on a 8.4-acre site which
provides paved parking for 366 cars. The complex was 95% leased by 31 tenants at
September 30, 2000.
5850 San Felipe in Houston, Texas is a 6-story office building comprising
100,900 rentable square feet. It was 99% occupied at September 30, 2000 by 33
tenants. The property was built in 1977 and is situated on 2.1 acres and has 388
parking spaces.
Sorrento II is comprised of two, two-story buildings located at 9980 and
10020 Huennekens Street in San Diego, California. Built in 1986, the two
buildings contain approximately 88,423 rentable square feet and are located on a
3.7-acre site with 418 parking spaces. The property was 100% occupied as of
September 30, 2000 by 5 tenants.
Parkade Center is a mixed use, office/retail complex located at 601
Business Loop West in Columbia, Missouri. Built in 1965, this building is
situated on a 19.39-acre site and contains approximately 229,368
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rentable square feet. Parking is provided for 1,367 automobiles. The property
was 87% occupied with 70 tenants as of September 30, 2000.
Sierra Mira Mesa is located on 9444 Waples in San Diego, California. The
four-story, multi-tenant office building was built in 1987 and contains
approximately 89,560 rentable square feet and is situated on a 5.2-acre site.
Surface parking is provided for 417 automobiles. The building was 97% occupied
by 5 tenants as of September 30, 2000.
Bristol Bay is an office building located at 2424 S.E. Bristol in Newport
Beach, California. The two-story building was built in 1988 and contains
approximately 47,026 rentable square feet. The building is situated on a
2.4-acre site, which provides a total of 192 parking spaces. The building was
94% occupied with 6 tenants as of September 30, 2000.
Pacific Spectrum is a multi-tenant office located at 10201 and 10235 South
51st Street in Phoenix, Arizona. Pacific Spectrum consists of one single-story
office and a two-story office joined by a breezeway. Built in 1986, the two
buildings contain approximately 70,511 square feet and are located on a
5.57-acre site. Parking for 293 cars is provided. The buildings were 92%
occupied with 28 tenants as of September 30, 2000.
The Chrysler Building is a nine-story, multi-tenant office located at 7700
Irvine Center Drive in Irvine, California, strategically located within the
Irvine Center/Spectrum area in the heart of Orange County. Built in 1989, the
building is located on a 6.77-acre site and contains approximately 207,700
rentable square feet. Parking for 815 cars is provided. The building was 96%
occupied with 51 tenants as of September 30, 2000.
Northwest Corporate Center II is an office building located at 5757
Phantom Drive in St. Louis, Missouri. Built in 1983, Northwest Corporate Center
II contains approximately 87,944 rentable square feet and is located on a
4.714-acre site with 383 parking spaces. The property was 48% occupied as of
September 30, 2000 by 6 tenants.
Sierra Creekside is located at 100 Park Place in San Ramon, California.
The property is comprised of two, two-story steel frame and brick-face office
buildings. Built in 1985, the property contains approximately 47,800 rentable
square feet and is situated on a 3.2-acre site with 216 parking spaces. The
property was 100% occupied as of September 30, 2000 by 18 tenants.
Office/Warehouse Properties. American Spectrum will own 12 properties in 6
states which are a combination of office and warehouse space. Included are bulk
warehouse distribution facilities; office/warehouse properties where the office
component is generally 40% or less with the warehouse portion being unfinished
and used for storage, distribution or light assembly; and buildings which
contain a high percentage of finished office space with the warehouse portion
generally semi-finished and designed for use in the computer industry. The
following are brief descriptions of each of these properties:
The Jackson Industrial Building A ("Jackson Warehouse") is a warehouse
building located at Post Road and 30th Street in Indianapolis, Indiana. Jackson
Warehouse is a one-story, masonry building and is located on a 21.87-acre site
with 128 parking spaces. The building, originally constructed in 1976 and
subsequently expanded in 1980, contains approximately 320,000 net rentable
square feet. Jackson Warehouse was 100% leased by 2 tenants at September 30,
2000.
Oak Grove Commons is an office/warehouse complex built beginning in 1972
through 1976 and located on Brook Drive in the city of Downers Grove, Illinois,
a suburb of Chicago. Oak Grove Commons consists of three adjoining single-story
buildings constructed of brick veneer with concrete block backing which contain
a total of approximately 137,000 net rentable square feet and are located on a
7.6-acre site which provides paved parking for 303 cars. The complex was 95%
leased by 28 tenants at September 30, 2000.
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Park Plaza I & II ("Park Plaza") is an office/warehouse center located at
5707-5797 Park Plaza Court in Indianapolis, Indiana. Park Plaza consists of two
one-story, concrete block buildings. Park Plaza I was built in 1975 and Park
Plaza II in 1979. Park Plaza is located on a 9-acre site which provides paved
parking for 150 cars. The buildings contain a total of approximately 95,000 net
rentable square feet and was 96% leased by 27 tenants at September 30, 2000.
Morenci Professional Park Buildings A, B, C and D ("Morenci") is an
office/warehouse complex located at 62nd Street and Guion Road in Indianapolis,
Indiana. Morenci consists of four one-story, masonry buildings located on a
13.35-acre site with 380 parking spaces and was built in 1975. Morenci contains
a total of approximately 105,600 net rentable square feet and was 90% leased by
47 tenants at September 30, 2000.
Sierra Southwest Pointe is comprised of four one-story buildings located
at 9630 Clarewood Drive in Houston, Texas. Built in 1972, the property contains
approximately 100,868 rentable square feet and is located on a 6.4-acre site.
Parking is provided for 168 cars. The property was 91% occupied by 23 tenants as
of September 30, 2000.
Northeast Commerce Center is a two building office/warehouse/showroom
facility located at 420-422 Wards Corner Road in Loveland, Ohio, a suburb of
Cincinnati. The two single-story buildings contain 50,000 net rentable square
feet each, or an aggregate of approximately 100,000 net rentable square feet.
The buildings were built in 1985 and are situated on a 7.5-acre site which
provides parking for 278 cars. The buildings were 65% leased by 5 tenants at
September 30, 2000.
Tower Industrial Building is an office warehouse located at 750-760 Tower
Road in Mundelein, Illinois, a suburb of Chicago. The one-story concrete block
building was constructed in 1983, contains approximately 42,000 net rentable
square feet, and is situated on a 3-acre site which provides parking for 140
cars. The building is currently 100% leased by one tenant at September 30, 2000.
Sierra Valencia is a single-story "S" shaped building located at 3280
Hemisphere Loop in Tucson, Arizona. Built in 1987, the building contains
approximately 82,520 rentable square feet and is located on a 5.5-acre site. 227
parking space are provided of which 51 are covered. The building was 97%
occupied as of September 30, 2000 by 9 tenants.
Sierra Westlakes is a complex with 2 one-story buildings located at 1560
Cable Ranch Road in San Antonio, Texas. Built in 1985, the two buildings are
constructed of tilt-up concrete panels with glass window walls at the corners.
The property contains approximately 95,370 rentable square feet and is located
on a 6.5-acre site with 713 parking spaces. The property was 75% occupied with
two tenants as of September 30, 2000.
Sorrento I is a two-story building located at 9535 Waples Street in San
Diego, California. Built in 1986, the building is constructed of concrete
tilt-up panels with crushed aggregate stone finish and glass panels. The
property contains approximately 43,100 rentable square feet and is located on a
2.1-acre site. On-site parking is available for 148 automobiles. The property
was 100% occupied by one tenant as of September 30, 2000.
Technology is located at 3100 Alvin Devane Boulevard in Austin, Texas. The
property is comprised of two tilt-up concrete buildings. The buildings were
built in 1986 and contain approximately 109, 012 rentable square feet. Located
on a 6.61-acre site, Technology provides parking spaces to accommodate 350
automobiles. The property was 100% occupied with 6 tenants at September 30,
2000.
The Business Center is a single-story, high tech industrial building
located at 13701-13739 Rider Trail North in St. Louis, Missouri. Built in 1985,
the building contains approximately 64,837 rentable square feet
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and is located on a 5.3-acre site with 162 parking spaces. The property was 100%
occupied by 5 tenants as of September 30, 2000.
Apartment Properties. American Spectrum will own 5 apartment properties
located in 3 states. The following are brief descriptions of each of the
apartment properties:
The Lakes is a 408-unit rental community located at 306 Chaparrall Creek
Drive in Hazelwood, Missouri. This complex consists of 28 two-story frame
buildings on a 28-acre site. The Lakes were built in 1985 and contain
approximately 311,912 rentable square feet. Parking is provided for 839
automobiles. The property was at 94% occupancy at September 30, 2000.
Meadow Wood Village is a 206-unit rental apartment complex located on
Ximeno Avenue in the City of Long Beach, California. It was constructed in 1985
at a density of 25.91 units per acre on 7.5 acres within a small master-planned
community. Meadow Wood Village offers 206 carport-parking spaces for residents,
as well as open spaces for residents and guests. The property was at 90%
occupancy at September 30, 2000.
Creekside Apartments is a 152-unit rental complex located on Monroe Street
in the City of Riverside, California. Built in 1991, the Creekside was created
especially for seniors 55 and older. The complex is located on a 7.41-acre site
and contains approximately 77,650 rentable square feet. Parking is provided for
150 cars. The property was 93% occupied as of September 30, 2000.
Villa Redondo is located in Long Beach, California, at 3428 Hathaway
Avenue. Built in 1990, a "village" feeling is created by distributing the
property's 125 units among 11 two-and three-story buildings, all set amid richly
landscaped grounds on 8 acres. The complex contains approximately 96,802
rentable square feet and provides 240 parking spaces for the residents and their
guests. The property was 92% occupied as of September 30, 2000.
Autumn Ridge is a 366-unit rental complex located at 920 E. Houston Avenue
in Pasadena, Texas. Built in 1965, Autumn Ridge is located on a 3.3-acre site
and contains approximately 297,401 rentable square feet. Parking is provided for
387 cars. The property was 59% occupied as of September 30, 2000.
Shopping Centers. American Spectrum will own 5 shopping center properties
located in 3 states. The following are brief descriptions of each of the
shopping center properties:
Maple Tree Shopping Center ("Maple Tree") is a shopping center located at
the corner of Clayton and Clarkson Roads in West St. Louis County, Missouri.
Constructed in 1974 of steel and masonry block, Maple Tree contains
approximately 72,000 net rentable square feet and is located on a 7.8-acre site
which provides paved parking for 357 cars. The property was 100% occupied by 18
tenants as of September 30, 2000.
Columbia North East Shopping Center is located on the west side of Two
Notch Road in Richland County, South Carolina. Built in 1975 and remodeled in
1991, the one-story shopping center contains approximately 56,515 net rentable
square feet. The shopping center provides parking spaces to accommodate 435
automobiles and is situated on a 5-acre site. The building was 92% occupied with
6 tenants as of September 30, 2000.
Marketplace Shopping Center is located at 1001 Harden Street, South
Carolina. The two-story shopping center was built in 1951 and remodeled in 1980.
The shopping center is constructed of brick veneer and stucco with stone accents
over concrete with aluminum framed glass. The building is located on a 5-acre
site and contains approximately 100,709 rentable square feet. Located next to
the University of South Carolina, the shopping center provides parking spaces
for 351 automobiles. The building was 51% occupied with 7 tenants as of
September 30, 2000.
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Richardson Plaza Shopping Center is located at 537 St. Andrews Road in
Columbia, South Carolina. Built in 1982, the one-story building contains
approximately 108,139 square feet and is located on an 8.8-acre site.
Constructed of brick and concrete with aluminum framed glass, the shopping
center provides parking spaces to accommodate 551 automobiles. The property was
70% occupied with 8 tenants as of September 30, 2000.
Beach & Lampson Pad D is a retail building located at 8050-8060 Lampson in
Stanton, California. Built in 1989, the property contains approximately 13,017
rentable square feet and has parking for 25 cars. The property was 28% occupied
by 3 tenants as of September 30, 2000.
Land Held for Development:
Phoenix Van Buren is a vacant land parcel on the south side of East Van
Buren Street in Phoenix, Arizona. The site is an irregularly shaped parcel
containing approximately 16.65 acres and is indicated to have had several uses,
including a mobile home park, retail shops and a gasoline station. This site has
been cleared of all improvements since January 1997.
Geographic Distribution of Properties. The following map shows the
location of the properties which will be owned by American Spectrum upon
completion of the consolidation.
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[Map showing location of properties]
<PAGE> 168
PROPERTY OVERVIEW
The properties are located in 18 commercial and industrial real estate
markets and in each of the four regions of the United States listed below.
Information regarding the properties by region as of September 30, 2000 is set
forth below. All of the properties will be owned in fee simple, assuming all of
the funds participate in the consolidation. If any of the funds which hold
properties as part of a joint venture with other funds do not approve the
consolidation, those properties may be held in joint venture with that fund.
<TABLE>
<CAPTION>
Properties by Region
-------------------------------------------------------------------------------------
Rentable Square Feet Annualized Net Rent(1)
Number of Percent
Property Type by Region Properties Number % of Total Amount % of Total Leased
------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office/Warehouse Properties
California-Arizona Region 2 125,620 3.30% $ 884,112 2.42% 98.04%
Carolinas Region 0 0.00% -- 0.00 0.00
Upper Midwest Region 7 864,865 22.70% 3,786,591 10.37 93.52
Texas Region 3 305,250 8.01% 2,332,849 6.39 89.04
----------- ----------- ----------- ----------- ----------- -----------
Total Office/Warehouse properties 12 1,295,735 34.00% $ 7,002,752 19.18% 93.53%
Office:
California-Arizona Region 6 553,587 14.53% $11,826,248 32.39% 96.53%
Carolinas Region 0 0.00% 0.00 0.00
Upper Midwest Region 5 579,572 15.21% 6,149,940 16.85 83.49
Texas Region 1 100,900 2.65% 1,221,754 3.35 99.02
----------- ----------- ----------- ----------- ----------- -----------
Total Office properties 12 1,234,059 32.39% $19,197,943 52.58% 93.02%
Shopping Centers:
California-Arizona Region 1 13,017 0.34% $ 60,168 0.16% 27.54%
Carolinas Region 3 265,353 6.96% 1,007,319 2.76 67.04
Upper Midwest Region 1 72,149 1.89% 469,183 1.29 100.00
Texas Region 0 -- 0.00% -- 0.00 0.00
----------- ----------- ----------- ----------- ----------- -----------
Total Shopping Centers 5 350,519 9.20% $ 1,536,671 4.21% 64.86%
Total Commercial Leasing 29 2,880,313 75.59% $27,737,365 75.98% 83.80%
Apartment Properties:
California-Arizona Region 3 320,816 8.42% $ 4,959,922 13.59% 90.96%
Carolinas Region 0 0.00
Upper Midwest Region 1 311,912 8.19% 2,525,004 6.92 94.36
Texas Region 1 297,400 7.80% $ 1,286,185 3.52 58.60
----------- ----------- ----------- ----------- ----------- -----------
Total Apartment Properties 5 930,128 24.41% $ 8,771,112 24.02% 81.31%
----------- ----------- ----------- ----------- ----------- -----------
Total 34* 3,810,441 100.00% $36,508,477 100.00% 87.55%
=========== =========== =========== =========== =========== ===========
</TABLE>
* Vacant land not included
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<TABLE>
<CAPTION>
Properties by Region
Per Leased
Square
Property State Type Year Built Rentable Square Feet Annualized Net Rent(1) Foot
-------------------------------- ----- -------- ----------- ------------------------------ ------------------------------------
Sq. Ft.
Number % Leased Leased Amount % of Total
----------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Arizona Region
Valencia AZ OFF/WARE 1987 82,520 96.97% 80,060 $ 588,960 1.61% $ 7.36
Sorento 1 CA OFF/WARE 1986 43,100 100.00% 43,100 $ 295,152 0.81% $ 6.85
Total Industrial AZ 125,620 98.04% 123,160 $ 884,112 $ 7.10
----------- --------- --------- ------------ --------- ---------
Pacific Spectrum CA OFFICE 1986 70,511 92.47% 65,204 $ 1,114,561 3.05% $ 17.09
Mira Mesa CA OFFICE 1986 89,560 97.04% 86,909 $ 1,967,480 5.39% $ 22.64
Creekside Office CA OFFICE 1984 47,800 100.00% 47,800 $ 1,008,048 2.76% $ 21.09
Sorrento II - Office CA OFFICE 1988 88,073 100.00% 88,073 $ 1,003,024 2.75% $ 11.39
Back Bay CA OFFICE 1988 50,371 94.37% 47,536 $ 1,081,911 2.96% $ 22.76
Chrysler Building CA OFFICE 1989 207,272 95.95% 198,872 $ 5,651,225 15.48% $ 28.42
----------- --------- --------- ------------ --------- ---------
Total Office 553,587 96.53% 534,394 $11,826,248 $ 20.56
Beach & Lampson Pad D CA RETAIL 1987 13,017 27.54% 3,585 $ 60,168 0.16% $ 16.78
----------- --------- --------- ------------ --------- ---------
Total Retail 13,017 27.54% 3,585 $ 60,168 $ 16.78
Creekside Apts CA APTS 1991 77,650 92.76% 72,028 $ 965,332 2.64%
Villa Redondo CA APTS 1990 96,802 92.00% 89,058* $ 1,661,124 4.55%
Meadow Wood CA APTS 1985 146,364 89.32% 130,732* $ 2,333,466 6.39%
----------- --------- --------- ------------ --------- ---------
Total Apts 320,816 90.96% 291,818 $ 4,959,922
Sorrento II - Land CA LAND
Phoenix Van Buren AZ LAND
----------- --------- --------- ------------ --------- ---------
Total Land
----------- --------- --------- ------------ --------- ---------
California Arizona Region Total 1,013,040 94.07% 952,957 $17,730,451 48.57% $ 18.61
----------- --------- --------- ------------ --------- ---------
Upper-Midwest Region --
Oak Grove Commons IL OFF/WARE 1972-76 137,678 94.89% 130,637 $ 932,167 2.55% $ 7.14
Jackson Industrial A IN OFF/WARE 1976-80 320,000 100.00% 320,000 $ 783,200 2.15% $ 2.45
Morenci Professional Park IN OFF/WARE 1975-79 105,600 89.77% 94,800 $ 428,580 1.17% $ 4.52
Tower Industrial Bldg IL OFF/WARE 1974 42,120 100.00% 42,120 $ 168,480 0.46% $ 4.00
Northeast Commerce Ctr OH OFF/WARE 1985 100,000 65.36% 65,360 $ 391,351 1.07% $ 5.99
Business Center MO OFF/WARE 1985 64,387 100.00% 64,387 $ 543,113 1.49% $ 8.44
Park Plaza I and II IN OFF/WARE 1975-79 95,080 96.21% 91,480 $ 539,700 1.48% $ 5.90
----------- --------- --------- ------------ --------- ---------
Total Industrial 864,865 93.52% 808,784 $ 3,786,591 $ 9.61
Countryside Executive Ctr IL OFFICE 1984 91,975 92.55% 85,126 $ 1,397,647 3.83% $ 16.42
Leawood Fountain Plaza KS OFFICE 1982 85,778 88.92% 76,272 $ 1,343,793 3.68% $ 17.62
NorthCreek Office Park OH OFFICE 1984-86 91,731 94.77% 86,933 $ 1,322,361 3.62% $ 15.21
Northwest Corporate Center MO OFFICE 1983-87 88,116 47.86% 42,172 $ 696,072 1.91% $ 16.51
Parkade Center MO OFFICE 1965 221,972 87.13% 193,404 $ 1,390,068 3.81% $ 7.19
----------- --------- --------- ------------ --------- ---------
Total Office 579,572 83.49% 483,908 $ 6,149,940 $ 9.12
Maple Tree Shopping Ctr RETAIL 1974 72,149 100.00% 72,149 $ 469,183 1.29% $ 6.50
Total Retail 72,149 100.00% 72,149 $ 469,183 $ 6.50
The Lakes MO APTS 1985 311,912 94.36% 294,320* $ 2,525,004 6.92%
----------- --------- --------- ------------ --------- ---------
Total Apts 311,912 94.36% 294,320 $ 2,525,004
----------- --------- --------- ------------ --------- ---------
UP-MID Region Total 1,828,498 90.74% 1,659,161 $12,930,718 35.42% $ 7.79
----------- --------- --------- ------------ --------- ---------
Carolina Region
Columbia North East SC RETAIL 1991 56,505 91.62% 51,772 $ 231,033 0.63% $ 4.46
Marketplace SC RETAIL 1980 100,709 50.51% 50,868 $ 297,253 0.81% $ 5.84
Richardson Plaza SC RETAIL 1992 108,139 69.59% 75,254 $ 479,033 1.31% $ 6.37
----------- --------- --------- ------------ --------- ---------
Carolina Region Total 265,353 67.04% 177,894 $ 1,007,319 2.76% $ 5.66
----------- --------- --------- ------------ --------- ---------
</TABLE>
156
<PAGE> 170
<TABLE>
<CAPTION>
Per Leased
Square
Property State Type Year Built Rentable Square Feet Annualized Net Rent(1) Foot
-------------------------------- ----- -------- ----------- ------------------------------ ------------------------------------
Sq. Ft.
Number % Leased Leased Amount % of Total
----------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Texas Region
Technology TX OFF/WARE 1986 109,012 100.00% 109,012 $ 1,149,420 3.15% $ 10.54
Southwest Point TX OFF/WARE 1972 100,868 90.70% 91,487 $ 537,841 1.47% $ 5.88
Westlakes TX OFF/WARE 1985 95,370 74.75% 71,289 $ 644,788 1.77% $ 9.04
----------- --------- --------- ------------ --------- ---------
Total Industrial 305,250 89.04% 271,788 $ 2,332,049 $ 8.49
San Felipe TX OFFICE 1977 100,900 99.02% 99,911 $ 1,221,754 3.35% $ 12.23
Total Office 100,900 99.02% 99,911 $ 1,221,754 $ 12.23
Autumn Ridge TX APTS 1999 297,400 58.60% 174,276* $ 1,286,185 3.52%
----------- --------- --------- ------------ --------- ---------
Total Apts 297,400 58.60% 174,276 $ 1,286,185
----------- --------- --------- ------------ --------- ---------
Texas Region Total 703,550 77.60% 545,976 $ 4,839,989 13.26% $ 8.86
=========== ========= ========= ============= ========= =========
--
Total Commercial Leasing 2,880,313 2,575,573 $27,737,365
Total Multi-Family Leasing 930,128 760,415 $ 8,771,112
Totals 3,810,441 87.55% 3,335,988 $36,508,477 100.00% $ 11.67
=========== ========= ========= ============= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Properties by Type
Per Leased
Property State Region Year Built Rentable Square Feet Annualized Net Rent Square Foot
------------------------------------------------------------------------------------------------------------------------------------
Sq. Ft.
Number % Leased Leased Amount % of Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office/Warehouse
Valencia AZ CAL-AZ 1987 82,520 96.97% 80,060 $ 588,960 1.61% $ 7.36
Sorento 1 CA CAL-AZ 1986 43,100 100.00% 43,100 $ 295,152 0.81% $ 6.85
------------------------------------------------------------------------
Total CAL-AZ Industrial 125,620 98.04% 123,160 $ 884,112 $ 7.10
------------------------------------------------------------------------
Park Plaza I and II IN UP-MID 1975-79 95,080 96.21% 91,480 $ 539,700 1.48% $ 5.90
Oak Grove Commons IL UP-MID 1972-76 137,678 94.89% 130,637 $ 932,167 2.55% $ 7.14
Jackson Industrial A IN UP-MID 1976-80 320,000 100.00% 320,000 $ 783,200 2.15% $ 2.45
Tower Industrial Bldg IL UP-MID 1974 42,120 100.00% 42,120 $ 168,480 0.46% $ 4.00
Northeast Commerce Ctr OH UP-MID 1985 100,000 65.36% 65,360 $ 391,351 1.07% $ 5.99
Business Center MO UP-MID 1985 64,387 100.00% 64,387 $ 543,113 1.49% $ 8.44
Morenci Professional Park IN UP-MID 1975-79 105,600 89.77% 94,800 $ 428,580 1.17% $ 4.52
------------------------------------------------------------------------
Total UP-MD Industrial 864,865 93.52% 808,784 $ 3,786,591 $ 5.49
------------------------------------------------------------------------
Technology TX TEXAS 1986 109,012 100.00% 109,012 $ 1,149,420 3.15% $ 10.54
Southwest Point TX TEXAS 1972 100,868 90.70% 91,487 $ 537,841 1.47% $ 5.88
Westlakes TX TEXAS 1985 95,370 74.75% 71,289 $ 644,788 1.77% $ 9.04
------------------------------------------------------------------------
Total TEXAS Industrial 305,250 89.04% 271,788 $ 2,332,049 $ 8.49
------------------------------------------------------------------------
Office/Warehouse Total 1,295,735 92.90% 1,203,732 $ 7,002,752 19.18% $ 5.82
------------------------------------------------------------------------
Office Properties
Pacific Spectrum AZ CAL-AZ 1986 70,511 92.47% 65,204 $ 1,114,561 3.05% $ 17.09
Mira Mesa CA CAL-AZ 1986 89,560 97.04% 86,909 $ 1,967,480 5.39% $ 22.64
Creekside Office CA CAL-AZ 1984 47,800 100.00% 47,800 $ 1,008,048 2.76% $ 21.09
Sorrento II-Office CA CAL-AZ 1988 88,073 100.00% 88,073 $ 1,003,024 2.75% $ 11.39
Back Bay CA CAL-AZ 1988 50,371 94.37% 47,536 $ 1,081,911 2.96% $ 22.76
Chrysler Building CA CAL-AZ 1989 207,272 95.95% 198,872 $ 5,651,225 15.48% $ 28.42
------------------------------------------------------------------------
Total CAL-AZ Office 553,587 96.53% 534,394 $ 11,826,249 $ 20.56
------------------------------------------------------------------------
Countryside Executive Ctr IL UP-MID 1984 91,975 92.55% 85,126 $ 1,397,647 3.83% $ 16.42
</TABLE>
157
<PAGE> 171
<TABLE>
<CAPTION>
Per Leased
Property State Region Year Built Rentable Square Feet Annualized Net Rent Square Foot
------------------------------------------------------------------------------------------------------------------------------------
Sq. Ft.
Number % Leased Leased Amount % of Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Leawood Fountain Plaza KS UP-MID 1982 85,778 88.92% 76,272 $ 1,343,793 3.68% $ 17.62
NorthCreek Office Park OH UP-MID 1984-86 91,731 94.77% 86,933 $ 1,322,361 3.62% $ 15.21
Northwest Corporate Center MO UP-MID 1983-87 88,116 47.86% 42,172 $ 696,072 1.91% $ 16.51
Parkade Center MO UP-MID 1965 221,972 87.13% 193,404 $ 1,390,068 3.81% $ 7.19
------------------------------------------------------------------------
Total UP-MID Office MO 579,572 83.49% 483,908 $ 6,149,941 $ 14.59
San Felipe TX TEXAS 1977 100,900 99.02% 99,911 $ 1,221,754 3.35% $ 12.23
------------------------------------------------------------------------
Total TEXAS Office 100,900 99.02% 99,911 $ 1,221,754 $ 12.23
------------------------------------------------------------------------
Office Properties Total 1,234,059 90.61% 1,118,213 $ 37,174,134 52.58% $ 33.24
------------------------------------------------------------------------
Shopping Centers
Beach & Lampson Pad D CA CAL-AZ 1987 13,017 27.54% 3,585 $ 60,168 0.16% $ 16.78
------------------------------------------------------------------------
Total CAL-AZ Retail 13,017 27.54% 3,585 $ 60,168 $ 16.78
Maple Tree Shopping Ctr MO UP-MID 1974 72,149 100.00% 72,149 $ 469,183 1.29% $ 6.50
------------------------------------------------------------------------
Total UP-MID Retail 72,149 100.00% 72,149 $ 469,183 $ 6.50
Columbia North East SC CAROL 1991 56,505 91.62% 51,772 $ 231,033 0.63% $ 4.46
Marketplace SC CAROL 1980 100,709 50.51% 50,868 $ 297,253 0.81% $ 5.84
Richardson Plaza SC CAROL 1992 108,139 69.59% 75,254 $ 479,033 1.31% $ 6.37
------------------------------------------------------------------------
Total CAROL Retail 265,353 67.04% 177,894 $ 1,007,319 $ 5.66
------------------------------------------------------------------------
Shopping Centers Total 350,519 72.36% 253,628 $ 1,536,670 4.21% $ 6.06
------------------------------------------------------------------------
Apartment Properties
Creekside Apts CA CAL-AZ 1991 77,650 92.76% 72,028 $ 965,332 2.64%
Villa Redondo CA CAL-AZ 1990 96,802 92.00% 89,058 $ 1,661,124 4.55%
Meadow Wood CA CAL-AZ 1985 146,364 89.32% 130,732 $ 2,333,466 6.39%
------------------------------------------------------------------------
Total CAL-AZ Apts 320,816 90.96% 291,818 $ 4,959,922
The Lakes MO UP-MID 1985 311,912 94.36% 294,320 $ 2,525,004 6.92%
------------------------------------------------------------------------
Total UP-MID Apts 311,912 94.36% 294,320 $ 2,525,004
Autumn Ridge TX TEXAS 1999 297,400 58.60% 174,276 $ 1,286,185 3.52%
------------------------------------------------------------------------
Total TEXAS Apts 297,400 58.60% 174,276 $ 1,286,185
------------------------------------------------------------------------
Apartment Properties Total 930,128 81.75% 760,415 $ 8,771,111 24.02%
------------------------------------------------------------------------
Total Commercial Leasing 2,880,313 2,575,573 $ 27,737,366
Total Multi-Family Leasing 930,128 760,415 $ 8,771,111
Totals 3,810,441 87.55% 3,335,988 $ 36,508,477 100.00% $ 11.67
========================================================================
</TABLE>
Note: % Leased subtotals and total are calculated based on the average for the
applicable category.
(1) Annualized Net Rent means annualized monthly Net Rent from leases in
effect as of September 30, 2000. Net Rent means contractual rent,
excluding any reimbursements for real estate taxes and operating expenses.
The following table shows the aggregate number of leases in American
Spectrum's portfolio of properties which expire each calendar year through the
year 2009, as well as the number of leases which expire after December 31, 2009.
The table does not reflect the exercise of any of the renewal options provided
to the tenant under the terms of such leases.
158
<PAGE> 172
Lease Expiration Table(1)
<TABLE>
<CAPTION>
Number of Annualized Base
Year Leases(2) Rent Amount Percent
--------------------------------------------- ---------- --------------- -------
<S> <C> <C> <C>
2000.......................................... 88 $1,402,925 5.06%
2001.......................................... 131 5,328,264 19.21%
2002.......................................... 112 4,218,926 15.21%
2003.......................................... 99 6,987,984 25.19%
2004.......................................... 43 3,441,784 12.41%
2005.......................................... 29 3,404,901 12.27%
2006.......................................... 3 644,192 2.32%
2007.......................................... 5 650,031 2.34%
2008.......................................... 1 134,045 0.48%
2009.......................................... 2 474,906 1.71%
Thereafter.................................... 8 1,049,407 3.80%
---------- --------------- -------
Totals........................................ 521 $27,737,366 100.00%
========== =============== =======
</TABLE>
(1) The expiring number of leases includes suites that are billed to a master
bill and may not show square footage and/or dollars for that unit. The
numbers also reflect leases that have expired and reverted to a
month-to-month lease. Those numbers and dollars are reflected in the 2000
figures. The amounts are arrived at by multiplying the monthly base rate
as of September 2000 times 12 months.
(2) Excluding leases from apartment properties.
Lease provisions relating to casualty loss and condemnation will vary
among American Spectrum's leases. In a number of American Spectrum leases, the
tenant may terminate its lease upon casualty or condemnation. In substantially
all of these leases, the tenant's right to terminate the lease is conditioned on
one or more of the following factors: (1) the damage or the taking being of a
material nature; (2) the damage or taking occurring within the last few years of
the lease term and the tenant not exercising its option to extend the lease; or
(3) the period of time necessary to repair the premises exceeding a specified
number of months.
Under certain circumstances, a tenant generally may assign its lease or
sublet the property without American Spectrum's approval, although the tenant
will typically remain liable under the lease and the guarantor, if any, will
typically remain liable under its guaranty subsequent to assignment or sublease.
The tenant may also have a right, under specified circumstances, to substitute a
comparable property for a property leased from American Spectrum.
TENANT INFORMATION
The following table sets forth the Company's 15 largest tenants based on
annualized base rent as of September 30, 2000.
159
<PAGE> 173
<TABLE>
<CAPTION>
Weighted Average
Percent of Months Remaining
Total Leased Annualized Base Annualized After September
Tenants Square Feet Rent(1)(2) Base Rent(1) 30, 2000
---------------------------------- ------------ --------------- ------------ -----------------
<S> <C> <C> <C> <C>
State Comp. Insurance, CA 74,567 $1,724,290 6.22% 29
Chrysler Motors, CA 40,320 943,488 3.40% 46
Ion Implant Services 57,742 602,826 2.17% 59
Von Duprin, Inc., IN 194,000 518,604 1.87% 14
Sears, Inc., TX 45,935 431,789 1.56% 87
Onyx Acceptance Corp. 23,282 407,436 1.47% 56
Cincinnati Group Health, OH 30,633 404,587 1.46% 39
US Dept of Agriculture, MO 41,488 348,084 1.25% 10
Advanced Micro Systems, SC 31,495 340,146 1.23% 32
Quanterra, Inc., MO 31,927 336,444 1.21% 15
Food Lion, Inc., SC 59,803 309,129 1.11% 45
Cubic Communications, CA 43,100 295,152 1.06% 31
Harte-Hanks, CA 29,150 291,503 1.05% 58
Cummins & White, CA 12,844 285,912 1.03% 13
Paper Mfg. Company, IN 126,000 264,600 .95% 22
============ =============== ============ =================
842,286 7,504,260 27.05% 41
</TABLE>
(1) Aggregate of all Affiliates of tenants based on information known.
(2) Annualized Base Rent means annual contractual rent.
The following table sets forth information relating to the distribution of the
Company's leases at the properties based upon rentable square feet under lease
as of September 30, 2000.
<TABLE>
<CAPTION>
Percent of
Annualized Portfolio
Square Footage Number Percent of Total Leased Base Rent Annualized
Under Lease of Leases All Leases Square Feet (in Thousands) Base Rent
---------------------------- --------- ---------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Less than 10,001 468 89.83% 1,173,653 14,986 54.03%
10,001-20,000 31 5.96% 409,693 5,069 18.27%
20,001-50,000 19 3.64% 595,340 5,075 18.30%
50,001-100,000 1 0.19% 74,567 1,824 6.58%
100,001 and over 2 0.38% 320,000 783 2.82%
--------- ---------- ------------ -------------- ----------
521 100.000% 2,573,253 27,737 100.00%
</TABLE>
SIGNIFICANT PROPERTIES
Chrysler Building, Irvine California
Depreciation of Signficant Property
The Chrysler Building is deemed "significant" becasue it accounts for more
than 10% of the Company's revenues for the last fiscal year and its book value
amounted to 10% or more of the Company's total assets for such period. For
federal income tax purposes, the basis, net of accumulated depreciation, in the
building and
160
<PAGE> 174
improvements is approximately $20 million and the land is approximately $2
million at December 31, 1999. The real property associated with the builidng
generally will be depreciated for federal income tax purposes over 39 years
using the straight line method. For financial reporting purposes, the building
is recorded at its historical cost and is depreciated using the straight line
method over its estimated useful life, typically 40 years.
Real Estate Taxes on Significant Property
The 2000/2001 fiscal annual real estates taxes to be paid on the Chrysler
Building are approximately $389,000. The Orange County, California real estate
tax rate is $18.865 per each $1,000 of assessed value.
Occupany, Effective Rent and Other Data at Significant Property
The following table sets forth year-end occupancy of and Net Effective
Rent at the Chrysler Building for 1996 through 2000.
<TABLE>
<CAPTION>
Occupancy at December 31, Net Effective Rent
------------------------- ------------------
1996 1997 1998 1999 2000* 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
89.87% 95.67% 87.19% 91.09% 95.95% $18.06 $19.35 $20.79 $21.51 $28.36
</TABLE>
----------
* For the period ending September 30, 2000.
The tenants of the Chrysler building are general professional service
firms and companies. As of September 30, 2000 one tenant occupied 10% or more of
the rentable square footage at the Chrysler Building. That tenant is Chrysler
Motor Corporation, a division of a major automotive manufacturer. Chrysler Motor
Corporation occupies 24,320 out of 207,692 rentable square feet, or 11.71% of
the building. The loss of this significant tenant could have a material adverse
effect on the financial performance of the property.
<TABLE>
<CAPTION>
Monthly Base Expiration
Suite Tenant RSF Rent Annual Rent Date Renewal Options
--------- ---------------------------- ---------- ------------- ----------- ------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
One option to extend
300 Chrysler Motor Corporation 24,320 47,242 566,904 July 2004 for 5 years
</TABLE>
Real Estate Taxes
The Chrysler building had an assessed appraised value of $20,625,093 for
the 2000/2001 fiscal year and total real estate taxes due of $389,102.32. The
tax rate per $1,000 was $18,865.
Lease Expiration Schedule
The following table sets forth scheduled lease expectations of the Chrysler
building:
<TABLE>
<CAPTION>
Number of Leases Square Footage Annualized Base Rent Percentage of
Year Expiring Expiring of Expiring Leases Annualized Base Rent
---------------- ------------------- ---------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
2000 (1) 6 8,352 $253,989 4.49%
2001 8 12,993 $396,063 7.01%
2002 8 10,080 $311,716 5.52%
</TABLE>
161
<PAGE> 175
<TABLE>
<CAPTION>
Number of Leases Square Footage Annualized Base Rent Percentage of
Year Expiring Expiring of Expiring Leases Annualized Base Rent
---------------- ------------------- ---------------- ---------------------- ------------------------
<S> <C> <C> <C> <C>
2003 6 17,127 $548,255 9.70%
2004 12 65,730 $1,680,700 29.74%
2005 6 26,001 $822,052 14.55%
2006 2 21,104 $561,441 9.93%
2007 -- -- -- --
2008 -- -- -- --
2009 and after 6 37,888 $1,077,008 19.06%
------------------- ---------------- ---------------------- ------------------------
54 199,275 $5,651,225 100.00%
</TABLE>
----------
(1) Represents lease expirations from October 1 to December 31, 2000 and
month-to-month leases.
Capital Expenditures
Our capital expenditure requirements include both normal recurring capital
expenditures and tenant alterations and lease commissions relating to the
releasing of space which is currently occupied and capital expenditures,
relating to tenant improvements and lease commissions relating to space at
properties which are currently unoccupied. CGS had a history of acquiring
properties which require renovation, repositioning or management changes to
improve their performance and enable them to compete effectively. We plan to
continue investing in these types of properties. These properties may require
major capital expenditures or significant tenant improvements.
We have budgeted $7,378,806 for capital expenditures, tenant improvements
and lease commissions in 2001. We plan to fund these amounts primarily from
proceeds from refinancing of properties. In addition, approximately $400,000 of
these amounts will be funded from reserve and approximately $600,000 is expected
to be funded from proceeds relating to settlement of a claim relating to
construction defects at one property.
The Chrysler building, which may be considered a significant property will
require capital expenditures primarily for maintenance of the roof, fans and
parking lot and tenant improvements and leasing commissions for releasing space.
We have budgeted $476,128 for these purposes in 2001.
MORTGAGE DEBT
Upon consummation of the consolidation, American Spectrum will have debt
of approximately $176 million. Such debt is generally limited recourse mortgage
debt and is secured by mortgages on 32 properties. Mortgage debt totaling $101
million is fixed rate and self-amortizing, and $75 million of such debt is at a
variable mortgage rate, with all or a portion of the principal due in a lump sum
payment at maturity. The weighted annual interest rate on the mortgage debt is
8.67% (based on the interest rates in effect at June 30, 2000). The following
table provides certain information with respect to American Spectrum's debt,
including its proportionate share of the debt of unconsolidated joint ventures:
<TABLE>
<CAPTION>
06/30/00 INTEREST
PROPERTY DEBT RATE MATURITY
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shopping Center
Beach & Lampson Pad D 654,400 8.80% March 2015
</TABLE>
162
<PAGE> 176
<TABLE>
<CAPTION>
06/30/00 INTEREST
PROPERTY DEBT RATE MATURITY
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Columbia North East 1,034,564 9.86% 2000 - 2003 (1)
Maple Tree Shopping Ctr. 1,943,584 9.01% December 2004
Marketplace 4,127,762 9.87% 2000 - 2003 (1)
Richardson Plaza 4,530,167 10.97% 1999 - 2008 (1)
----------------------------------
Total Shopping Center 12,290,477 10.08%
----------------------------------
Office
Bristol Bay 6,967,584 8.80% March 2015
Countryside Executive Ctr. 1,186,033 10.25% December 2002
Chrysler Building 34,940,000 8.50% July 2010
Creekside 4,040,218 9.14% January 2005
Mira Mesa 4,407,215 7.74% October 2010
NorthCreek Office Park 3,753,048 10.25% December 2002
Northwest Corporate Center 10,734,826 9.34% 2000 - 2001 (1)(2)
Parkade Center 6,267,789 8.30% October 2000
Park Plaza I and II 1,802,131 9.01% December 2004
San Felipe 3,000,000 5.00% April 2004
Spectrum 7,465,582 8.44% 2000 & 2009 (1)
----------------------------------
Total Offices 84,564,426 8.59%
----------------------------------
Office/Warehouse
Jackson Industrial A 3,577,511 9.31% November 2000
Morenci Professional Park 1,874,350 9.01% December 2004
Nooney Rider Trail 3,708,729 10.74% April 2002
Northeast Commerce Ctr. 1,874,642 10.25% December 2002
Oak Grove Commons 1,113,603 9.61% December 2002
Sorrento I 1,630,402 8.75% September 2009
Southwest Point 1,486,061 8.35% September 2009
Technology 11,808,248 10.54% 2000 & 2008 (1)
Valencia 1,358,189 9.25% April 2007
Westlakes 1,887,058 9.00% March 2006
----------------------------------
Total Office/Warehouse 30,318,793 9.92%
----------------------------------
Apartment Properties
Autumn Ridge 6,810,131 9.15% May 2001
Creekside 5,518,910 8.44% 2002 & 2009 (1)
</TABLE>
163
<PAGE> 177
<TABLE>
<CAPTION>
06/30/00 INTEREST
PROPERTY DEBT RATE MATURITY
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Villa Redondo 9,347,887 6.51% January 2009
Meadow Wood 10,840,000 7.40% December 2001
The Lakes 12,981,604 6.62% 2006 & 2031 (1)
----------------------------------
Total Apartment Properties 45,498,532 7.38%
----------------------------------
Development Land
Phoenix Van Buren 2,943,530 12.07% 2001 & 2005 (1)
----------------------------------
Totals 175,615,758 8.67%
----------------------------------
</TABLE>
----------
(1) Property is encumbered by more than one mortgage. Interest rate represents
the weighted average of the mortgage indebtedness and the maturity dates
shows the range of maturity dates.
(2) Amount represents July 2000 mortgage balance after paydown to lenders from
sales of one building.
Environmental Matters
American Spectrum has undertaken a third-party Phase I investigation of
potential environmental risks when evaluating an acquisition. A "Phase I
investigation" is an investigation for the presence or likely presence of
hazardous substances or petroleum products under conditions which indicate an
existing release, a post release or a material threat of a release. A Phase I
investigation does not typically include any sampling. Where warranted, further
assessments are performed by third-party environmental consulting and
engineering firms. American Spectrum may acquire a property with environmental
contamination, subject to a determination of the level of risk and potential
cost of remediation. American Spectrum generally will require property tenants
to fully indemnify it against any environmental problem or condition existing as
of the date of purchase and will obtain environmental insurance for any
contaminations on properties. In some instances, American Spectrum will be the
assignee of or successor to the buyer's indemnification rights. Additionally,
American Spectrum will generally structure its leases to require the tenant to
assume all responsibility for environmental compliance or environmental
remediation and to provide that non-compliance with environmental laws be deemed
a lease default.
Insurance
American Spectrum carries comprehensive liability, fire, extended coverage
and rental loss insurance covering all of our properties, with policy
specifications and insured limits which American Spectrum believes are adequate
and appropriate under the circumstances. There are, however, certain types of
losses that are not generally insured because they are either uninsurable or not
economically feasible to insure. Should an uninsured loss or a loss in excess of
insured limits occur, American Spectrum could lose its capital invested in the
property, as well as the anticipated future revenues from the property and, in
the case of debt which is with recourse to American Spectrum, would remain
obligated for any mortgage debt or other financial obligations related to the
property. Any such loss would adversely affect American Spectrum. Moreover,
American Spectrum will generally be liable for any unsatisfied obligations other
than non-recourse obligations. American Spectrum believes that our properties
are adequately insured. No assurance can be given that material losses in excess
of insurance proceeds will not occur in the future.
164
<PAGE> 178
Competition
American Spectrum itself will compete with other entities both to locate
suitable properties for acquisition and to locate purchasers for its properties.
While the markets in which we compete are highly fragmented with no dominant
competitors, we face substantial competition in both our leasing and property
acquisition activities. There are numerous other similar types of leasing and
property acquisition activities. There are numerous other similar types of
properties located in close proximity to each of our properties. The amount of
leasable space available in any market could have a material adverse effect on
our ability to rent space and on the rents charged. Competition for acquisition
of existing properties from institutional investors and other publically traded
REITs has increased substantially in the past several years. In many of the
company's markets, institutional investors and owners and developers of
properties compete vigorously for the acquisition, development and lease of
space. Many of these competitors have substantial resources and experience.
Employees
American Spectrum will employ 72 individuals, including 42 on-site
property management and maintenance personnel, none of which will be covered by
collective bargaining agreements. American Spectrum believes that its
relationship with its employees are good.
Legal Proceedings
American Spectrum is not a party to any material legal proceedings.
BUSINESS OF THE FUNDS
The following discussion describes the current business of the funds and
the terms upon which the funds' properties are leased. As of June 30, 2000 all
of the proceeds raised by the funds in their respective offerings of units have
been invested in properties or other investments permitted by the terms of their
partnership agreements. At this time, the general partners of the funds do not
expect to reinvest the proceeds from the sale of any properties in new
properties or other investments. Instead, we expect to distribute such proceeds
to the limited partners in accordance with the terms of each fund's partnership
agreement.
General
Between 1979 and 1985, each fund was organized as a limited partnership to
purchase existing office, office/warehouse or apartment properties, including
land and buildings, as well as office, office/warehouse or apartment properties
upon which such office buildings or apartments would be constructed and the land
underlying the office, office/warehouse or apartment building. The properties
are located in the mid-western United States, Southwestern United States, and
California.
Management Services
The CGS Management Company is responsible for assisting the funds in
acquiring properties, negotiating leases, collecting rental payments, inspecting
the properties and the tenants' books and records and responding to tenant
inquiries and notices. The CGS Management Company also provides information to
each fund about the status of the leases and the properties. In exchange for
these services, the CGS Management Company is entitled to receive a management
fee from each fund which, generally, is an annual fee equal to 6% of gross
revenues.
The titles to properties purchased by the funds are insured by appropriate
title insurance policies and/or abstract opinions consistent with normal
practices in the jurisdictions in which the properties are located.
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<PAGE> 179
In selecting lessees, your general partners and the CGS Management Company
have historically considered the net worth of the lessee and behavior of lease
payments combined with anticipated use of the space to be leased.
Description of Properties
General. As of September 30, 2000, the funds owned, in the aggregate, 18
properties. The following table provides certain annualized information with
respect to the funds' properties owned as of September 30, 2000.
<TABLE>
<CAPTION>
Number of Percent of
States in Average Total
Total which Age of American
Number of Properties Building Aggregate Spectrum
Fund Properties are Located on Property Total Revenue Revenue
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sierra Pacific Development Fund (2) 1 1 16 $1,008,048 2.76%
Sierra Pacific Development Fund II (2) 3 1 22 2,404,383 6.59%
Sierra Pacific Development Fund III (2) 1 1 14 295,152 0.81%
Sierra Pacific Institutional Properties V (2) 1 1 12 1,003,024 2.75%
Sierra Pacific Pension Investors '84 (2) 2 2 13.5 2,556,450 7.00%
Nooney Income Fund Ltd., L.P. (1) 2 2 22 2,275,960 6.23%
Nooney Income Fund Ltd. II, L.P. (1) 4 2 18 3,279,839 8.98%
Nooney Real Property Investors-Two, L.P. 4 2 23.5 $2,220,663 6.08%
</TABLE>
----------
(1) Nooney Income Fund Ltd., L.P. and Nooney Income Fund Ltd. II L.P. own a
76% interest and a 24% interest, respectively, in an office building as
tenants in common. For purposes of this table, Nooney Income Fund Ltd.,
L.P. is deemed to own the property since it owns a greater interest
therein.
(2) The properties listed on the table as owned by Sierra Pacific Development
Fund, Sierra Pacific Development Fund III and Sierra Pacific Institutional
Properties V are owned through partnerships in which Sierra Pacific
Development Fund II and Sierra Pacific Pension Investors '84 also have
interests.
Land. Lot sizes generally range from 130,000 to 320,000 square feet
depending upon building size and local demographic factors. Generally, the cost
of the underlying land ranges from $182,000 to $2,500,000, although the cost of
the land for particular properties may be higher or lower in some cases.
Buildings. Building and site preparation costs have varied depending upon
the size of the building and the site and the area in which the property is
located. Building and site preparation costs ranged from $312,000 to $8,300,000
for each property.
Description of Leases
The leases of the properties are summarized below. The terms and
conditions of any lease, however, entered into by any of the funds with regard
to a property may vary from those described below.
General. A fund is the lessor under the lease except in certain
circumstances in which it may be a party to a joint venture or co-tenancy
arrangement which, in turn, owns the property. In those cases, the joint
venture, rather than the fund, will be the lessor, and all references in this
section to the fund as lessor therefore should be read accordingly.
Term of Leases. Each fund's properties are leased for an initial term of
two to ten years with some leases having renewal options. The minimum rental
payment under the renewal option generally is greater than that due for the
final lease year of the initial term of the lease.
166
<PAGE> 180
As of September 30, 2000, the average remaining initial lease term with
respect to the funds' properties was approximately three years. Leases
accounting for approximately 41.20% of the total annualized base rent for the
period ended September 30, 2000, have initial lease terms extending until at
least September 30, 2002.
The following table shows the aggregate number of leases in American
Spectrum's portfolio of properties which expire each calendar year through the
year 2009, as well as the number of leases which expire after December 31, 2009.
The table does not reflect the exercise of any of the renewal options provided
to the tenant under the terms of such leases.
Lease Expiration Table
<TABLE>
<CAPTION>
Base Rent
-------------------------------------------
Year Number Amount Percent
--------------------------------------------------- ---------- ---------------- -------------
<S> <C> <C> <C>
2000.......................................... 37 620,794 4.13%
2001.......................................... 87 3,293,277 21.89%
2002.......................................... 81 2,802,637 18.63%
2003.......................................... 71 4,799,029 31.90%
2004.......................................... 21 1,319,910 8.77%
2005.......................................... 16 1,202,699 7.99%
2006.......................................... 1 82,751 0.55%
2007.......................................... 4 573,855 3.81%
2008.......................................... 1 134,045 0.89%
2009.......................................... 1 34,187 0.23%
Thereafter.................................... 4 181,958 1.21%
---------- ---------------- -------------
Totals........................................ 324 15,045,142 100.00%
</TABLE>
Financing
The funds are generally authorized to borrow funds. The Partnership
Agreements of each of the funds contain certain restrictions on the funds'
authority to borrow. As a matter of overall policy, the funds have limited the
amount that they have borrowed. As of June 30, 2000, the funds had a ratio of
total indebtedness to total assets of 37.99%.
Sale of Properties
The funds generally hold their properties until their general partners
determine either that their sale or other disposition is advantageous in view of
each fund's investment objectives, or that such objectives will not be met. The
general partners originally intended to sell each fund's properties within five
to ten years after their acquisition or as soon thereafter as market conditions
permit. In deciding whether to sell properties, the general partners will
consider factors such as potential capital appreciation, net cash flow and
federal income tax considerations.
In connection with any sale of a property, the general partners do not
anticipate and, in most cases, the funds are prohibited from, making
reinvestment of the net sales proceeds in additional properties. Net sales
proceeds not reinvested in properties or used to establish reserves deemed
necessary or advisable by the general partners are distributed to the limited
partners in accordance with each fund's partnership agreement.
In connection with sales of properties by the funds, purchase money
security interests may be taken by the funds as part payment of the sales price.
The terms of payment are affected by custom in the area in which the property is
located and by prevailing economic conditions. When a purchase money security
interest is accepted in
167
<PAGE> 181
lieu of cash upon the sale of a fund's property, the fund continues to have a
mortgage on the property and the proceeds of the sale will be realized over a
period of years rather than at closing of the sale.
Competition
The competitive environment in which the funds operate is substantially
similar to that of American Spectrum, as described above on page ____.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of American Spectrum and of the funds. In the case of American
Spectrum, American Spectrum's Board of Directors has determined these policies,
and generally, the Board may amend or revise such policies from time to time
without a vote of the stockholders. for the funds, the policies have been set
according to the investment objectives set forth in the partnership agreement
governing each fund. The description included here regarding the funds is
general to all the funds.
AMERICAN SPECTRUM
Investment Policies
Real Estate Investments. American Spectrum seeks to acquire and manage a
diversified portfolio of real estate and other assets and will reinvest proceeds
from its sale of properties.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. American Spectrum may in the future invest in
securities of entities engaged in real estate activities or securities of other
issuers, including for the purpose of exercising control over such entities.
American Spectrum may acquire all or substantially all of the securities or
assets of REITs or similar entities where such investments would be consistent
with its investment policies. In any event, American Spectrum does not intend
that its investments in securities will require it to register as an "Investment
Company" under the Investment Company Act, and American Spectrum would divest
itself of such securities before any such registration would be required.
Joint Ventures and Wholly-Owned Subsidiaries. American Spectrum may in the
future enter into joint ventures or general partnerships and other participation
with real estate developers, owners and others for the purpose of obtaining an
equity interest in a particular property or properties in accordance with
American Spectrum's investment policies. Such investments permit American
Spectrum to own interests in large properties without unduly restricting
diversification and, therefore, add flexibility in structuring American
Spectrum's portfolio.
Engaging in the Purchase and Sale of Investments and Investing in the
Securities of Others for the Purpose of Exercising Control. As part of its
investment activities, American Spectrum may acquire, own and dispose of general
and limited partner interests, stock, warrants, options or other equity
interests in entities and exercise all rights and powers granted to the owner of
any such interests.
Offering Securities in Exchange for Property. American Spectrum may offer
American Spectrum shares, Operating Partnership units or other securities in
exchange for a property.
Repurchasing or Reacquiring Its Own Shares. American Spectrum may purchase
or repurchase American Spectrum shares from any person for such consideration as
the Board of Directors may determine in its reasonable discretion, whether more
or less than the original issuance price of American Spectrum shares or the then
trading price of American Spectrum shares.
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<PAGE> 182
Financing Policies
Issuance of Additional Securities. American Spectrum's Board of Directors
may, in its discretion, issue additional equity securities. American Spectrum
expects to issue additional equity from time to time to increase its available
capital. The issuance of additional equity interests may result in the dilution
of the interests of the American Spectrum stockholders at the time of such
issuance.
Issuance of Senior Securities. American Spectrum may at any time issue
securities senior to the American Spectrum shares, upon such terms and
conditions as may be determined by the Board of Directors.
Borrowing Policy. American Spectrum may, at any time, borrow, on a secured
or unsecured basis, funds to finance its business and in connection therewith
execute, issue and deliver promissory notes, commercial paper, notes,
debentures, bonds and other debt obligations which may be convertible into
American Spectrum shares or other equity interests or be issued together with
warrants to acquire American Spectrum shares or other equity interests.
Miscellaneous Policies
Making Annual or Other Reports to Stockholders. American Spectrum will be
subject to the reporting requirements of the Exchange Act and will file annual
and quarterly reports thereunder. American Spectrum currently intends to provide
annual and quarterly reports to its stockholders.
Restrictions on Related Party Transactions. American Spectrum's bylaws
prohibit American Spectrum from engaging in a transaction with a director,
officer or person owning or controlling 1% or more of any class of American
Spectrum's outstanding voting securities (or any affiliate of such persons) (to
all of whom we refer to here as the Interested Parties), except to the extent
that such transactions are specifically authorized by the terms of the bylaws.
The bylaws will permit a transaction, including the acquisition of property,
with any of the Interested Parties, however, if the terms or conditions of such
transaction have been disclosed to the Board of Directors and approved by a
majority of directors not otherwise interested in the transaction, and such
directors, in approving the transaction, have determined the transaction to be
fair, competitive, commercially reasonable and on terms and conditions no less
favorable to American Spectrum than those available from unaffiliated third
parties.
Ownership Restrictions. The articles of incorporation prohibit any one
stockholder from owning greater than 5% of any class of its outstanding shares.
This limitation does not apply to existing stockholders who own more than 5% of
American Spectrum shares at the effective date of the consolidation.
Company Control. The Board of Directors has exclusive control over
American Spectrum's business and affairs subject only to the restrictions in the
articles of incorporation and bylaws. Stockholders have the right to elect
members of the Board of Directors. The Directors are accountable to American
Spectrum as fiduciaries and are required to exercise good faith and integrity in
conducting American Spectrum's affairs as described in "Fiduciary
Responsibility" on page ____.
Working Capital Reserves
American Spectrum will maintain working capital reserves or immediate
borrowing capacity in amounts that the Board of Directors determines to be
adequate to meet normal contingencies in connection with the operation of its
business and investments.
THE FUNDS
Investment Policies
169
<PAGE> 183
Real Estate Investments. The funds' principal investment activity was the
acquisition of a diversified portfolio of real estate assets consisting
primarily of office and office/warehouse. While the funds generally hold their
properties for long-term investment, a fund may dispose of a property if the
general partners deem such disposition to be in its best interests. Generally,
any proceeds from such disposition must be distributed to the partners in the
fund according to the terms of the partnership agreement governing such fund.
The funds are finite term entities which are structured to dissolve when the
assets of the funds are liquidated. The funds generally intended to hold their
properties for five to ten years.
Financing
The funds are generally restricted in the amount and nature of borrowings.
Additionally, none of the funds are authorized to raise additional capital for
(or reinvest the net sale or refinancing proceeds in) new investments, absent
amendments to their partnership agreements.
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of American Spectrum are as follows:
<TABLE>
<CAPTION>
Approximate
Name Position Age Time in Office (1)
-------------------------- ------------------------------------------- ----- ------------------
<S> <C> <C> <C>
William J. Carden Chief Executive Officer, President and 57 Since 1989
Chairman of the Board
Timothy R. Brown Director 53 Since August 2000
William W. Geary, Jr. Director 56 Since August 2000
Lawrence E. Fiedler Director 61 Since August 2000
Harry A. Mizrahi Chief Operating Officer, Senior Vice 42 Since 2000
President and Director
Thomas N. Thurber Chief Financial Officer and Senior Vice 50 Since 1995
President
Paul E. Perkins Senior Vice President 34 Since 1994
Patricia A. Nooney Senior Vice President 43 Since 2000
</TABLE>
----------
(1) Including serving with the CGS Predecessor.
William J. Carden - Mr. Carden is president and one of the founders of CGS
Real Estate Services, Inc. Mr. Carden also serves as Chairman of the Board of
American Spectrum Real Estate Services, Inc., a full services real estate
broker, five of the offices of which are Coldwell Banker Commercial franchises.
Mr. Carden also serves as an officer and director of the corporate general
partners of each of the funds. He received an accounting degree from Long Beach
State. More than five years ago, real estate companies controlled by Mr. Carden
and of which Mr. Carden was an officer or director were subject to proceedings
under the federal bankruptcy act.
Timothy R. Brown - Mr. Brown has been a partner in the law firm of
Thompson Knight Brown Parker & Leahy L.L.P. since 1999. Prior to that, for more
than the five past years, he was a founder and partner at Brown, Parker & Leahy
L.L.P. He received his B.A. from Stanford University and his Juris Doctorate
from the University of Texas School of Law.
William W. Geary, Jr. - Mr. Geary has served as the President of Carlsberg
Management Company, a real estate development company, since February 1986. Mr.
Geary received his MBA and BS degrees from Northwestern
170
<PAGE> 184
University in Chicago, Illinois. Mr. Geary received his Charter Financial
Analyst's designation. Mr. Geary received the Certified Property manager's (CPM)
designation from the Institute of Real Estate management, Specialist in Real
Estate Securities (SRS) designation from the Real Estate Management, Specialist
in Real Estate Securities (SRS) designation from the Real Estate Securities and
Syndication Institute and the Certified Commercial-Investment Member (CCIM)
designation from the Realtors National Marketing Institute. He is a Member of
Los Angeles Society of Security Analysts.
Lawrence E. Fiedler - Mr. Fiedler has served as President of JRM
Development Enterprises, Inc. and its affiliated companies since 1987. These
companies have developed, acquired, managed and leased retail, residential and
commercial properties throughout the United States. In addition, Mr. Fiedler has
been an Adjunct Professor at the New York University Real Estate Institute since
1979. Mr. Fiedler received a Bachelor of Sciences degree from Syracuse
University, an LLB from New York University School of Law and an LL.M. from New
York University School of Law in Taxation.
Harry A. Mizrahi - Mr. Mizrahi is Chief Operating Officer of American
Spectrum Realty. During 1999-2000, Mr. Mizrahi headed the New York office of
International Property Corporation, an affiliate of the Reichmann Group of
Companies. Mr. Mizrahi is also an Adjunct Assistant Professor at New York
University's Real Estate Institute. From 1994-1998, Mr. Mizrahi was a Vice
President and Director of Salomon Brothers' and Salomon Smith Barney's Real
Estate Investment Banking Groups. During 1981-1991, Mr. Mizrahi was employed by
Eastdil Realty and became an officer and Partner. Mr. Mizrahi received a B.A.
from Northwestern University and an M.B.A. from Columbia University Graduate
School of Business, and attended Harvard University Kennedy School of
Government.
Thomas N. Thurber - From 1995 to present, Mr. Thurber has served as the
Chief Financial Officer of CGS Real Estate Company, Inc. ("CGS"). Mr. Thurber is
also the president of S-P Properties, Inc., the corporate general partner of
certain of the funds. Prior to joining CGS, from 1993 through 1995 he was
self-employed as a real estate advisor and investor in Houston. From 1989 to
1993, Mr. Thurber was the Director of Real Estate and Chief Financial Officer
for the Horowitz Trust, a real estate investment firm; from 1987 to 1999 he held
the same positions with The Vanderbilt Group, a retail development company in
Southern California. Mr. Thurber was a partner in a regional C.P.A. firm,
Williamson & Associates later BDO Seidman, from 1983 to 1987. In 1982 and 1983,
Mr. Thurber served as Senior Controller for Joseph C. Canizaro Interests, a real
estate developer in New Orleans. From 1979 to 1982, Mr. Thurber was the
Controller, U.S. Operations for Daon Corporation and from 1972 to 1979 he held
various positions with Arthur Andersen LLP, progressing to Senior Tax Manager.
Mr. Thurber is a CPA and holds a degree in accounting from Florida State
University.
Paul E. Perkins - Mr. Perkins has been with CGS Real Estate Company, Inc.
since 1994 and currently heads the financial services group. From 1988 to 1992
he was an investment broker with the Seeley Company, a Los Angeles-based
commercial real estate brokerage firm. Mr. Perkins holds an undergraduate degree
in business and finance from the University of Southern California and a
Master's Degree in real estate from New York University.
Patricia A. Nooney -Ms. Nooney has served as President of the St. Louis
office of Coldwell Banker Commercial American Spectrum since October 1997. From
1981 through September 1997, Ms. Nooney was an officer of Brooklyn Street
Properties, Inc. Ms. Nooney was an auditor with Deloitte & Touche from 1978 to
1981. Ms. Nooney received a B.A. in Business Administration from the University
of Miami. Ms. Nooney holds the designations of Certified Property Manager (CPM)
and Certified Commercial Investment Member (CCIM). She will serve as the
national secretary/treasurer of the Institute of Real Estate Management (IREM)
in 2001.
Board of Directors
General. American Spectrum will operate under the direction of its Board
of Directors, the members of which are accountable to American Spectrum as
fiduciaries. A majority of the directors will be independent directors.
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<PAGE> 185
American Spectrum currently has five directors. It may have no fewer than
three directors and no more than 15. Directors will be elected annually, and
each director will hold office until the next annual meeting of stockholders or
until his successor has been duly elected and qualified. There is no limit on
the number of times that a director may be elected to office. Although the
number of directors may be increased or decreased as discussed above, a decrease
shall not have the effect of shortening the term of any incumbent director.
Any director may resign at any time and may be removed, with or without
cause, only by the stockholders upon the affirmative vote of at least 75% of all
the shares of common stock outstanding and entitled to vote in the election of
the directors. The notice of such meeting shall indicate that the purpose, or
one of the purposes, of such meeting is to determine if a director shall be
removed.
Committees of the Board of Directors. Pursuant to the articles of
incorporation, the Board of Directors may establish committees as it deems
appropriate. Currently, American Spectrum has an audit committee which consists
of American Spectrum's three independent directors. The audit committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the independent
public accountants, reviews the independence of the independent public
accountants, considers the range of audit and non-audit fees and reviews the
adequacy of American Spectrum's internal accounting controls.
The Board of Directors may from time to time establish certain other
committees to facilitate American Spectrum's management. The Board of Directors
initially will not have a nominating committee and the entire Board of Directors
will perform the function of such committee.
Compensation of Directors. Each non-employee director is entitled to
receive $12,000 annually for serving on the Board of Directors, as well as fees
of $1,000 per meeting attended and $500 for each telephonic meeting in which the
Director participates, including committee meetings. A director may elect to
receive the fee in cash or American Spectrum shares. We will also reimburse each
director for travel expenses for attending meetings. Under the plan, each
non-employee director will also be entitled to an initial grant of an option to
acquire 10,000 American Spectrum shares, 5,000 of which will be granted at the
Exchange Value of $15 per share on closing of the consolidation and 5,000 of
which will be granted on the six-month anniversary of the closing of the
consolidation at the fair market value on the date of grant. In addition, each
non-employee director will be entitled to an annual automatic grant of an option
to acquire 5,000 American Spectrum shares. The first automatic grant will be on
the date of the 2002 annual meeting. The annual grant will be at the fair market
value on the date of the grant. The plan is described below.
Executive Compensation
The following Summary Compensation Table sets forth the compensation
earned for each of the last three completed fiscal years by: (i) the persons who
served as American Spectrum's chief executive officer during the last completed
fiscal year; and (ii) the four most highly compensated officers of American
Spectrum other than the chief executive officer who were serving as executive
officers at the end of the last completed fiscal year and whose total annual
salary and bonus equaled or exceeded $100,000.
172
<PAGE> 186
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Name and Principal Position Year Salary Bonus
------------------------------------------------------------------ --------- ---------------- -------------
<S> <C> <C> <C>
William J. Carden, Chairman of the Board, President and Chief 1999 $470,000 $50,000
Executive Officer 1998 460,000 50,000
1997 350,000 50,000
Thomas N. Thurber, Chief Financial Officer 1999 187,200 50,000
1998 171,600 0
1997 153,000 20,000
</TABLE>
Employment Agreements
Effective __________ ___, 2000, American Spectrum entered into employment
agreements with William J. Carden, Harry A. Mizrahi, Thomas N. Thurber, Paul E.
Perkins and Patricia A. Nooney. Each of the employment agreements provides for a
base salary as follows: William J. Carden - $480,000; Harry A. Mizrahi -
$200,000, subject to increase to up to $500,000 upon achievement of certain
targets relating to the Company's total assets; Thomas N. Thurber - $300,000,
Paul E. Perkins - $125,000; and Patricia A. Nooney - $125,000. In addition, each
of the employment agreements provide for a discretionary bonus. Each of the
employment agreements also provides for the grant of the following number of
shares of common stock and the grant of options to purchase the number of
American Spectrum shares set forth below. 50% of such options will be granted at
Exchange Value on the date of the consummation of the consolidation and 50% of
such options will be granted on the six month anniversary of the consummation of
the consolidation at the fair market value on the date of grant. William J.
Carden - grant of 17,500 shares and 25,000 options; Harry A. Mizrahi - grant of
35,000 shares and 50,000 options; Thomas N. Thurber - grant of 35,000 shares and
50,000 options; Paul E. Perkins - grant of 10,000 shares and 15,000 options; and
Patricia A. Nooney - grant of 2,000 shares and 4,500 options. Each of the
employment agreements terminates on the third anniversary of the consummation of
the consolidation. The stock grants and options will vest over a four-year
period.
American Spectrum has also entered into noncompetition agreements with
each of the foregoing persons providing that, subject to certain exceptions,
they will not engage in specified activities in the office, office/warehouse or
multifamily apartment industry.
Option and Restricted Share Plans
American Spectrum has adopted the 2000 Performance Incentive Plan (or, the
Plan). The Board believes that the Plan is in the best interest of American
Spectrum and will enable it to attract and retain highly qualified executive
officers, directors and employees.
The Plan is qualified under Rule 16b-3 under the Exchange Act. The Plan
will be administered by the Board of Directors and provides for the granting of
options, stock appreciation rights or restricted stock. Under the Plan, 720,000
American Spectrum shares are available for issuance to executive officers,
directors or other key employees of American Spectrum, which number may increase
over time based on the number of outstanding American Spectrum shares. Options
to acquire American Spectrum shares are expected to be in the form of
non-statutory stock options and are exercisable for up to 10 years following the
date of the grant. The exercise price of each option will be set by the Board of
Directors, but the Plan requires that the price per American Spectrum share must
be equal to or greater than the fair market value of the American Spectrum
shares on the grant date.
The Plan also provides for the issuance of stock appreciation rights,
which generally entitle a holder to receive cash or stock, as determined by the
Board of Directors at the time of exercise, equal to the difference between the
exercise price and the fair market value of the American Spectrum shares,
restricted American Spectrum shares to
173
<PAGE> 187
executive officers, directors or other key employees upon such terms and
conditions as shall be determined by the Board of Directors in its sole
discretion and other performance-based incentives.
Incentive Compensation
American Spectrum has established an incentive compensation plan for key
officers of American Spectrum. This plan provides for payment of cash bonuses to
participating officers after evaluating the officer's performance and the
overall performance of American Spectrum. The Chief Executive Officer makes
recommendations to the Board of Directors, which makes the final determination
for the award of bonuses. The Board of Directors determines such bonuses, if
any, for the Chief Executive Officer.
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<PAGE> 188
PRINCIPAL STOCKHOLDERS OF AMERICAN SPECTRUM
The table below provides information regarding beneficial ownership of
American Spectrum shares as of the date of the issuance of American Spectrum
shares in the consolidation (assuming that American Spectrum acquires 100% of
the funds).
<TABLE>
<CAPTION>
Percentage of
Number of Shares of Common Outstanding Common
Name of Beneficial Owner (1) Stock(2) Stock (3)
-------------------------------------- ------------------------------ -----------------------------
<S> <C> <C>
William J. Carden (4) 1,521,453 20.67%
John Galardi (5) 1,132,137 15.37%
Harry A. Mizrahi 41,250
Thomas N. Thurber 41,250
Paul E. Perkins 11,850
Patricia A. Nooney 2,563
Timothy R. Brown (6) 2,500
William W. Geary, Jr. (7) 2,500
Lawrence E. Fiedler (8) 2,500
</TABLE>
----------
Less than 1%.
(1) Except as specifically noted in the footnotes below, the address of each
of the named beneficial owners is c/o American Spectrum Realty, Inc., 1800
East Deere Avenue, Santa Ana, California 92705.
(2) For each beneficial owner, American Spectrum shares subject to options or
conversion rights exercisable, respectively within 60 days of the
consummation of the consolidation are deemed outstanding. Includes as to
Messrs. Carden and Galardi American Spectrum shares issuable in exchange
for Operating Partnership units. Does not include any American Spectrum
shares to be issued under the 2000 Plan six months after the consummation
of the consolidation.
(3) The percentage ownership after the consolidation is based on 7,367,892
American Spectrum shares outstanding upon completion of the consolidation
assuming the consolidation of 100% of the funds, that no notes are issued
and that all Operating Partnership units are exchanged for American
Spectrum shares. Beneficial ownership is determined in accordance with the
rules of the SEC.
(4) Includes American Spectrum shares and Operating Partnership units owned by
trusts for the benefit of Mr. Carden's children, as to which Michael
Matkins is trustee and by Mr. Carden's wife. Also includes American
Spectrum shares owned by corporations in which Mr. Carden, Mr. Galardi and
Mr. Matkins own common stock. The American Spectrum shares owned by such
corporations may be deemed to be beneficially owned by each of such
persons.
(5) Mr. Galardi's address is 39590 Highway 82, Aspen, Colorado 81611. Includes
American Spectrum shares and Operating Partnership units owned by trusts
for the benefit of Mr. Galardi's children. Also includes American Spectrum
shares owned by corporations in which Mr. Carden, Mr. Galardi and Mr.
Matkins own common stock. The American Spectrum shares owned by such
corporations may be deemed to be beneficially owned by each of such
persons.
(6) Mr. Brown's address is Two Allen Center, 1200 Smith Street, Suite 3600,
Houston, Texas 77002.
(7) Mr. Geary's address is 6171 West Century Boulevard, Suite 100, Los
Angeles, California 90045.
(8) Mr. Fiedler's address is 156 West 56th Street, Suite 1101, New York, New
York 10019.
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RELATED PARTY TRANSACTIONS
Transactions Relating to the Consolidation
In connection with the consolidation, limited partnerships and limited
liability companies owned or controlled by William J. Carden and John N. Galardi
and their family members and affiliates will be merged into American Spectrum.
Upon completion of the consolidation, 17 properties in which these principal
shareholders hold interests, in addition to the properties owned by the funds,
will be owned by American Spectrum. In addition, the principal shareholders hold
limited partnership interests in the funds. Upon completion of these
transactions, the principal shareholders and members of their family will own
2,135,627 American Spectrum shares and Operating Partnership units having a
value of $32,034,405, based on the Exchange Value of $15 per share. The
interests contributed by the principal shareholders to American Spectrum have a
book value of $(35,738,836).
Exchange Rights
American Spectrum will enter into the agreement of limited partnership and
an exchange rights agreement with the limited partners of the Operating
Partnership. In addition to the limited partnership interests held by American
Spectrum, we estimate that there will be approximately __ limited partnership
interests held by limited partners. These limited partners will be the partners
in the CGS privately held entities including the Principal Shareholders. The
exchange rights agreement provides that holders of Operating Partnership units
have the right, on and after the first anniversary of the your of the
consolidation, to cause the Operating Partnership to exchange Operating
Partnership units for cash at the then fair market value of the American
Spectrum shares or, at the election of American Spectrum, to exchange the
Operating Partnership units for American Spectrum shares (on a one-for-one
basis).
Registration Rights Agreement
American Spectrum will enter into a registration rights agreement with
persons issued American Spectrum shares and Operating Partnership units in
private transactions in connection with the consolidation with the CGS privately
held entities, including the principal shareholders. Under a registration rights
agreement, American Spectrum will agree to register for resale under the
Securities Act American Spectrum shares issued to such persons, or issuable in
exchange for Operating Partnership units issued to them, after the first
anniversary of the consummation of the consolidation.
Third Party Management Services
Prior to consummation of the consolidation, subsidiaries of CGS furnished
property management and brokerage services to both affiliated entities and to
third parties. Prior to consummation of the consolidation, the Third Party
Management Company will be distributed to the shareholders of CGS. The Third
Party Management Company had revenues of $_________ and $4,829,000 for 1999
and the six months ended June 30, 2000 and net losses of $_________ and
$(253,000) for the six months ended June 30, 2000. Based on the methodology
used to value the CGS Management Company, we do not believe that the Third Party
Management Company has material value.
Other Transactions
In connection with the operation of the properties, there have been
transactions relating to the properties between entities controlled by the
principal shareholders and the CGS privately held entities and the CGS
Management Company. These transactions include loans and advances and furnishing
of services. The funds paid affiliates of CGS an aggregate of $5,490,277 for
services rendered during 1997, 1998 and 1999. Messrs. Carden and Thurber
received salaries and bonuses from CGS, which are set forth in the table under
"Management -- Executive Compensation". Messrs. Carden and Galardi have received
distributions from the CGS privately held
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entities with respect to their ownership interests on the same basis as
unaffiliated third parties. During [1997, 1998 and 1999], Messrs. Carden and
Galardi received distributions of $__________, $____________ and
$______________, respectively.
Obligations of the CGS privately held entities, including certain bank
loans and certain amounts payable to Sierra Pacific Development Fund II, L.P. in
settlement of a litigation, the proceeds of which will be distributed to the
limited partners of Sierra Pacific Development Fund II, will be liabilities of
American Spectrum following the closing of the consolidation. The obligations
and indebtedness, other than mortgage indebtedness, of the CGS privately held
entities will become indebtedness of American Spectrum, which aggregate
approximately $11,713,000. $10,800,000 of these liabilities were guaranteed by
Carden or Galardi. These liabilities were deducted in determining the number of
American Spectrum shares and Operating Partnership units to be owned by the
principal shareholders.
FIDUCIARY RESPONSIBILITY
Directors and Officers of American Spectrum
The directors are accountable to American Spectrum and its stockholders as
fiduciaries and must perform their duties in good faith, in a manner believed to
be in American Spectrum's best interests and that of its stockholders and with
such care, including reasonable inquiry, as an ordinarily prudent person in a
like position would use under similar circumstances. The articles of
incorporation provide that the directors will not be personally liable to
American Spectrum or to any stockholder for the breach of a fiduciary
responsibility, to the full extent that such limitation or elimination of
liability is permitted under Maryland law. The bylaws provide that American
Spectrum will indemnify its directors and officers to the full extent permitted
under Maryland law. Pursuant to the bylaws and the MGCL, American Spectrum will
indemnify each director and officer against any liability and related expenses,
including attorneys' fees, incurred in connection with any proceeding in which
he or she may be involved by reason of his or her service in such position so
long as the director or officer acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, American Spectrum's best
interest, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
A director and officer is also entitled to indemnification against
expenses incurred in any action or suit by or on behalf of American Spectrum to
procure a judgment in its favor by reason of his or her service in such position
if the director or officer acted in good faith and in a manner reasonably
believed to be in, or not opposed to, American Spectrum's best interests, except
that no such indemnification will be made if the director or officer is judged
to be liable to American Spectrum, unless the applicable court of law determines
that, despite the adjudication of liability, the director or officer is
reasonably entitled to indemnification for such expenses. The bylaws authorize
American Spectrum to advance funds to a director or officer for costs and
expenses, including attorneys' fees, incurred in a suit or proceeding upon
receipt of an undertaking by such director or officer to repay such amounts if
it is ultimately determined that he or she is not entitled to be indemnified.
American Spectrum has entered into agreements with its directors and executive
officers, indemnifying them to the fullest extent permitted by Maryland law. If
the consolidation is consummated, you and other stockholders of American
Spectrum may have more limited recourse against the directors and officers than
you would have absent these agreements and the provisions in the articles of
incorporation and bylaws.
To the extent that these indemnification provisions apply to actions
arising under the Securities Act, American Spectrum has been informed that, in
the opinion of the SEC, such indemnification provisions are contrary to public
policy as expressed in the Securities Act and, therefore, are not enforceable.
American Spectrum has obtained insurance policies indemnifying the directors and
officers against certain civil liabilities, including liabilities under the
federal securities laws, which might be incurred by them in such capacity.
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General Partners of the Funds
The general partners of the funds are accountable to the funds as
fiduciaries and owe each fund and the partners a duty of loyalty and a duty of
care and are required to exercise good faith and fair dealing in conducting the
fund's affairs. Each fund's partnership agreement generally provides that
neither the general partners, nor any of their affiliates performing services on
behalf of the fund, will be liable to the fund or any of the limited partners
for any act or omission by them performed in good faith pursuant to authority
granted to them by the partnership agreement, or in accordance with its
provisions, and in a manner they reasonably believed to be within the scope of
their authority and in the best interests of the fund, provided that such act or
omission did not constitute negligent misconduct or a breach of their fiduciary
duty. As a result, you and the other limited partners might have a more limited
right of action in certain circumstances than you would have in the absence of
such a provision in the partnership agreements.
Each fund's partnership agreement also generally provides that the general
partners and some of their affiliates are indemnified from losses relating to
acts performed or failures to act in connection with the business of the fund,
except to the extent indemnification is prohibited by law provided that the
general partner or their affiliate determined in good faith that the course of
conduct was in the best interests of the fund and provided further that the
course of conduct did not constitute negligence, misconduct, or a breach of
their fiduciary duty. Notwithstanding the foregoing, neither the general
partners nor any of the their affiliates will be indemnified by any fund from
any liability, loss, damage, cost or expense incurred by the general partners or
any affiliate in connection with any claim involving allegations that the
general partners or their affiliate violated federal or state securities laws
unless:
o a court has held in the general partner or their affiliate's favor on the
merits of the claims of each count involving alleged securities law
violations as to the person seeking indemnification and the court approves
indemnification of the litigation costs;
o a court of competent jurisdiction has dismissed such claims with prejudice
on the merits, and the court approves indemnification of the litigation
costs; or
o a court of competent jurisdiction has approved a settlement of the claims
against the person seeking indemnification and finds that indemnification
of the settlement and related costs should be made.
In each of the situations described above, the court of law considering
the request for indemnification must be advised as to the position of the SEC,
the applicable state securities authority and any other applicable regulatory
authority regarding indemnification for violations of securities laws. Any
indemnification may not be enforceable as to certain liabilities arising from
claims under the Securities Act and state securities laws, and, in the opinion
of the SEC, such indemnification is contrary to public policy and is therefore
unenforceable. For purposes of the foregoing, the general partners' affiliates
will be indemnified only when operating within the scope of the general
partners' authority. Any claim for indemnification under a partnership agreement
will be satisfied only out of the assets of the fund, and no limited partner has
any personal liability to satisfy an indemnification claim made against the
fund.
Each fund may also advance funds to a third person indemnified under the
partnership agreement for legal expenses incurred as a result of legal action
brought against such person if:
o the legal action relates to the performance of duties or services by such
person on behalf of the fund;
o the legal action is initiated by a party other than a limited partner; and
o such person undertakes to repay the advanced funds to the fund if it is
subsequently determined that such person is not entitled to
indemnification pursuant to the terms of the partnership agreement.
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The partnership agreement of each fund provides that the fund may pay the
attorneys' fees of a person indemnified under the partnership agreement as they
are incurred. No fund pays for any insurance covering liability of the general
partners or any other indemnified person for acts or omissions for which
indemnification is not permitted by its partnership agreement, although the
general partners may be named as additional insured parties on policies obtained
for the benefit of the fund if there is no additional cost to such fund. As part
of its assumption of liabilities in the consolidation, American Spectrum will
indemnify the general partners and their affiliates for periods prior to and
following the consolidation to the extent of the general partners and their
affiliates' indemnity under the terms of the partnership agreements and
applicable law.
DESCRIPTION OF CAPITAL STOCK
The articles of incorporation authorize a total of 125 million shares of
capital stock, consisting of 100 million shares of common stock, $.01 par value
per share, and 25 million shares of preferred stock. As of the consummation of
the consolidation, American Spectrum will have 6,936,035 shares of common stock
outstanding and no preferred stock outstanding. Currently, there is no
established public trading market for the American Spectrum shares. Upon
consummation of the consolidation, the American Spectrum shares will be listed
on the _________ under the symbol "__________".
Stockholders are entitled to one vote per share on all matters to be voted
on by stockholders and are entitled to receive ratably such distributions as may
be declared on the American Spectrum shares by the Board of Directors in its
discretion from funds legally available for these distributions. In the event of
the liquidation, dissolution or winding up of American Spectrum, stockholders
are entitled to share ratably in all assets remaining after payment of all debts
and other liabilities and any liquidation preference of any holders of preferred
stock. Stockholders have no subscription, redemption, conversion or preemptive
rights. Matters submitted for stockholder approval generally require a majority
vote of the shares present and voting thereon.
American Spectrum shares offered in the consolidation will be fully paid
and nonassessable when issued.
Preferred Stock
Under the articles of incorporation, the Board of Directors may from time
to time establish and issue one or more series of preferred stock without
stockholder approval. The Board of Directors may classify or reclassify any
unissued preferred stock by setting or changing the number, designation,
preference, conversion or other rights, voting powers, restrictions, limitations
as to dividends, qualifications and terms or conditions of redemption of such
series. Because the Board of Directors has the power to establish the
preferences and rights of each series of preferred stock, it may afford the
holders of any series of preferred stock preferences, powers and rights, voting
or otherwise, senior to the rights of stockholders.
Ownership Limits and Restrictions on Transfer
If American Spectrum elects REIT status:
o not more than 50% in value of outstanding equity securities of all
classes, or equity shares, may be owned, directly or indirectly, by five
or fewer individuals, as defined in the Code to include certain entities,
during the last half of a taxable year;
o the equity shares must be beneficially owned by 100 or more persons during
at least 335 days of a taxable year of 12 months or during a proportionate
part of a shorter taxable year; and
o American Spectrum must satisfy certain complex requirements with respect
to the nature of its income and assets for it to maintain such REIT
status.
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To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding equity shares, American Spectrum's amended and restated
articles of incorporation provide generally that no holder may own, or be deemed
to own by virtue of certain attribution provisions of the Code, more than 5% of
the issued and outstanding equity shares of American Spectrum referred to as the
ownership limit. This limitation will not apply to holders who own more than the
ownership limit at the date of the consummation of the consolidation. The Board
of Directors, upon receipt of a ruling from the Internal Revenue Service, an
opinion of counsel, or other evidence satisfactory to the Board of Directors, in
its sole discretion, may waive or change, in whole or in part, the application
of the ownership limit with respect to any person that is not an individual, as
defined in Section 542(a)(2) of the Code. In connection with any such waiver or
change, the Board of Directors may require such representations and undertakings
from such person or affiliates and may impose such other conditions, as the
Board deems necessary, advisable or prudent, in its sole discretion, to
determine the effect, if any, of the proposed transaction or ownership of equity
shares on American Spectrum's status as a REIT for federal income tax purposes.
In addition, the Board of Directors, from time to time, may increase the
ownership limit, except that: (i) the ownership limit may not be increased and
no additional limitations may be created if, after giving effect thereto,
American Spectrum would be "closely held" within the meaning of Section 856(h)
of the Code; and (ii) the ownership limit may not be increased to a percentage
that is greater than 5%. This limitation does not apply to existing stockholders
who own more than 5% of American Spectrum shares at the effective date of the
consolidation. Prior to any modification of the ownership limit, the Board of
Directors will have the right to require such opinions of counsel, affidavits,
undertakings or agreements as it may deem necessary, advisable or prudent, in
its sole discretion, in order to determine or ensure American Spectrum's status
as a REIT.
The ownership limit will not be automatically removed even if the REIT
provisions of the Code are changed so that they no longer contain any ownership
concentration limitation or if the ownership concentration limit is increased.
In addition to preserving American Spectrum's status as a REIT for federal
income tax purposes, the ownership limit may prevent any person or small group
of persons from acquiring control of American Spectrum.
Pursuant to the articles of incorporation, if any purported transfer of
preferred stock or common stock of American Spectrum or any other event would
otherwise result in any person violating the ownership limit or such other limit
as provided in the articles of incorporation or as otherwise permitted by the
Board of Directors, then any such purported transfer will be void and of no
force or effect with respect to the purported transferee as to that number of
shares in excess of the ownership limit or such other limit. We refer to the
purported transferee as the prohibited transferee and the shares in excess of
the ownership limit as the excess shares. The prohibited transferee shall
acquire no right or interest in the excess shares. Any excess shares will be
transferred automatically by operation of law, to a trust, the beneficiary of
which will be a qualified charitable organization selected by American Spectrum.
The transferee will be a person unaffiliated with American Spectrum who is
designated by American Spectrum. The automatic transfer will be effective as of
the close of business on the business day prior to the date of the transfer.
Within 20 days of receiving notice from American Spectrum of the transfer of
shares to the trust, the trustee of the trust will be required to sell the
excess shares to a person or entity who could own such shares without violating
the ownership limit or as otherwise permitted by the Board of Directors. The
trustee will distribute to the prohibited transferee an amount equal to the
lesser of the price paid by the prohibited transferee for the excess shares or
the sales proceeds received by the trust for such excess shares.
In the case of any excess shares resulting from any event other than a
transfer or from a transfer for no consideration, such as a gift, the trustee
will be required to sell the excess shares to a qualified person or entity and
distribute to the prohibited owner an amount equal to the lesser of the market
price of the excess shares as of the date of the event or the sales proceeds
received by the trust for the excess shares. In either case, any proceeds in
excess of the amount distributable to the prohibited transferee or prohibited
owner, as applicable, will be distributed to the beneficiary. Prior to a sale of
any of the excess shares by the trust, the trustee will be entitled to receive,
in trust for the beneficiary, all dividends and other distributions paid by
American Spectrum with respect to the excess shares, and also will be entitled
to exercise all voting rights with respect to the excess shares. Subject to the
MGCL,
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effective as of the date that such shares have been transferred to the trust,
the trustee shall have the authority, in its sole discretion to: (1) rescind as
void any vote cast by a prohibited transferee or prohibited owner, as
applicable, prior to the discovery by American Spectrum that such shares have
been transferred to the trust; and (2) recast such vote in accordance with the
desires of the trustee acting for the benefit of the Beneficiary. However, if
American Spectrum has already taken irreversible corporate action, then the
trustee shall not have the authority to rescind and recast such vote. Any
dividend or other distribution paid to the prohibited transferee or prohibited
owner prior to the discovery by American Spectrum that such shares had been
automatically transferred to a trust as described above, will be required to be
repaid to the trustee upon demand for distribution to the beneficiary. In the
event that the transfer to the trust as described above is not automatically
effective for any reason to prevent violation of the ownership limit or such
other limit as provided in the articles of incorporation or as otherwise
permitted by the Board of Directors, then the articles of incorporation provide
that the transfer of the excess shares will be voided.
In addition, American Spectrum shares held in trust shall be deemed to
have been offered for sale to American Spectrum, or its designee, at a price per
share equal to the lesser of: (1) the price per share on the transaction that
resulted in such transfer to the trust, or, in the case of a gift, the market
price at the time of the gift; and (2) the market price on the date American
Spectrum, or its designee, accepts such offer. American Spectrum shall have the
right to accept such offer until the trustee has sold the shares of stock held
in the trust. Upon such a sale to American Spectrum, the interest of the
beneficiary in the shares sold shall terminate and the trustee shall distribute
the net proceeds of the sale to the prohibited transferee or prohibited owner.
If any purported transfer of shares of preferred stock or common stock
would cause American Spectrum to be beneficially owned by fewer than 100
persons, such transfer will be null and void in its entirety and the intended
transferee will acquire no rights to the stock.
All certificates issued by American Spectrum representing equity shares
will bear a legend referring to the restrictions described above.
The articles of incorporation of American Spectrum also provides that all
persons who own, directly or by virtue of the attribution provisions of the
Code, more than 5% of the outstanding equity shares, or such lower percentage as
may be set by the Board of Directors, must file an affidavit with American
Spectrum containing information specified in the amended and restated articles
of incorporation no later than January 31st of each year. In addition, each
stockholder, upon demand, shall be required to disclose to American Spectrum in
writing such information with respect to the direct, indirect and constructive
ownership of shares as the directors deem necessary to comply with the
provisions of the Code, as applicable to a REIT, or to comply with the
requirements of an authority or governmental agency.
The ownership limitations described above may have the effect of
precluding acquisitions of control of American Spectrum by a third party.
Registrar and Transfer Agent
The Registrar and Transfer Agent for the American Spectrum shares is ____.
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DESCRIPTION OF THE NOTES
The notes will be issued under the Indenture between American Spectrum and
___, as trustee. We refer to ___________ as the Indenture Trustee. A copy of the
form of Indenture is filed as an exhibit to the Registration Statement of which
this consent solicitation is a part. The note terms include those provisions
contained in the Indenture and those made part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended. The notes are subject to all such
terms, and, if you are to be a holder of notes, we refer you to the Indenture
and the Trust Indenture Act for a statement thereof. The following summary of
certain provisions of the Indenture does not purport to be complete and is
subject to and qualified in its entirety by reference to the Indenture. As used
in this section, the term American Spectrum means American Spectrum and all of
its subsidiaries, unless otherwise expressly stated or the context otherwise
requires.
General
A separate series of notes will be issued pursuant to the Indenture to the
limited partners of each fund who elect to receive notes in exchange for their
units in connection with the consolidation. The terms of each series of notes
will be substantially identical. The notes will be direct, senior unsecured and
unsubordinated obligations of American Spectrum and will rank pari passu with
each other and with all other unsecured and unsubordinated indebtedness of
American Spectrum from time to time outstanding. The notes will be recourse
obligations of American Spectrum, but the holders thereof will not have recourse
against any stockholder, officer or director of American Spectrum. The notes
will be effectively subordinated to mortgages and other secured indebtedness of
American Spectrum to the extent of the value of the property securing such
indebtedness. As of June 30, 2000, on a pro forma basis assuming American
Spectrum had acquired all of the funds, American Spectrum would have had
aggregate consolidated debt of approximately $176 million, to which the notes
were effectively subordinated or which ranked equal with such notes.
The notes will mature on _________ ___, ______, which is approximately
eight years following the currently expected date that the consolidation will be
completed.
Except as described under "--Limitation on Incurrence of Debt," the
Indenture does not contain any other provisions that would limit the ability of
American Spectrum to incur indebtedness or that would afford holders (as defined
below) of the notes protection in the event of:
o a highly leveraged or similar transaction involving American
Spectrum or the management of American Spectrum (for example, a
leveraged buy-out);
o a change of control of American Spectrum; or
o a reorganization, restructuring, merger or similar transaction
involving American Spectrum that may adversely affect the
noteholders.
In addition, subject to the limitations set forth under "--Merger,
Consolidation or Sale," American Spectrum may, in the future, enter into certain
transactions such as the sale of all or substantially all of its assets or the
merger or consolidation of American Spectrum that would increase the amount of
American Spectrum's indebtedness or substantially reduce or eliminate American
Spectrum's assets, which may have an adverse effect on American Spectrum's
ability to service its indebtedness, including the notes. American Spectrum and
its management have no present intention of engaging in a highly leveraged or
similar transaction involving American Spectrum.
The notes will be issued in fully registered form. This means that for
each limited partner who elects to receive notes, such limited partner will be
issued a note in his, her or its name. In the event that a limited partner
wishes to transfer the note, the limited partner will be required to produce the
note prior to transfer and endorse the note over to the transferee in the manner
required by the transferee.
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Principal and Interest
The principal amount of the notes with respect to each fund will be equal
to 96.14% of your portion of the Exchange Value of the American Spectrum shares,
that would otherwise have been paid to your fund.
The notes will bear interest at a fixed rate of interest equal to ___% per
annum, which was determined based on 120% of the applicable federal rate as of
________ __, 2000. Interest will accrue from the closing of the consolidation or
from the immediately preceding Interest Payment Date (as defined below) to which
interest has been paid, payable semi-annually in arrears on each June 15 and
December 15, commencing __________ ___, 2000 (each, an Interest Payment Date),
and on the Maturity Date, to the persons in whose names the notes are registered
in the security register for the notes at the close of business on the date 14
calendar days prior to such payment day regardless of whether such day is a
Business Day, as defined in the Indenture. If any interest payment date falls on
a day that is not a Business Day, payment will be made on the next Business Day
and no additional interest will be paid. Interest on the notes will be computed
on the basis of a 360-day year of twelve 30-day months.
The principal of each note payable on the Maturity Date will be paid
against presentation and surrender of such note at an office or agency
maintained by American Spectrum in _______________ (the Paying Agent) in United
States dollars. Initially, the Indenture Trustee will act as Paying Agent.
Redemption
Notes of any series may be redeemed at any time at the option of American
Spectrum, in whole or from time to time in part, at a redemption price equal to
the sum of the principal amount of the notes being redeemed plus accrued
interest thereon to the redemption date, which we refer to as the Redemption
Price.
In the event that, following the closing of the consolidation, American
Spectrum:
(1) sells or otherwise disposes of any property owned by a fund immediately
prior to the consolidation and realizes net cash proceeds in excess of:
(a) the amount required to repay mortgage indebtedness outstanding
immediately prior to the consolidation secured by such property or
otherwise required to be applied to the reduction of indebtedness of
American Spectrum; and
(b) the costs incurred by American Spectrum in connection with such sale
or other disposition; or
(2) refinances, whether at maturity or otherwise, any indebtedness secured by
any property owned by the fund immediately prior to the consolidation and
realizes net cash proceeds in excess of the amount of indebtedness secured
by such property at the time of the consolidation, calculated prior to any
repayment or other reduction in the amount of such indebtedness in the
consolidation, and the costs incurred by American Spectrum in connection
with such refinancing (in either case, Net Cash Proceeds),
American Spectrum will be required within 90 days of the receipt of the total
Net Cash Proceeds to redeem at the Redemption Price an aggregate amount of
principal of the particular series of the notes which were issued to the holders
who were limited partners of such fund prior to the consolidation equal to 80%
of such Net Cash Proceeds.
If the Paying Agent, other than American Spectrum or an affiliate thereof,
holds, on the redemption date of any notes, money sufficient to pay such notes,
then on and after that date such notes will cease to be outstanding and interest
on them will cease to accrue.
Notice of any optional or mandatory redemption of any notes will be given
to holders at their addresses, as shown in the security register for the notes,
not more than 60 nor less than 30 days prior to the date fixed for
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redemption. The notice of redemption will specify, among other items, the
Redemption Price and the principal amount of the notes held by such Holder to be
redeemed.
If less than all the notes of any series are to be redeemed, the Indenture
Trustee shall select, in such manner as it shall deem fair and appropriate, the
notes to be redeemed in whole or in part.
Proceeds from Sale of Properties Formerly Owned by the Funds
In the event that, following the closing of the consolidation, American
Spectrum sells or otherwise disposes of any property owned by a fund immediately
prior to the consolidation and realizes Net Cash Proceeds, in excess of:
o the amount required to repay mortgage indebtedness outstanding
immediately prior to the consolidation secured by such property or
otherwise required to be applied to the reduction of indebtedness of
American Spectrum; and
o the costs incurred by American Spectrum in connection with such sale
or other disposition,
American Spectrum will be required within 90 days of the receipt of the
total Net Cash Proceeds to redeem at the redemption price an aggregate amount of
principal of the particular series of the notes which were issued to the holders
who were limited partners of such fund prior to the consolidation equal to 80%
of such Net Cash Proceeds.
Proceeds from Refinancings of Properties Formerly Owned by the Funds
In the event that, following the closing of the consolidation, American
Spectrum refinances, whether at maturity or otherwise, any indebtedness secured
by any property owned by a fund immediately prior to the consolidation and
realizes Net Cash Proceeds in excess of:
o the amount of indebtedness secured by such property at the time of
the consolidation, calculated prior to any repayment or other
reduction in the amount of such indebtedness in the consolidation;
and
o the costs incurred by American Spectrum in connection with such
refinancing,
American Spectrum will be required within 90 days of the receipt of the
total Net Cash Proceeds to redeem at the redemption price an aggregate amount of
principal of the particular series of the notes which were issued to the holders
who were limited partners of such fund prior to the consolidation equal to 80%
of such Net Cash Proceeds.
Limitation on Incurrence of Indebtedness
Pursuant to the terms of the Indenture, American Spectrum will not, and
will not permit any of its subsidiaries to, incur any indebtedness, including
indebtedness that is acquired as the result of acquisitions, other than
intercompany indebtedness that is subordinate in right of payment to the notes,
if immediately after giving effect to the incurrence of such indebtedness, the
aggregate principal amount of all outstanding indebtedness of American Spectrum
and its subsidiaries on a consolidated basis, determined in accordance with
GAAP, is greater than 70% of American Spectrum's Total Assets, as defined below.
As used in the Indenture and the description thereof herein:
Appraised Real Estate Value means the appraised value of our properties or
any property subsequently purchased by American Spectrum, as determined by
Stanger or another independent real estate appraiser retained by American
Spectrum.
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Subsidiary means:
a corporation, partnership, limited liability company, trust, REIT or
other entity a majority of the voting power of the voting equity
securities of which are owned, directly or indirectly, by American
Spectrum or by one or more subsidiaries of American Spectrum;
a partnership, limited liability company, trust, REIT or other entity not
treated as a corporation for federal income tax purposes, a majority of
the equity interests of which are owned, directly or indirectly, by
American Spectrum or a subsidiary of American Spectrum; or
one or more corporations which, either individually or in the aggregate,
would be Significant Subsidiaries (as defined in the Indenture, except
that the investment, asset and equity thresholds for purposes of this
definition shall be 5%), the majority of the value of the equity interests
of which are owned, directly or indirectly, by American Spectrum or by one
or more subsidiaries.
Total Assets means the sum of: (1) Appraised Real Estate Value; and (2)
all other assets (excluding intangibles) of American Spectrum and its
Subsidiaries determined on a consolidated basis (it being understood that the
accounts of Subsidiaries shall be consolidated with those of American Spectrum
only to the extent of American Spectrum's proportionate interest therein).
Merger, Consolidation or Sale
American Spectrum will not merge or consolidate with or into, or sell,
lease, convey, transfer or otherwise dispose of all or substantially all of its
property and assets, as an entirety or substantially as an entirety in one
transaction or a series of related transactions, to any individual, corporation,
limited liability company, fund, joint venture, association, joint stock
company, trust, REIT, unincorporated organization or government or any agency or
political subdivision thereof (any such entity, a Person), or permit any Person
to merge with or into American Spectrum, unless:
o either American Spectrum shall be the continuing Person or the
Person (if other than American Spectrum) formed by such
consolidation or into which American Spectrum is merged or that
acquired such property and assets of American Spectrum shall be an
entity organized and validly existing under the laws of the United
States of America or any state or jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and
delivered to the Indenture Trustee, all of the obligations of
American Spectrum on the notes and under the Indenture;
o immediately after giving effect, on a pro forma basis, to such
transaction, no default or event of default, as described below,
shall have occurred and be continuing; and
o American Spectrum will have delivered to the Indenture Trustee an
officers' certificate stating that such consolidation, merger or
transfer and such supplemental indenture complies with such
conditions.
Events of Default, Notice and Waiver
The following events are Events of Default with respect to the notes of
any series:
o default for 30 days in the payment of any installment of interest on
any note of such series;
o default in the payment of the principal of any note when due and
payable at maturity, redemption, by acceleration or otherwise;
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o default in the payment of any mandatory redemption of principal on
or before the date 90 days after the receipt of the total Net Cash
Proceeds from the applicable sale or other disposition or
refinancing of a property giving rise to the obligation to make such
redemption;
o default in the performance of any other covenant or agreement of
American Spectrum contained in the Indenture, such default having
continued for 60 days after written notice as provided in the
Indenture; and
o certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator, assignee or trustee of
American Spectrum or any Significant Subsidiary or any of their
respective property. The term Significant Subsidiary means any
Subsidiary which is a "significant subsidiary" of American Spectrum
as defined by Regulation S-X promulgated under the Securities Act.
If an Event of Default under the Indenture occurs and is continuing, then
in every such case other than a bankruptcy-related Event of Default as described
above, in which case the principal amount of the notes shall become immediately
due and payable, the Indenture Trustee or the holders of not less than 25% in
principal amount of the outstanding notes of any series may declare the
principal amount of all of the notes of any series to be due and payable
immediately by written notice thereof to American Spectrum, and to the Indenture
Trustee if given by the holders. However, at any time after such a declaration
of acceleration with respect to any series of notes has been made, but before a
judgment or decree for payment of the money due has been obtained by the
Indenture Trustee, the holders of not less than a majority of the principal
amount of outstanding notes of any series may rescind and annul such declaration
and its consequences if: (1) American Spectrum shall have paid or deposited with
the Indenture Trustee all required payments of the principal of and interest on
the notes of any series, plus certain fees, expenses, disbursements and advances
of the Indenture Trustee; and (2) all Events of Default, other than the
nonpayment of accelerated principal of (or specified portion thereof) and
interest on the notes have been cured or waived. The Indenture provides that the
holders of not less than a majority of the principal amount of the outstanding
notes of a series may waive any past default with respect to such series and its
consequences, except a default in the payment of the principal of or interest on
any note, or in respect of a covenant or provision contained in the Indenture
that cannot be modified or amended without the consent of the holder of each
outstanding note affected thereby.
The Indenture Trustee will be required to give notice to noteholders
within 90 days of a default under the Indenture unless such default has been
cured or waived; provided, however, that the Indenture Trustee may withhold
notice to the holders of any default, except a default in the payment of the
principal of or interest on any note or in the payment of any mandatory
redemption installment in respect of any note, if specified Responsible Officers
(as defined in the Indenture) of the Indenture Trustee determine in good faith
such withholding to be in the interest of such holders.
The Indenture provides that no noteholders may institute any proceeding,
judicial or otherwise, with respect to the Indenture or for the appointment of a
receiver or trustee, or for any other remedy thereunder, except in the case of
failure of the Indenture Trustee, for 60 days, to act after it has received a
written request to institute proceedings in respect of an Event of Default from
the holders of not less than 25% in principal amount of the outstanding notes,
as well as an offer of indemnity reasonably satisfactory to it. This provision
will not prevent, however, any noteholders from instituting suit for the
enforcement of payment of the principal of and interest on such notes at the
respective due dates thereof.
Subject to provisions in the Indenture relating to its duties in case of
default, the Indenture Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
holders of any outstanding notes under the Indenture, unless such holders shall
have offered to the Indenture Trustee thereunder reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding notes shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
of exercising any trust or power conferred upon the Indenture Trustee.
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However, the Indenture Trustee may refuse to follow any direction which is in
conflict with any law or the Indenture, which may involve the Indenture Trustee
if the Indenture Trustee in good faith determines that the proceeding will
involve the Indenture Trustee in personal liability or which may be unduly
prejudicial to the holders of notes of such series not joining therein. Within
120 days after the close of each fiscal year, American Spectrum must deliver to
the Indenture Trustee a certificate, signed by one of several specified officers
of American Spectrum, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof.
Modification of the Indenture
Modifications and amendments of the Indenture will be permitted to be made
by American Spectrum and the Indenture Trustee without the consent of any holder
of notes for any of the following purposes:
o to cure any ambiguity, defect or inconsistency in the Indenture;
o to evidence the succession of another Person to American Spectrum as
obligor under the Indenture;
o to permit or facilitate the issuance of the notes in uncertificated form;
o to make any change that does not adversely affect the rights of any holder
of notes;
o to provide for the issuance of and establish the form and terms and
conditions of the notes of any series as permitted by the Indenture;
o to add to the covenants of American Spectrum or to add Events of Default
for the benefit of holders or to surrender any right or power conferred
upon American Spectrum in the Indenture;
o to evidence and provide for the acceptance of appointment by a successor
Indenture Trustee or facilitate the administration of the trusts under the
Indenture by more than one Indenture Trustee;
o to provide for guarantors or collateral for the notes of any series; or
o to comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Modifications and amendments of the Indenture, other than those described
above, will be permitted to be made only with the consent of the holders of not
less than a majority in principal amount of all outstanding notes which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of each noteholder affected
thereby:
o change the stated maturity of the principal of, any installment of
interest on, any note;
o reduce the principal amount of or interest on any note;
o change the place of payment, or the coin or currency, for the payment of
principal of or interest on any note;
o impair the right to institute suit for the enforcement of any payment on
or with respect to any note;
o waive a default in the payment of principal of or interest on the notes,
other than a recission of acceleration of the notes of any series and a
waiver of the payment default that resulted from such acceleration, as
provided in the Indenture; or
o reduce the percentages of outstanding notes of any series necessary to
modify or amend the Indenture or to waive compliance with certain
provisions thereof or certain defaults and consequences.
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The Indenture provides that the holders of not less than a majority in
principal amount of outstanding notes have the right to waive compliance by
American Spectrum with certain covenants in the Indenture.
Satisfaction and Discharge
American Spectrum may discharge certain obligations to noteholders under
the notes that have not already been delivered to the Indenture Trustee for
cancellation and that either have become due and payable or will become due and
payable within one year, or scheduled for redemption within one year, by
irrevocably depositing with the Indenture Trustee, in trust, funds in an amount
sufficient to pay the entire indebtedness on such notes in respect of principal
and interest to the date of such deposit (if such notes have become due and
payable) or to the stated maturity or redemption date, as the case may be, and
delivering to the Indenture Trustee an officers' certificate and a legal opinion
stating that the conditions precedent to such discharge have been complied with.
No Conversion Rights
The notes will not be convertible into or exchangeable for any capital
stock of American Spectrum.
Governing Law
The Indenture will be governed by and shall be construed in accordance
with the laws of the State of New York.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax issues associated
with the consolidation was prepared by Proskauer Rose LLP, and is based upon the
laws, regulations, and reported judicial and administrative rulings and
decisions in effect as of the date of this consent solicitation, all of which
are subject to change, retroactively or prospectively, and to possibly differing
interpretations. All statements including legal conclusions regarding material
federal income tax issues are the opinion of Proskauer Rose LLP, unless stated
otherwise. This discussion does not purport to deal with all of the federal
income or other tax consequences applicable to you in light of your particular
investment or other circumstances.
American Spectrum has not requested a ruling from the Internal Revenue
Service (or IRS) or any other tax authority on the federal, state or local tax
considerations relevant to the operation of American Spectrum, the
consolidation, or the ownership or disposition of American Spectrum shares or
notes. Proskauer Rose LLP has rendered certain opinions discussed herein and
believes that if the IRS were to challenge the conclusions expressed in the
opinions, the conclusions should prevail in court. Opinions of counsel are not
binding on the IRS or on the courts, however, and we cannot predict whether the
conclusions reached by Proskauer Rose LLP would be sustained in court.
You should consult your own tax advisor in determining the federal, state,
local, foreign and other tax consequences to you of the receipt, ownership, and
disposition of American Spectrum shares, or notes (if you are eligible for and
choose the notes option). You should also consult your own tax advisor regarding
the tax treatment of a REIT and potential changes in applicable tax laws.
Material Tax Differences between the Ownership of Units and American Spectrum
Shares
If your fund consolidates with American Spectrum you will receive American
Spectrum shares unless you elect the notes option.
If American Spectrum consolidates with your fund and you receive American
Spectrum shares, your ownership of American Spectrum shares will affect the
character and amount of income reportable by you in the future. Because each
fund is a partnership for federal income tax purposes, it is not subject to
taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum, as a stockholder of American Spectrum, you
will be taxed based on the amount of distributions you receive from American
Spectrum. Each year American Spectrum will send you a Form 1099-DIV reporting
the amount of taxable and nontaxable distributions paid to you during the
preceding year. The taxable portion of these distributions depends on the amount
of American Spectrum's earnings and profits. Because the consolidation may be a
partially taxable transaction, American Spectrum's tax basis in the acquired
properties may be higher than the funds' tax basis had been in the same
properties. At the same time, however, American Spectrum may be required to
utilize a slower method of depreciation with respect to some of its properties
than the method of depreciation these funds use. As a result, American
Spectrum's tax depreciation from the acquired properties may differ from the
funds' tax depreciation. Accordingly, under certain circumstances, even if
American Spectrum were to make the same level of distributions as your fund, a
different portion of the distributions could constitute taxable income to you.
In addition, the character of this income to you as a stockholder of American
Spectrum does not depend on its character to American Spectrum. The income will
generally be ordinary dividend income to you and will be classified as portfolio
income under the passive loss rules, except with respect to capital gains
dividends, discussed below. Furthermore, if American Spectrum incurs a taxable
loss, the loss will not be passed through to you. For certain other differences
attributable to American Spectrum's status as a REIT, see "--Taxation of
American Spectrum" and "--Taxation of Stockholders--Taxable Domestic
Stockholders" below.
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Tax Consequences of the Consolidation
Tax Consequences of Your Fund's Transfer of Assets to American Spectrum.
If your fund consolidates with American Spectrum, your fund will merge with
American Spectrum, the Operating Partnership or a subsidiary of the Operating
Partnership. For federal income tax purposes, American Spectrum intends to take
the position that the merger of American Spectrum and your fund will be treated
as a transfer of assets of your fund to American Spectrum in exchange for shares
and a subsequent distribution in liquidation of such shares. Consistent with
this position, for those limited partners who elect the notes option, the
transaction will be viewed as a sale of their interest in your fund to American
Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal the funds' basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated among
such assets in accordance with their relative fair market values as described in
section 1060 of the Code. As a result, American Spectrum's basis in each
acquired property will differ from the fund's basis therein, and the properties
will be subject to different depreciable periods and methods as a result of the
consolidation. These factors could result in an overall change, following the
consolidation, in the depreciation deductions attributable to the properties
acquired from the funds.
Tax Consequences to Limited Partners Who Receive Shares. Each fund intends
to report the consolidation on the basis that it qualifies for non-recognition
treatment under Section 351 of the Code. In general, under Section 351(a) of the
Code, a person recognizes no gain or loss is if:
o property is transferred to a corporation by one or more individuals
or entities in exchange for the stock of that corporation; and
o immediately after the exchange, such individuals or entities are in
control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock possessing
at least 80% of the total combined voting power of all classes of stock entitled
to vote and at least 80% of the total number of shares of all other classes of
stock of the corporation. American Spectrum has represented to Proskauer Rose
LLP that, following the consolidation, the partners of the funds together with
other qualified contributors, will own stock possessing at least 80% of the
total combined voting power of all classes of American Spectrum stock entitled
to vote and at least 80% of the total number of shares of all other classes of
the stock of American Spectrum. In addition, under Section 351(e) of the Code
and Treasury Regulations promulgated thereunder, transfers to investment
companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code because of the length of
time until the contemplated REIT election as well as the uncertainty as to
whether such election will be made. Accordingly, American Spectrum and the funds
will take the position that the funds will not recognize gain upon their
transfer of assets to American Spectrum except with respect to Sierra Pacific
Development Fund III and Nooney Real Property Investors - Two, L.P.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
each fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain. Proskauer Rose LLP is not opining as to whether gain
will be recognized by the contributing funds in the consolidation.
Sierra Pacific Development Fund III and Nooney Real Property
Investors-Two, L.P. will recognize gain in addition to any gain resulting from
an IRS challenge. The gain will be equal to the amount by which the liabilities
assumed exceed the bases of the assets transferred, and your share of the gain
will be allocated to limited partners of these funds. The estimated amount of
the gain is set forth in the supplement for these funds.
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Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of Your Fund."
Character of Gain or Loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same.
Tax Consequences of the Liquidation and Termination of Your Fund. If you
elect to receive shares in the consolidation your fund should be deemed to have
sold its assets to American Spectrum for shares followed by a distribution in
liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution and you are a
partner in Sierra Pacific Development Fund III or Nooney Real Property
Investors-Two, L.P. your fund will recognize gain to the extent that the
liabilities assumed by American Spectrum exceed the bases of the assets your
fund contributed to American Spectrum. See "Tax Consequences to Limited Partners
who Receive Shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by the transferor fund. Such gain,
if any, will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your sale
of your interests in your fund. However, you may be able to report income from
the notes based upon the installment method. The installment method permits you
to pay tax as the principal amount is paid on your notes. See "Tax Consequences
to Limited Partners Who Receive Notes." Your basis in the notes received in the
distribution will be the same as your basis in your units, after adjustment for
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your fund, plus any gain recognized in the distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your fund
are held for investment and not for resale, the consolidation will not result in
the recognition of material unrelated business taxable income by you if you are
a tax-exempt investor that does not hold units either as a "dealer" or as
debt-financed property within the meaning of section 514, and you are not an
organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss
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on the consolidation. In addition, the consolidation may result in the
recognition by tax-exempt partners of material unrelated business taxable income
to the extent the properties owned by the funds are encumbered by debt. However,
this is not applicable to educational organizations, qualified pension,
profit-sharing and stock bonus plans and certain closely held real property
holding companies.
Tax Issues Relating to Foreign Limited Partners. The rules governing U.S.
federal income taxation of nonresident alien individuals and foreign entities
are complex, and we will not try here to provide more than a brief summary of
certain rules relating to the consolidation. If you are a foreign limited
partner, you should consult your tax advisors to determine the impact of the
consolidation under the tax laws applicable to you, including any reporting
requirements.
The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)
introduced special rules applicable to foreign investors in United States real
property and partnerships owning United States real property. FIRPTA generally
subjects foreign investors to United States taxation at regular United States
rates on the gain from the sale by such foreign investors of United States real
property interests. These include:
o United States real estate; and
o interests in partnerships holding United States real estate. FIRPTA
also imposes withholding on such sales.
Section 702(b) of the Code determines the character of an item included in
a partner's distributive share of gain as if the item were realized directly by
the partner from the source from which the item was realized by the partnership.
Therefore, if a partnership sells a United States real property interest, FIRPTA
should apply as if the foreign partner had sold the United States real property
interest directly. Substantially all of the assets in the funds consist of
United States real property interests. Accordingly, you should take into account
your distributive share of any gain or loss recognized by your fund on its
disposition of the United States real property interests in the consolidation.
Consequently, you will be subject to tax upon your distributive share of any
such gain.
Section 1446 requires partnerships to withhold at a 39.6% rate with
respect to noncorporate foreign partners and at a 35% rate with respect to
corporate foreign partners on "effectively connected taxable income" allocable
to foreign partners. A foreign partner's distributive share of the income from a
disposition of a United States real property interest is subject to withholding
under section 1446 because FIRPTA characterizes such gain as effectively
connected taxable income. Any amounts withheld with respect to the distributive
share of a foreign partner are treated as a credit against the United States tax
liability of such partner for the taxable year to which the withholding relates.
Withheld amounts are treated as a distribution on the last day of the
partnership taxable year for which the withheld amount was paid (or, if earlier,
on the last day on which the partner owned an interest in the partnership).
To satisfy the above withholding obligation with respect to the
consolidation, your fund may retain and place in an escrow account, or similar
arrangement, American Spectrum shares or notes to be received by any foreign
limited partner, pending a sale of a portion of American Spectrum shares or
notes sufficient to satisfy the withholding requirement or, alternatively, the
receipt of an amount of cash from such foreign limited partner sufficient to
satisfy the withholding requirement.
Taxation of Noteholders
Stated Interest. If you use the accrual method of tax accounting, and you
receive notes from your cash method fund you must include the value of the note
in income when received. If you are a cash method taxpayer and receive notes in
the consolidation, under general principles of the Code, you must include stated
interest in income as it is actually or constructively received.
Payments of interest income to you will constitute portfolio income, not
passive activity income for purposes of section 469 of the Code. Accordingly,
such income will not be subject to reduction by your losses from
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passive activities (e.g., any interest in a trade or business held as a limited
partner in which you do not materially participate) if you are subject to the
passive activity loss rules. Income attributable to interest payments may be
offset by investment expense deductions, however, subject to the limitation
that, if you are an individual investor, you may only deduct miscellaneous
itemized deductions (including investment expenses) to the extent such
deductions exceed two percent of your adjusted gross income.
Receipt of Principal. Noteholders will recognize gain or loss when
American Spectrum makes payments of principal under the notes. The amount of
gain or loss recognized at the time the principal payments are made is equal to
the amount of the principal payment multiplied by a fraction, the denominator of
which is the face amount of the note and the numerator of which is the remainder
of the face amount of the note less the noteholder's basis in the note. If,
however, the notes are redeemed in part prior to the Maturity Date, the amount
of gain or loss recognized at the time the principal payments are made will be
equal to the difference between the amount of the principal payments made and a
proportionate amount of the noteholder's basis in the notes. To the extent a
noteholder's adjusted tax basis in his or her notes is greater than the face
amount of the notes, the excess should be treated as a capital loss upon the
retirement or maturity of the notes.
Disposition of Notes. In general, if you are a noteholder, you will
recognize gain or loss upon the sale, exchange, redemption or other taxable
disposition of a note. Such gain is equal to the difference between:
o the amount of cash and the fair market value of property received
(except, for cash method taxpayers, to the extent attributable to
the payment of accrued interest); and
o your tax basis in the note. Any such gain or loss will generally be
long-term capital gain or loss, provided the note was a capital
asset in your hands and was held for more than one year.
If the face amount of the notes that you hold at the end of the taxable
year (together with any other installment obligations that you receive during
the year) exceeds $5 million, you may be required to pay to the IRS interest at
the federal underpayment rate based on a portion of the tax liability that you
have deferred.
Taxation of American Spectrum
General. Until American Spectrum elects to be taxed as a REIT American
Spectrum will be taxed as an ordinary corporation and it will be subject to
federal income tax on its taxable income at regular corporate rates. Any
distribution by American Spectrum to its stockholders will be subject to tax as
a dividend at stockholder's respective dividend rates. Beginning with the tax
year ending on December 31, 2002, American Spectrum intends to elect to be taxed
as a REIT for federal income tax purposes, as defined in sections 856 through
860 of the Code. American Spectrum believes that it is organized and will
operate so as to qualify as a REIT. We cannot predict, however, whether American
Spectrum will continue to succeed in qualifying as a REIT. The provisions of the
Code pertaining to REITs are highly technical and complex. Accordingly, we urge
you to review this summary with your tax advisor as well as the applicable Code
sections, rules and regulations issued thereunder, and administrative and
judicial interpretations thereof.
If American Spectrum qualifies as a REIT for federal income tax purposes,
it generally will not be subject to federal corporate income tax on net income
that is currently distributed to American Spectrum stockholders. This treatment
substantially eliminates the "double taxation" that generally results from
investments in a corporation. Double taxation is tax imposed at the corporate
level when earned and once again at the stockholder level when distributed.
Certain Corporate Level Taxation. Regardless of whether American Spectrum
qualifies as a REIT, American Spectrum will be subject to federal income tax in
the following circumstances:
o American Spectrum will be taxed at regular corporate rates on any
undistributed real estate investment trust taxable income, including
undistributed net capital gains.
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o American Spectrum may be subject to the alternative minimum tax on
its items of tax preference.
o If American Spectrum has net income from foreclosure property, it
will be subject to tax on this income at the highest corporate rate.
Foreclosure property is real property, and any attached personal
property acquired as a result of default on a lease of, or on a loan
secured by, this property.
o If American Spectrum has net income derived from a prohibited
transaction, this income will be subject to a 100% tax. A prohibited
transaction is a sale or other disposition of property that is held
primarily for sale to customers in the ordinary course of business.
o If American Spectrum should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain
other requirements have been met, it will be subject to a 100% tax
on the net income attributable to the greater of the amount by which
it fails the 75% or the 95% test.
o If, during each calendar year, American Spectrum fails to distribute
at least the sum of: (i) 85% of its real estate investment trust
ordinary income for such year; (ii) 95% of its real estate
investment trust capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, American
Spectrum will be subject to a four percent excise tax on the excess
of the required distribution over the amounts actually distributed.
o In addition, a REIT is subject to an entity level tax on the sale of
property it held before electing REIT status. During the 10-year
period following its qualification as a REIT, American Spectrum will
be subject to an entity level tax on the income it recognizes upon
the sale of assets including all the assets transferred to it as
part of the consolidation it held before electing REIT status in an
amount up to the amount of the built-in-gains at the time American
Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT for any taxable year and
relief provisions do not apply, American Spectrum will be subject to federal
income tax as an ordinary corporation on its taxable income at regular corporate
rates. To the extent that American Spectrum would be subject to tax liability
for any taxable year, the amount of cash available for satisfaction of its
liabilities and for distribution to its stockholders would be reduced. In
addition, if American Spectrum fails to qualify as a REIT, distributions made to
you, as a stockholder of American Spectrum, generally would be taxable as
ordinary income to the extent of current and accumulated earnings and profits.
In addition, subject to certain limitations, certain investors would be eligible
for the corporate dividends received deduction. We cannot guarantee that any
such distributions would be made. American Spectrum would not be eligible to
elect REIT status for the four taxable years after the taxable year it failed to
qualify as a REIT, unless its failure to qualify was due to reasonable cause and
not willful neglect and certain other requirements were satisfied.
Requirements for Qualification. As discussed more fully below, the Code
defines a REIT as a corporation, trust or association that:
o is managed by one or more trustees or directors;
o uses transferable shares or transferable certificates to evidence
beneficial ownership;
o would be taxable as a domestic corporation, but for sections 856
through 860 of the Code;
o is neither a financial institution nor an insurance company;
o has at least 100 persons as beneficial owners;
o is not closely held as defined in section 856(h) of the Code; and
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o satisfies certain other tests that are described below regarding the
nature of its assets and income and the amount of its distributions.
Following the consummation of the consolidation, American Spectrum will
satisfy the share ownership requirement set forth above. In order to ensure
continuing compliance with these ownership requirements, American Spectrum will
place certain restrictions on the transfer of its stock. These restrictions will
prevent further concentration of stock ownership. See "DESCRIPTION OF CAPITAL
STOCK -- Ownership Limits and Restrictions on Transfer." Moreover, to evidence
compliance with these requirements, American Spectrum must maintain records
which disclose actual ownership of its outstanding common stock. In fulfilling
its obligation to maintain these records, American Spectrum must demand written
statements each year from the record holders of designated percentages of its
common stock disclosing the actual owners of such common stock. A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of American Spectrum's records. Although a failure to make such demand to
ascertain the actual ownership of its shares will not cause a disqualification
of REIT status, a monetary fine will result. A stockholder failing or refusing
to comply with American Spectrum's written demand must submit with his or her
tax return a similar statement and certain other information.
In the case of a REIT that is a partner in a partnership, the Treasury
Regulations deem that the REIT owns its proportionate share of the assets of the
partnership and is entitled to the income of the partnership attributable to its
proportionate share. In addition, the assets and gross income (as defined in the
Code) of the partnership attributed to the REIT retain the same character as in
the hands of the partnership for purposes of section 856 of the Code, including
satisfying the gross income tests and the asset tests described below. Thus,
American Spectrum's proportionate share of the assets, liabilities and items of
income of the Operating Partnership will be treated as assets, liabilities and
items of income of American Spectrum for purposes of applying the asset and
gross income tests described below.
Income Tests. In order for American Spectrum to qualify as a REIT, there
are currently two requirements relating to American Spectrum's gross income that
must be satisfied annually.
o First, at least 75% of American Spectrum's gross income for each
taxable year must consist of temporary investment income or of
certain defined categories of income derived directly or indirectly
from investments relating to real property or the mortgages on real
property. Subject to various limitations, these categories include:
o rents from real property;
o interest on mortgages on real property;
o gain from the sale or other disposition of real property
(including interests in real property and in mortgages on real
property) not primarily held for sale to customers in the
ordinary course of business;
o income from foreclosure property;
o dividends or other distributions on, and gain (other than from
prohibited transactions) from the sale or disposition of,
shares in other REITs; and
o amounts received as consideration for entering into either
loans secured by real property or purchases or leases of real
property.
o Second, at least 95% of American Spectrum's gross income for each
taxable year must be derived either from income qualifying under the
75% test or from dividends, other types of interest and gain from
the sale or disposition of stock or securities, or from any
combination of the foregoing.
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American Spectrum expects to satisfy the two current tests for the taxable
year commencing January 1, 2002 and subsequent taxable years.
Much of American Spectrum's income will be derived from rent from its
properties. Rent from its properties qualifies as "rents from real property" in
satisfying the two gross income tests only if the following conditions are met:
o The rent must not be based in whole or in part, directly or
indirectly, on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a
fixed percentage or percentages of receipts or sales;
o Rents received from a tenant will not qualify as "rents from real
property" if American Spectrum, or a direct or indirect owner of 10%
or more of American Spectrum, owns, directly or constructively, 10%
or more of the tenant;
o If rent attributable to personal property leased in connection with
a lease of real property is greater than 15% of the total rent
received under the lease, then the portion of rent attributable to
the personal property will not qualify as "rents from real
property"; and
o For rents to qualify as "rents from real property," American
Spectrum generally must not operate or manage the property or
furnish or render services to the tenants of such property, except
that American Spectrum may directly perform services that are
"usually or customarily rendered" in connection with the rental of
space for occupancy, other than services that are considered to be
rendered to the occupant of the property. However, American Spectrum
is permitted to earn up to one percent of its gross income from
tenants, determined on a property-by-property basis, by furnishing
services that are noncustomary or provided directly to the tenants
without causing the rental income to fail to qualify as rents from
real property.
American Spectrum has represented to Proskauer Rose LLP that it will not
violate any of the four conditions specified above. Specifically, American
Spectrum expects that a substantial majority of its income will be derived from
leases of the type described in "American Spectrum's Business and the Properties
-- The Properties-Description of Leases". American Spectrum does not expect such
leases to generate income that would not qualify as rents from real property for
purposes of the 75% and 95% income tests.
If American Spectrum fails to satisfy one or both of the 75% or 95% tests
for any taxable year, it may still qualify as a REIT if:
o American Spectrum's failure is due to reasonable cause and not
willful neglect;
o It reports the nature and amount of each item of its income on a
schedule attached to its tax return for such year; and
o The reporting of any incorrect information is not due to fraud with
intent to evade tax.
Even if these three requirements are met and American Spectrum is not
disqualified as a REIT, however, a penalty tax would be imposed by reference to
the amount by which American Spectrum failed the 75% or 95% test (whichever
amount is greater).
Asset Tests. For tax years commencing January 1, 2002, at the end of each
quarter of American Spectrum's taxable year, at least 75% of the value of its
total assets must consist of "real estate assets," cash and cash items
(including receivables), and certain government securities. The balance of
American Spectrum's assets generally may be invested without restriction.
However, securities holdings with respect to any one issuer and not within the
75% class of assets generally must not, except with respect to a taxable REIT
subsidiary, exceed 5% of the value of
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American Spectrum's assets or 10% of an issuer's value or outstanding voting
securities. In addition, not more than 20% of the value of American Spectrum's
total assets may consist of the total value of all of its taxable REIT
subsidiaries. The term "real estate assets" includes:
o Real property;
o Interests in real property;
o Leaseholds of land or improvements thereon; and
o Mortgages on any such property or leasehold and any property
attributable to the temporary investment of new capital (but only if
this investment is in stock or a debt instrument and only for the
one-year period beginning on the date that American Spectrum
receives the capital).
After initially meeting the asset tests at the close of any quarter,
American Spectrum will not lose its status as a REIT for failure to satisfy the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter.
American Spectrum believes that it will satisfy the requirements for the
three asset tests described above. American Spectrum intends to maintain
adequate records of the value of its assets to ensure compliance with the asset
tests and to take such other actions within 30 days after the close of any
quarter as may be required to cure any noncompliance. In particular, at the end
of each calendar quarter, American Spectrum will limit and diversify its
ownership of securities as necessary to satisfy the REIT asset tests described
above.
Ownership Tests. The Code provides the following ownership requirements
for qualification as a REIT:
o During the last half of each taxable year, not more than 50% in
value of the REIT's outstanding shares may be owned, directly or
indirectly (applying certain attribution rules), by five or fewer
individuals (or certain entities as defined in the Code); and
o There must be at least 100 stockholders (without reference to any
attribution rules) on at least 335 days of a 12-month taxable year
(or a proportionate part of a shorter taxable year).
These requirements do not apply to the first taxable year for which
American Spectrum would make a REIT election. In keeping with these
requirements, American Spectrum's articles of incorporation generally prohibit
any person or entity from actually, constructively or beneficially acquiring or
owning more than 5% of the issued and outstanding American Spectrum capital
stock. This limitation does not apply to existing stockholders who own more than
5% of American Spectrum shares as of the effective date of the consolidation.
Under the articles of incorporation, the Board of Directors may require
that each holder of American Spectrum shares disclose to American Spectrum's
Board of Directors in writing such information with respect to actual,
constructive or beneficial ownership of American Spectrum shares. Treasury
Regulations govern the method by which American Spectrum is required to
demonstrate compliance with these stock ownership requirements and the failure
to satisfy such regulations could cause American Spectrum to fail to qualify as
a REIT. We believe that American Spectrum will meet these stock ownership
requirements for each taxable year and will be able to demonstrate its
compliance with these requirements.
Distribution Requirements. American Spectrum must distribute to its
stockholders for each taxable year ordinary income dividends in an amount equal
to at least:
o 90% of the sum of :
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o its "real estate investment trust taxable income" (computed before
deduction of dividends and excluding any net capital gains) and;
o the excess of net income from foreclosure property over the tax on
such income, minus
o certain excess noncash income.
"Real estate investment trust taxable income" generally is the taxable income of
a REIT computed as if it were an ordinary corporation, with certain adjustments.
American Spectrum must make distributions in the taxable year to which they
relate, or, if declared before the timely filing of American Spectrum's tax
return for such year and paid not later than the first regular dividend payment
after such declaration, in the following taxable year.
American Spectrum intends to make distributions to stockholders that will
meet the 90% distribution requirement. Under some circumstances, however,
American Spectrum may not have sufficient funds from its operations to make cash
distributions to satisfy the 90% distribution requirement. For example, in the
event of the default or financial failure of one or more tenants or lessees,
American Spectrum might be required under federal income tax principles to
continue to accrue rent for some period of time even though American Spectrum
would not currently be receiving the corresponding amounts of cash. Similarly,
American Spectrum might not be entitled, under federal income tax principles, to
deduct certain expenses at the time those expenses are incurred. In either case,
American Spectrum's cash available for making distributions might not be
sufficient to satisfy the 90% distribution requirement. If the cash available to
American Spectrum is insufficient to make the necessary distributions, American
Spectrum might raise cash by borrowing funds, issuing new securities or selling
assets. If American Spectrum ultimately were unable to satisfy the 90%
distribution requirement, it would fail to qualify as a REIT and, as a result,
would be subject to federal income tax as an ordinary corporation.
If American Spectrum fails to satisfy the 90% distribution requirement as
a result of an adjustment to its tax returns by the IRS, under certain
circumstances it may be able to rectify its failure by paying a "deficiency
dividend" (plus a penalty and interest) within 90 days after such adjustment.
This deficiency dividend would be included in American Spectrum's deductions for
dividends paid for the taxable year affected by such adjustment. The deduction
for a deficiency dividend will be denied, however, if any part of the adjustment
resulting in the deficiency is attributable to fraud with intent to evade tax or
to willful failure to file an income tax return on time.
Opinion of Proskauer Rose LLP. Based upon representations made by officers
of American Spectrum with respect to relevant factual matters upon the existing
Code provisions, the applicable regulations issued under the Code (Treasury
Regulations), and reported administrative and judicial interpretations of the
Code and Treasury Regulations, upon Proskauer Rose LLP's independent review of
relevant documents, and upon the assumption that American Spectrum will operate
in the manner described in this consent solicitation, Proskauer Rose LLP has
opined the following:
o American Spectrum is organized in conformity with the requirements
for qualification as a REIT; and
o American Spectrum's proposed method of operation will enable it to
meet the requirements for qualification as a REIT.
You should bear in mind, however, that American Spectrum's ability to qualify
and remain qualified as a REIT depends upon actual operating results and future
actions by and events involving American Spectrum and others. Proskauer Rose
LLP's opinion does not ensure that the actual results of American Spectrum's
operations and future actions and events (including changes in tax laws) will
enable American Spectrum to satisfy in any given year the requirements for
qualification and taxation as a REIT.
Upon receipt of a written request from you or from your representative
designated in writing, we will provide you with a free copy of Proskauer Rose
LLP's opinion.
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Taxation of Stockholders
Taxable Domestic Stockholders. For any taxable year in which American
Spectrum qualifies as a REIT for federal income tax purposes, if you (as a
stockholder) are a United States person, you generally will be taxed in the
following manner. A United States person generally, is any person other than a
nonresident alien individual, a foreign trust or estate or a foreign partnership
or corporation:
o Distributions American Spectrum makes to you generally will be taxed
as ordinary income;
o Amounts that you receive that American Spectrum properly designates
as capital gain dividends generally will be taxed as long-term
capital gain, without regard to the period for which you have held
American Spectrum shares, to the extent that they do not exceed
American Spectrum's actual net capital gain for the taxable year;
o If you are a corporate stockholder, you may have to treat up to 20%
of certain capital gain dividends as ordinary income. Such ordinary
income and capital gain are not eligible for the dividends received
deduction allowed to corporations;
o American Spectrum may elect to retain and pay income tax on its net
long-term capital gain. If American Spectrum so elects, you will
take into income your share of the retained capital gain as
long-term capital gain and will receive a credit or refund for your
share of the tax paid by American Spectrum. In addition, you will
increase the basis of your American Spectrum shares by an amount
equal to the excess of the retained capital gain included in your
income over the tax deemed paid by you;
o Distributions in excess of American Spectrum's current or
accumulated earnings and profits will not be taxable to you to the
extent that they do not exceed the adjusted basis of your American
Spectrum shares, but rather will reduce the adjusted basis of your
American Spectrum shares. Assuming the shares are a capital asset in
your hands, to the extent that distributions in excess of current
and accumulated earnings and profits exceed the adjusted basis of
your American Spectrum shares, such distributions will be included
in your income as capital gain. The capital gain will be long term
capital gain or short-term capital gain if you have held the
American Spectrum shares for one year or less;
o Any distribution that is:
o declared by American Spectrum in October, November or December
of any calendar year and payable to stockholders of record on
a specified date in such months; and
o actually paid by American Spectrum in January of the following
year, shall be deemed to have been received by each
stockholder on December 31 of the calendar year in which the
dividend is declared and, as a result, will be includable in
your gross income for that taxable year;
o You may not deduct on your income tax returns any net operating or
net capital losses of American Spectrum;
o Upon the sale or other disposition of your American Spectrum shares,
you generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale or other
disposition and the adjusted basis of your American Spectrum shares
involved in the transaction. The gain or loss will be long term
capital gain or loss if, at the time of sale or other disposition,
you have held the American Spectrum shares involved for more than
one year;
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o If you receive a capital gain dividend with respect to American
Spectrum shares that you have held for six months or less at the
time of sale or other disposition, any loss by you recognize will be
long-term capital loss to the extent of the amount of the capital
gain dividend that was treated as long-term capital gain; and
o Generally, the redemption of American Spectrum shares by American
Spectrum will result in recognition of ordinary income by you unless
you "completely terminate" or substantially reduce your interest in
American Spectrum, as described in the Code.
The tax treatment discussed above is a summary of the general rules and
may not deal with all of the tax consequences applicable to you in light of your
particular investment or other circumstances. Therefore, you should consult your
own tax advisors for an explanation of the tax consequences to you of the
receipt, ownership, and disposition of American Spectrum shares.
Tax-Exempt Stockholders. If you are an American Spectrum stockholder and a
tax-exempt entity, you generally will be taxed in the following manner:
o Dividends paid by American Spectrum to you generally will not
constitute Unrelated Business Taxable Income (UBTI) as defined in
section 512(a) of the Code, provided that you have not financed the
acquisition of American Spectrum shares with "acquisition
indebtedness" within the meaning of section 524(c) of the Code and
your American Spectrum shares are not otherwise used in an unrelated
trade or business; and
o If you are a qualified trust (i.e., any trust described in section
401(a) of the Code and exempt from tax under section 501(a) of the
Code) that holds more than 10% (by value) of the shares of American
Spectrum, and if:
o (i) treating qualified trusts holding American Spectrum shares
as individuals would result in a determination that American
Spectrum is "closely held" within the meaning of section
856(h)(1) of the Code; and
o (ii) American Spectrum is "predominantly held" by qualified
trusts, you may be required to treat a certain percentage of
American Spectrum's distributions as UBTI. The restrictions on
ownership of American Spectrum shares in the articles of
incorporation will prevent application of the provisions
treating a portion of REIT distributions as UBTI to tax-exempt
entities purchasing American Spectrum shares, absent a waiver
of the restrictions by American Spectrum's Board of Directors,
as discussed in "Description of Capital Stock ownership limits
and Restrictions on Transfer."
The tax treatment of distributions by qualified retirement plans, IRAs,
Keogh plans and other tax-exempt entities is beyond the scope of this
discussion. If you are one of these entities, you should consult your own tax
advisors regarding such questions.
Foreign Stockholders. The rules governing U.S. federal income taxation of
nonresident alien individuals, foreign corporations, foreign participants and
other foreign stockholders (collectively, Non-U.S. Stockholders) are complex,
and we will not try here to provide more than a summary of such rules, so if you
are a prospective Non-U.S. Stockholder, you should consult with your tax
advisors to determine the impact of federal, state and local laws with regard to
an investment in American Spectrum shares, including any reporting requirements.
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Assuming that the income from investment in American Spectrum shares will
not be effectively connected with your conduct of a United States trade or
business, if you are a Non-U.S. Stockholder, you generally will be taxed in the
following manner:
o Distributions that are not attributable to gain from sales or
exchanges by American Spectrum of United States real property
interests and not designated by American Spectrum as capital gain
dividends will be treated as dividends of ordinary income to the
extent American Spectrum makes such distributions out of current and
accumulated earnings and profits. Such dividends ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
dividend, unless an applicable tax treaty reduces or eliminates that
tax;
o Distributions in excess of American Spectrum's current and
accumulated earnings and profits will not be taxable to you to the
extent that such distributions do not exceed the adjusted basis of
your American Spectrum shares, but rather will reduce the adjusted
basis of your American Spectrum shares;
o To the extent that distributions in excess of current and
accumulated earnings and profits exceed the adjusted basis of your
American Spectrum shares, the distributions will give rise to tax
liability if you would otherwise be subject to tax on any gain from
the sale or disposition of your American Spectrum shares;
o If it cannot be determined at the time American Spectrum pays a
distribution whether the distribution will be in excess of current
and accumulated earnings and profits, the distribution will be
subject to withholding at the rate of 30%. You may seek a refund of
the withheld amount from the IRS, however, if it is subsequently
determined that the distribution was, in fact, in excess of American
Spectrum's current and accumulated earnings and profits;
o American Spectrum is permitted, but not required, to make reasonable
estimates of the extent to which distributions exceed current or
accumulated earnings and profits. To the extent American Spectrum
determines that the distributions are to exceed current or
accumulated earnings and profits, a 10% withholding tax will apply
to each such distributions, which may be refunded to the extent it
exceeds your actual U.S. tax liability, provided you furnish
required information to the IRS;
o Distributions that are attributable to gain from sales or exchanges
by American Spectrum of United States real property interests will
be taxed to you under the provisions of the Foreign Investment in
Real Property Tax Act of 1980 (or, FIRPTA), as amended. Under
FIRPTA, distributions attributable to gain from sales of United
States real property interests are taxed to you as if such gain were
effectively connected with a United States business. You would thus
be taxed at the normal capital gain rates applicable to U.S.
stockholders (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien
individuals). Also, distributions subject to FIRPTA may be subject
to a 30% branch profits tax in the hands of a foreign corporate
stockholder not entitled to treaty exemption or rate reduction.
Treasury Regulations require American Spectrum to withhold 35% of
any distribution that it could designate as a capital gain dividend.
You may credit this amount against your FIRPTA tax liability; and
o Gain that you recognize upon a sale of American Spectrum shares
generally will not be taxed under FIRPTA if American Spectrum is a
"domestically controlled REIT." American Spectrum currently believes
that it will be a "domestically controlled REIT."
Gain not subject to FIRPTA nonetheless will be taxable to you if:
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o Investment in the American Spectrum shares is treated as
"effectively connected" with your U.S. trade or business; or
o You are a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and certain
other conditions are met. If you are a foreign corporate
stockholder, "effectively connected" gain you realize may be subject
to an additional 30% branch profits tax, subject to possible
exemption or rate reduction under an applicable tax treaty. If the
gain on the sale of your American Spectrum shares were to be subject
to taxation under FIRPTA, you would be subject to the same treatment
as U.S. stockholders with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). The purchaser of
your American Spectrum shares would be required to withhold and
remit to the IRS 10% of the purchase price.
State and Local Taxes
American Spectrum or its stockholders or both may be subject to state,
local or other taxation in various state, local or other jurisdictions,
including those in which they transact business or reside. The tax treatment in
such jurisdictions may differ from the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult with their own tax
advisors regarding the effect of state, local and other tax laws on an
investment in the common stock of American Spectrum.
EXPERTS
The combined audited financial statements and schedules of American Spectrum
Predecessor and the audited financial statements and schedules of Nooney Rider
Trail, LLC and Meadow Wood Village Apartments Ltd., LP and the related financial
statements schedule included in this consent solicitation to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Nooney Income Fund Ltd., Nooney Income Fund
Ltd. II, L.P., Sierra Pacific Development Fund, Sierra Pacific Development Fund
II, Sierra Pacific Development Fund III, Sierra Pacific Pension Investors '84
and Sierra Pacific Institutional Investors V and Sierra Mira Mesa Partners as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999 and the financial statements of Nooney Real Property
Investors-Two, L.P. as of November 30, 1999 and 1998, and for each of the three
years in the period ended November 30, 1999, and the related financial statement
schedules included in the consent solicitation, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing in the
registration statement (such report for Sierra Pacific Development Fund III
expresses an unqualified opinion and includes an explanatory paragraph relating
to partnership's ability to continue as a going concern), and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The consolidated balance sheets of Nooney-Hazelwood Associates, L.P. and
Investor as of December 31, 1997, 1998 and 1999 and the related statements of
operations, partners capital and cash flows for each of the three years then
ended and the related financial statements schedule, included in this consent
solicitation, have been audited by Wolfe, Nilges, Nahorski, P.C., independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
such report.
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LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for American Spectrum by Proskauer Rose LLP. Proskauer Rose LLP will rely on
Ballard Spahr Andrews & Ingersoll P.C. as to certain matters of Maryland law.
WHERE YOU CAN FIND MORE INFORMATION
American Spectrum and each fund are subject to the reporting requirements
of the Exchange Act, and are required to file reports and other information with
the Securities Exchange Commission, 450 Fifth Street N.W., Washington, D.C.
20549. In addition, American Spectrum has filed a Registration Statement on Form
S-4 under the Securities Act with respect to the securities offered pursuant to
this consent solicitation. This consent solicitation, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and financial schedules thereto. For
further information concerning the consolidation, you should refer to American
Spectrum's Registration Statement and such exhibits and schedules which are
available at the SEC's web site at http://www.sec.gov. Also, you may examine
copies of such documents without charge at, or obtain copies of such documents
upon payment of prescribed fees from, the Public Reference Section of the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
regional offices of the SEC located at Room 1400, 75 Park Place, New York, New
York 10007 and at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511.
The supplement to this consent solicitation has been prepared for your
fund and will be delivered to you and the other limited partners of your fund.
Upon receipt of a written request by you or your representative so designated in
writing, we will send a copy of any supplement without charge. All requests
should be directed to Mackenzie Partners, Inc., 156 Fifth Avenue, New York, NY
10010. (800) 322-2885.
Statements contained in this consent solicitation or any supplements
hereto as to the contents of any contract or other document which is filed as an
exhibit to the Registration Statement are not necessarily complete, and each
such statement is qualified in its entirety by reference to the full text of
such contract or document.
In addition to applicable legal or __________ requirements, if any,
American Spectrum will send to holders of American Spectrum shares annual
reports containing audited financial statements with a report thereon by
American Spectrum's independent public accountants and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
The Annual Report for Nooney Real Property Investors-Two, L.P. (File Number
0-10287) on Form 10-K for the year ended November 30, 2000 and the Quarterly
Report on Form 10-Q for the quarter ended August 31, 2000 are incorporated by
reference.
The Annual Reports on Form 10-K for the year ended December 31, 2000 and
the Quarterly Reports on Form 10-Q for the quarter ending June 30, 2000 for
each of the following funds are incorporated by reference:
Nooney Income Fund Ltd. II, L.P. (File Number 0-14360)
Nooney Income Fund Ltd., L.P. (File Number 0-13241)
Sierra Pacific Development Fund (File Number 0-11068)
Sierra Pacific Development Fund II (File Number 0-12036)
Sierra Pacific Development Fund III (File Number 0-14276)
Sierra Pacific Institutional Properties V (File Number 0-15702)
Sierra Pacific Pension Investors '84 (File Number 0-14268)
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Index to Financial Statements
<TABLE>
<S> <C>
Pro Forma Unaudited Financial Information
Maximum Scenario
AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED BALANCE SHEET - JUNE 30, 2000........................... F-9
THE FUNDS PRO FORMA COMBINING BALANCE SHEET - JUNE 30, 2000............................................ F-11
OTHER AFFILIATES PRO FORMA COMBINING BALANCE SHEET - JUNE 30, 2000..................................... F-13
AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED
JUNE 30, 2000.......................................................................................... F-14
THE FUNDS PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 2000......... F-16
OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED
JUNE 30, 2000.......................................................................................... F-18
AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF OPERATIONS - FOR THE YEAR ENDED
DECEMBER 31, 1999...................................................................................... F-19
THE FUNDS PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999........... F-20
OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999.... F-21
AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF CASH FLOWS - FOR THE SIX MONTHS
ENDED JUNE 30, 2000.................................................................................... F-22
THE FUNDS PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE SIX MONTHS ENDED JUNE 30, 2000......... F-23
OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE SIX MONTHS ENDED
JUNE 30, 2000.......................................................................................... F-24
AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED
DECEMBER 31, 1999...................................................................................... F-25
THE FUNDS PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED DECEMBER 31, 1999........... F-26
OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED DECEMBER 31, 1999.... F-27
American Spectrum Pro Forma Unaudited Combined Balance Sheet--June 30, 2000............................ F-28
The Funds Pro Forma Combining Balance Sheet--June 30, 2000............................................. F-29
Other Affiliates Pro Forma Combining Balance Sheet--June 30, 2000...................................... F-30
Minimum Scenario
American Spectrum Pro Forma Unaudited Combined Statement of Operations--for the six months ended
June 30, 2000.......................................................................................... F-31
The Funds Pro Forma Combining Statement of Operations--for the six months ended June 30, 2000.......... F-32
Other Affiliates Pro Forma Combining Statement of Operations--for the six months ended June 30, 2000... F-33
American Spectrum Pro Forma Unaudited Combined Statement of Operations--for the year ended December
31, 1999............................................................................................... F-34
The Funds Pro Forma Combining Statement of Operations--for the year ended December 31, 1999............ F-35
Other Affiliates Pro Forma Combining Statement of Operations--for the year ended December 31, 1999..... F-36
American Spectrum Pro Forma Unaudited Combined Statement of Cash Flows--for the six months ended
June 30, 2000.......................................................................................... F-37
The Funds Pro Forma Combining Statement of Cash Flows--for the six months ended June 30, 2000.......... F-38
Other Affiliates Pro Forma Combining Statement of Cash Flows--for the six months ended June 30, 2000... F-39
American Spectrum Pro Forma Unaudited Combined Statement of Cash Flows--for the year ended
December 31, 1999...................................................................................... F-40
The Funds Pro Forma Combining Statement of Cash Flows--for the year ended December 31, 1999............ F-41
Other Affiliates Pro Forma Combining Statement of Cash Flows--for the year ended December 31, 1999..... F-42
Notes to the Pro Forma Unaudited Combined Financial Information of American Spectrum................... F-43
CGS Management Company Table............................................................................F-51
American Spectrum Predecessor:
Report of Independent Public Accountants................................................................F-53
Combined Balance Sheets - December 31, 1998 and 1999 and June 30, 2000 (Unaudited)......................F-54
Combined Statements of Operations - for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 1999 and 2000 (Unaudited).........................................F-55
Combined Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 1999 and 2000 (Unaudited).........................................F-56
Combined Statements of Equity (Deficit) for the years ended December 31, 1997, 1998 and
1999 and for the six months ended June 30, 1999 and 2000 (Unaudited)....................................F-58
Notes to Combined Financial Statements..................................................................F-59
Meadow Wood Village Apartments, Ltd., LP:
Selected Historical Financial Data......................................................................F-73
Report of Independent Public Accountants................................................................F-75
Balance Sheets - December 31, 1998 and 1999 and June 30, 2000 (Unaudited)...............................F-76
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 1999 and 2000 (Unaudited)........................................F-77
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and
for the six months ended June 30, 1999 and 2000 (Unaudited)............................................F-78
Statements of Equity (Deficit) for the years ended December 31, 1997, 1998 and
for the six months ended June 30, 1999 and 2000 (Unaudited).............................................F-79
Notes to Financial Statements...........................................................................F-80
Nooney Rider Trail, LLC
Selected Historical Financial Data.....................................................................F-86
Report of Independent Public Accounts...................................................................F-88
Balance Sheets - December 31, 1998 and 1999 and June 30, 2000 (Unaudited)...............................F-89
Statements of Operations for the years ended December 31, 1997, 1998
and 1999 and for the six months ended June 30, 1999 and 2000 (Unaudited)................................F-90
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and
for the six months ended June 30, 1999 and 2000 (Unaudited) ...... .....................................F-91
Statements of Equity (Deficit) for the years ended December 31, 1997,
1998 and 1999 and for the six months ended June 30, 1999 and 2000 (Unaudited).......................... F-92
Notes to Financial Statements...........................................................................F-93
Noozelwood Associates, L.P.
Selected Historical Financial Data.....................................................................F-98
Independent Auditors' Report...........................................................................F-100
Consolidated Balance Sheets - December 31, 1998, 1999 and June 30, 2000................................F-101
Consolidated Statements of Partners' Capital (Deficit) for the years ended December 31, 1997, 1998
and 1999 and for the six months ended June 30, 1999 and 2000...........................................F-102
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999 and for
the six months ended June 30, 1999 and 2000............................................................F-103
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and for
the six months ended June 30, 1999 and 2000............................................................F-104
Notes to the Consolidated Financial Statements.........................................................F-105
</TABLE>
F-1
<PAGE> 218
<TABLE>
<S> <C>
Sierra Pacific Development Fund I
Selected Historical Financial Data........................................................................F-113
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-116
- Six months ended June 30, 2000 and 1999..............................................................F-119
Independent Auditor's Report..............................................................................F-121
Balance Sheets - December 31, 1998 and 1999...............................................................F-122
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-123
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-124
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-125
Notes to Financial Statements and Schedules...............................................................F-126
Balance Sheets - December 31, 1999 and June 30, 2000 (Unaudited)..........................................F-138
Statements of Operations for the three and six months ended June 30, 1999 and 2000 (Unaudited)............F-139
Statements of Equity (Deficit) for six months ended June 30, 2000 (Unaudited).............................F-140
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-141
Notes to Financial Statements.............................................................................F-142
Sierra Pacific Development Fund II
Selected Historical Financial Data........................................................................F-146
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-150
- Six months ended June 30, 2000 and 1999..............................................................F-154
Independent Auditor's Report..............................................................................F-156
Balance Sheets - December 31, 1998 and 1999...............................................................F-157
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-158
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-159
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-160
Notes to Financial Statements and Schedules...............................................................F-162
Audited Financial Statements of Sierra Mira Mesa Partners.................................................F-182
Balance Sheets - December 31, 1999 and June 30, 2000 (Unaudited)..........................................F-197
Statements of Operations for the three and six months ended June 30, 1999 and 2000 (Unaudited) ...........F-198
Statements of Equity (Deficit) for six months ended June 30, 2000 (Unaudited).............................F-199
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-200
Notes to Financial Statements.............................................................................F-201
</TABLE>
F-2
<PAGE> 219
<TABLE>
<S> <C>
Sierra Pacific Development Fund III
Selected Historical Financial Data........................................................................F-206
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-211
- Six months ended June 30, 2000 and 1999..............................................................F-215
Independent Auditor's Report..............................................................................F-217
Balance Sheets - December 31, 1998 and 1999...............................................................F-228
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-229
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-230
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-231
Notes to Financial Statements and Schedules...............................................................F-232
Audited Financial Statements of Sorrento I Partners.......................................................F-232
Balance Sheets December 31, 1999 and June 30, 2000 (Unaudited)............................................F-238
Statements of Operations for the three and six months ended June 30, 1999 and 2000 (Unaudited)............F-239
Statements of Equity (Deficit) for six months ended June 30, 2000 (Unaudited).............................F-240
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-241
Notes to Financial Statements.............................................................................F-242
Sierra Pacific Pension Investors '84
Selected Historical Financial Data........................................................................F-247
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-252
- Six months ended June 30, 2000 and 1999..............................................................F-255
Independent Auditor's Report..............................................................................F-257
Balance Sheets - December 31, 1998 and 1999...............................................................F-258
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-260
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-262
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-263
Notes to Financial Statements and Schedules...............................................................F-265
Audited Financial Statements of Sierra Mira Mesa Partners.................................................F-278
Balance Sheets December 31, 1999 and June 30, 2000 (Unaudited)............................................F-296
Statements of Operations for the three and six months ended June 30, 1999 and 2000 (Unaudited)............F-297
Statements of Equity (Deficit) for six months ended June 30, 2000 (Unaudited).............................F-298
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-299
Notes to Financial Statements.............................................................................F-300
</TABLE>
F-3
<PAGE> 220
<TABLE>
<S> <C>
Sierra Pacific Institutional Properties V
Selected Historical Financial Data........................................................................F-305
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-308
- Six months ended June 30, 2000 and 1999..............................................................F-311
Independent Auditor's Report..............................................................................F-312
Balance Sheets - December 31, 1998 and 1999...............................................................F-313
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-314
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-315
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-316
Notes to Financial Statements and Schedules...............................................................F-317
Balance Sheets December 31, 1999 and June 30, 2000 (Unaudited)............................................F-324
Statements of Operations for the three and six months ended June 30, 1999 and 2000 (Unaudited)............F-328
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-329
Statements of Equity (Deficit) for six months ended June 30, 2000 (Unaudited).............................F-326
Notes to Financial Statements.............................................................................F-331
Nooney Income Fund Ltd., L.P.
Selected Historical Financial Data........................................................................F-335
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-338
- Six months ended June 30, 2000 and 1999..............................................................F-344
Independent Auditor's Report..............................................................................F-349
Balance Sheets - December 31, 1998 and 1999...............................................................F-350
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-351
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-352
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-353
Notes to Financial Statements and Schedules...............................................................F-354
Balance Sheets December 31, 1999 and June 30, 2000 (Unaudited)............................................F-364
Statements of Operations and Partners' Equity for the three and six months ended June 30, 1999 and 2000
(Unaudited).............................................................................................F-365
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-366
Notes to Financial Statements.............................................................................F-367
</TABLE>
F-4
<PAGE> 221
<TABLE>
<S> <C>
Nooney Income Fund Ltd. II, L.P.
Selected Historical Financial Data........................................................................F-373
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-375
- Six months ended June 30, 2000 and 1999..............................................................F-382
Independent Auditor's Report..............................................................................F-388
Balance Sheets - December 31, 1998 and 1999...............................................................F-389
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999...........................F-390
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999..............F-391
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.............................F-392
Notes to Financial Statements and Schedules...............................................................F-394
Balance Sheets December 31, 1999 and June 30, 2000 (Unaudited)............................................F-408
Statements of Operations and Partners' Equity for the three and six months ended June 30, 1999 and 2000
(Unaudited)...............................................................................................F-409
Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)......................F-410
Notes to Financial Statements.............................................................................F-411
Nooney Real Property Investors - Two L.P.
Selected Historical Financial Data........................................................................F-417
Management's Discussion and Analysis of Financial Condition and Results of Operations
- December 31, 1999, 1998 and 1997.....................................................................F-421
- Six months ended June 30, 2000 and 1999..............................................................F-427
Independent Auditor's Report..............................................................................F-433
Balance Sheets - November 30, 1998 and 1999...............................................................F-434
Statements of Operations - for the years ended November 30, 1997, 1998 and 1999...........................F-435
Statement of Partners' Equity (Deficit) for the years ended November 30, 1997, 1998 and 1999..............F-436
Statements of Cash Flows for the years ended November 30, 1997, 1998 and 1999.............................F-437
Notes to Financial Statements and Schedules...............................................................F-439
Balance Sheets November 30, 1999 and May 31, 2000 (Unaudited).............................................F-453
Statements of Operations and Partners' Deficit for the three and six months ended
May 31, 1999 and 2000 (Unaudited).........................................................................F-454
Statements of Cash Flows for the six months ended May 31, 1999 and 2000 (Unaudited)......................F-455
Notes to Financial Statements.............................................................................F-456
</TABLE>
F-5
<PAGE> 222
PRO FORMA UNAUDITED COMBINED FINANCIAL INFORMATION OF
AMERICAN SPECTRUM
The following tables set forth certain combined financial information for
American Spectrum on a pro forma basis, to give effect to the Consolidation and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements
contained elsewhere in this Consent Solicitation and the accompanying
Supplements. The pro forma statements of operations and cash flows give effect
to the Consolidation as if the respective transactions occurred at the beginning
of the period presented. The unaudited pro forma balance sheet gives effect to
the Consolidation as if American Spectrum had completed each transaction on June
30, 2000. Pro forma financial data has been provided under two separate
assumptions: (1) all Funds are acquired in the Consolidation ("Maximum
Participation") and (2) only the Funds that, on a combined basis, have the
lowest combined net cash provided by operating activities that satisfies all
conditions to consummate the Consolidation, participated in the Consolidation
("Minimum Participation"). The Other Affiliates will have previously agreed to
the Consolidation.
We are providing this information for illustrative purposes only. It does not
necessarily reflect what the results of operations, cash flows or financial
position of American Spectrum would have been if the Consolidation had actually
occurred on the dates indicated. This information also does not necessarily
indicate what American Spectrum's future operating results, cash flows, or
consolidated financial position will be. This information also does not reflect
certain additional costs associated with the Consolidation, which American
Spectrum cannot presently estimate.
F-6
<PAGE> 223
INDEX TO PRO FORMA UNAUDITED COMBINED FINANCIAL INFORMATION OF
AMERICAN SPECTRUM
MAXIMUM SCENARIO:
1. AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED BALANCE SHEET - JUNE 30,
2000
2. THE FUNDS PRO FORMA COMBINING BALANCE SHEET - JUNE 30, 2000
3. OTHER AFFILIATES PRO FORMA COMBINING BALANCE SHEET - JUNE 30, 2000
4. AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF OPERATIONS -
FOR THE SIX MONTHS ENDED JUNE 30, 2000
5. THE FUNDS PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE SIX MONTHS
ENDED JUNE 30, 2000
6. OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE SIX
MONTHS ENDED JUNE 30, 2000
7. AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF OPERATIONS -
FOR THE YEAR ENDED DECEMBER 31, 1999
8. THE FUNDS PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE YEAR ENDED
DECEMBER 31, 1999
9. OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF OPERATIONS - FOR THE YEAR
ENDED DECEMBER 31, 1999
10. AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF CASH FLOWS -
FOR THE SIX MONTHS ENDED JUNE 30, 2000
11. THE FUNDS PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE SIX MONTHS
ENDED JUNE 30, 2000
12. OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE SIX
MONTHS ENDED JUNE 30, 2000
13. AMERICAN SPECTRUM PRO FORMA UNAUDITED COMBINED STATEMENT OF CASH FLOWS -
FOR THE YEAR ENDED DECEMBER 31, 1999
14. THE FUNDS PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE YEAR ENDED
DECEMBER 31, 1999
15. OTHER AFFILIATES PRO FORMA COMBINING STATEMENT OF CASH FLOWS - FOR THE YEAR
ENDED DECEMBER 31, 1999
F-7
<PAGE> 224
MINIMUM SCENARIO:
16. American Spectrum Pro Forma Unaudited Combined Balance Sheet--June 30, 2000
17. The Funds Pro Forma Combining Balance Sheet--June 30, 2000
18. Other Affiliates Pro Forma Combining Balance Sheet--June 30, 2000
19. American Spectrum Pro Forma Unaudited Combined Statement of Operations--for
the six months ended June 30, 2000
20. The Funds Pro Forma Combining Statement of Operations--for the six months
ended June 30, 2000
21. Other Affiliates Pro Forma Combining Statement of Operations--for the six
months ended June 30, 2000
22. American Spectrum Pro Forma Unaudited Combined Statement of Operations--for
the year ended December 31, 1999
23. The Funds Pro Forma Combining Statement of Operations--for the year ended
December 31, 1999
24. Other Affiliates Pro Forma Combining Statement of Operations--for the year
ended December 31, 1999
25. American Spectrum Pro Forma Unaudited Combined Statement of Cash Flows--for
the six months ended June 30, 2000
26. The Funds Pro Forma Combining Statement of Cash Flows--for the six months
ended June 30, 2000
27. Other Affiliates Pro Forma Combining Statement of Cash Flows--for the six
months ended June 30, 2000
28. American Spectrum Pro Forma Unaudited Combined Statement of Cash Flows--for
the year ended December 31, 1999
29. The Funds Pro Forma Combining Statement of Cash Flows--for the year ended
December 31, 1999
30. Other Affiliates Pro Forma Combining Statement of Cash Flows--for the year
ended December 31, 1999
31. Notes to the Pro Forma Unaudited Combined Financial Information of American
Spectrum.
F-8
<PAGE> 225
UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
--------------- ---------- ---------------
ASSETS:
<S> <C> <C> <C>
Real estate held for investment, net $ 92,070 $ 53,960 $ 15,856
Cash 776 5,138 456
Accounts receivable, net 1,693 3,336 150
Accounts and notes receivable from 3,610 8,557 592
affiliates, net
Investment in uncombined partnerships
and joint ventures 3,493 -- --
Goodwill and other 6,174 7,200 2,223
--------- --------- ---------
Total assets $ 107,816 $ 78,191 $ 19,277
========= ========= =========
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 6,141 $ 2,721 $ 1,439
Deferred revenue 273 -- 26
Mortgage notes payable, net 114,096 34,961 27,530
Notes payable to affiliates 13,632 -- 500
Other 48 530 77
--------- --------- ---------
Total liabilities 134,190 38,212 29,572
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------------------------
Adjustments & Property Management Pro Forma
Eliminations (4) Business (5) Acquisitions (6) Combined
---------------- ------------ ---------------- --------
ASSETS:
<S> <C> <C> <C> <C>
Real estate held for investment, net $ (986)(4a) $ (1,033)(5a) $ 59,684 $ 219,551
Cash (9)(4a) (415)(5a) (2,343)(9) 14,083
17,500(12) (630)(9)
(6,390)(4d)
Accounts receivable, net (80)(4a) (1,551)(5a) -- 3,548
Accounts and notes receivable from (7,383)(4b) (871)(5a) -- 4,505
affiliates, net
Investment in uncombined partnerships
and joint ventures (2,283)(4c) (208)(5a) -- 1,002
Goodwill and other (8)(4a) (1,949)(5a) 165 12,473
500(12) (1,832)(9) --
--------- --------- --------- ---------
Total assets $ 861 $ (6,027) $ 55,044 $ 255,162
========= ========= ========= =========
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ (74)(4a) $ (722)(5a) $ -- $ 9,505
Deferred revenue -- (15)(5a) -- 284
Mortgage notes payable, net (1,125)(4a) (1,306)(5a) -- 192,156
18,000(12)
Notes payable to affiliates (7,383)(4b) (3,064)(5a) -- 3,685
Other -- -- -- 655
--------- --------- --------- ---------
Total liabilities 9,418 (5,107) -- 206,285
</TABLE>
F-9
<PAGE> 226
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MANDATORILY-REDEEMABLE COMMON
STOCK OF SUBSIDIARY 1,045 -- -- -- (1,045)(5a) -- --
EQUITY (DEFICIT) (27,419) 39,979 (10,295) (8,557)(4e) 125(5b) 57,506 48,877
(2,462)(9)
-------- ------- ------- ------ ------- ------- --------
Total liabilities and
equity (deficit) $107,816 $78,191 $19,277 $ 861 $(6,027) $55,044 $255,162
======== ======= ======= ====== ======= ======= ========
OTHER PRO FORMA DATA:
Book value per share (7) $ 6.63
========
</TABLE>
F-10
<PAGE> 227
PRO FORMA COMBINING BALANCE SHEET OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Sierra Sierra Sierra Sierra Sierra
Pacific Pacific Pacific Pacific Pacific Sierra
Development Development Development Institutional Pension Mira Mesa
Fund Fund II Fund III Properties Investors 84 Partners
V (A)
----------- ----------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate held for
investment, net $ 2,443 $10,325 $-- $ 5,672 $ 1,153 $ 8,538
Cash 109 109 1 34 11 100
Accounts receivable, net 68 647 497 156 1,171
Accounts receivable from
affiliates, net 4,647 1,459 2,451
Investment in uncombined
partnerships
and joint ventures 2,142 7,286 1,922
Other 2,768 865 280 941 779
------- ------- ------- ------- ------- -------
Total assets $ 5,388 $18,735 $ 1 $ 6,483 $11,006 $14,961
======= ======= ======= ======= ======= =======
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued
expenses $ 108 $ 953 $-- $ 23 $ 128 $ 78
Distributions in excess of
investment in
uncombined partnerships
and joint ventures 348
Mortgage notes payable, net 4,040 6,373 1,358 6,038
Other 15
------- ------- ------- ------- ------- -------
Total liabilities 4,148 7,326 348 23 1,486 6,131
MINORITY INTEREST 14 4,399
EQUITY (DEFICIT) 1,240 11,409 (361) 2,061 9,520 8,830
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Nooney Nooney Property
Income Fund Income Fund Investors Two,
Ltd., LP Ltd., II LP LP (B) Adjustments Combined (2)
----------- ----------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate held for $ 5,264 $14,114 $ 6,451 $-- $53,960
investment, net
Cash 1,490 1,354 1,930 5,138
Accounts receivable, net 206 432 159 3,336
Accounts receivable from
affiliates, net 8,557
Investment in uncombined
partnerships
and joint ventures (11,350) --
Other 156 414 997 -- 7,200
------- ------- ------- --------- -------
Total assets $ 7,116 $16,314 $ 9,537 $ (11,350) $78,191
======= ======= ======= ========= =======
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued
expenses $ 268 $ 554 $ 609 $ -- $ 2,721
Distributions in excess of
investment in
uncombined partnerships
and joint ventures 9,224 (348) --
Mortgage notes payable, net 1,114 6,814 34,961
Other 144 269 102 530
------- ------- ------- --------- -------
Total liabilities 1,526 7,637 9,935 (348) 38,212
MINORITY INTEREST (4,413) --
EQUITY (DEFICIT) 5,590 8,677 (398) (6,589) 39,979
</TABLE>
F-11
<PAGE> 228
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- ------- -------
Total liabilities and equity
(deficit) $ 5,388 $18,735 $ 1 $ 6,483 $11,006 $14,961 $ 7,116
======= ======= ======= ======= ======= ======= =======
OTHER DATA:
Cash flows from
operations-12/31/99 182 85 -- (493) 497 615
======= ======= ======= ======= ======= =======
Pro-rata share of appraised
value 7,660 22,149 727 6,068 20,476 5,570
======= ======= ======= ======= ======= =======
Include for minimum calculation (x) X X X
85 -- (493)
======= ======= =======
22,149 727 6,068
======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
------- ------- --------- -------
Total liabilities and equity
(deficit) $16,314 $ 9,537 $ (11,350) $78,191
======= ======= ========= =======
OTHER DATA:
Cash flows from
operations-12/31/99 684 (4) 1,566
======= ======= =======
Pro-rata share of appraised
value 27,080 15,590 105,320
======= ======= =======
Include for minimum calculation (x) X
(4) (412)
======= =======
15,590 44,534
======= =======
</TABLE>
(A) Sierra Mira Mesa (SMM) is 100% owned by two funds that account for their
investments in SMM on the equity method. SMM is consolidated in the
combination of the funds under the maximum scenario.
(B) Nooney Real Property Investors Two, LP has a fiscal quarter ending on May
31. The one month period ended June 30 is not material to the pro forma
presentation of financial condition and results of operations.
F-12
<PAGE> 229
PRO FORMA COMBINING BALANCE SHEET OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined (3)
---------- -------------------- -------------- -----------
ASSETS:
<S> <C> <C> <C> <C>
Real estate held for investment, net $ 1,444 $ 7,237 $ 7,175 $ 15,856
Cash 11 97 348 456
Accounts receivable, net 90 36 24 150
Accounts receivable from affiliates, net 100 488 4 592
Other 47 810 1,366 2,223
-------- -------- -------- --------
Total assets $ 1,692 $ 8,668 $ 8,917 $ 19,277
======== ======== ======== ========
LIABILITIES AND DEFICIT:
LIABILITIES:
Accounts payable and accrued expenses $ 867 $ 284 $ 288 $ 1,439
Deferred revenue -- 21 5 26
Mortgage notes payable, net 3,709 10,840 12,981 27,530
Notes payable to affiliates 437 63 -- 500
Other -- -- 77 77
-------- -------- -------- --------
Total liabilities 5,013 11,208 13,351 29,572
DEFICIT (3,321) (2,540) (4,434) (10,295)
-------- -------- -------- --------
Total liabilities and equity (deficit) $ 1,692 $ 8,668 $ 8,917 $ 19,277
======== ======== ======== ========
</TABLE>
F-13
<PAGE> 230
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma
American
Spectrum Pro Forma Other Adjustments &
Predecessor (1) Funds (2) Affiliates(3) Eliminations(4)
-------------- --------- ------------- ---------------
REVENUES:
<S> <C> <C> <C> <C>
Rental and reimbursement $ 7,708 $ 8,199 $ 2,722 $ (88)(4g)
Property management 4,829 -- -- --
Income from affiliates 964 604 29 (1,381)(4f)
-------- -------- -------- --------
Total revenues 13,501 8,803 2,751 (1,469)
EXPENSES:
Property operating 2,502 3,283 899 (4)(4g)
(964)(4f)
Property management 5,329 29 -- --
Fees to related parties -- 297 80 --
Real estate and other taxes 644 622 259 (26)(4g)
Depreciation and amortization 1,723 2,063 427 (13)(4g)
Interest 6,435 1,508 1,018 (481)(4g)
720(12)
Impairment charges -- -- -- --
-------- -------- -------- --------
Total expenses 16,633 7,802 2,683 (768)
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale
of property (3,132) 1,001 68 (701)
Equity in income (loss) of noncombined
partnerships (270) -- -- 270(4h)
Gain (Loss) on sale of property 1,328 -- -- --
-------- -------- -------- --------
Net income (loss) before extraordinary
item (2,074) 1,001 68 (431)
Extraordinary item - extinguishment
of debt (1,861) (46) -- --
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------------------------
Property Management Pro Forma
Business (5) Acquisitions (6) Combined
------------------- ---------------- ---------
REVENUES:
<S> <C> <C> <C>
Rental and reimbursement $ -- 278(6b) $ 18,819
Property management (4,829)(5c) -- --
Income from affiliates -- -- 216
-------- -------- --------
Total revenues (4,829) 278 19,035
EXPENSES:
Property operating 383(5d) -- 6,099
Property management (5,358)(5d) -- --
Fees to related parties -- -- 377
Real estate and other taxes -- -- 1,499
Depreciation and amortization (142)(5d) 1,023(6a) 5,081
Interest (9)(5d) -- 9,191
Impairment charges 44(5d) -- 44
-------- -------- --------
Total expenses (5,082) 1,023 22,291
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale
of property 253 (745) (3,256)
Equity in income (loss) of noncombined
partnerships -- -- --
Gain (Loss) on sale of property -- -- 1,328
-------- -------- --------
Net income (loss) before extraordinary
item 253 (745) (1,928)
Extraordinary item - extinguishment
of debt -- -- (1,907)
</TABLE>
F-14
<PAGE> 231
<TABLE>
<S> <C> <C> <C> <C> <C>
-------- -------- -------- -------- --------
Net income (loss) before reorganization
costs (3,935) 955 68 (431) 253
Reorganization costs (9)
Net income (loss) after reorganization
costs (10)
OTHER PRO FORMA DATA:
Basic and diluted income per share
Weighted average shares outstanding (7)
Deficiency to cover fixed charges (8)
</TABLE>
<TABLE>
<S> <C> <C>
-------- --------
Net income (loss) before reorganization
costs (745) (3,835)
Reorganization costs (9) (2,462)
--------
Net income (loss) after reorganization
costs (10) $ (6,297)
========
OTHER PRO FORMA DATA:
Basic and diluted income per share
$ (0.85)
========
Weighted average shares outstanding (7)
7,368
========
Deficiency to cover fixed charges (8)
$ 6,297
========
</TABLE>
F-15
<PAGE> 232
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Sierra Sierra Sierra Sierra Sierra
Pacific Pacific Pacific Pacific Pacific
Development Development Development Institutional Pension
Fund Fund II Fund III Properties V Investors 84
----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 490 $ 1,267 $- $ 699 $ 273
Interest and other -- 237 -- 11 79
------- ------- ------- ------- -------
Total revenues 490 1,504 -- 710 352
EXPENSES:
Property operating 269 886 14 237 214
Management and advisory -- -- -- -- --
Property management -- -- -- 29 --
Fees to related parties (5) -- -- -- -- --
Real estate and other taxes -- -- -- -- --
Depreciation and amortization 160 441 -- 230 74
Interest 164 223 -- -- 64
------- ------- ------- ------- -------
Total expenses 593 1,550 14 496 352
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property and
extraordinary item (103) (46) (14) 214 --
Equity in income (loss) of
noncombined partnerships -- 101 (7) -- 233
</TABLE>
<TABLE>
<CAPTION>
Sierra Nooney Nooney Real Adjustments Combined
Mira Income Nooney Property (2)
Mesa Fund Income Investors
Partners(A) Ltd., LP Fund II, LP Two, LP (B)
-------- -------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 1,097 $ 1,036 $ 2,050 $ 1,287 $ -- $ 8,199
Interest and other 205 20 2 50 -- 604
------- ------- ------- ------- ------- -------
Total revenues 1,302 1,056 2,052 1,337 -- 8,803
EXPENSES:
Property operating 410 336 600 317 -- 3,283
Management and advisory -- -- -- -- -- --
Property management -- -- -- -- -- 29
Fees to related parties (5) -- 76 142 79 -- 297
Real estate and other taxes 36 136 258 192 -- 622
Depreciation and amortization 284 203 402 269 -- 2,063
Interest 245 52 301 459 -- 1,508
------- ------- ------- ------- ------- -------
Total expenses 975 803 1,703 1,316 -- 7,802
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property
and extraordinary item 327 253 349 21 -- 1,001
Equity in income (loss) of
noncombined partnerships -- -- -- -- (327) --
</TABLE>
F-16
<PAGE> 233
<TABLE>
<S> <C> <C> <C> <C> <C>
Gain (loss) on sale of property -- -- -- -- --
Extraordinary item - extinguishment
of debt (46) -- -- -- --
------- ------- ------- ------- -------
Net income (loss) before minority
interest (149) 55 (21) 214 233
Minority interest's share in loss
(income) 7 -- 5 (94)
------- ------- ------- ------- -------
Net income (loss) $ (142) $ 55 $ (16) $ 120 $ 233
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gain (loss) on sale of property -- -- -- -- -- --
Extraordinary item - extinguishment
of debt -- -- -- -- -- (46)
------- ------- ------- ------- ------- -------
Net income (loss) before minority
interest 327 253 349 21 (327) 955
Minority interest's share in loss
(income) -- 82 --
------- ------- ------- ------- ------- -------
Net income (loss) $ 327 $ 253 $ 349 $ 21 $ (245) $ 955
======= ======= ======= ======= ======= =======
</TABLE>
(A) Sierra Mira Mesa (SMM) is 100% owned by two funds that account for their
investments in SMM on the equity method. SMM is consolidated in the
combination of the funds under the maximum scenario.
(B) Nooney Real Property Investors Two, LP has a fiscal quarter ending on May
31. The one month period ended June 30 is not material to the pro forma
presentation of financial condition and results of operations.
F-17
<PAGE> 234
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined (3)
---------- ------------------- -------------- ------------
REVENUES:
<S> <C> <C> <C> <C>
Rental and reimbursement $ 299 $ 1,132 $ 1,291 $ 2,722
Property management --
Interest and other 5 16 8 29
------- ------- ------- -------
Total revenues 304 1,148 1,299 2,751
EXPENSES:
Property operating 10 380 509 899
Management and advisory -- -- -- --
Property management -- -- -- --
Fees to related parties (5) 4 5 71 80
Real estate and other taxes 72 107 80 259
Depreciation and amortization 38 171 218 427
Interest 199 386 433 1,018
Impairment charges -- -- -- --
------- ------- ------- -------
Total expenses 323 1,049 1,311 2,683
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property and
extraordinary item (19) 99 (12) 68
Equity in loss of noncombined partnerships -- -- -- --
Gain (loss) on sale of property -- -- -- --
Extraordinary item - extinguishment of debt -- -- -- --
------- ------- ------- -------
Net loss before minority interest (19) 99 (12) 68
Minority interest in (loss) income -- -- -- --
------- ------- ------- -------
Net loss $ (19) $ 99 $ (12) $ 68
======= ======= ======= =======
</TABLE>
F-18
<PAGE> 235
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma Adjustments
American Pro Forma ----------------------------------------------
Spectrum Pro Forma Other Adjustments & Property Management Pro Forma
Predecessor (1) Funds (2) Affiliates (3) Eliminations (4) Business (5) Acquisitions (6) Combined
--------------- --------- -------------- ---------------- ------------ ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 14,813 $ 15,177 $ 5,157 $ (518)(4g) $ -- $ 551(6b) $ 35,180
Property management 5,452 -- -- -- (5,452)(5c) -- --
Income from affiliates 2,357 903 39 (1,638)(4f) -- -- 1,661
--------------- --------- -------------- ----------- ------ ------- --------
Total revenues 22,622 16,080 5,196 (2,156) (5,452) 551 36,841
EXPENSES:
Property operating 3,396 6,813 1,762 (386)(4g) -- -- 11,585
Property management 10,766 -- -- -- (5,843)(5d) -- 4,923
Fees to related parties -- 1,337 265 (1,602)(4f) -- -- --
Real estate and other
taxes 1,597 2,009 378 (48)(4g) -- -- 3,936
Depreciation and
amortization 3,259 4,144 891 (24)(4g) (313)(5d) 2,044(6a) 10,001
Interest 9,982 2,502 1,943 (173)(4g) (153)(5d) -- 15,541
-- -- -- 1,440 (12) -- -- --
Impairment charges 5,164 -- -- -- (1,724)(5d) -- 3,440
--------------- --------- -------------- ----------- ------- -------- --------
Total expenses 34,164 16,805 5,239 (793) (8,033) 2,044 49,426
Loss before equity in loss
of noncombined
partnerships and gain on
sale of property (11,542) (725) (43) 1,363 2,581 (1,493) (12,585)
Equity in loss of
noncombined
partnerships (330) -- -- 330(4h) -- -- --
Gain on sale of property -- 83 -- -- -- -- 83
--------------- --------- -------------- ----------- ------- -------- --------
Net income (loss) before
extraordinary item $ (11,872) $ (642) $ (43) $ (1,033) $ 2,581 $ (1,493) $(12,502)
Extraordinary item -
extinguishment of debt (214) -- -- -- -- -- (214)
--------------- --------- -------------- ----------- ------- -------- --------
Net income (loss) before
reorganization costs (12,086) (642) (43) (1,033) 2,581 (1,493) (12,716)
=============== ========= ============== =========== ======= ======== ========
REORGANIZATION COSTS (9) (2,462)
========
NET INCOME (LOSS) AFTER
REORGANIZATION COSTS(10) (15,178)
========
OTHER PRO FORMA DATA:
Basic and diluted loss
per share $ (2.06)
========
Weighted average shares
outstanding (7) 7,368
========
Deficiency to cover
fixed charges (8) $ 15,178
========
</TABLE>
F-19
<PAGE> 236
PROFORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Sierra Sierra Sierra Sierra Sierra Sierra
Pacific Pacific Pacific Pacific Pacific Mira
Development Development Development Institutional Pension Mesa
Fund Fund II Fund III Properties V Investors 84 Partners (A)
----------- ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 919 $ 2,356 $ -- $ 1,193 $ 622 $ 2,126
Property management -- -- -- -- -- --
Interest and other -- 410 15 34 187 224
---------- ---------- ---------- ------------ ----------- ----------
Total revenues 919 2,766 15 1,227 809 2,350
EXPENSES:
Property operating 330 2,029 15 606 296 583
Management and advisory -- -- -- -- -- --
Property management -- -- -- -- -- --
Fees to related parties (5) 88 396 -- 156 36 119
Real estate and other taxes 102 373 -- 111 141 99
Depreciation and amortization 337 869 -- 442 249 587
Interest 153 437 -- -- 136 450
Impairment charges -- -- -- -- -- --
---------- ---------- ---------- ------------ ----------- ----------
Total expenses 1,010 4,104 15 1,315 858 1,838
Loss before equity in loss of
noncombined partnerships,
gain (loss) on sale of
property and extraordinary
item (91) (1,338) -- (88) (49) 512
Equity in loss of noncombined
partnerships -- 161 (7) -- 323 (36)
Gain (loss) on sale of property -- -- -- -- 83 --
Extraordinary item - extinguishment
of debt -- -- -- -- -- --
---------- ---------- ---------- ------------ ----------- ----------
Net income (loss) before minority
interest (91) (1,177) (7) (88) 357 476
Minority interest in (loss) income 7 31 8
---------- ---------- ---------- ------------ ----------- ----------
Net income (loss) $ (84) $ (1,177) $ (7) $ (57) $ 357 $ 484
========== ========== ========== ============ =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Nooney Nooney Property
Income Fund Income Fund Investors Two,
Ltd., LP Ltd., II LP LP (B) Adjustments Combined (2)
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 2,087 $ 3,724 $ 2,150 $ -- $ 15,177
Property management -- -- -- -- --
Interest and other 29 4 -- -- 903
----------- ----------- ------------- ---------- -----------
Total revenues 2,116 3,728 2,150 -- 16,080
EXPENSES:
Property operating 795 1,542 617 -- 6,813
Management and advisory -- -- -- -- --
Property management -- -- -- -- --
Fees to related parties (5) 150 257 135 -- 1,337
Real estate and other taxes 253 544 386 -- 2,009
Depreciation and amortization 403 766 491 -- 4,144
Interest 93 554 679 -- 2,502
Impairment charges -- -- -- -- --
----------- ----------- ------------- ---------- -----------
Total expenses 1,694 3,663 2,308 -- 16,805
Loss before equity in loss of
noncombined partnerships,
gain (loss) on sale of
property and extraordinary
item 422 65 (158) -- (725)
Equity in loss of noncombined
partnerships -- -- -- (441) --
Gain (loss) on sale of property -- -- -- -- 83
Extraordinary item - extinguishment
of debt -- -- -- -- --
----------- ----------- ------------- ---------- -----------
Net income (loss) before minority
interest 422 65 (158) (441) (642)
Minority interest in (loss) income (46) --
----------- ----------- ------------- ---------- -----------
Net income (loss) $ 422 $ 65 $ (158) $ (487) $ (642)
=========== =========== ============= ========== ===========
</TABLE>
(A) Sierra Mira Mesa (SMM) is 100% owned by two funds that account for their
investments in SMM on the equity method. SMM is consolidated in the combination
of the funds under the maximum scenario
(B) Nooney Real Property Investors Two, LP has a fiscal year ending on November
30. The one month period ended December 31 is not material to the pro forma
presentation of financial condition and results of operations.
F-20
<PAGE> 237
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined(3)
---------- ------------------- --------------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 561 $ 2,194 $ 2,402 $ 5,157
Property management -- -- --
Interest and other 10 18 11 39
--------- ---------------- -------------- --------
Total revenues 571 2,212 2,413 5,196
EXPENSES:
Property operating 72 659 1,031 1,762
Management and advisory -- -- -- --
Property management -- -- -- --
Fees to related parties (5) 28 105 132 265
Real estate and other taxes 99 120 159 378
Depreciation and amortization 74 376 441 891
Interest 395 672 876 1,943
Impairment charges -- -- -- --
--------- ---------------- -------------- --------
Total expenses 668 1,932 2,639 5,239
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property and
extraordinary item (97) 280 (226) (43)
Equity in loss of noncombined partnerships -- -- -- --
Gain (loss) on sale of property -- -- -- --
Extraordinary item - extinguishment of debt -- -- -- --
--------- ---------------- -------------- --------
Net income (loss) before minority interest (97) 280 (226) (43)
Minority interest in (loss) income -- -- -- --
--------- ---------------- -------------- --------
Net income (loss) $ (97) $ 280 $ (226) $ (43)
========= ================ ============== ========
</TABLE>
F-21
<PAGE> 238
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
American
Spectrum Other
Predecessor (1) Funds (2) Affiliates (3)
--------------- --------- --------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,301 $ 797 $ 849
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (904) (2,791) (60)
Purchase of equipment (138) -- --
Other (208) 457 (19)
-------------- --------- ------------
Net cash used in investing activities (1,250) (2,334) (79)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable * 877 1,931 (547)
Net borrowings (repayments) of affiliate notes (4,993) -- --
Net equity contributions (distributions) 1,522 (2,007) (130)
Other -- 868 --
Extraordinary gain (loss) on extinguishment of debt 1,861 -- --
-------------- --------- ------------
Net cash used in (provided by) financing activities (733) 792 (677)
Net increase (decrease) in cash 318 (745) 93
Cash, beginning of period 458 5,883 363
-------------- --------- ------------
Cash, end of period $ 776 $ 5,138 $ 456
============== ========= ============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------------------------
Property
Adjustments & Management Proforma
Eliminations (4) Business (5) Acquisitions (6) Combined
--------------- ---------------- --------------- --------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ -- $ -- $ -- $ 3,947
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- -- -- (3,755)
Purchase of equipment -- -- -- (138)
Other -- -- -- 230
----------- ------------ ------------ --------
Net cash used in investing activities -- -- -- (3,663)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable * 17,500(12) -- -- 19,761
Net borrowings (repayments) of affiliate notes -- -- -- (4,993)
Net equity contributions (distributions) (6,390)(4d) -- -- (7,005)
Other -- -- -- 868
Extraordinary gain (loss) on extinguishment of debt -- -- -- 1,861
----------- ------------ ------------ --------
Net cash used in (provided by) financing activities 11,110 -- -- 10,492
Net increase (decrease) in cash 11,110 -- -- 10,776
Cash, beginning of period (9)(4a) (415)(5a) (2,973)(9) 3,307
----------- ------------ ------------ --------
Cash, end of period $ 11,101 $ (415) $ (2,973) $ 14,083
=========== ============ ============ ========
</TABLE>
* Net of Issuance costs
F-22
<PAGE> 239
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Sierra Sierra Sierra Sierra Sierra
Pacific Pacific Pacific Pacific Pacific
Development Development Development Institutional Pension
Fund Fund II Fund III Properties V Investors 84
------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 75 $ (447) $ (14) $ 418 $ (205)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- (91) -- (2,176) (24)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other -- (570) -- -- --
------------ ---------- ---------- ------------ ------------
Net cash used in investing activities -- (661) -- (2,176) (24)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 2,367 (24) -- -- (40)
Net borrowings (repayments) of affiliate
notes -- -- -- -- --
Net equity contributions (distributions) (2,355) -- 11 1,657 249
Other (112) 980 -- -- --
------------ ---------- ---------- ------------ ------------
Net cash used in (provided by) financing
activities (100) 956 11 1,657 209
Net increase (decrease) in cash (25) (152) (3) (101) (20)
Cash, beginning of period 134 261 4 135 31
------------ ---------- ---------- ------------ ------------
Cash, end of period $ 109 $ 109 $ 1 $ 34 $ 11
============ ========== ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Sierra Nooney Real
Mira Nooney Nooney Property
Mesa Income Fund Income Fund Investors Two,
Partners (A) Ltd., LP Ltd., II LP LP (B) Combined (2)
------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 464 $ 378 $ 368 $ (240) $ 797
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- (114) (147) (239) (2,791)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other 1,027 -- -- -- 457
------------ ----------- ----------- ------------- -----------
Net cash used in investing activities 1,027 (114) (147) (239) (2,334)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (141) (11) (57) (163) 1,931
Net borrowings (repayments) of affiliate
notes -- -- -- -- --
Net equity contributions (distributions) (1,569) -- -- -- (2,007)
Other -- -- -- -- 868
------------ ----------- ----------- ------------- -----------
Net cash used in (provided by) financing
activities (1,710) (11) (57) (163) 792
Net increase (decrease) in cash (219) 253 164 (642) (745)
Cash, beginning of period 319 1,237 1,190 2,572 5,883
------------ ----------- ----------- ------------- -----------
Cash, end of period $ 100 $ 1,490 $ 1,354 $ 1,930 $ 5,138
============ =========== =========== ============= ===========
</TABLE>
(A) Sierra Mira Mesa (SMM) is 100% owned by two funds that account for their
investments in SMM on the equity method. SMM is consolidated in the combination
of the funds under the maximum scenario
(B) Nooney Real Property Investors Two, LP has a fiscal quarter ending on May
31. The one month period ended June 30 is not material to the pro forma
presentation of financial condition and results of operations.
F-23
<PAGE> 240
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands, except per share data)
Period Covered SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined (3)
---------- ---------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....... $ 332 $ 179 $ 338 $ 849
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment....... -- (1) (59) (60)
Purchase of equipment.............................. -- -- -- --
Acquisitions of businesses......................... -- -- -- --
Other.............................................. -- -- (19) (19)
---------- ---------------- -------------- ------------
Net cash used in investing activities........... -- (1) (78) (79)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable....... (342) (90) (115) (547)
Net borrowings (repayments) of affiliate notes..... -- -- -- --
Net equity contributions (distributions)........... -- (130) -- (130)
Other.............................................. -- -- -- --
---------- ---------------- -------------- ------------
Net cash used in (provided by) financing
activities................................... (342) (220) (115) (677)
Net increase (decrease) in cash.................... (10) (42) 145 93
Cash, beginning of period.......................... 21 139 203 363
---------- ---------------- -------------- ------------
Cash, end of period................................ $ 11 $ 97 $ 348 $ 456
============= ================ ============== ============
</TABLE>
F-24
<PAGE> 241
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: Year ended December 31, 1999
<TABLE>
<CAPTION>
Proforma Adjustments
American -------------------------------
Spectrum Other Adjustments Property Proforma
Predecessor (1) Funds (2) Affiliates (3) Eliminations (4) Management (5) Acquisitions(6) Combined
-------------- -------- ------------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (5,894) $ 2,279 $ 639 $ -- $ -- $ -- $ (3,060)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to real estate
held for investment (4,854) (1,913) (218) -- -- -- (6,985)
Purchase of equipment -- -- -- -- -- -- --
Other (2,062) (838) 48 -- -- -- (2,852)
-------------- -------- ------------- ----------- -------- -------- --------
Net cash used in investing
activities (6,916) (2,751) (170) -- -- -- (9,837)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
of notes payable * 10,322 2,793 (425) 17,500(12) -- -- 30,190
Net borrowings (repayments)
of affiliate notes 132 -- 98 -- -- -- 230
Net equity contributions
(distributions) 2,376 838 (258) (6,390)(4d) -- -- (3,434)
Other 214 -- -- -- -- -- --
-------------- -------- ------------- ----------- -------- -------- --------
Net cash used in (provided
by) financing activities 13,044 3,631 (585) 11,110 -- -- 26,986
Net increase (decrease) in
cash (64) 3,159 (116) 11,110 -- -- 14,089
Cash, beginning of period 522 2,724 479 (9)(4a) (415)(5a) (2,973)(9) 328
-------------- -------- ------------- ----------- -------- -------- --------
Cash, end of period $ 458 $ 5,883 $ 363 $ 11,101 $ (415) $ (2,973) $ 14,417
============== ======== ============= =========== ======== ======== ========
</TABLE>
*Net of Issuance cost
F-25
<PAGE> 242
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: Year ended December 31, 1999
<TABLE>
<CAPTION>
Sierra Sierra Sierra Sierra Sierra
Pacific Pacific Pacific Pacific Pacific
Development Development Development Institutional Pension
Fund Fund II Fund III Properties V Investors 84
----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 182 $ 85 $ -- $ (493) $ 497
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (37) (387) -- (343) (148)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other -- 326 -- -- (241)
----------- ----------- ----------- ------------ ------------
Net cash used in investing activities (37) (61) -- (343) (389)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (47) 166 -- -- (87)
Net borrowings (repayments) of affiliate notes -- -- -- -- --
Net equity contributions (distributions) (47) -- 2 967 --
Other -- -- -- -- --
----------- ----------- ----------- ------------ ------------
Net cash used in (provided by) financing (94) 166 2 967 (87)
activities
Net increase (decrease) in cash 51 190 2 131 21
Cash, beginning of period 83 71 2 4 10
----------- ----------- ----------- ------------ ------------
Cash, end of period $ 134 $ 261 $ 4 $ 135 $ 31
=========== =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Sierra Nooney Nooney Property
Mira Mesa Income Fund Income Fund Investors Two,
Partners (A) Ltd., LP Ltd., II LP LP (B) Combined (2)
------------ ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 713 $ 615 $ 684 $ (4) $ 2,279
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (161) (158) (619) (60) (1,913)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other (923) -- -- -- (838)
------------ ----------- ------------ ------------- ------------
Net cash used in investing activities (1,084) (158) (619) (60) (2,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 760 (25) (124) 2,150 2,793
Net borrowings (repayments) of affiliate notes -- -- -- -- --
Net equity contributions (distributions) (84) -- -- -- 838
Other -- -- -- -- --
------------ ----------- ------------ ------------- ------------
Net cash used in (provided by) financing 676 (25) (124) 2,150 3,631
activities
Net increase (decrease) in cash 305 432 (59) 2,086 3,159
Cash, beginning of period 14 805 1,249 486 2,724
------------ ----------- ------------ ------------- ------------
Cash, end of period $ 319 $ 1,237 $ 1,190 $ 2,572 $ 5,883
============ =========== ============ ============= ============
</TABLE>
(A) Sierra Mira Mesa (SMM) is 100% owned by two funds that account for their
investments in SMM on the equity method. SMM is consolidated in the combination
of the funds under the maximum scenario.
(B) Nooney Real Property Investors Two, LP has a fiscal year ending on November
30. The one month period ended December 31 is not material to the pro forma
presentation of financial condition and results of operations.
F-26
<PAGE> 243
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined (3)
------------ ------------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 42 $ 370 $ 227 $ 639
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (9) (107) (102) (218)
Purchase of equipment -- -- -- --
Acquisitions of businesses -- -- -- --
Other -- -- 48 48
------------ ---------------- -------------- ------------
Net cash used in investing activities (9) (107) (54) (170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (77) (120) (228) (425)
Net borrowings (repayments) of affiliate notes 35 63 -- 98
Net equity contributions (distributions) -- (258) -- (258)
Other -- -- -- --
------------ ---------------- -------------- ------------
Net cash used in (provided by) financing activities (42) (315) (228) (585)
Net increase (decrease) in cash (9) (52) (55) (116)
Cash, beginning of period 30 191 258 479
------------ ---------------- -------------- ------------
Cash, end of period $ 21 $ 139 $ 203 $ 363
============ ================ ============== ============
</TABLE>
F-27
<PAGE> 244
UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro forma Other
Predecessor (1) Funds (2) Affiliates (3)
--------------- --------- ------------
<S> <C> <C> <C>
ASSETS:
Real estate held for
investment, net $ 92,070 $ 22,448 $ 15,856
Cash 776 2,074 456
Accounts receivable, net 1,693 1,303 150
Accounts and notes receivable
from affiliates, net 3,610 4,647 592
Investment in uncombined
partnerships and joint
ventures 3,493 2,142 --
Goodwill and other 6,174 2,142 2,223
------------ --------- ------------
Total assets $ 107,816 $ 34,756 $ 19,277
============ ========= ============
LIABILITIES AND EQUITY
(DEFICIT):
LIABILITIES:
Accounts payable and accrued
expenses $ 6,141 $ 1,585 $ 1,439
Distributions in excess of
investment in uncombined
partnerships and joint
ventures -- 348 --
Deferred revenue 273 -- 26
Mortgage notes payable, net 114,096 15,597 27,530
-- -- --
Notes payable to affiliates 13,632 -- 500
Other 48 102 77
------------ --------- ------------
Total liabilities 134,190 17,632 29,572
MINORITY
INTEREST 4,413 --
MANDATORILY-REDEEMABLE COMMON
STOCK OF SUBSIDIARY 1,045 -- --
EQUITY (DEFICIT) (27,419) 12,711 (10,295)
------------ --------- ------------
Total liabilities and equity (deficit) $ 107,816 $ 34,756 $ 19,277
============ ========= ============
OTHER PRO FORMA DATA:
Book value per share (7)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------------------------------
Property
Adjustments & Management Pro forma
Eliminations (4) Business (5) Acquisitions (6) Combined
---------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Real estate held for
investment, net $ (986)(4a) $ (1,033)(5a) $35,234 $ 163,589
Cash (9)(4a) (415)(5a) (808)(9) 11,019
(6,390)(4d) (2,165)(9)
17,500(12)
Accounts receivable, net (80)(4a) (1,551)(5a) -- 1,515
Accounts and notes receivable
from affiliates, net (5,103)(4b) (871)(5a) -- 2,875
Investment in uncombined
partnerships and joint
ventures (348)(4c) (208)(5a) -- 5,079
Goodwill and other (8)(4a) (1,949)(5a) 719 7,969
500(12) (1,832)(9)
----------- -------- ------- ------------
Total assets $ 5,076 $ (6,027) $31,148 $ 192,046
=========== ======== ======= ============
LIABILITIES AND EQUITY
(DEFICIT):
LIABILITIES:
Accounts payable and accrued
expenses $ (74)(4a) $ (722)(5a) -- $ 8,369
Distributions in excess of
investment in uncombined
partnerships and joint
ventures -- -- -- 348
Deferred revenue -- (15)(5a) -- 284
Mortgage notes payable, net (1,125)(4a) (1,306)(5a) -- 172,792
18,000(12) -- --
Notes payable to affiliates (5,103)(4b) (3,064)(5a) -- 5,965
Other -- -- -- 227
----------- -------- ------- ------------
Total liabilities 11,698 (5,107) -- 187,985
MINORITY
INTEREST -- -- -- 4,413
MANDATORILY-REDEEMABLE COMMON
STOCK OF SUBSIDIARY -- (1,045)(5a) -- --
EQUITY (DEFICIT) (6,622)(4e) 125(5b) 35,145 (352)
(3,997)(9)
----------- -------- ------- ------------
Total liabilities and equity (deficit) $ 5,076 $ (6,027) $31,148 $ 192,046
=========== ======== ======= ============
OTHER PRO FORMA DATA:
Book value per share (7) $ (0.09)
============
</TABLE>
F-28
<PAGE> 245
PRO FORMA COMBINING BALANCE SHEET OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Real
Sierra Pacific Sierra Pacific Sierra Pacific Property
Development Development Institutional Investors Two,
Fund II Fund III Properties V LP Combined(2)
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 10,325 $ -- $ 5,672 $ 6,451 $ 22,448
Cash 109 1 34 1,930 2,074
Accounts receivable, net 647 -- 497 159 1,303
Accounts receivable from affiliates, net 4,647 -- -- -- 4,647
Investment in uncombined partnerships
and joint ventures 2,142 -- -- -- 2,142
Other 865 -- 280 997 2,142
------------- ------------- ------------- ------------- -------------
Total assets $ 18,735 $ 1 $ 6,483 $ 9,537 $ 34,756
============= ============= ============= ============= =============
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 953 $ -- $ 23 $ 609 $ 1,585
Distributions in excess of investment in
uncombined partnerships and joint
ventures -- 348 -- -- 348
Mortgage notes payable, net 6,373 -- -- 9,224 15,597
Other 102 102
------------- ------------- ------------- ------------- -------------
Total liabilities 7,326 348 23 9,935 17,632
MINORITY INTEREST -- 14 4,399 -- 4,413
EQUITY (DEFICIT) 11,409 (361) 2,061 (398) 12,711
------------- ------------- ------------- ------------- -------------
Total liabilities and equity (deficit) $ 18,735 $ 1 $ 6,483 $ 9,537 $ 34,756
============= ============= ============= ============= =============
</TABLE>
F-29
<PAGE> 246
PRO FORMA COMBINING BALANCE SHEET OF OTHER
AFFILIATES
(Amounts in thousands)
Period Covered: AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney
Rider Village Hazelwood
Trail, LP Apartments, Ltd. Associates, LP Combined(3)
--------- ---------------- -------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 1,444 $ 7,237 $ 7,175 $ 15,856
Cash 11 97 348 456
Accounts receivable, net 90 36 24 150
Accounts receivable from affiliates, net 100 488 4 552
Other 47 810 1,366 2,223
------- ------- ------- --------
Total assets $ 1,692 $ 8,668 $ 8,917 $ 19,277
======= ======= ======= ========
LIABILITIES AND DEFICIT:
LIABILITIES:
Accounts payable and accrued expenses $ 867 $ 284 $ 288 $ 1,439
Deferred revenue -- 21 5 26
Mortgage notes payable, net 3,709 10,840 12,951 27,530
Notes payable to affiliates 437 63 -- 500
Other -- -- 77 77
------- ------- ------- --------
Total liabilities 5,013 11,208 13,351 29,572
DEFICIT (3,321) (2,540) (4,434) (10,295)
------- ------- ------- --------
Total liabilities and equity (deficit) $ 1,692 $ 8,668 $ 8,917 $ 19,277
======= ======= ======= ========
</TABLE>
F-30
<PAGE> 247
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro Forma Other Adjustments &
Predecessor (1) Funds (2) Affiliates (3) Eliminations (4)
--------------- --------- -------------- ----------------
REVENUES:
<S> <C> <C> <C> <C>
Rental and reimbursement $ 7,708 $ 3,253 $ 2,722 $ (88)(4g)
Property management 4,829 -- -- --
Income from affiliates 964 298 29 (728)(4f)
------------ --------- ------------ --------
Total revenues 13,501 3,551 2,751 (816)
EXPENSES:
Property operating 2,502 1,454 899 (4)(4g)
Property management 5,329 29 -- (311)(4f)
Fees to related parties -- 79 80 --
Real estate and other taxes 644 192 259 (26)(4g)
Depreciation and amortization 1,723 940 427 (13)(4g)
Interest 6,435 682 1,018 (481)(4g)
-- -- -- 720(12)
Impairment charges -- -- -- --
------------ --------- ------------ --------
Total expenses 16,633 3,376 2,683 (115)
Loss before equity in loss of noncombined
partnerships and gain (loss)
on sale of property (3,132) 175 68 (701)
Equity in income (loss) of noncombined
partnerships (270) 94 -- 20(4h)
Gain (loss) on sale of property 1,328 -- -- --
------------ --------- ------------ --------
Net income (loss) before
minority interest (2,074) 269 68 (681)
Minority interest in (loss) -- (89) --
Extraordinary item -
extinguishment of debt (1,861) -- -- --
------------ --------- ------------ --------
Net income (loss) before
reorganization costs (10) (3,935) 180 68 (681)
Reorganization costs (9) -- -- -- --
------------ --------- ------------ --------
Net income (loss) after
reorganization costs $ (3,935) $ 180 $ 68 $ (681)
============ ========= ============ ========
OTHER PRO FORMA DATA:
Basic and diluted loss per share
Weighted average shares outstanding (7)
Deficiency to cover fixed charges (8)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------
Property
Management Pro Forma
Business (5) Acquisitions (6) Combined
------------ ------------ ------------
REVENUES:
<S> <C> <C> <C>
Rental and reimbursement $ -- $ 87(6b) $ 13,682
Property management (4,829)(5c) -- --
Income from affiliates -- -- 563
------------ -------- ------------
Total revenues (4,829) 87 14,245
EXPENSES:
Property operating 72(5d) -- 4,923
Property management (5,047)(5d) -- --
Fees to related parties -- -- 159
Real estate and other taxes -- -- 1,069
Depreciation and amortization (142)(5d) 478(6a) 3,413
Interest (9)(5d) -- 8,365
-- --
Impairment charges 44(5d) -- 44
------------ -------- ------------
Total expenses (5,082) 478 17,973
Loss before equity in loss of noncombined
partnerships and gain (loss)
on sale of property 253 (391) (3,728)
Equity in income (loss) of noncombined
partnerships -- -- (156)
Gain (loss) on sale of property -- -- 1,328
------------ -------- ------------
Net income (loss) before
minority interest 253 (391) (2,556)
Minority interest in (loss) -- -- (89)
Extraordinary item -
extinguishment of debt -- -- (1,861)
------------ -------- ------------
Net income (loss) before
reorganization costs 253 (391) (4,506)
Reorganization costs (9) (3,997)
------------
Net income (loss) after
reorganization costs (10) $ (8,503)
============
OTHER PRO FORMA DATA:
Basic and diluted loss per share $ (2.09)
============
Weighted average shares outstanding (7) 4,060
============
Deficiency to cover fixed charges (8) $ 8,503
============
</TABLE>
F-31
<PAGE> 248
PRO FORMA HISTORICAL COMBINING DATA OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Nooney Real
Sierra Pacific Sierra Pacific Sierra Pacific Property
Development Development Institutional Investors Two,
Fund II Fund III Properties V LP (A) Combined
-------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 1,267 $ -- $ 699 $ 1,287 $ 3,253
Property management -- -- -- -- --
Interest and other 237 -- 11 50 298
------------ ------------ ------------ ------------ -----------
Total revenues 1,504 -- 710 1,337 3,551
EXPENSES:
Property operating 886 14 237 317 1,454
Management and advisory -- -- -- -- --
Property management -- -- 29 -- 29
Fees to related parties (5) -- -- -- 79 79
Real estate and other taxes -- -- -- 192 192
Depreciation and amortization 441 -- 230 269 940
Interest 223 -- -- 459 682
Impairment charges -- -- -- -- --
------------ ------------ ------------ ------------ -----------
Total expenses 1,550 14 496 1,316 3,376
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property
and extraordinary item (46) (14) 214 21 175
Equity in loss of noncombined
partnerships 101 (7) -- -- 94
Gain (loss) on sale of property -- -- -- -- --
Extraordinary item - extinguishment
of debt -- -- -- -- --
------------ ------------ ------------ ------------ -----------
Net income (loss) before minority
interest 55 (21) 214 21 269
Minority interest's share in loss
(income) -- 5 (94) -- (89)
------------ ------------ ------------ ------------ -----------
Net income (loss) $ 55 $ (16) $ 120 $ 21 $ 180
============ ============ ============ ============ ===========
</TABLE>
(A) Nooney Real Property Investors Two, LP has a fiscal quarter ending on May
31. The one month period ended June 30 is not material to the pro forma
presentation of financial condition and results of operations.
F-32
<PAGE> 249
PRO FORMA COMBINING DATA OF OTHER
AFFILIATES
(Amounts in thousands)
Period Covered:
<TABLE>
<CAPTION>
Six months ended June 30, 2000
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined(3)
------------ ------------------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 299 $ 1,132 $ 1,291 $ 2,722
Property management
Interest and other 5 16 8 29
----------- ------------------- ------------- -----------
Total revenues 304 1,148 1,299 2,751
EXPENSES:
Property operating 10 380 509 899
Management and advisory - - - -
Property management - - - -
Fees to related parties(5) 4 5 71 80
Real estate and other taxes 72 107 80 259
Depreciation and amortization 38 171 218 427
Interest 199 386 433 1,018
Impairment charges - - - -
----------- ------------------- ------------- -----------
Total expenses 323 1,049 1,311 2,683
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of property and
extraordinary item (19) 99 (12) 68
Equity in loss of noncombined partnerships - - - -
Gain (loss) on sale of property - - - -
Extraordinary item -- extinguishment of debt - - - -
----------- ------------------- ------------- -----------
Net loss before minority interest (19) 99 (12) 68
Minority interest in (loss) income - - - -
----------- ------------------- ------------- -----------
Net loss $ (19) $ 99 $ (12) $ 68
=========== =================== ============= ===========
</TABLE>
F-33
<PAGE> 250
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-------------- ------------ --------------
<S> <C> <C> <C>
REVENUES:
Rental and
reimbursement $ 14,813 $ 5,699 $ 5,157
Property management 5,452 -- --
Income from affiliates 2,357 459 39
------------ ------------ ------------
Total revenues 22,622 6,158 5,196
EXPENSES:
Property operating 3,396 3,267 1,762
Property management 10,766 -- --
Fees to related parties -- 687 265
Real estate and other taxes 1,597 870 378
Depreciation and amortization 3,259 1,802 891
Interest 9,982 1,116 1,943
Impairment charges 5,164 -- --
------------ ------------ ------------
Total expenses 34,164 7,742 5,239
Loss before equity in income (loss) of noncombined
partnerships (11,542) (1,584) (43)
Equity in income (loss) of noncombined
partnerships (330) 154 --
------------ ------------ ------------
Net income (loss) before minority interest and
extraordinary item (11,872) (1,430) (43)
Minority interest in (loss) income -- 31 --
Extraordinary item - extinguishment of debt (214) -- --
------------ ------------ ------------
Net income (loss) before
reorganization costs(10) $ (12,086) $ (1,399) $ (43)
============ ============ ============
Reorganization Costs (a)
Net income (loss) after
reorganization Costs
OTHER PRO FORMA DATA:
Basic and diluted loss per share
Weighted average shares outstanding (7)
Deficiency to cover fixed charges (8)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------------------------------------------
Adjustments & Property Management Pro Forma
Eliminations (4) Business (5) Acquisitions (6) Combined
---------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental and
reimbursement $ (518)(4g) $ -- $ 43(6b) $ 25,194
Property management -- (5,452)(5c) -- --
Income from affiliates (988)(4f) -- -- 1,867
------------ ------------ ------------ ------------
Total revenues (1,506) (5,452) 43 27,061
EXPENSES:
Property operating (386)(4g) -- -- 8,039
Property management -- (5,843)(5d) -- 4,923
Fees to related parties (952)(4f) -- -- --
Real estate and other taxes (48)(4g) -- -- 2,797
Depreciation and amortization (24)(4g) (313)(5d) 252(6a) 5,867
Interest (173)(4g) (153)(5d) -- 14,155
1,440(12)
Impairment charges -- (1,724) (5d) -- 3,440
------------ ------------ ------------ ------------
Total expenses (143) (8,033) 252 39,221
Loss before equity in income (loss) of
noncombined partnerships 77 2,581 209 (12,160)
Equity in income (loss) of noncombined
partnerships 152 -- -- (24)
------------ ------------ ------------ ------------
Net income (loss) before minority interest and
extraordinary item 229(4h) 2,581 209 (12,184)
Minority interest in (loss) income -- -- -- 31
Extraordinary item - extinguishment of debt -- -- -- (214)
------------ ------------ ------------ ------------
Net income (loss) before
reorganization costs $ 229 $ 2,581 $ 209 $ (12,367)
============ ============ ============ ============
Reorganization Costs
(9) (3,997)
------------
Net income (loss) after
reorganization Costs
(10) (16,364)
============ ============ ============ ============
OTHER PRO FORMA DATA:
Basic and diluted loss per share $ (3.05)
============
Weighted average shares outstanding (7) 4,060
============
Deficiency to cover fixed charges (8) $ 16,364
============
</TABLE>
F-34
<PAGE> 251
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney
Real
Sierra Pacific Sierra Pacific Sierra Pacific Property
Development Development Institutional Investors Two,
Fund II Fund III Properties V LP (A) Combined (2)
-------------- -------------- -------------- -------------- ------------
REVENUES:
<S> <C> <C> <C> <C> <C>
Rental and reimbursement $ 2,356 $ -- $ 1,193 $ 2,150 $ 5,699
Property management -- -- -- -- --
Interest and other 410 15 34 -- 459
------------ ------------ ------------ ------------ ------------
Total revenues 2,766 15 1,227 2,150 6,158
EXPENSES:
Property operating 2,029 15 606 617 3,267
Management and advisory -- -- -- -- --
Property management -- -- -- -- --
Fees to related parties (5) 396 -- 156 135 687
Real estate and other taxes 373 -- 111 386 870
Depreciation and amortization 869 -- 442 491 1,802
Interest 437 -- -- 679 1,116
Impairment charges -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total expenses 4,104 15 1,315 2,308 7,742
Loss before equity in loss of
noncombined
partnerships, gain (loss) on sale
of property and
extraordinary item (1,338) -- (88) (158) (1,584)
Equity in loss of noncombined
partnerships 161 (7) -- -- 154
Gain (loss) on sale of property -- -- -- -- --
Extraordinary item -
extinguishment of debt -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss before minority
interest (1,177) (7) (88) (158) (1,430)
Minority interest in (loss)
income -- -- 31 -- 31
------------ ------------ ------------ ------------ ------------
Net loss $ (1,177) $ (7) $ (57) $ (158) $ (1,399)
============ ============ ============ ============ ============
</TABLE>
(A) Nooney Real Property Investors Two, LP has a fiscal year ending on November
30. The one month period ended December 31 is not material to the pro forma
presentation of financial condition and results of operations.
F-35
<PAGE> 252
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered
Year ended December 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LLC Apartments, Ltd. LP Associates, LP Combined (3)
----------- ------------------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 561 $ 2,194 $ 2,402 $ 5,157
Property management - - - -
Interest and other 10 18 11 39
----- ------- ------- -------
Total revenues 571 2,212 2,413 5,196
EXPENSES:
Property operating 72 659 1,031 1,762
Management and advisory - - - -
Property management - - - -
Fees to related parties (5) 28 105 132 265
Real estate and other taxes 99 120 159 378
Depreciation and amortization 74 376 441 891
Interest 395 672 876 1,943
Impairment charges - - - -
----- ------- ------- -------
Total expenses 668 1,932 2,639 5,239
Loss before equity in loss of
noncombined partnerships, gain
(loss) on sale of property and
extraordinary item (97) 280 (226) (43)
Equity in loss of noncombined
partnerships - - - -
Gain (loss) on sale of
property - - - -
Extraordinary item -
extinguishment of debt - - - -
----- ------- ------- -------
Net income (loss) before
minority interest (97) 280 (226) (43)
Minority interest in (loss)
income - - - -
----- ------- ------- -------
Net income (loss) $ (97) $ 280 $ (226) $ (43)
===== ======= ======= =======
</TABLE>
F-36
<PAGE> 253
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------------------
American Property
Spectrum Other Adjustments & Management Proforma
Predecessor(1) Funds(2) Affiliates(3) Eliminations(4) Business(5) Acquisitions(6) Combined
-------------- -------- ------------- --------------- ----------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 2,301 $ (283) $ 849 $ -- $ -- $ -- $ 2,867
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to real estate held
for investment (904) (2,506) (60) -- -- -- (3,470)
Purchase of equipment (138) -- -- -- -- -- (138)
Other (208) (570) (19) -- -- -- (797)
-------- ------- -------- -------- ------ -------- --------
Net cash used in
investing activities (1,250) (3,076) (79) -- -- -- (4,405)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments)
of notes payable* 877 (187) (547) 17,500(12) -- -- 17,643
Net borrowings (repayments)
of affiliate notes (4,993) -- -- -- -- -- (4,993)
Net equity contributions
(distributions) 1,522 1,668 (130) (6,390)(4d) -- -- (3,330)
Other -- 980 -- -- -- -- 980
Extraordinary gain (loss) on
extinguishment of debt 1,861 -- -- -- -- 1,861
-------- ------- -------- -------- ------ -------- --------
Net cash used in (provided
by) financing activities (733) 2,461 (677) 11,110 -- -- 12,161
Net increase (decrease) in cash 318 (898) 93 11,110 -- -- 10,623
Cash, beginning of period 458 2,972 363 (9)(4a) (415)(5a) (2,973)(9) 396
-------- ------- -------- -------- ------ -------- --------
Cash, end of period $ 776 $ 2,074 $ 456 $ 11,101 $ (415) $ (2,973) $ 11,019
======== ======= ======== ======== ====== ======== ========
</TABLE>
* Net of Issuance costs
F-37
<PAGE> 254
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Sierra Sierra Sierra Nooney Real
Pacific Pacific Pacific Property
Development Development Institutional Investors
Fund II Fund III Properties V Two, LP(A) Combined(2)
------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (447) $ (14) $ 418 $ (240) $ (283)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (91) -- (2,176) (239) (2,506)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other (570) -- -- -- (570)
------- ------- ------- ------- ----------
Net cash used in investing activities (661) -- (2,176) (239) (3,076)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (24) -- -- (163) (187)
Net borrowings (repayments) of affiliate notes -- -- -- -- --
Net equity contributions (distributions) -- 11 1,657 -- 1,668
Other 980 -- -- -- 980
------- ------- ------- ------- ----------
Net cash used in (provided by) financing
activities 956 11 1,657 (163) 2,461
Net increase (decrease) in cash (152) (3) (101) (642) (898)
Cash, beginning of period 261 4 135 2,572 2,972
------- ------- ------- ------- ----------
Cash, end of period $ 109 $ 1 $ 34 $ 1,930 $ 2,074
======= ======= ======= ======= ==========
</TABLE>
(A) Nooney Real Property Investors Two, LP has a fiscal quarter ending on May
31. The one month period ended June 30 is not material to the pro forma
presentation of financial condition and results of operations.
F-38
<PAGE> 255
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands, except per share data)
Period Covered: Six months ended June 30, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LLC Apartments, Ltd. LP Associates, LP Combined(3)
----------- ------------------- -------------- -----------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................. $ 332 $ 179 $ 336 $ 849
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for
investment.......................... - (1) (59) (60)
Purchase of equipment.................. - - - -
Acquisitions of businesses............. - - - -
Other.................................. - - (19) (19)
----- ----- ----- -----
Net cash used in investing
activities........................ - (1) (78) (79)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes
payable............................. (342) (90) (115) (547)
Net borrowings (repayments) of
affiliate notes..................... - - - -
Net equity contributions
(distributions)..................... - (130) - (130)
Other.................................. - - - -
----- ----- ----- -----
Net cash used in (provided by)
financing activities.............. (342) (220) (115) (677)
Net increase (decrease) in cash.......... (10) (42) 145 93
Cash, beginning of period................ 21 139 203 363
----- ----- ----- -----
Cash, end of period....................... $ 11 $ 97 $ 348 $ 456
===== ===== ===== =====
</TABLE>
F-39
<PAGE> 256
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Proforma Adjustments
-------------------------------------------
American
Spectrum Other Adjustments Property Proforma
Predecessor(1) Funds(2) Affiliates(3) Eliminations(4) Management(5) Acquisitions(6) Combined
-------------- -------- ------------- --------------- ------------- --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (6,192) $ (412) $ 639 $ -- $ -- $ -- $ (5,751)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Additions to real estate held
for investment (4,854) (790) (218) -- -- -- (5,862)
Purchase of equipment -- -- -- -- -- -- --
Other (2,062) 326 48 -- -- -- (1,688)
-------- -------- -------- -------- -------- ------- --------
Net cash used in investing
activities (6,916) (464) (170) -- -- -- (7,550)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings (repayments) of
notes payable 10,322 2,316 (425) 17,500(12) -- -- 29,713
Net borrowings (repayments) of
affiliate notes 132 -- 98 -- -- -- 230
Net equity contributions
(distributions) 2,376 969 (258) (6,390)(4d) -- -- (3,303)
Other 214 -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Net cash used in (provided
by) financing activities 13,044 3,285 (585) 11,110 -- -- 26,640
Net increase (decrease) in cash (64) 2,409 (116) 11,110 -- -- 13,339
Cash, beginning of period 522 563 479 (9)(4a) (415)(5a) (2,973)(9) (1,833)
-------- -------- -------- -------- -------- ------- --------
Cash, end of period $ 458 $ 2,972 $ 363 $ 11,101 $ (415) $(2,973) $ 11,506
======== ======== ======== ======== ======== ======= ========
</TABLE>
F-40
<PAGE> 257
PRO FORMA COMBINING DATA OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Real
Sierra Pacific Sierra Pacific Sierra Pacific Property
Development Development Institutional Investors
Fund II Fund III Properties V Two, LP(A) Combined(2)
------- -------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 85 $ -- $ (493) $ (4) $ (412)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (387) -- (343) (60) (790)
Purchase of equipment -- -- -- -- --
Acquisitions of businesses -- -- -- -- --
Other 326 -- -- -- 326
------- ------- ------- ------- -------
Net cash used in investing activities (61) -- (343) (60) (464)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 166 -- -- 2,150 2,316
Net borrowings (repayments) of affiliate notes -- -- -- -- --
Net equity contributions (distributions) -- 2 967 -- 969
Other -- -- -- -- --
------- ------- ------- ------- -------
Net cash used in (provided by) financing
activities 166 2 967 2,150 3,285
Net increase (decrease) in cash 190 2 131 2,086 2,409
Cash, beginning of period 71 2 4 486 563
------- ------- ------- ------- -------
Cash, end of period $ 261 $ 4 $ 135 $ 2,572 $ 2,972
======= ======= ======= ======= =======
</TABLE>
(A) Nooney Real Property Investors Two, LP has a fiscal year ending on November
30. The one month period ended December 31 is not material to the pro forma
presentation of financial condition and results of operations.
F-41
<PAGE> 258
PRO FORMA COMBINING DATA OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trail, LLC Apartments, Ltd. LP Associates, LP Combined (3)
---------- -------------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 42 $ 370 $ 227 $ 639
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (9) (107) (102) (218)
Purchase of equipment -- -- -- --
Acquisitions of businesses -- -- -- --
Other -- -- 48 48
---- ----- ----- -----
New cash used in investing activities (9) (107) (54) (170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (77) (120) (228) (425)
Net borrowings (repayments) of affiliate notes 35 63 -- 98
Net equity contributions (distributions) -- (258) -- (258)
Other -- -- -- --
---- ----- ----- -----
Net cash used in (provided by) financing activities (42) (315) (228) (585)
Net increase (decrease) in cash (9) (52) (55) (116)
Cash, beginning of period 30 191 258 479
---- ----- ----- -----
Cash, end of period $ 21 $ 139 $ 203 $ 363
==== ===== ===== =====
</TABLE>
F-42
<PAGE> 259
NOTES TO THE PRO FORMA UNAUDITED
COMBINED FINANCIAL INFORMATION OF
AMERICAN SPECTRUM
1 AMERICAN SPECTRUM PREDECESSOR
The combined historical financial statements of American Spectrum
Predecessor include the accounts of various entities which have (a)
majority ownership interest(s) held by Mssrs. Carden, Galardi and/or their
affiliates, and (b) agreed to transfer their properties to American
Spectrum in exchange for shares of American Spectrum or limited partnership
units in the operating partnership in a private transaction. Such
historical amounts have been derived from the historical audited and
unaudited combined financial statements of American Spectrum Predecessor
included elsewhere in this consent solicitation. These financial statements
reflect all entities at carry-over basis due to the high degree of common
and controlling interests held by Mssrs. Carden and Galardi. See also Note
1 to the combined financial statements of American Spectrum Predecessor for
information regarding the planned reorganization of American Spectrum
Predecessor.
2 THE FUNDS
Historical information of the Funds has been combined and all inter-fund
balances and transactions have been eliminated in the presentation (See
combining schedules). These amounts reflect solely the combination of the
historical financial statements of the funds and do not reflect the
application of any effects of the consolidation.
The "Maximum Participation" scenario includes all eight publicly-traded
Limited Partnerships (the "Funds") which are managed by companies included
in the combined financial statements of American Spectrum Predecessor. This
scenario also consolidates the accounts of Sierra Mira Mesa Partners
(SMMP), a partnership that is wholly-owned by two of the Funds (each with a
50 percent interest). SMMP was previously accounted-for using the equity
method, by each of those funds.
The "Minimum Participation" scenario includes the Funds with the lowest
cash flows from operations for the year ended December 31, 1999 that
achieve the minimum threshold of appraised value of real property ($23
million) in order to complete the Consolidation.
They are: Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Nooney Real Property Investors Two, L.P.
The historical audited and unaudited combined financial data from which the
disclosed amounts are derived can be found at elsewhere in this consent
solicitation. In the Consolidation, the acquisition of each of the Funds
will be accounted for using purchase accounting.
F-43
<PAGE> 260
3 OTHER AFFILIATES
The other affiliates are entities in which affiliates of Mssrs. Carden,
Galardi have substantial common ownership, but also have significant
outside interests. Such Other Affiliates consist of:
Meadow Wood Village Apartments, Ltd. LP
Nooney Rider Trail LLC
Nooney-Hazelwood Associates, LP
The historical information of these entities has been combined. There were
no inter-company transactions or balances (see combining schedules). These
amounts reflect solely the combination of the historical financial
statements of the other affiliates and do not reflect the application or
any effects of the consolidation.
The historical audited and unaudited combined financial data from which the
disclosed amounts are derived can be found elsewhere in this consent
solicitation. In the Consolidation, the acquisition of each of the other
affiliates will be accounted for using purchase accounting.
4 ADJUSTMENTS AND ELIMINATIONS
The various entities to be included in the proposed consolidation have paid
management fees, administrative fees and interest to companies included in
the consolidated financial statements of American Spectrum Predecessor. A
subsidiary of American Spectrum will manage the properties subsequent to
the Consolidation. Inter-company fees are eliminated in the pro forma
combination. Also, there have historically been certain loans and advances
between companies included in American Spectrum Predecessor and the Funds,
these amounts and the related interest expense/income have also been
eliminated in the pro forma combination.
The eliminating entries are as follows:
(a) To eliminate the assets and liabilities of West Florissant, a
property owned by American Spectrum Predecessor that will not be
included in the transaction.
(b) To eliminate accounts and notes receivable and payable between
American Spectrum Predecessor, the Funds and Other Affiliates.
(c) To eliminate American Spectrum Predecessor investments in the
Funds and Other Affiliates.
(d) To reflect planned cash distribution to limited partners of Sierra
Pacific Development Fund II (see note 11).
F-44
<PAGE> 261
(e) Reflects adjustments for the following:
<TABLE>
<CAPTION>
Maximum Minimum
------- -------
<S> <C> <C>
Elimination of Net Liabilities of West
Florissant (4a) $ 116 $ 116
Elimination of American Spectrum
Predecessor's investment in the Funds
and other affiliates (4c) (2,283) (348)
Distribution to Limited Partners of Sierra
Pacific Development Fund II (4d) (6,390) (6,390)
------- -------
Total $(8,557) $(6,622)
======= =======
</TABLE>
(f) To eliminate property management and administrative fee revenue
and expenses between American Spectrum Predecessor and the Funds
and Other Affiliates.
(g) To eliminate the operations of West Florissant (see (a) above).
(h) To eliminate American Spectrum Predecessor equity in loss of Funds
and Other Affiliates.
5 PROPERTY MANAGEMENT BUSINESS
The property management subsidiaries of CGS are included in American
Spectrum Predecessor and have, in part, historically provided property
management, brokerage and leasing services to properties not affiliated
with American Spectrum Predecessor, The Funds or the Other Affiliates, i.e.
third parties. The specific revenues and expenses related thereto, which
are included in the historical amounts, have been eliminated in the pro
forma presentation since American Spectrum will not provide such services
after the Consolidation. The third party property management activities
will be distributed to the shareholders of the property management
companies (primarily Mssrs. Carden and Galardi), prior to the
Consolidation. The following eliminating entries represent the distribution
of the third party property management operations:
(a) To eliminate all assets and liabilities associated with third
party property management
F-45
<PAGE> 262
operations.
(b) To reflect the distribution to shareholders of net liabilities (at
book value) of third party property management operations.
(c) To eliminate property management revenue from third parties.
(d) To eliminate property management expenses related to third parties
and reclassify remaining costs to property operations.
6 ACQUISITIONS
Reflects adjustments to apply purchase accounting to the entities
comprising the Funds and Other Affiliates - see "Accounting Treatment."
The exchange values, which are based on appraisals of the real estate
properties, are discussed elsewhere in this prospectus and have been used
to allocate purchase price. The exchange value assigned reflects the $15
per share value determined in the transaction multiplied by the number of
shares or operating partnership units to be issued and approximates fair
value. The total purchase price of the Funds and other affiliates was $75.8
million (maximum scenario) and $11.4 million, respectively, based on
5,050,000 and 763,000 shares to be issued. Under the minimum scenario for
the Funds, the purchase price was $26.1 million, based on 1,742,000 shares.
The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
Funds
------------------------ Other
Maximum Minimum Affiliates
------- ------- ----------
<S> <C> <C> <C>
Real Estate $ 91,911 $ 35,949 $ 37,589
Cash 2,795 1,266 456
Accounts Receivable, Net 3,336 1,303 150
Accounts and Notes Receivable
from Affiliates 8,557 4,647 592
Investment in Uncombined
Partnerships and Joint
Ventures -- 2,142 --
Prepaid and Other 7,365 2,861 2,223
--------- --------- ---------
Total assets 113,964 48,168 41,010
Liabilities (Principally Mortgage
Notes Payable) (38,212) (17,632) (29,572)
Minority Interest -- (4,413) --
--------- --------- ---------
Total purchase price $ 75,752 $ 26,123 $ 11,438
========= ========= =========
</TABLE>
F-46
<PAGE> 263
The purchase adjustments to the statements of operations consist primarily
of adjustments to:
(a) depreciation resulting from the adjusted carrying amounts of the
properties, and
(b) lease rent revenue recognition on a straight-line basis as of the
assumed purchase date, assuming all leases originated as of the
assumed purchase date(s).
Any change to the values of real estate determined in the preliminary
appraisals will change the exchange values which, in turn, will change the
purchase price to be allocated. In addition, final exchange values will
reflect current balance sheet data. Exchange values included herein reflect
balance sheet data as of March 31, 2000.
7 LOSS PER SHARE
The number of shares outstanding has been adjusted to reflect the number of
shares to be issued to effect the Consolidation, assuming all participants
in the transaction receive shares in American Spectrum. The effect of the
issuance of operating partnership units instead of shares would not be
material to the pro forma presentation. American Spectrum Predecessor will
be considered the acquirer for accounting purposes due to its relative
significance as determined by the number of shares/units received in the
exchange offer. American Spectrum Realty (formerly CGS Real Estate Company,
one of the American Spectrum Predecessor entities) is the legal acquirer.
8 DEFICIENCY TO COVER FIXED CHARGES
Deficiency to cover fixed charges is the amount of earnings that would be
required to achieve a ratio of earnings to fixed charges of 1.0. For
purposes of determining the ratio of earnings to fixed charges, earnings
consist of earnings before extraordinary items, income taxes and fixed
charges.
Fixed charges consist of interest on indebtedness, the amortization of debt
issuance costs and that portion of operating rental expense representing
interest.
9 TRANSACTION FEES
Total transaction fees are estimated to be approximately $4.8 million, of
which approximately $1.8 million was paid and recorded in other assets as
of June 30, 2000. Approximately $2.3 million of the transaction fees is
attributable to the acquisition of the Funds and the Other Affiliates under
the maximum scenario. The transaction costs have been reflected as a
reduction in cash and an increase in the purchase price allocated to these
entities in the pro forma balance sheet. The remaining amount of
approximately $2.5 million has been reflected as a cost of the
reorganization of American Spectrum Predecessor in the statement of
operations under the maximum scenario. Under the minimum
F-47
<PAGE> 264
scenario the excess of the transaction fees over amounts related to the
purchase of the Funds and Other Affiliates were assumed to relate to the
reorganization and were expensed in the statement of operations.
10 PROMISSORY NOTE OPTION
The accompanying pro forma statements have been prepared assuming none of
the participants in the transaction opt for promissory notes instead of
shares of American Spectrum or operating partnership units.
The following would be the impact on net loss, net loss per share and cash
flows Assuming different amounts of promissory notes are issued. The
promissory notes are unsecured, bear interest at 8% and mature in 8 years.
F-48
<PAGE> 265
AMERICAN SPECTRUM
ANALYSIS OF PRO FORMA AMOUNTS
SUPPORT FOR NOTE TO PROFORMA FINANCIAL STATEMENTS
Total exchange value 110,520
Assumed interest rate 8%
Assumption 5.00%(a)
<TABLE>
<CAPTION>
Year ended December 31 Six Months ended June 30
---------------------- ------------------------
Min Max Min Max
--- --- --- ---
<S> <C> <C> <C> <C>
Loss after reorganization costs (16,364) (15,178) (8,503) (6,297)
Interest charge(c) (442) (442) (221) (221)
------- ------- ------ ------
Adjusted loss after reorganization costs (16,806) (15,260) (8,724) (6,518)
======= ======= ====== ======
Shares 4,060 7,368 4,060 7,368
Adjustment(c) (203) (368) (203) (368)
------- ------- ------ ------
Adjusted Shares 3,857 7,000 3,857 7,000
======= ======= ====== ======
Adjusted loss per share (4.36) (2.23) (2.26) (0.93)
======= ======= ====== ======
Cash flow from operations (5,751) (3,068) 2,867 3,947
Interest charge(c) (442) (442) (221) (221)
------- ------- ------ ------
Adjusted cash flow from operations (6,193) (3,510) 2,646 3,726
======= ======= ====== ======
</TABLE>
Assumption 10.00%(b)
<TABLE>
<CAPTION>
Year ended December 31 Six Months ended June 30
---------------------- ------------------------
Min Max Min Max
--- --- --- ---
<S> <C> <C> <C> <C>
Loss after reorganization costs (16,364) (15,178) (8,503) (6,297)
Interest charge(c) (884) (884) (442) (442)
------- ------- ------ ------
Adjusted loss after reorganization costs (17,248) (16,062) (8,945) (6,739)
======= ======= ====== ======
Shares 4,060 7,368 4,060 7,368
Adjustment(c) (406) (737) (406) (737)
------- ------- ------ ------
Adjusted Shares 3,654 6,631 3,654 6,631
======= ======= ====== ======
Adjusted loss per share (4.72) (2.42) (2.45) (1.02)
======= ======= ====== ======
Cash flow from operations (5,751) (3,068) 2,867 3,947
Interest charge(c) (884) (884) (442) (442)
------- ------- ------ ------
Adjusted cash flow from operations (6,635) (3,952) 2,425 3,505
======= ======= ====== ======
</TABLE>
F-49
<PAGE> 266
(a) Management believes that this scenario represents a reasonable
estimate of the minimum amount of debt that would be elected by
participants in the consolidation, representing aggregate exchange
value of approximately $5.5 million or 5% of the total exchange
value of $110.5 million.
(b) This represents the maximum amount of debt that management
believes will be issued to participants in the consolidation
representing aggregate exchange value of approximately $11.1
million, or 10% of the total exchange value.
(c) Net loss, net loss per share and cash flow from operations reflect
the pro forma net loss after restructuring charges reported in the
pro forma financial statements for American Spectrum, adjusted for
incremental interest charges associated with the issuance of
promissory notes under the two scenarios. Net loss per share also
reflects the shares included in the pro forma financial
statements, adjusted for a reduction in the number of shares to be
issued due to the issuance of promissory notes.
11 LIMITED PARTNER DISTRIBUTION
In December 1994, a company included in the American Spectrum Predecessor
acquired the corporate general partner of Sierra Pacific Development Fund
II ("Fund II") in exchange for assumption of unsecured loans payable to
Fund II ("Unsecured Debt"). Separately, the American Spectrum Predecessor
acquired property from Fund II in exchange for cash and a purchase money
note payable to Fund II secured by the property acquired ("Secured Debt").
Pursuant to terms of a litigation settlement agreement relating to the
Unsecured Debt, the Secured Debt, and other matters, American Spectrum
Predecessor agreed to repay both debts and cause Fund II to distribute the
proceeds to the partners of Fund II. As of June 30, 2000, interest and
principal due Fund II with respect to the Unsecured Debt and Secured Debt
totaled $6,390,000.
12 REFINANCING OF DEBT
The Company expects to complete a refinancing of the mortgage debt on
certain properties concurrent with the closing of the consolidation. Net
proceeds from the refinancing are expected to be at least $17,500,000, of
which proceeds of $6,390,000 will be used to pay the Unsecured Debt and the
Secured Debt, with the remainder retained for future property acquisitions.
Loan costs are estimated to be $500,000. The weighted average annual
interest rate on the $18 million of incremental borrowing is expected to be
8 percent and the loan will be due 2010.
F-50
<PAGE> 267
The following table shows the portion of American Spectrum Predecessor pro forma
statement of operations for the six months ended June 30, 2000 which were
derived from the following components: (1) ASR Predecessor Properties, comprised
of the real properties included in American Spectrum Predecessor and (2) the CGS
real estate management entities. The statement of operations of the CGS real
estate management entities is then adjusted to eliminate the operating results
of the CGS Third Party Management Company, which will be excluded from the
consolidation, and to show the pro forma operating results of the CGS Management
Company.
AMERICAN SPECTRUM PREDECESSOR
MANAGEMENT COMPANY OPERATIONS - PROFORMA
STATEMENT OF OPERATIONS - FOR THE PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
COMPONENTS OF AMERICAN
SPECTRUM PREDECESSOR
------------------------
CGS
REAL ESTATE
MANAGEMENT
CO. ELIMINATION RECLASSIFICATIONS
AMERICAN ASR & THIRD OF & ELIMINATION OF CGS
SPECTRUM PREDECESSOR PARTY THIRD PARTY NON-MANAGEMENT MANAGEMENT
PREDECESSOR PROPERTIES OPERATIONS OPERATIONS OPERATIONS COMPANY
----------- ----------- ---------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental income $7,708 $7,708 $ - $ $ $
Property management income 4,829 - 4,829 (4,829) -
Other (Note A) 964 964 924 1,888
---------- ----------- --------- ----------- ---------------- ----------
Total Revenues 13,501 7,708 5,793 (4,829) 924 1,888
COSTS AND EXPENSES:
Property operating 2,502 2,816 (343) 383 (40) -
Property management expenses (Note A) 5,329 - 5,358 (5,358) 1,296 1,296
Depreciation and amortization 1,723 1,538 185 (142) (43) -
Real estate taxes 644 644 - -
Equity in loss of uncombined partnerships - - - -
---------- ----------- --------- ----------- ---------------- ----------
Total Costs and Expenses 10,198 4,998 5,200 (5,117) 1,213 1,296
OTHER (INCOME) EXPENSES
Interest expense 6,435 5,571 864 (9) (855) -
Impairment charge - - - 44 (44) -
---------- ----------- --------- ----------- ---------------- ----------
Total other (Income) Expenses 6,435 5,571 864 35 (899) -
Loss before equity in loss of noncombined
partnerships & gain (loss) on sale of property (3,132) (2,861) (271) 253 610 592
Equity in income (loss) of noncombined partnership (270) - (270) 270 -
Gain (Loss) on sale of property 1,328 - 1,328 (1,328) -
---------- ----------- --------- ----------- ---------------- ----------
Net income (loss) before extraordinary item (2,074) (2,861) 787 253 (448) 592
Extraordinary item - extinguishment of debt (1,861) (1,861)
---------- ----------- --------- ----------- ---------------- ----------
Net income (loss) $(3,935) $(4,722) $787 $253 $(448) $592
========== =========== ========= =========== ================ ==========
</TABLE>
Note A - American Spectrum Predecessor column includes net property management
related income in "Other". The net amounts were broken into income and expense
elements for reporting under the CGS Management Company column.
F-51
<PAGE> 268
AMERICAN SPECTRUM PREDECESSOR
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
F-52
<PAGE> 269
Report of Independent Public Accountants
To American Spectrum Predecessor:
We have audited the accompanying combined balance sheets of American Spectrum
Predecessor, as defined in Note 1 to the financial statements, as of December
31, 1998 and 1999, and the related combined statements of operations, equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of American Spectrum
Predecessor as of December 31, 1998 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
July 26, 2000
F-53
<PAGE> 270
AMERICAN SPECTRUM PREDECESSOR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
(In 000's) 1998 1999 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Real estate held for investment, net $ 90,348 $ 95,588 $ 92,070
Cash 522 458 776
Accounts receivable, net 1,161 1,241 1,693
Notes and accounts receivable from affiliates 4,539 3,970 3,610
Investments in uncombined partnerships 1,517 3,297 3,493
Equipment, net 1,036 705 684
Goodwill, net 2,469 -- 1,448
Other assets 3,236 3,176 4,042
--------- --------- ---------
Total assets $ 104,828 $ 108,435 $ 107,816
========= ========= =========
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 3,842 $ 4,893 $ 5,983
Deferred revenue 899 1,553 273
Notes payable 96,318 110,590 114,096
Notes and accounts payable to affiliates 18,335 15,675 13,838
Note payable to shareholders 700 700 --
--------- --------- ---------
Total liabilities 120,094 133,411 134,190
--------- --------- ---------
MANDATORILY-REDEEMABLE COMMON STOCK OF SUBSIDIARY 1,045 1,045 1,045
--------- --------- ---------
COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT)
Capital $ 1,208 $ 2,527 $ 2,527
Accumulated deficit (17,519) (28,548) (29,946)
--------- --------- ---------
Total equity (deficit) (16,311) (26,021) (27,419)
--------- --------- ---------
Total liabilities and equity (deficit) $ 104,828 $ 108,435 $ 107,816
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-54
<PAGE> 271
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------------ ----------------------
(In 000's, except per share information) 1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $ 10,145 $ 13,651 $ 14,813 $ 6,940 $ 7,708
Property management operations 4,546 8,689 5,452 5,045 4,829
Income from affiliates 1,809 2,047 2,357 966 964
-------- -------- -------- -------- --------
Total revenues 16,500 24,387 22,622 12,951 13,501
-------- -------- -------- -------- --------
COSTS AND EXPENSES
Property operating expense 1,683 2,886 3,396 1,794 2,502
Property management expense 7,472 12,164 10,766 5,735 5,329
Depreciation and amortization 2,203 3,313 3,259 1,835 1,723
Real estate taxes 848 1,523 1,597 369 644
Equity in (income) loss of uncombined
Partnerships 127 (224) 330 454 270
Impairment charges -- 126 5,164 20 --
-------- -------- -------- -------- --------
Total costs and expenses 12,333 19,788 24,512 10,207 10,468
OTHER (INCOME) EXPENSES
Interest expense 7,901 9,585 9,982 4,530 6,435
Gain on sale of property -- -- -- -- (1,328)
-------- -------- -------- -------- --------
Total other (income) expenses 7,901 9,585 9,982 4,530 5,107
-------- -------- -------- -------- --------
Net loss before extraordinary
Items (3,734) (4,986) (11,872) (1,786) (2,074)
Extraordinary items -- gain (loss) on
extinguishment of debt 50 163 (214) (574) (1,861)
-------- -------- -------- -------- --------
Net loss $ (3,684) $ (4,823) $(12,086) $ (2,360) $ (3,935)
======== ======== ======== ======== ========
PRO FORMA BASIC AND DILUTED LOSS PER COMMON
SHARE (UNAUDITED):
Loss before extraordinary item $ (2.40) $ (3.20) $ (7.62) $ (1.15) $ (1.33)
Extraordinary item .03 .10 (.14) (.37) (1.20)
-------- -------- -------- -------- --------
Net loss $ (2.37) $ (3.10) $ (7.76) $ (1.52) $ (2.53)
======== ======== ======== ======== ========
Weighted average shares outstanding 1,557 1,557 1,557 1,557 1,557
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements of operations.
F-55
<PAGE> 272
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30, (Unaudited)
------------------------------------ ----------------------
(In 000's) 1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,684) $ (4,823) $(12,086) $ (2,360) $ (3,935)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,203 3,313 3,259 1,834 1,723
Equity in losses (income) of investees 127 (224) 330 (30) 12
Impairment charges -- 126 5,164 -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net (437) 276 (80) (351) (453)
Decrease (increase) in accounts receivable from
affiliates 1,751 (12) 569 (2,159) (1,768)
Decrease (increase) in other assets, net (3,434) (369) (687) 198 (1,256)
Increase (decrease) in deferred revenue 1,019 (198) 654 (174) 46
Increase (decrease) in accounts payable and
accrued expenses 463 1,151 986 290 1,248
Increase (decrease) in accounts payable - affiliates 1,103 (2,211) (4,301) 2,373 6,684
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (889) (2,971) (6,192) (379) 2,301
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from (investments in) uncombined
investees, net 244 99 (2,062) -- (208)
Purchases of real estate held for investment (310) (1,480) (4,854) (1,735) (1,854)
Proceeds from sales of real estate held for investment -- -- -- -- 950
Purchases of property, plant & equipment (1,273) -- -- -- (138)
-------- -------- -------- -------- --------
Net cash used in investing activities (1,339) (1,381) (6,916) (1,735) (1,250)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, net 2,529 3,511 10,322 5,050 1,577
Equity contributions (distributions), net (739) (2,038) 2,376 2,451 1,522
Proceeds from (repayments of) loan from shareholders -- 700 -- -- (700)
Borrowings (repayments) on notes payable to affiliates 749 2,194 132 (5,723) (4,993)
Extraordinary (gain) loss on extinguishment of debt (50) (163) 214 574 1,861
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 2,494 4,204 13,044 2,352 733
-------- -------- -------- -------- --------
Increase (decrease) in cash 266 (148) (64) 238 318
Cash, beginning of period 404 670 522 522 458
-------- -------- -------- -------- --------
Cash, end of period $ 670 $ 522 $ 458 $ 760 $ 776
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest, net of amounts capitalized of
$320 for 1998, $1,200 for 1999, $ 537 at June 1999 and
$0 at June 2000 $ 6,833 $ 7,763 $ 8,253 $ 4,675 $ 7,150
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-56
<PAGE> 273
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1997, the Company recorded goodwill and issued mandatorily redeemable
common stock of a subsidiary of $1,045,000 in connection with its merger with
Spectrum Holdings.
During 1997, the Company acquired various assets such as goodwill, properties
(Parkade and West Florissant) and partnership interests (general and limited) by
assuming debt totaling $9,179,000 and paying cash of $1,371,000.
During 1997, the Company acquired certain real estate through the issuance of
debt to affiliates.
During 1998, the Company acquired the McDonnell property for a purchase price of
$12,133,000 and other assets (debt costs) of $360,000 primarily by assuming debt
for $11,637,000 and paying $856,000 cash.
During 1999, the Company purchased a property by assuming approximately
$4,415,000 in liabilities.
During the six months ended June 30, 2000, the Company purchased a 100% interest
in two management companies for 1,498,000. The Company issued notes and
recorded goodwill.
During the six months ended June 30, 2000, the Company transferred land with
book value of $3,298,000 to Sierra Pacific Development Fund, an affiliated
company.
During the six months ended June 30, 2000, the net amount of various affiliate
receivables and payables of $1,016,000 was converted to equity.
F-57
<PAGE> 274
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF EQUITY (DEFICIT)
<TABLE>
<CAPTION>
(In 000's) Accumulated
Equity Deficit Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 1,385 $ (6,417) $ (5,032)
Net income (loss) -- (3,684) (3,684)
Contributions (distributions), net (1,537) 803 (734)
-------- -------- --------
Balance as of December 31, 1997 (152) (9,298) (9,450)
Net income (loss) -- (4,823) (4,823)
Contributions (distributions), net 1,360 (3,398) (2,038)
-------- -------- --------
Balance as of December 31, 1998 1,208 (17,519) (16,311)
Net income (loss) -- (12,086) (12,086)
Contributions (distributions), net 1,319 1,057 2,376
-------- -------- --------
Balance as of December 31, 1999 2,527 (28,548) (26,021)
Net income (loss) - unaudited -- (3,935) (3,935)
Contributions (distributions), net - unaudited -- 2,539 2,539
-------- -------- --------
Balance as of June 30, 2000 - unaudited 2,527 (29,946) (27,419)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-58
<PAGE> 275
AMERICAN SPECTRUM PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION
NATURE OF BUSINESS AND PRINCIPLES OF
COMBINATION
American Spectrum Predecessor ("the Company")
is a combination of various properties and
operations 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 mainly of
office, office/warehouse, shopping center,
and multi-family apartment properties.
The entities owning the properties or
management operations all (1) have majority
ownership interests held by Mr. William J.
Carden and Mr. John Galardi and/or their
affiliates and (2) have agreed to participate
in a consolidation transaction with other
entities in which Mssrs. Carden and Galardi
have interests. The entities included in
these combined financial statements will be
merged into the successor entity prior to the
consummation of the Transaction. The
reorganized American Spectrum Predecessor
will then (subject to approval) acquire eight
public limited partnerships and three private
entities. These events are collectively
referred to as "the Transaction". Assuming
all entities elect to be acquired, the
aggregate purchase price will be
approximately $87.2 million in stock,
operating partnership units, and promissory
notes of American Spectrum. These
partnerships are engaged in substantially the
same business as the Company. The Company
currently provides property management
services to these entities. The successor to
the Company intends to qualify as a real
estate investment trust (REIT) beginning in
2002 for federal income tax purposes.
The combined financial statements include CGS
Real Estate Company, Inc. and its wholly
owned property subsidiaries listed as
follows:
<TABLE>
<CAPTION>
Legal Entity Properties
------------ ----------
<S> <C>
American Spectrum Realty Inc. Parkade Center
American Spectrum Realty Inc. West Florissant
Pasadena Autumn Ridge, LP Pasadena Autumn Ridge
Villa Redondo LLC Villa Redondo
CGS Real Estate Company Inc. Sorrento II Land
CGS Real Estate Company Inc. Bally's Land
</TABLE>
Property management operations are conducted
through various consolidated property
management subsidiaries in which CGS has
ownership interest of 80 to 100 percent and
which are referred to as the CGS Management
Company.
The combined financial statements also
include three privately-held real estate
limited partnerships and LLCs where the
ownership percentage is in substance
identical to the ownership of CGS (the Common
Control LP's) as follows:
F-59
<PAGE> 276
<TABLE>
<CAPTION>
Legal Entity Properties
------------ ----------
<S> <C>
McDonnell Associates LLP NW Corporate Center
Pacific Spectrum LLC Pacific Spectrum
Creekside/Riverside LLC Creekside Senior Apartments
</TABLE>
1. ORGANIZATION Additionally, the combined financial
(CONTINUED) statements include four privately-held real
estate limited partnerships and LLCs where
the general partner or managing member and
more than 50% of the limited partnership
interests are controlled by the owners of CGS
as follows:
<TABLE>
<CAPTION>
Legal Entity Properties
------------ ----------
<S> <C>
CGS Properties Marketplace Columbia LP Columbia N.E. Marketplace
Third Coast LLC Richardson Plaza
Third Coast LLC Sierra Technology
Back Bay LLC Back Bay Office
Seventy Seven LLC Chrysler
</TABLE>
The combining financial statements also
include a property, Beach and Lampson Pad "D"
which will be contributed to the Company by
another entity controlled by the owners of
CGS.
CGS has consolidated all entities in which it
has a majority ownership interest or other
evidence of control. None of the other
entities comprising American Spectrum
Predecessor have any subsidiaries.
Transactions and accounts between
consolidated entities and combining entities
have been eliminated. Accounts and
transactions eliminated include inter-entity
loans and advances and management fees
charged to various entities by the management
company subsidiaries of CGS Real Estate
Company, Inc.
The Company has experienced losses in the
periods presented. Management believes such
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 accrue
due to the temporary excess of operating
expenses, interest expense, and management
costs over rental income along with
impairment charges on certain properties that
do not affect cash flow. These losses are
anticipated to be more than offset by
increases in the value of the properties,
which cannot be recognized as income under
generally accepted accounting principles.
Historically, the Company has augmented its
cash flow from properties by generating funds
from periodic real estate refinancing. If
refinancing debt was not available, the
Company would curtail its asset turn-around
program, substantially reduce overhead, and
operate solely on the cash flow from
properties.
F-60
<PAGE> 277
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES REAL ESTATE HELD FOR INVESTMENT
Real estate held for investment is carried at
cost net of impairment losses, determined
based on estimated future cash flows.
Economic, market, environmental and political
conditions may affect management's
development, investment and/or marketing
plans. In addition, the implementation of
such development, investment and/or marketing
plans could be affected by the availability
of future financing for investment and
development activities. Accordingly, the
ultimate fair value of the Company's real
estate properties is dependent upon future
economic and market conditions, the
availability of financing, and the resolution
of political, geographical, environmental,
and other related issues.
Buildings and improvements included in real
estate held for investment are depreciated
using the straight-line method over the
estimated useful lives of the related assets,
ranging from five to forty years.
EVALUATION OF IMPAIRMENT
In 1995, the Financial Accounting Standards
Board issued Statement of Financial
Accounting Standards No. 121, Accounting for
Impairment of Long-lived Assets to be
Disposed of ("SFAS 121").
Long-lived assets, including real estate held
for investment that are expected to be held
and used in operations are to be carried at
the lower of cost or, if impaired, the fair
value of the asset. Long-lived assets to be
disposed of should be reported at the lower
of carrying amount or fair value less cost to
sell. A review for impairment loss is
triggered if the sum of expected future cash
flows (undiscounted and without interest
charges) is less than the carrying amount of
the asset. Assumptions and estimates used to
calculate fair value in determining the
amount of any impairment loss include
estimated occupancy, lease revenue, costs to
enter into leases with tenants, and property
operation costs. The calculation of an
impairment loss is based on estimated
discounted future cash flows. The estimates
to determine an impairment adjustment can
change in the near term as economic
conditions fluctuate.
During 1999, the Company evaluated certain
goodwill associated with acquired management
companies and recorded an impairment charge
of $2.2 million in accordance with SFAS 121.
The goodwill impaired relates to the
management companies located in Missouri and
Colorado which were acquired in October and
August 1997, respectively. The impairment
charge was triggered by the loss of several
management contracts. (See also Note 4 for
discussion of impairment applicable to
certain real estate properties).
The entities to which the remaining goodwill
relates continue to appreciate but are not
planned to be a part of the ongoing
operations of the company since these
entities perform primarily third party
management services.
The analysis of impairment was performed due
to the operating performance of the
properties and included independent
appraisals of the properties which were based
on projected cash flows of the properties.
F-61
<PAGE> 278
2. SUMMARY OF SIGNIFICANT ALLOWANCE FOR CREDIT LOSSES
ACCOUNTING POLICIES A provision for credit losses is recorded
(CONTINUED) based on management's judgement of tenant
creditworthiness. The activity in the
allowance for credit losses during 1999, 1998
and 1997 was as follows:
<TABLE>
<CAPTION>
(000's)
Balance at Balance at
Years Ending Beginning of Provision for Accounts Balance at
December 31, Year Credit Losses Written Off End of Year
<S> <C> <C> <C> <C>
1999 (94) (14) 84 (24)
1998 (34) (80) 20 (94)
1997 (20) (14) -- (34)
</TABLE>
EQUIPMENT
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 five
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.
CAPITALIZATION OF INTEREST
The Company follows the practice of
capitalizing interest to real estate held for
investment during the period of development,
in accordance with SFAS 34, "Capitalization
of Interest Cost." Interest costs capitalized
during 1999 and 1998 were $1,200,000 and
$320,000, respectively. No amounts were
capitalized in 1997.
INVESTMENT IN AND LOSSES IN EXCESS OF
INVESTMENTS IN UNCOMBINED PARTNERSHIPS
The Company invests in various public and
private limited partnerships and in limited
liability companies that are engaged in
substantially the same business as the
Company.
Losses in excess of investments in limited
partnerships represent the portion of
partnership obligations that management
believes the Company is responsible for as
the general partner. Accordingly, the Company
investments may be reduced below zero if the
investee records losses which the general
partner is obligated to fund. The Company
does not record any losses in excess of
investments when it only acts as a limited
partner. The Company accounts for its
investments in limited partnerships using the
equity method, under which the Company
initially records its investment in the
limited partnerships at cost and adjusts the
carrying amount of the investment to
recognize its share of the income or losses
of the limited partnerships after the date of
acquisition. Partnership income and losses
are allocated in accordance with the
respective partnership agreements.
F-62
<PAGE> 279
2. SUMMARY OF SIGNIFICANT DEFERRED REVENUES
ACCOUNTING POLICIES Deferred revenues represent non-refundable
(CONTINUED) prepayments of rents on certain operating
properties, which are recognized as revenue
when earned. A substantial portion relates to
one affiliated tenant who has prepaid certain
ground lease rent for an extended period.
INTEREST RATE SWAP
An interest rate swap is used by the Company
to manage interest rate sensitivity for one
of its debt arrangements. The periodic net
settlement for interest rate swaps is
recorded as an adjustment to interest expense
or capitalized if the project containing the
swap is still in the development period as
discussed above under Capitalization of
Interest.
REVENUE RECOGNITION
Lease agreements with tenants are accounted
for as operating leases and rental income is
recognized on the straight-line method over
the term of the related operating lease.
Unbilled rent receivable represents the
difference between rent recognized under the
straight-line method and the actual cash due
and is included in other assets on the
accompanying combined balance sheets.
Property operating cost reimbursements due
from tenants for common area maintenance are
recognized in the period the expenses are
incurred.
DEBT ISSUANCE COSTS AND DISCOUNTS
Debt issuance costs and discounts related to
the Company's notes payable are deferred and
amortized to interest expense using the
effective interest method over the term of
the related notes. Debt issuance costs are
included in other assets in the accompanying
consolidated balance sheets.
MANDATORILY-REDEEMABLE COMMON STOCK OF
SUBSIDIARY
In August 1997, American Spectrum Real Estate
Services, Inc. (ASREI), a subsidiary of CGS,
acquired all of the common stock of Spectrum
Holdings, Ltd. in exchange for common shares
of ASREI. These minority shareholders have
the right to put their shares of ASREI at
$522.500 per share or $1,045,000.
INCOME TAXES
Currently, the Company includes various
partnerships and limited liability
corporations that are not subject to Federal
or significant state income tax at the entity
level.
The corporate entities that are subject to
income tax currently account for their income
taxes using the asset and liability method.
Deferred income tax assets and liabilities
are determined based on the differences
between the financial reporting and tax bases
of assets and liabilities and are measured
using currently enacted tax rates and laws.
These entities have accumulated net operating
losses for both Federal and State reporting
purposes and pay minimal taxes. The Company
has operations in California, Arizona, Texas,
Missouri, South Carolina, North Carolina,
Colorado, Maryland, Illinois, Indiana,
Kansas, Minnesota, Nebraska, and Ohio.
Consummation of the transaction may
significantly impact the future utilization
of net operating loss carry-forwards.
F-63
<PAGE> 280
2. SUMMARY OF SIGNIFICANT The successor to the Company intends to
ACCOUNTING POLICIES qualify as a REIT beginning in 2002 for
(CONTINUED) federal income tax purposes. As a REIT, the
Company will not generally be liable for
federal corporate income taxes. As such,
uncertainty exists as to the ultimate tax
asset to be realized. Management has recorded
a valuation allowance against the entire net
deferred tax asset to reflect this
uncertainty. If the Company fails to qualify
as a REIT in any taxable year, it will be
subject to federal income taxes on its
taxable income at regular corporate tax
rates.
PRO FORMA BASIC AND DILUTED LOSS PER SHARE
(UNAUDITED)
Pro forma basic and diluted loss per share is
computed by dividing the loss available to
common stockholders by the number of common
shares that will be received by the owners of
the entities comprising the Company for their
interests therein, after consummation of the
Transaction. Pro forma loss per share was
calculated assuming all of the Company's
owners exchange their existing ownership
interests for shares in the successor entity
at the exchange values determined by outside
valuation. The effect of owners who elect to
receive operating partnership units in lieu
of shares in the successor entity will not
materially impact diluted loss per share.
The expected number of shares to be received
by the owners in each entity include the
following (in thousands):
<TABLE>
<S> <C>
CGS Real Estate Inc. & wholly owned
subsidiaries 800
McDonnell Associates LCC (208)
Pacific Spectrum LLC 73
Creekside/Riverside LLC 114
CGS Properties Marketplace Columbia LP 22
Third Coast LLC (170)
Back Bay LLC 96
Seventy Seven LLC 830
------
1,557
======
</TABLE>
Certain of the assets have negative exchange
values upon which ownership interests in the
successor entity arising from the Transaction
are based. The owners of McDonnell Associates
LLC are proportionally identical to the
owners of CGS, thus the shares allocated
these partners will be less as a result of
their ownership in the McDonnell property.
Third Coast LLC has one outside partner, who
will be entitled to a portion of the shares
allocated to that entity. The remaining
partners will incur a reduction in their
partnership units.
F-64
<PAGE> 281
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES UNAUDITED INTERIM INFORMATION
(CONTINUED) The accompanying financial information as of
June 30, 2000, and for the six months ended
June 30, 1999 and 2000 is unaudited. In the
opinion of management, this information has
been prepared on substantially the same basis
as the annual combined financial statements
and contains all adjustments (consisting of
normal recurring accruals) necessary to
present fairly the financial position and
results of operations as of such date and for
such periods.
COMPREHENSIVE INCOME
Net income as reported by the Company
reflects total comprehensive income for the
years ended December 31, 1998 and 1999, and
the six months ended June 30, 1999 and 2000
since there are no additional transactions
that would be classified as comprehensive
income.
SEGMENT DISCLOSURE
Management believes that the Company operates
in a single segment. The Company's real
estate operations have similar economic and
environmental conditions, business processes,
types of customers (i.e., tenants), and
services provided, and because resource
allocation and other operating decisions made
by senior management are based on evaluation
of the entire portfolio.
USE OF ESTIMATES
The preparation of consolidated 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 disclosure of contingent
assets and liabilities at the date of the
consolidated balance sheet. Actual results
could materially differ from those estimates.
In assessing impairment of real estate
assets, certain estimates were used by
management related to future lease income to
be realized and future operating costs to be
incurred. These estimates could materially
differ from the actual results achieved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the company's cash,
accounts receivable, notes receivable,
accounts payable and accrued expenses and
notes payable approximate fair value.
F-65
<PAGE> 282
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES NEW ACCOUNTING PRONOUNCEMENTS
(CONTINUED) On December 3, 1999, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), which addressed
certain revenue recognition policies,
including the accounting for overage rent by
a lessor. SAB 101 requires overage rent to be
recognized as revenue only when the tenants'
sales exceed their sales threshold. The
Company will adopt SAB 101 for the quarter
ending December 31, 2000. Because the Company
does not have a significant amount of
existing leases with overage rent provisions,
management does not believe that adoption of
this standard will have a material effect on
the Company's financial statements. In
addition, SAB 101 will impact the timing in
which overage rent is recognized throughout
each year, but will not have a material
impact on the total overage of rent
recognized each full year.
On June 15, 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"). 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 will be effective
for the Company beginning with the 2001
fiscal year and may not be applied
retroactively. Management does not believe
that SFAS 133 will have a material impact on
the combined financial statements.
3. ACQUISITIONS The following properties were acquired during
the three year period ended December 31,
1999:
<TABLE>
<CAPTION>
(In 000's) Acquisition Purchase
Property Description Date Price
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Phoenix Van Buren Land Aug. 1997 $ 1,033
Beach & Lampson Retail Oct. 1997 1,251
Sorrento II Land Oct. 1997 3,267
Parkade Mixed Nov. 1997 7,009
West Florissant Mixed Nov. 1997 1,208
Creekside Riverside Apartments Nov. 1997 4,712
McDonnell LLC Offices Aug. 1998 12,100
Bally's Land Sept. 1998 1,109
Autumn Ridge Apartments May 1999 5,450
-------
$37,139
=======
</TABLE>
Substantially all of the purchase price,
except for working capital amounts, was
allocated to the real estate properties.
4. REAL ESTATE HELD FOR Real estate held for investment consists of
INVESTMENT the following (see Note 7):
F-66
<PAGE> 283
<TABLE>
<CAPTION>
June 30,
December 31, 2000
(IN 000'S) 1998 1999 (unaudited)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income producing property:
Land $ 21,597 $ 23,087 $ 18,441
Building and improvements 77,232 83,220 85,592
------------------------------------------------------------------------------------
98,829 106,307 104,033
Accumulated depreciation and amortization (8,481) (10,719) (11,963)
------------------------------------------------------------------------------------
$ 90,348 $ 95,588 $ 92,070
</TABLE>
Included in real estate held for investment
is a mixed-use commercial operating property
located in Missouri, the McDonnell property,
which was acquired in August 1998 and has a
carrying value of $13,197,000, which secures
debt totaling $14,398,000 (Note 7). As of
December 31, 1999, and subsequent to that
date, the property has been partially leased.
The Company's management intends to lease the
remainder of the property in fiscal 2000.
During 1999, the Company recorded an
impairment loss of $1,156,000 in accordance
with SFAS No. 121 based in part on the
planned sale of one building on the property;
this sale was consummated in 2000 (Note 10).
During 1999, the Company also recorded an
impairment loss of $1,593,000 on a retail
building which was acquired in February 1989,
and an impairment loss of $168,000 on land
which was acquired in September 1998, in
accordance with SFAS No 121. The analysis of
impairment was performed due to the operating
performance of the properties and included
independent appraisals of the properties
which were based on projected cash flows of
the properties.
5. EQUIPMENT Equipment consists primarily of furniture and
fixtures and information technology/computer
equipment. Accumulated depreciation was
approximately $1,423,000 and $1,761,000 at
December 31, 1998 and 1999, respectively.
6. INVESTMENTS IN
UNCOMBINED The Company is a general partner and has a
PARTNERSHIPS fifty percent or less ownership in the
following uncombined partnerships at December
31, 1999:
<TABLE>
<CAPTION>
General Limited
Partner Partner
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sierra Pacific Institutional Properties V* 1% 0%
Sierra Pacific Development Fund III* 1 0
Sierra Pacific Development Fund II* 1 0
Sierra Pacific Development Fund* 1 5.96
Sierra Pacific Pension Investors '84* 1 4.91
Nooney Income Fund LTD* 1 13.6
Nooney Income Fund II* 1 5.83
Nooney Real Property Investors Two LP* 1 5.4
Nooney Rider Trail, LLC 0 1
8622 Starcrest Investors LLC 0 38.25
Mariner's Place 9.62 0
Meadow Wood Village Associates LTD LP* 1 0
California Consultants, Limited 1 0
--------------------------------------------------------------------------------------
</TABLE>
*Entities expected to participate in the
Transaction (Note 2).
The Company uses the equity method of
accounting for its investments in these fifty
percent or less owned partnerships. The
accounting policies of the entities are
substantially the same as those of the
Company.
F-67
<PAGE> 284
7. DEBT Debt consists of the following:
<TABLE>
<CAPTION>
December 31, June 30,
2000
(IN 000'S) 1998 1999 (Unaudited)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed rate debt payable to financial
institutions, secured by real estate held
for investment at an interest rate between
6.5% and 12.5% due between 2001
and 2015. $ 17,402 $ 23,693 $ 57,231
Variable Rate debt payable to financial
institutions and other lenders, secured by
real estate held for investment at an
interest rate between 8% and 9% or based on
various indexes, due between 2000 and
2015. 79,142 87,017 56,939
-----------------------------------
96,544 110,710 114,170
Discount on Debt (226) (120) (74)
-----------------------------------
$ 96,318 $ 110,590 $ 114,096
</TABLE>
Generally, the debt is arranged on a
property-specific basis and is secured by the
property. Mssrs. Carden and Galardi have
provided guarantees on certain borrowings
and/or stock of CGS and/or its subsidiaries
have been pledged as collateral.
Certain of the Company's notes payable
provide for various warranties, covenants and
restrictions pertaining to financial and
non-financial matters requiring compliance on
a continuing basis. Default on any warranty,
covenant or restriction could affect the
lender's commitment to lend, and if not
waived or corrected, could activate the
maturity of any borrowings outstanding under
the notes.
As of December 31, 1999, management believes
the Company was in compliance with financial
and other covenants of its various debt
agreements.
Future principal payments, excluding the
effect of the refinancing documented in Note
10, as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
-------------------------------------------------------------
<S> <C>
2000 $ 27,189
2001 14,377
2002 754
2003 28,512
2004 852
Thereafter 39,026
-------------------------------------------------------------
$110,710
=============================================================
</TABLE>
F-68
<PAGE> 285
7. DEBT (CONTINUED)
The Company expects to refinance the debt
that matures in 2000, except for a portion
related to the McDonnell property which was
listed for sale at December 31, 1999 and sold
in 2000 (See Note 10).
Debt obligations totaling $1,300,000 have
provisions requiring the payment of a fee in
the event of early repayment.
The Company has a two year $12 million note
from a bank that was entered into on August
14, 1998. This note had a renewal option for
an additional 12-month term if the Company
requested in writing 30 days prior to the
maturity date. The Company exercised this
renewal option and extended the maturity date
to August 15, 2001.
8. RELATED PARTY
TRANSACTIONS ADVANCES TO SHAREHOLDERS
Advances to shareholders consist of
non-interest bearing advances, due on demand.
NOTES RECEIVABLE FROM AFFILIATES
Notes receivable from affiliates consist of
various notes secured by real estate. The
notes bear interest at various rates, ranging
from 8% to 12%, mature in various years
through February 2015 and serve as collateral
on certain notes payable (see Note 7).
Certain of the notes were purchased at a
discount to their notional amount. As of
December 31, 1999, unamortized discounts on
such notes totaled $2,518,000. Additionally,
the Company has recorded an allowance for
loss totaling $614,000 to fully reserve one
note. As of December 31, 1999, accrued
interest on notes receivable from affiliates
totals $242,000.
MANAGEMENT COMPANY
The Company includes various property
management subsidiaries which provide
leasing, brokerage, and other services to
affiliates and other parties. Amount
paid/received for 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 management has small
interests.
9. COMMITMENTS AND LEASE OBLIGATIONS AS LESSOR
CONTINGENCIES The Company, through ownership of various
commercial and retail operating properties
and ground-leased land, is a lessor under
various non-cancelable operating leases.
Minimum future rental income under these
non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
--------------------------------------------------------------
<S> <C>
2000 $2,801
2001 1,784
2002 1,414
2003 1,504
2004 1,926
--------------------------------------------------------------
$9,429
==============================================================
</TABLE>
F-69
<PAGE> 286
9. COMMITMENTS AND The Company's lease rent income from overage
CONTINGENCIES or percentage rents was not material for each
(CONTINUED) of the periods presented. The Company has an
interest in three apartment complexes. The
rentals of apartment units are generally for
terms of one year or less. Accordingly, the
above table does not reflect minimum future
rental expense for such apartment complexes.
LEASE OBLIGATIONS AS LESSEE
The Company is a lessee under various
noncancellable operating leases for the land
underlying office facilities. Minimum future
rentals under these noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
------------------------------------------------------------
<S> <C>
2000 $ 629
2001 361
2002 291
2003 172
------------------------------------------------------------
$21,229
</TABLE>
EMPLOYEE OBLIGATIONS
The Company is obligated under various
employment agreements with key employees.
Minimum future obligations under these
employment agreements are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
---------------------------------------------------------------------------
<S> <C>
2000 $729
2001 729
2002 565
---------------------------------------------------------------------------
$2,023
</TABLE>
LITIGATION
The Company is 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
matters, is presently unknown. In the opinion
of management, the amount of ultimate
liability, if any, with respect to these
actions will not materially affect the
financial position or results of operations
of the Company.
INTEREST RATE SWAP
At December 31, 1999, the Company had one
interest rate swap outstanding with a
notional amount of $11,950,000. The interest
rate swap was executed as part of a debt
agreement issued in conjunction with the
financing of a property owned by the Company.
The swap involves the exchange of a floating
rate interest payment for a fixed rate
interest payment. The swap expired in August
2000, and was not renewed. As of December 31,
1999, the interest rate swap had an estimated
market value of $23,000.
F-70
<PAGE> 287
10. SIGNIFICANT 2000 EVENTS
-- SIX MONTHS ENDED REAL ESTATE TRANSACTIONS
JUNE 30, 2000 On February 1, 2000, the Company entered into
an informal purchase and sale agreement with
Sorrento II Partners, an affiliate, to sell a
parcel of land. The sale price of the
property was $3,500,000 and the carrying
value of the land was $3,298,000 at the time
of the sale.
On March 17, 2000, the Company sold certain
land in California to an unrelated third
party. The transaction resulted in an
immaterial loss.
The Company sold a parking structure located
in Long Beach, California in March, 2000, and
recognized a gain of $1.2 million.
In August 2000, the Company sold one of the
buildings comprising the McDonnell property.
No significant gain/loss will be recorded in
the quarter ended September 30, 2000 related
to this sale.
DEBT REFINANCING
As of December 31, 1999, the Company had
approximately $31,556,000 in debt outstanding
to a finance company. Subsequent to year-end,
the Company refinanced this debt with a bank
loan of $34,940,000. This loan matures on
July 10, 2010, when the principal and
remaining interest is payable.
F-71
<PAGE> 288
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
Financial Statements as of December 31, 1999 and for the three years then ended
Together With Auditors' Report
F-72
<PAGE> 289
SELECTED HISTORICAL FINANCIAL DATA OF MEADOW WOOD VILLAGE APTS., LTD., LP
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the three years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with the
Financial Statements and Notes thereto which follow.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
(in thousands) 1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 1,863 $ 2,039 $ 2,194 $ 1,087 $ 1,132
Interest and other income 86 20 18 9 16
------- ------- ------- ------- -------
Total revenues 1,949 2,059 2,212 1,096 1,148
======= ======= ======= ======= =======
EXPENSES:
Property operating 731 757 764 307 385
Real estate and other taxes 120 120 120 114 107
Depreciation and amortization 260 332 376 165 171
Interest expense 731 715 672 328 386
------- ------- ------- ------- -------
Total expenses 1,842 1,924 1,932 914 1,049
======= ======= ======= ======= =======
Net income before extraordinary item 107 135 280 182 99
Extraordinary item - loss on
extinguishment of debt (71) -- -- -- --
------- ------- ------- ------- -------
Net income $ 36 $ 135 $ 280 $ 182 $ 99
======= ======= ======= ======= =======
</TABLE>
F-73
<PAGE> 290
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges (1) 1.05 1.19 1.42 1.55 1.26
Cash distributions 195 240 260 0 0
Total properties owned at end of period 1 1 1 1 1
BALANCE SHEET DATA:
Cash and cash equivalents 255 191 140 171 97
Real estate held for investment, net 7,946 7,766 7,520 7,638 7,237
Accounts receivable, net 5 57 402 185 524
Other assets 680 652 629 690 810
Total assets, at book value 8,886 8,666 8,691 8,684 8,668
Total assets, at valued assigned for the
consolidation 20,844
Total liabilities 11,311 11,196 11,200 11,151 11,208
Total deficit (2,425) (2,530) (2,509) (2,467) (2,540)
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net 182 (64) (52) (20) (42)
Cash provided by operating activities 735 420 370 160 179
</TABLE>
1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
F-74
<PAGE> 291
Report of Independent Public Accountants
To the Partners of Meadow Wood Village Apartments, Ltd., LP:
We have audited the accompanying balance sheets of Meadow Wood Village
Apartments, Ltd., LP as of December 31, 1998 and 1999, and the related
statements of operations, partners' capital (deficit) and cash flows for the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Meadow Wood Village Apartments,
Ltd., LP as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ARTHUR ANDERSEN LLP
Orange County, California
July 26, 2000
F-75
<PAGE> 292
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, June 30,
(In 000's) 1998 1999 2000
------------ ------------ ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Real estate held for investment $ 7,766 $ 7,520 $ 7,237
Cash 191 139 97
Accounts receivable, net of allowance for doubtful accounts of
$10, $14, and $32, as of December 31, 1998, 1999, and
June 30, 2000, respectively 37 9 36
Accounts receivable from affiliates 20 394 488
Other assets, net 652 629 810
-------- -------- --------
Total assets $ 8,666 $ 8,691 $ 8,668
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 145 195 $ 284
Deferred revenue 1 11 21
Notes payable 11,050 10,930 10,840
Notes payable to affiliates -- 65 63
-------- -------- --------
Total liabilities 11,196 11,201 11,208
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT)
Capital 135 135 135
Accumulated deficit (2,665) (2,645) (2,675)
-------- -------- --------
Total partners' capital (deficit) (2,530) (2,510) (2,540)
-------- -------- --------
Total liabilities and partners' capital
(deficit) $ 8,666 $ 8,691 $ 8,668
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-76
<PAGE> 293
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------------------- --------------------------
(In 000's) 1997 1998 1999 1999 2000
------- ------ ------ ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $ 1,863 $2,039 $2,194 $1,087 $1,132
Other income 86 20 18 9 16
------- ------ ------ ------ ------
Total revenues 1,949 2,059 2,212 1,096 1,148
------- ------ ------ ------ ------
COSTS AND EXPENSES
Property operating 342 351 341 166 178
Depreciation and amortization 260 332 376 165 171
Real estate taxes 120 120 120 60 61
Management fees to affiliate 95 105 105 53 46
Repairs and maintenance 168 164 184 82 164
Other 126 137 134 60 43
------- ------ ------ ------ ------
Total costs and expenses 1,111 1,209 1,260 586 663
------- ------ ------ ------ ------
OTHER EXPENSE
Interest expense 731 715 672 328 386
------- ------ ------ ------ ------
Net income before extraordinary
item 107 135 280 182 99
Extraordinary item - loss on
extinguishment of debt (71) -- -- -- --
------- ------ ------ ------ ------
Net income $ 36 $ 135 $ 280 $ 182 $ 99
======= ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-77
<PAGE> 294
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30,
December 31, (Unaudited)
--------------------------------- ------------------
(In 000's) 1997 1998 1999 1999 2000
------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 36 $ 135 $ 280 $ 182 $ 99
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 260 332 376 165 170
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 32 (31) 28 (4) (28)
Decrease (increase) in accounts receivable from
affiliates -- (20) (374) (124) (94)
Decrease (increase) in other assets, net 353 (1) -- (75) (67)
Decrease (increase) in deferred revenue 4 (7) 10 2 10
Increase (decrease) in accounts payable and
accrued expenses 50 12 50 14 89
------- ----- ----- ----- -----
Net cash provided by (used in) operating activities 735 420 370 160 179
------- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for tenant improvements (222) (124) (108) -- (1)
------- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable, net 30 (120) (120) (60) (90)
Partner contributions (distributions), net (361) (240) (258) (120) (130)
Increase in notes payable to affiliates -- -- 64 -- --
------- ----- ----- ----- -----
Net cash (used in) financing activities (331) (360) (314) (180) (220)
------- ----- ----- ----- -----
Increase (decrease) in cash 182 (64) (52) (20) (42)
Cash, beginning of period 73 255 191 191 139
------- ----- ----- ----- -----
Cash, end of period $ 255 $ 191 $ 139 $ 171 $ 97
======= ===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,127 $ 715 $ 672 $ 316 $ 372
======= ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
F-78
<PAGE> 295
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
(In 000's) Partners' Accumulated
Capital Deficit Total
--------- ----------- -------
<S> <C> <C> <C>
Balance, December 31, 1996 $ 135 $(2,235) $(2,100)
Net income -- 36 36
Distributions, net -- (361) (361)
------- ------- -------
Balance, December 31, 1997 135 (2,560) (2,425)
Net income -- 135 135
Distributions, net -- (240) (240)
------- ------- -------
Balance, December 31, 1998 135 (2,665) (2,530)
Net income -- 280 280
Distributions, net -- (260) (260)
------- ------- -------
Balance, December 31, 1999 135 (2,645) (2,510)
Net income (unaudited) -- 99 99
Distributions, net (unaudited) -- (129) (129)
------- ------- -------
Balance, June 30, 2000 (unaudited) $ 135 $(2,675) $(2,540)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-79
<PAGE> 296
MEADOW WOOD VILLAGE APARTMENTS LTD., LP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 ORGANIZATION
NATURE OF BUSINESS
Meadow Wood Village Apartments Ltd., LP ("the
Partnership") is a California limited
partnership that owns an apartment complex
located in Long Beach, California. The
general partner is CGS Real Estate Company,
Inc. ("CGS"), which has 1% of the ownership
interest. Limited partnership interests
include a 43% interest held by Mr. William J.
Carden, a 50% owner of the general partner,
and a 56% interest held by various unrelated
parties. Profits and losses are allocated to
the partners in proportion to each partners'
percentage interest. Management fees are paid
for property management to an entity that is
affiliated with the general partner (Note 5).
This property owned by the Partnership has
been identified as a potential additional
property to include in a consolidation
transaction ("the Transaction") with other
entities, certain of which share common
ownership with the general partner.
Subsequent to the Transaction, the successor
company intends to qualify as a real estate
investment trust (REIT) for federal income
tax purposes beginning in 2002.
2 SUMMARY OF SIGNIFICANT
ACCOUNTING REAL ESTATE HELD FOR INVESTMENT
POLICIES Real estate held for investment is carried at
cost net of impairment losses, determined
based on estimated future cash flows.
Economic, market, environmental and political
conditions may affect management's
development, investment and/or marketing
plans. In addition, the implementation of
such development, investment and/or marketing
plans could be affected by the availability
of future financing for investment and
development activities. Accordingly, the
ultimate fair values of the Partnership's
real estate are dependent upon future
economic and market conditions, the
availability of financing, and the resolution
of political, geographical, environmental,
and other related issues.
Real estate held for investment is
depreciated using the straight-line method
over the estimated useful lives of the
related assets, ranging from five to forty
years. Land is not depreciated.
F-80
<PAGE> 297
2 SUMMARY OF SIGNIFICANT EVALUATION OF IMPAIRMENT
ACCOUNTING In 1995, the Financial Accounting Standards
POLICIES Board issued Statement of Financial
(CONTINUED) Accounting Standards No. 121, Accounting for
Impairment of Long-lived Assets to be
Disposed of ("SFAS 121"). SFAS 121 requires
that long-lived assets and certain
identifiable intangibles to be held and used
be reviewed for impairment whenever events or
changes in circumstances indicate that the
carrying amount of an asset may not be
recoverable based on the estimated future
cash flows (undiscounted and without interest
charges). SFAS 121 also requires that
long-lived assets and certain identifiable
intangibles to be disposed of be reported at
the lower of carrying amount or fair value
less costs to sell. Long-lived assets,
including real estate held for investment
that are expected to be held and used in
operations are to be carried at the lower of
cost or, if impaired, the fair value of the
asset. Long-lived assets to be disposed of
should be reported at the lower of carrying
amount or fair value less cost to sell. A
review for impairment loss is triggered if
the sum of expected future cash flows
(undiscounted and without interest charges)
is less than the carrying amount of the
asset. Assumptions and estimates used to
calculate fair value in determining the
amount of any impairment loss include
estimated occupancy, lease revenue, costs to
enter into leases with tenants, and property
operation costs. The calculation of an
impairment loss is based on estimated future
cash flows, including appropriate return and
interest. The estimates to determine an
impairment adjustment can change in the near
term as economic conditions fluctuate.
ALLOWANCE FOR CREDIT LOSSES
A provision for credit losses is recorded
based on management's judgment of tenant
creditworthiness. The activity in the
allowance for credit losses during 1999, 1998
and 1997 was as follows:
<TABLE>
<CAPTION>
(IN 000'S)
Balance at
Years Ending Beginning of Provision for Accounts Balance at
December 31, Year Credit Losses Written Off End of Year
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 $(10) $(4) -- $ (14)
1998 (4) (6) -- (10)
1997 -- (4) -- (4)
</TABLE>
F-81
<PAGE> 298
2 SUMMARY OF SIGNIFICANT DEFERRED REVENUES
ACCOUNTING Deferred revenues represent non-refundable
POLICIES prepayments of rents on certain
(CONTINUED) operating properties, which are recognized as
revenue when earned.
REVENUE RECOGNITION
Lease agreements with tenants are accounted
for as operating leases and rental income is
recognized over the term of the related
operating lease. The Partnership's properties
are leased under lease agreements whose terms
do not typically exceed one year.
DEBT ISSUANCE COSTS
Debt issuance costs related to the
Partnership's notes payable are deferred and
amortized to interest expense using the
effective interest method over the term of the
related notes. Debt issuance costs are
included in other assets in the accompanying
consolidated balance sheets.
INCOME TAXES
Currently, the Partnership is a limited
liability partnership that is not subject to
Federal or significant state income tax.
Income taxes are the responsibility of the
individual partners.
UNAUDITED INTERIM INFORMATION
The accompanying financial information as of
June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited. In the
opinion of management, this information has
been prepared on substantially the same basis
as the annual financial statements and
contains all adjustments (consisting of normal
recurring accruals) necessary to present
fairly the financial position and results of
operations as of such date and for such
periods.
COMPREHENSIVE INCOME
Net income as reported by the Partnership
reflects total comprehensive income for the
years ended December 31, 1998 and 1999, and
the six months ended June 30, 1999 and 2000
since there are no transactions that would be
classified as comprehensive income.
F-82
<PAGE> 299
2 SUMMARY OF SIGNIFICANT USE OF ESTIMATES
ACCOUNTING
POLICIES The preparation of financial statements in
(CONTINUED) conformity with generally accepted accounting
principles requires management to make
estimates and assumptions that affect the
reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the balance sheet.
Actual results could materially differ from
those estimates.
In assessing impairment of real estate assets,
certain estimates were used by management
related to future lease income to be realized
and future operating costs to be incurred.
These estimates could materially differ from
the actual results achieved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash,
accounts receivable, accounts payable, accrued
expenses and notes payable approximate fair
value.
3 REAL ESTATE Real estate held for investment consists of
HELD FOR the following:
INVESTMENT
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ 2000
(IN 000'S) 1998 1999 (Unaudited)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income producing property:
Land $ 2,300 $ 2,300 2,300
Building and improvements 8,237 8,344 8,288
----------------------------------------------------------------------------------------
$ 10,537 $ 10,644 $ 10,588
Accumulated depreciation and amortization (2,771) (3,124) (3,351)
----------------------------------------------------------------------------------------
$ 7,766 $ 7,520 $ 7,237
========================================================================================
</TABLE>
F-83
<PAGE> 300
4 NOTES PAYABLE Notes payable consist of:
<TABLE>
<CAPTION>
December 31, June 30,
2000
(IN 000'S) 1998 1999 (Unaudited)
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt payable to a municipality, secured by real
estate held for investment at an interest
rate of Libor +-3/4%; (5.96%, 7.26%, and
7.41%, as of December 31, 1998 and
1999, and June 30, 2000, due 2003. $11,050 $10,930 $10,840
----------------------------------------------------------------------------------------
$11,050 $10,930 $10,840
========================================================================================
</TABLE>
Minimum future principal payments over the
remaining terms of the notes payable as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
----------------------------------------------
<S> <C>
2000 $ 160
2001 180
2002 180
2003 180
2004 10,230
----------------------------------------------
$ 10,930
==============================================
</TABLE>
5 RELATED PARTY MANAGEMENT COMPANY
TRANSACTIONS The Partnership pays property management fees
to an entity affiliated with the general
partner for providing leasing, brokerage, and
other services.
6 COMMITMENTS AND LITIGATION
CONTINGENCIES The Partnership is 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
matters, is presently unknown. In the opinion
of management, the amount of ultimate
liability, if any, with respect to these
actions will not materially affect the
financial position of the Partnership.
F-84
<PAGE> 301
NOONEY RIDER TRAIL, LLC
Financial Statements as of December 31, 1999 and 1998 and for the three years
then ended Together With Auditors' Report
F-85
<PAGE> 302
SELECTED HISTORICAL COMBINED FINANCIAL DATA OF NOONEY RIDER TRAIL, LLC
The following table sets forth certain selected historical financial data of the
Company. The selected operating and financial position data as of and for each
of the three years ended December 31, 1999 have been derived from the audited
financial statements of the Company. The selected operating and financial
position data as of June 30, 2000 and for the six months ended June 30, 2000 and
1999 have been derived from the unaudited financial statements of the Company.
This information should be read in conjunction with the Financial Statements and
Notes thereto which follow.
<TABLE>
<CAPTION>
(in thousands) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $585 $594 $561 $261 $299
Interest and other income 1 3 10 2 5
---- ---- ---- ---- ----
Total revenues..................... 586 597 571 263 304
==== ==== ==== ==== ====
EXPENSES:
Property operating 98 101 100 42 14
Real estate and other taxes 84 90 99 56 72
Depreciation and amortization 62 70 74 40 38
Interest expense................... 423 413 395 188 199
---- ---- ---- ---- ----
Total expenses..................... 667 674 668 326 323
==== ==== ==== ==== ====
Net loss........................... $(81) $(77) $(97) $(63) $(19)
==== ==== ==== ==== ====
</TABLE>
F-86
<PAGE> 303
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Deficiency of earnings to cover fixed
charges (1) 81 77 97 63 19
Total properties owned at end of period 1 1 1 1 1
BALANCE SHEET DATA:
Cash and cash equivalents $46 $30 $21 $6 $11
Real estate held for investment, net 1,533 1,526 1,474 1,492 1,444
Accounts receivable, net 56 43 134 96 190
Other assets 44 31 54 62 47
Total assets, at book value 1,679 1,630 1,683 1,656 1,692
Total assets, at value assigned for the 3,545
consolidation
Total liabilities 4,807 4,835 4,985 4,924 5,013
Total deficit (3,128) (3,205) (3,302) (3,268) (3,321)
CASH FLOW DATA:
Decrease in cash and equivalents, net (41) (16) (9) (24) (10)
Cash provided by operating activities 84 78 42 18 332
</TABLE>
1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earning before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest. Deficiency of earnings to cover fixed
charges is the amount of earnings that would be required to achieve a
ratio of earnings to fixed charges of 1.0.
F-87
<PAGE> 304
Report of Independent Public Accountants
To the Members of Nooney Rider Trail, LLC:
We have audited the accompanying balance sheets of Nooney Rider Trail, LLC as of
December 31, 1998 and 1999, and the related statements of operations, members'
equity and cash flows for the each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nooney Rider Trail, LLC as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
/s/ARTHUR ANDERSEN LLP
Orange County, California
July 26, 2000
F-88
<PAGE> 305
NOONEY RIDER TRAIL, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, June 30,
--------------- -----------
(In 000's) 1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
ASSETS
Real estate held for investment $ 1,526 $ 1,474 $ 1,444
Cash 30 21 11
Accounts receivable 43 63 90
Accounts receivable from affiliates -- 71 100
Other assets, net 31 54 47
------- ------- -------
Total assets $ 1,630 $ 1,683 $ 1,692
======= ======= =======
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 676 $ 796 $ 867
Accounts payable to affiliates 31 67 331
Notes payable 4,128 4,051 3,709
Notes payable to affiliates -- 71 106
------- ------- -------
Total liabilities 4,835 4,985 5,013
------- ------- -------
COMMITMENTS AND CONTINGENCIES
EQUITY (DEFICIT)
Members' equity 601 601 601
Accumulated deficit (3,806) (3,903) (3,922)
------- ------- -------
Total equity (deficit) (3,205) (3,302) (3,321)
------- ------- -------
Total liabilities and equity
(deficit) $ 1,630 $ 1,683 $ 1,692
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-89
<PAGE> 306
NOONEY RIDER TRAIL
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------
(In 000's) 1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $547 $541 $505 $261 $299
Tenant reimbursements 38 53 56 - -
Other income 1 3 10 2 5
------- ------- ------- ------- --------
Total revenues 586 597 571 263 304
------- ------- ------- ------- --------
COSTS AND EXPENSES
Property operating 34 30 29 19 19
Depreciation and amortization 62 70 74 40 38
Real estate taxes 84 90 99 56 72
Management fees to affiliate 2 32 28 3 4
Repairs and maintenance 23 20 27 16 7
Other 39 19 16 4 (16)
------- ------- ------- ------- --------
Total costs and expenses 244 261 273 138 124
------- ------- ------- ------- --------
OTHER EXPENSE
Interest expense 423 413 395 188 199
------- ------- ------- ------- --------
Net loss $(81) $(77) $(97) $(63) $(19)
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-90
<PAGE> 307
NOONEY RIDER TRAIL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------
(In 000's) 1997 1998 1999 1999 2000
---- ---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (81) $ (77) $ (97) $ (63) $ (19)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 62 70 74 40 38
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net (14) -- (19) 9 (27)
Decrease (increase) in other non-current assets -- (3) (36) (5) 2
(Decrease) in deferred revenue -- (28) -- (32) (4)
Increase in accounts payable,
accrued expenses and others 117 116 120 69 342
----- ----- ----- ----- -----
Net cash provided by operating activities 84 78 42 18 332
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to rental property and improvements (41) (48) (9) -- --
----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in accounts receivable from
Affiliates -- 13 (71)
Repayments on notes payable (84) (91) (77) (42) (342)
Borrowings on notes payable to affiliates, net -- -- 71
Increase in accounts payable to affiliates -- 32 35
----- ----- ----- ----- -----
Net cash used in financing activities (84) (46) (42) (42) (342)
----- ----- ----- ----- -----
Decrease in cash (41) (16) (9) (24) (10)
Cash, beginning of period 87 46 30 30 21
----- ----- ----- ----- -----
Cash, end of period $ 46 $ 30 $ 21 $ 6 $ 11
===== ===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 357 $ 356 $ 300 $ 133 $ 189
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
F-91
<PAGE> 308
NOONEY RIDER TRAIL, LLC
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
(In 000's) Members' Accumulated
Equity Deficit Total
------ ------- -----
<S> <C> <C> <C>
Balance, December 31, 1996 $ 601 $(3,648) $(3,047)
Net loss -- (81) (81)
------- ------- -------
Balance, December 31, 1997 601 (3,729) (3,128)
Net loss -- (77) (77)
------- ------- -------
Balance, December 31, 1998 601 (3,806) (3,205)
Net loss -- (97) (97)
------- ------- -------
Balance, December 31, 1999 601 (3,903) (3,302)
Net loss (unaudited) -- (19) (19)
------- ------- -------
Balance, June 30, 2000 (unaudited) $ 601 $(3,922) $(3,321)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-92
<PAGE> 309
NOONEY RIDER TRAIL, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1 ORGANIZATION NATURE OF BUSINESS
Nooney Rider Trail, LLC, ("the Company") is a
Missouri limited liability corporation that
owns a retail center located in Earth City,
Missouri. The general partner, CGS Real
Estate Company, Inc., has a 10% ownership
interest. This property has been identified
as a potential additional property to include
in a consolidation transaction ("the
Transaction") with other entities, certain of
which share common ownership with the general
partner. Subsequent to the Transaction, the
successor company intends to qualify as a
real estate investment trust (REIT) for
federal income tax purposes beginning in
2002.
2 SUMMARY OF SIGNIFICANT REAL ESTATE HELD FOR INVESTMENT
ACCOUNTING
POLICIES Real estate held for investment is carried at
cost net of impairment losses, determined
based on estimated future cash flows.
Economic, market, environmental and political
conditions may affect management's
development, investment and/or marketing
plans. In addition, the implementation of
such development, investment and/or marketing
plans could be affected by the availability
of future financing for investment and
development activities. Accordingly, the
ultimate fair values of the Company's real
estate are dependent upon future economic and
market conditions, the availability of
financing, and the resolution of political,
geographical, environmental, and other
related issues. Real estate held for
investment is depreciated using the
straight-line method over the estimated
useful lives of the related assets, ranging
from five to forty years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash,
accounts receivable, accounts payable,
accrued expenses and notes payables
approximate fair value.
F-93
<PAGE> 310
2 SUMMARY OF SIGNIFICANT EVALUATION OF IMPAIRMENT
ACCOUNTING
POLICIES (CONTINUED) In 1995, the Financial Accounting Standards
Board issued Statement of Financial
Accounting Standards No. 121, Accounting for
Impairment of Long-lived Assets to be
Disposed of ("SFAS 121"). SFAS 121 requires
that long-lived assets and certain
identifiable intangibles to be held and used
be reviewed for impairment whenever events or
changes in circumstances indicate that the
carrying amount of an asset may not be
recoverable based on the estimated future
cash flows (undiscounted and without interest
charges). SFAS 121 also requires that
long-lived assets and certain identifiable
intangibles to be disposed of be reported at
the lower of carrying amount or fair value
less costs to sell.
Long-lived assets, including real estate held
for investment that are expected to be held
and used in operations are to be carried at
the lower of cost or, if impaired, the fair
value of the asset. Long-lived assets to be
disposed of should be reported at the lower
of carrying amount or fair value less cost to
sell. A review for impairment loss is
triggered if the sum of expected future cash
flows (undiscounted and without interest
charges) is less than the carrying amount of
the asset. Assumptions and estimates used to
calculate fair value in determining the
amount of any impairment loss include,
amongst others, estimated occupancy, lease
revenue, costs to enter into leases with
tenants, and property operation costs. The
calculation of an impairment loss is based on
estimated future cash flows, including
appropriate return and interest. The
estimates to determine an impairment
adjustment can change in the near term as
economic conditions fluctuate.
REVENUE RECOGNITION
Lease agreements with tenants are accounted
for as operating leases and rental income is
recognized on the straight-line method over
the term of the related operating lease.
Unbilled rent receivable represents the
difference between rent recognized under the
straight-line method and actual cash due and
is recorded in accounts receivable on the
accompanying balance sheet. Property
operating cost reimbursements due from
tenants for common area maintenance are
recognized in the period the expenses are
incurred.
INCOME TAXES
Currently, the Company is a limited liability
corporation that is not subject to Federal or
most state income taxes. Income taxes are
generally the responsibility of the
individual partners.
F-94
<PAGE> 311
2 SUMMARY OF SIGNIFICANT UNAUDITED INTERIM INFORMATION
ACCOUNTING The accompanying financial information as of
POLICIES (CONTINUED) June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited. In the
opinion of management, this information has
been prepared on substantially the same basis
as the annual consolidated financial
statements and contains all adjustments
(consisting of normal recurring accruals)
necessary to present fairly the financial
position and results of operations as of such
date and for such periods.
COMPREHENSIVE INCOME
Net income as reported by the Company
reflects total comprehensive income for the
years ended December 31, 1998 and 1999, and
the six months ended June 30, 1999 and 2000
since there are no transactions that would be
classified as comprehensive income.
USE OF ESTIMATES
The preparation of consolidated 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 disclosure of contingent
assets and liabilities at the date of the
consolidated balance sheet. Actual results
could materially differ from those estimates.
In assessing impairment of real estate
assets, certain estimates were used by
management related to future lease income to
be realized and future operating costs to be
incurred. These estimates could materially
differ from the actual results achieved.
NEW ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the Securities and
Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), which addressed
certain revenue recognition policies,
including the accounting for overage rent by
a landlord. SAB 101 requires overage rent to
be recognized as a revenue only when the
tenants' sales exceed their sales threshold.
The Company will adopt SAB 101 for the
quarter ending December 31, 2000. Because the
Company does not have a significant amount of
existing leases with overage rent provisions,
management does not believe that adoption of
this standard will have material effect on
the Company's financial statements. In
addition, SAB 101 will impact the timing in
which overage rent is recognized throughout
each year, but will not have a material
impact on the total overage of rent
recognized each full year.
3 REAL ESTATE Real estate held for investment consists of
HELD FOR the following (see Note 4):
INVESTMENT
F-95
<PAGE> 312
<TABLE>
<CAPTION>
December 31, June 30,
------------ --------
2000
(IN 000'S) 1998 1999 (Unaudited)
---------- ---- ---- -----------
<S> <C> <C> <C>
Income producing property:
Land $390 $390 $390
---- ---- ----
Building and improvements 2,047 2,057 2,057
----- ----- -----
$2,437 $2,447 $2,447
Accumulated depreciation and amortization (911) (973) (1,003)
----- ----- -----
$1,526 $1,474 $1,444
====== ====== ======
</TABLE>
4 NOTES PAYABLE Notes payable consist of:
<TABLE>
<CAPTION>
December 31, June 30,
2000
(IN 000'S) 1998 1999 (Unaudited)
---------- ---- ---- -----------
<S> <C> <C> <C>
Debt payable to a financial institution,
secured by real estate held for
investment at an interest rate of prime
+3/4%; (8.50%, 9.25%, and 9.75% as of
December 31, 1998 and 1999, and March
31, 2000), principal due in May 2000. $3,748 $3,671 $3,329
Various unsecured debt bearing interest at
15% per annum, due in 2000 380 380 380
------ ------ ------
$4,128 $4,051 $3,709
====== ====== ======
</TABLE>
5 RELATED PARTY MANAGEMENT COMPANY
TRANSACTIONS The Company pays property management fees to
an entity affiliated with the general partner
for providing leasing, brokerage, and other
services to affiliates and other parties.
6. COMMITMENTS LEASE COMMITMENTS AS LESSOR
AND The Company is a lessor under various non-
CONTINGENCIES cancelable operating leases. Minimum future
rentals under these non-cancelable operating
leases as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount (IN 000'S)
------------------------- -----------------
<S> <C>
2000 $543
2001 519
2002 181
2003 86
2004 82
------
$1,411
======
</TABLE>
LITIGATION
The Company is 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
matters, is presently unknown. In the opinion
of management, the amount of ultimate
liability, if any, with respect to these
actions will not materially affect the
financial position of the Company.
7. 2000 EVENTS (UNAUDITED) 2000 EVENTS
The company modified their debt agreement to
extend the maturity date through April 30,
2002.
F-96
<PAGE> 313
NOONEY HAZELWOOD ASSOCIATES, L.P.
Financial Statements as of December 31, 1999 and for the three years then ended
Together With Auditors' Report
F-97
<PAGE> 314
A. SELECTED HISTORICAL FINANCIAL DATA OF NOONEY-HAZELWOOD ASSOCIATES, L.P.
AND INVESTEE
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with the
Financial Statements and Notes thereto which follow.
<TABLE>
<CAPTION>
(In thousands)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income.... $2,368 $2,468 $2,461 $2,445 $2,402 $1,194 $1,291
Interest and other income.......... 24 18 10 6 11 5 8
----- ----- ----- ----- ----- ----- -----
Total revenues..................... 2,392 2,486 2,471 2,451 2,413 1,199 1,299
===== ===== ===== ===== ===== ===== =====
EXPENSES:
Property operating................. 844 905 1,065 977 1,031 519 509
Management and advisory fees....... 131 133 135 134 132 66 71
Real estate and other taxes........ 136 138 145 155 159 77 80
Depreciation and amortization...... 460 635 469 454 441 219 218
Interest expense................... 825 854 922 903 876 445 433
----- ----- ----- ----- ----- ----- -----
Total expenses..................... 2,396 2,665 2,736 2,623 2,639 1,326 1,311
===== ===== ===== ===== ===== ===== =====
Net loss .......................... $(4) $(179) $(265) $(172) $(226) $(127) $(12)
===== ===== ===== ===== ===== ===== =====
</TABLE>
F-98
<PAGE> 315
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges (1) 1.0 - - - - - -
Deficiency of earnings to cover fixed
charges (2) - 179 265 172 226 127 12
Total properties owned at end of period 1 1 1 1 1 1 1
BALANCE SHEET DATA:
Cash and cash equivalents $601 $288 $409 $258 $203 $357 $348
Real estate held for investment, net 8,728 8,389 7,969 7,611 7,316 7,419 7,175
Accounts receivable from affiliates - - - 2 4 2 4
Accounts receivable, net 40 2 - - - - 24
Other assets 226 1,579 1,509 1,449 1,363 1,443 1,366
Total assets, at book value 9,595 10,258 9,887 9,320 8,886 9,221 8,917
Total assets, at valued assigned for the
consolidation 16,089
Total liabilities 13,175 14,017 13,911 13,517 13,309 13,545 13,351
General partners deficit (264) (265) (268) (270) (272) (271) (273)
Limited partners deficit (3,316) (3,494) (3,756) (3,927) (4,151) (4,053) (4,161)
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 93 165 121 (151) (55) 98 145
Cash provided by operating activities 314 608 245 241 227 230 338
</TABLE>
(1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
the amortization of debt issuance costs and that portion of operations
rental expense representing interest.
(2) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges
of 1.0
F-99
<PAGE> 316
B. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997 AND
UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED JUNE 30, 2000 AND 1999
INDEPENDENT AUDITORS' REPORT
To the Partners
Nooney-Hazelwood Associates, L.P.
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of
Nooney-Hazelwood Associates, L.P. and Investee, as of December 31, 1999 and
1998, and the related consolidated statements of operations, partners'
capital (deficit) accounts, and cash flows for the three years in the
period then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nooney-Hazelwood
Associates, L.P. and Investee as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for the three years in the
period then ended, in conformity with generally accepted accounting
principles.
/s/ Wolfe, Nilges, Nahorski
A Professional Corporation
February 29, 2000
St. Louis, Missouri
F-100
<PAGE> 317
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and June 30, 2000
<TABLE>
<CAPTION>
UNAUDITED
December 31, JUNE 30,
------------ --------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
ASSETS:
Cash $ 258,129 $ 203,188 $ 348,392
Accounts receivable, net of allowance for doubtful accounts of
$10,807, $18,672, and $14,195 200 -- 24,382
Accounts receivable from affiliates 2,125 4,350 4,350
Prepaid expenses 68,667 67,879 69,162
Restricted deposits and funded reserves (Note 2) 575,800 527,395 546,732
Property and equipment, net (Note 3) 7,610,637 7,315,684 7,174,788
Loan fees, net of amortization 804,578 767,761 749,353
------------ ------------ ------------
TOTAL ASSETS $ 9,320,136 $ 8,886,257 $ 8,917,159
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 116,598 $ 132,786 $ 288,378
Tenant security deposits 70,735 70,750 76,500
Deferred revenue 4,808 9,444 5,180
Notes payable (Note 3) 13,324,609 13,096,120 12,981,604
------------ ------------ ------------
Total Liabilities 13,516,750 13,309,100 13,351,590
------------ ------------ ------------
PARTNERS' CAPITAL (DEFICIT):
Equity 8,300,022 8,300,022 8,300,022
Accumulated deficit (12,324,718) (12,496,636) (12,722,865)
Net income (loss) (171,918) (226,229) (11,588)
------------ ------------ ------------
Total Partners' Capital (Deficit) (4,196,614) (4,422,843) (4,434,431)
------------ ------------ ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) $ 9,320,136 $ 8,886,257 $ 8,917,159
============ ============ ============
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated balance sheets.
F-101
<PAGE> 318
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
For the Years Ended December 31, 1997, 1998 and 1999 and For the Six Months
Ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Balance, December 31, 1996 $ (265,663) $(3,494,129) $(3,759,792)
Net loss (2,649) (262,255) (264,904)
----------- ----------- -----------
Balance, December 31, 1997 $ (268,312) $(3,756,384) $(4,024,696)
=========== =========== ===========
Balance, December 31, 1997 $ (268,312) $(3,756,384) $(4,024,696)
Net loss (1,719) (170,199) (171,918)
----------- ----------- -----------
Balance, December 31, 1998 $ (270,031) $(3,926,583) $(4,196,614)
=========== =========== ===========
Balance, December 31, 1998 $ (270,031) $(3,926,583) $(4,196,614)
Net loss for the six months ended June 30, 1999, unaudited (1,270) (125,772) (127,042)
----------- ----------- -----------
Balance, June 30, 1999, unaudited (271,301) (4,052,355) (4,323,656)
Net loss for the nine months ended December 31, 1999 (992) (98,195) (99,187)
----------- ----------- -----------
Balance, December 31, 1999 $ (272,293) $(4,150,550) $(4,422,843)
=========== =========== ===========
Balance, December 31, 1999 $ (272,293) $(4,150,550) $(4,422,843)
Net loss, unaudited (446) (11,142) (11,588)
----------- ----------- -----------
Balance, June 30, 2000, unaudited $ (272,739) $(4,161,692) $(4,434,431)
=========== =========== ===========
</TABLE>
The notes to the financial statements are an integral part of these consolidated
statements of partners' capital (deficit).
F-102
<PAGE> 319
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1998 and 1999 and For the Six Months
Ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
Year Ended December 31, JUNE 30,
----------------------- ---------
1997 1998 1999 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income $ 2,461,069 $ 2,445,448 $ 2,402,432 $ 1,194,028 $ 1,291,240
Other income 10,190 5,648 10,651 4,938 8,100
--------- --------- --------- --------- ---------
Total Revenues 2,471,259 2,451,096 2,413,083 1,198,966 1,299,340
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Property operating 769,866 732,795 754,513 364,231 386,022
Depreciation and amortization 469,019 453,924 440,762 218,666 218,428
Real estate taxes 145,177 154,875 159,338 77,438 79,669
Management fees 135,147 134,272 132,123 65,701 71,277
Repairs and maintenance 294,771 244,110 276,320 155,205 122,857
--------- --------- --------- --------- ---------
Total Costs and Expenses 1,813,980 1,719,976 1,763,056 881,241 878,253
--------- --------- --------- --------- ---------
INTEREST EXPENSE 922,183 903,038 876,256 444,767 432,675
--------- --------- --------- --------- ---------
NET LOSS $ (264,904) $ (171,918) $ (226,229) $ (127,042) $ (11,588)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated statements of operations.
F-103
<PAGE> 320
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1998 and 1999 and
For the Six Months Ended June 30, 1999 and 2000
<TABLE>
<CAPTION>
UNAUDITED
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ----------------
1997 1998 1999 1999 2000
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(264,904) $(171,918) $(226,229) $(127,042) $ (11,588)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 469,019 453,924 440,762 218,666 218,428
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 114 200 200 200 (24,382)
Decrease (increase) in accounts receivable from affiliates 1,955 (2,125) (2,225) -- --
Decrease (increase) in prepaid expenses 44,713 (6,308) 788 (34) (1,283)
Increase (decrease) in deferred revenue (4,375) 347 4,636 14,252 (4,336)
Increase (decrease) in security deposit liabilities (4,290) (860) 15 1,450 5,750
Increase (decrease) in accounts payable and accrued expenses 2,685 (32,749) 9,360 122,948 155,592
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 244,917 240,511 227,307 230,440 338,181
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted deposits and funded reserves (767) 29,142 48,405 (12,115) (19,337)
Additions to rental property and improvements (11,732) (59,058) (102,164) (9,000) (59,124)
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (12,499) (29,916) (53,759) (21,115) (78,461)
-----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage (99,909) (361,484) (228,489) (110,840) (114,516)
Additions to loan fees (11,174) -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (111,083) (361,484) (228,489) (110,840) (114,516)
-----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 121,335 (150,889) (54,941) 98,485 145,204
CASH, BEGINNING OF PERIOD 287,683 409,018 258,129 258,129 203,188
-----------------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 409,018 $ 258,129 $ 203,188 $ 356,614 $ 348,392
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 944,849 $ 912,623 $ 873,741 $ 440,987 $ 433,855
===================================================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated statements of cash flows.
F-104
<PAGE> 321
NOONEY-HAZELWOOD ASSOCIATES, L.P.
AND INVESTEE
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Nooney-Hazelwood Associates, L.P. (the Partnership) was organized as a Missouri
limited partnership on December 10, 1984. The Partnership was organized to
acquire and hold an interest in Lindbergh Boulevard Partners, L.P. (the
Investee), a Missouri limited partnership. The general partner is Nooney
Development Partners.
Lindbergh Boulevard Partners, L.P. (the Investee) was organized as a Missouri
Limited Partnership on December 10, 1984 to construct, own, operate and
ultimately sell The Lakes Apartments project. This project consists of 26
buildings with 408 residential units. The general partner is Nooney Hazelwood
Associates, L.P., which owns 99% of this Partnership. On August 28, 1996, the
Partnership refinanced its mortgage under Section 207 pursuant to Section 223(f)
of the National Housing Act. The Partnership's mortgage is co-insured by the
Secretary of Housing and Urban Development through the Federal Housing
Administration. This HUD insured loan is the Partnership's only major
HUD-assisted program. Such projects' are regulated by the United States
Department of Housing and Urban Development as to operating methods and
distributions to owners.
BASIS OF ACCOUNTING
The Partnership uses the accrual basis of accounting for both tax and financial
statement purposes.
ACCOUNTS RECEIVABLE
The Partnership provides an allowance for doubtful accounts equal to the
estimated collection losses that will be incurred in collection of all
receivables. The estimated losses are based on a review of the current status of
the existing receivables.
APARTMENT BUILDINGS AND EQUIPMENT
Land, buildings, furnishings and equipment are recorded at cost. Expenditures in
the nature of normal repairs and maintenance are charged to operations as
incurred.
F-105
<PAGE> 322
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Depreciation is computed using straight-line and accelerated methods based upon
estimated useful lives as follows:
<TABLE>
<S> <C>
Buildings 30 years
Building equipment - fixed 5 - 30 years
Building equipment - portable 5 years
Land improvements 5 - 15 years
Office furniture and equipment 5 years
</TABLE>
ALLOCATION OF PROFITS AND LOSSES
Pursuant to the terms of the Partnership Agreement, profits and losses from
operations are allocated 1% to the general partner and 99% to the limited
partner.
LOAN FEES
Loan fees are to be amortized over the 35 year term of the mortgage loan on a
straight-line basis.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and 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 may differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Partnership
and its 99% owned Investee, Lindbergh Boulevard Partners, L.P. Significant
interpartnership accounts and transactions have been eliminated. Amounts in the
financial statements are shown at 100%. The minority interest's share of
Lindbergh Boulevard Partners, L.P.'s accumulated net losses at December 31,
1997, 1998 and 1999 amounted to $90,415, $90,170 and $90,610, respectively. In
accordance with generally accepted accounting principles, this amount has been
absorbed by the Partnership.
F-106
<PAGE> 323
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
CASH EQUIVALENTS
For purposes of reporting the statement of cash flows, the Partnership considers
all cash accounts and all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
Lease agreements with tenants are accounted for as operating leases and rental
income is recognized using the straight-line method over the term of the related
operating lease. Deferred revenue represents tenant rent paid in advance of the
month it is actually due.
EVALUATION OF IMPAIRMENT
The partnership reviews its investment in property and equipment for impairment
whenever events or changes in circumstances indicate that the carrying value of
such property may not be recoverable. Recoverability is measured by a comparison
of the carrying amount of the real estate to the future net undiscounted cash
flow expected to be generated by the rental property. Assumptions and estimates
used to calculate fair value in determining the amount of any impairment loss
include estimated occupancy, lease revenue, costs to enter into leases with
tenants, property operation costs and any estimated proceeds from the eventual
disposition of the real estate. If the real estate is considered to be impaired,
the impairment to be recognized is measured at the amount by which the carrying
amount of the real estate exceeds the fair value of such property. There were no
impairment losses recognized in 1999 or 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial statements of the Partnership at December 31, 1999 and 1998
consist of cash, restricted deposits and funded reserves, receivables from
tenants and affiliates, accounts payable, tenant security deposits and notes
payable. For cash, restricted deposits and funded reserves, receivables,
accounts payable and tenant security deposits, the carrying amounts approximate
fair value due to the short term nature of these items. In the opinion of
management, it was not practicable to estimate the fair value of the notes
payable because quoted market prices for the same or similar issues and current
rates for debt of the same remaining maturities with similar collateral
requirements and restrictions are not available. See Note 3 for additional
information on notes payable.
F-107
<PAGE> 324
NOTE 2
RESTRICTED CASH ACCOUNTS
Restricted cash accounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Tenant security deposits $ 70,035 $ 73,944
Mortgage escrow deposits 80,969 78,815
Replacement reserve 424,796 374,636
--------------------------------------------------------------------------------
$ 575,800 $ 527,395
========== ==========
</TABLE>
Tenant security deposits are required by the regulatory agreement to be placed
in a segregated, interest bearing account in a Federally insured depository. The
balance of this account must at all times be at least equal to the security
deposit liability.
Mortgage escrow deposits are required by HUD and the mortgage note for the
purpose of funding the payment of property taxes, hazard insurance premiums and
mortgage insurance premiums. The escrow must be funded monthly at a level which
the Mortgagee estimates will accumulate sufficient funds to pay all escrow
obligations before they become due. The escrow is required by HUD to be
deposited in a separate account in a Federally insured depository.
The replacement reserve is required by the regulatory agreement for the purpose
of funding extraordinary maintenance, repair and replacement of capital items.
As required by HUD, $7,310 is deposited monthly and the balance of this account
must be maintained at a level determined by HUD to be sufficient to meet project
requirements. The reserves must be held in a Federally insured depository and
any disbursements from the reserve must be approved by HUD.
F-108
<PAGE> 325
NOTE 3
LONG-TERM DEBT
Mortgage Notes Payable:
Lindbergh Boulevard Partners, L.P. refinanced the mortgage note on August 28,
1996. The mortgage is financed by Midland Loan Services, Inc. and collateralized
by a fully-modified mortgage-backed security (GNMA Security). Funding for the
GNMA Security was provided by the issuance of Multifamily Housing Revenue
Refunding Bonds Series 1996 A, in the amount of $11,225,000, and Taxable
Multifamily Housing Revenue Refunding Bonds Series 1996B, in the amount of
$1,185,000, by the Industrial Development Authority of the City of Hazelwood,
Missouri. The mortgage is co-insured by the Secretary of Housing and Urban
Development acting through the Federal Housing Administration under Section 207
pursuant to 223(F) of the National Housing Act. The mortgage is secured by a
first lien mortgage on and security interest in property comprising The Lakes
Apartments along with a pledge of the rents, profits, income and charges from
operations to meet all debt and reserve requirements.
The mortgage is payable in monthly installments of $74,040 including principal
and interest at 6.39% per year through September 1, 2031.
Cash Flow Note Payable:
As part of the refinancing described above, Nooney-Hazelwood Associates obtained
a loan from the Industrial Development Authority of the City of Hazelwood,
Missouri ("Authority"). Funding was provided from the sale of the Authority's
Subordinate Distributed Cashflow Multifamily Housing Revenue Refunding Bonds
Series 1996C in the aggregate amount of $1,400,000. The note is payable solely
from distributable surplus cash as defined by the Regulatory Agreement with the
Federal Housing Administration dated August 28, 1996. Interest accrues at 9.5%
per year and is payable semi-annually. Principal payments are due semi-annually
beginning May 1, 1998.
Scheduled maturities of the notes at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Mortgage Cash Flow
Note Note Total
--------------------------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 120,959 $ 125,000 $245,959
2001 128,918 135,000 263,918
2002 137,402 155,000 292,402
2003 146,444 165,000 311,444
2004 156,080 185,000 341,080
Thereafter 11,376,317 265,000 11,641,317
----------- ---------- -----------
$12,066,120 $1,030,000 $13,096,120
</TABLE>
F-109
<PAGE> 326
NOTE 4
RELATED PARTY TRANSACTIONS
The managing general partner of the Partnership is Nooney Development Partners,
a Missouri limited partnership whose general partner is an affiliate of CGS Real
Estate Company. American Spectrum Midwest (formerly known as Nooney, Inc.), a
wholly-owned subsidiary of CGS Real Estate Company, manages the Partnership's
real estate for a management fee equal to 5% of the gross receipts from the
operation of the Lakes Apartments. Property management fees charged by American
Spectrum for the years ended December 31, 1997, 1998 and 1999 amounted to
$123,147, and $122,272, and $120,123, respectively. In addition, for each of the
years ended December 31, 1997, 1998 and 1999, the Partnership paid American
Spectrum Midwest $12,000 for administrative services and indirect expenses in
connection with the management of the Partnership.
NOTE 5
INCOME TAXES
The financial statements do not reflect a provision or liability for income
taxes as the partners are taxed directly on their individual shares of
partnership earnings.
NOTE 6
CONCENTRATION OF CREDIT RISK
The Partnership maintains its cash accounts in four commercial banks located in
St. Louis, Missouri. Accounts at each bank are secured by the Federal Deposit
Insurance Corporation (FDIC) up to $100,000 per bank. Mortgage escrow deposits
and reserve for replacements totaling $453,451 at December 31, 1999 are held by
Midland Loan Services, Inc., the mortgagee, in trust. A summary of the total
insured and uninsured cash balances at December 31, 1999, excluding mortgage
escrow deposits and reserve for replacements, is as follows:
<TABLE>
<S> <C>
Total cash in bank $ 294,626
Portion insured by FDIC (265,395)
---------------------------------------------------
Total uninsured cash $ 29,231
=========
</TABLE>
NOTE 7
UNAUDITED INTERIM INFORMATION
The accompanying financial information as of June 30, 2000 and for the six
months ended June 30, 1999 and 2000 is unaudited. In the opinion of management,
this information has been prepared on substantially the same basis as the annual
combined financial statements and contains all adjustments (consisting of normal
recurring accruals) necessary to present fairly the financial position and
results of operations as of such date and for such periods.
F-110
<PAGE> 327
SIERRA PACIFIC DEVELOPMENT FUND I
HISTORICAL FINANCIAL DATA
F-111
<PAGE> 328
Sierra Pacific Development Fund I
Table of Contents
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and Results of
Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts . . .
2. Schedule III - Real estate and accumulated depreciation . . .
F. Unaudited Financial Statements - Six Months Ended June 30, 2000 and 1999
F-112
<PAGE> 329
A. SELECTED HISTORICAL FINANCIAL DATA OF SIERRA PACIFIC DEVELOPMENT FUND
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED JUNE 30,
---------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 585 $ 748 $ 758 $ 920 $ 919 $ 448 $ 490
Interest and other income 7 8 -- -- -- -- --
------- ------- ------- ------- ------- ----- -----
Total revenues 592 756 758 920 919 448 490
======= ======= ======= ======= ======= ===== =====
EXPENSES:
Property operating 407 390 379 348 377 247 269
Management and advisory fees 26 29 34 42 40 -- --
Real estate and other taxes 92 77 78 92 102 -- --
Depreciation and amortization 407 468 409 371 337 174 160
Interest expense 70 164 160 157 153 77 164
------- ------- ------- ------- ------- ----- -----
Total expenses 1,002 1,128 1,060 1,010 1,009 498 593
======= ======= ======= ======= ======= ===== =====
Net loss before extraordinary item
and minority interest (410) (372) (302) (90) (90) (50) (103)
Extraordinary item - loss from write
off of deferred loan costs -- -- -- -- -- -- (46)
Minority interest 97 70 15 8 6 3 7
------- ------- ------- ------- ------- ----- -----
Net loss $ (313) $ (302) $ (287) $ (82) $ (84) $ (47) $(142)
======= ======= ======= ======= ======= ===== =====
</TABLE>
F-113
<PAGE> 330
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average number of units outstanding 29 29 29 29 29 29 29
Loss per unit (10.65) (10.29) (9.79) (2.79) (2.87) (1.59) (4.83)
Deficiency of earnings to cover fixed
charges (1)(2) 313 302 287 82 84 47 142
Cash distributions to minority investors (408) (541) (25) (178) (87) -- (2,433)
Total properties owned at end of period 1 1 1 1 1 1 1
Book value per limited partnership unit 73 62 53 50 47 48 45
Per unit value assigned for the consolidation 5,875
BALANCE SHEET DATA:
Cash and cash equivalents $ 787 $ 56 $ 87 $ 83 $ 134 $ 101 $ 109
Real estate held for investment, net 3,422 3,223 2,981 2,773 2,557 2,651 2,443
Accounts receivable, net 74 104 72 56 61 52 68
Investment in/due from partnerships -- 27 27 103 129 153 2,490
Other assets 272 300 269 252 238 227 278
Total assets, at book value 4,555 3,710 3,436 3,267 3,119 3,184 5,388
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30
---------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------ ----- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets, at valued assigned for the
consolidation 10,025
Total liabilities 1,942 1,979 1,864 1,802 1,738 1,766 4,148
General partners deficit -- -- -- -- -- -- (82)
Limited partners equity 2,136 1,834 1,547 1,465 1,381 1,418 1,32
Other equity (deficit) 477 (103) 25 -- -- -- --
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 748 (732) 32 (4) 51 18 (25)
Cash (used in) provided by operating
activities (587) 46 19 210 182 98 75
</TABLE>
(1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
(2) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges of
1.0
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B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - DECEMBER 31, 1999, 1998 AND 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1999, the Partnership owns a 93.45%
interest in the Sierra Creekside Partners, which operates one property, Sierra
Creekside (the "Property").
Results of Operations:
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Rental income for the year ended December 31, 1999 remained virtually unchanged
in comparison to the prior year, despite an increase in rental rates and
occupancy. In 1998, rental income included a lease buy-out negotiated with a
former tenant. The weighted-average effective annual rent per square foot, on an
accrual basis, increased from $18.57 at December 31, 1998 to $19.52 at December
31, 1999. Occupancy rose from 96% at December 31, 1998 to 100% at December 31,
1999.
Operating expenses remained relatively unchanged, increasing by $4,000, when
compared to 1998. Bad debt expense of $27,000 was recorded as a result of a
receivable write-off from an affiliate. Further, property taxes and insurance,
and administrative costs rose during the period. This increase was primarily
offset by a decrease in depreciation and amortization expenses. Depreciation
expense decreased principally as a result of fully depreciated tenant
improvements.
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
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<PAGE> 333
Rental income increased by $162,000, or 21%, when compared to the prior year.
This increase was primarily attributable to a lease buy-out negotiated in May
1998. The majority of the vacated space was re-leased at a higher rental rate.
The weighted-average effective annual rent per square foot, on an accrual basis,
increased from $16.16 at December 31, 1997 to $18.57 at December 31, 1998. This
increase was partially offset by a decrease in occupancy from 100% at December
31, 1997 to 96% at December 31, 1998.
Operating expenses decreased by $46,000, or 5%, principally due to a decrease in
depreciation and amortization expenses resulting from certain capitalized tenant
improvements and lease costs becoming fully depreciated during 1998. Further,
lower maintenance and repair costs were incurred in 1998 when compared to the
prior year. The increase was partially offset due to higher management fees
resulting from the increased rental income of the property and due to higher
property tax expense recorded in 1998.
Liquidity and Capital Resources:
In January 2000, the Partnership paid its loan balance due to Home Federal
Savings and entered into a new loan agreement for $4,250,000. The lender funded
$4,050,000 at closing and held back $200,000 to be drawn upon to help finance
future tenant improvements and leasing costs. The loan is secured by a trust
deed on the Sierra Creekside property. The Partnership received net proceeds of
$2,222,000 as a result of the new loan. The proceeds will primarily be used for
construction of new tenant space and as a source for contributions to the
minority owner of the Property, Sierra Mira Mesa Partners ("SMMP").
During 1999, the Partnership generated cash flows from operations of $182,000
and paid $67,000 for property additions and lease commissions. SMMP contributed
a total of $40,000 to the Partnership and received distributions of $87,000 from
the Partnership in 1999.
The Partnership is in a liquid position at December 31, 1999 with cash and
billed rents of $143,000 and current liabilities of $15,000.
The Partnership's primary capital requirements will be for construction of new
tenant space. It is anticipated that these requirements will be funded from the
operations of the Property, proceeds from the new loan and contributions from
SMMP.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
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<PAGE> 334
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership did not experience any major system failures or disruptions in
operations over the year 2000 transition. All systems have continued to operate
as normal.
The Partnership did not separately track internal costs related to the Year 2000
issue and Partnership management believes these amounts did not have a material
impact on the Partnership's financial position or results of operations.
The Partnership employs a property management company to manage, operate and
lease the property. The management company did not experience any major systems
failures or disruptions in operations at the property. The Partnership remains
confident that no Year 2000 issues with the property management company or other
third parties will arise in the future although no guarantees can be made to
that effect.
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<PAGE> 335
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
a) OVERVIEW
The following discussion should be read in conjunction with the Sierra Pacific
Development Fund's (the Partnership) Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Form 10-Q.
The Partnership currently owns a 94.92% interest in the Sierra Creekside
Partnership, which operates the Sierra Creekside property (the Property) in San
Diego, CA.
(b) RESULTS OF OPERATIONS
Rental income for the six months ended June 30, 2000 increased by approximately
$42,000, or 9%, when compared to the corresponding period in the prior year,
primarily due to higher rental rates. One tenant, who leases approximately 7,000
square feet of the Property, extended his lease for an additional five-year term
in March 2000 at a higher rate. Rental income for the quarter ended June 30,
2000 increased by approximately $27,000, or 12%, principally as a result of the
lease extension. The Property was 100% occupied at June 30, 2000 and 1999.
Operating expenses for the six months ended June 30, 2000 increased by
approximately $22,000, or 9%, in comparison to the same period in 1999. This
increase was principally due to higher utilities and maintenance and repair
costs. This increase was partially offset by a decrease in administrative costs
incurred during the period. Operating expenses for the three months ended June
30, 2000 decreased by approximately $6,000 or 5%, primarily as a result of the
lower administrative costs.
Depreciation and amortization expenses for the six months and three months ended
June 30, 2000 decreased by approximately $14,000, or 8%, and by approximately
$9,000, or 10%, respectively, principally due to fully depreciated capitalized
tenant improvements and fully amortized lease costs.
Interest expense for the six months and three months ended June 30, 2000,
increased by approximately $88,000 and $53,000, respectively, when compared to
the same periods in the prior year. As stated below, the Partnership refinanced
its mortgage loan on the Property in January 2000.
An extraordinary loss of approximately $46,000 was recorded in the first quarter
due to the write-off of deferred loan costs associated with the payoff of the
mortgage loan with Home Federal Savings.
(c) LIQUIDITY AND CAPITAL RESOURCES
In January 2000, the Partnership paid its loan balance of $1,669,000 to Home
Federal Savings and entered into a loan agreement with General Electric Capital
Corporation (GECC) in the amount of $4,250,000. The lender funded $4,050,000 at
closing and held back $200,000 to be drawn upon to help finance future tenant
improvements and leasing costs. The Partnership received net proceeds of
$2,222,000 as a result of the new
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<PAGE> 336
loan. The loan is secured by the Property and bears interest at 2.75% above the
GECC Composite Commercial Paper Rate. Principal and interest payments are due
monthly based on a 30-year amortization. The loan matures January 31, 2005. The
majority of the loan proceeds were distributed to the minority owner of the
property, Sierra Mira Mesa Partners (SMMP). During the six months ended June 30,
2000, SMMP received distributions totaling approximately $2,433,000 from the
Partnership and made contributions totaling approximately $78,000 to the
Partnership.
The Partnership is in a liquid position at June 30, 2000 with cash and billed
receivables of approximately $124,000 and accrued and other liabilities of
approximately $108,000. A secondary source of cash is available through
contributions from SMMP.
The Partnership's primary capital requirements are for the construction of new
tenant space and debt obligations. It is anticipated that these requirements
will be funded from the operations of the Property, the $200,000 tenant
improvement/lease commission holdback and contributions from SMMP.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
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<PAGE> 337
D. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Development Fund, a California limited partnership, (the "Partnership") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
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<PAGE> 338
SIERRA PACIFIC DEVELOPMENT FUND
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 134,154 $ 83,408
Rent receivables:
Unbilled rent (Notes 1 and 4) 51,981 47,993
Billed rent (Note 1) 8,640 8,297
Due from affiliates (Note 3) 0 26,916
Income-producing property - net of accumulated
depreciation and valuation allowance of
$3,289,481 in 1999 and $3,140,905 in 1998
(Note 4) 2,557,487 2,772,712
Other assets (Notes 1, 2 and 3) 238,197 252,588
Excess distributions to minority partner (Note 4) 128,513 75,610
---------- ----------
Total Assets $3,118,972 $3,267,524
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 64,825 $ 82,019
Note payable (Note 5) 1,673,186 1,720,324
---------- ----------
Total Liabilities 1,738,011 1,802,343
---------- ----------
Partners' equity (Notes 1 and 6):
General Partner 0 0
Limited Partners:
30,000 units authorized, 29,354 issued and
outstanding 1,380,961 1,465,181
---------- ----------
Total Partners' equity 1,380,961 1,465,181
---------- ----------
Total Liabilities and Partners' equity $3,118,972 $3,267,524
========== ==========
</TABLE>
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<PAGE> 339
See Accompanying Notes 17
SIERRA PACIFIC DEVELOPMENT FUND
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 919,172 $ 919,602 $ 757,716
Interest income 12 12 39
----------- ----------- -----------
Total revenues 919,184 919,614 757,755
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 337,049 370,805 409,297
Maintenance and repairs 113,003 109,938 140,098
Utilities 97,821 112,428 105,780
Property taxes and insurance 102,316 91,815 78,394
Legal and accounting 36,786 36,215 37,083
Administrative fees (Note 3) 48,023 29,717 30,750
General and administrative 35,876 37,185 38,720
Management fees (Note 3) 39,654 41,516 33,559
Salaries and payroll taxes 14,014 14,400 14,400
Renting expenses 0 0 2,861
Bad debt expense (Note 3) 26,916 0 0
Other operating expenses 5,286 9,206 8,762
----------- ----------- -----------
Total operating expenses 856,744 853,225 899,704
Interest 152,563 156,636 160,359
----------- ----------- -----------
Total expenses 1,009,307 1,009,861 1,060,063
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT
VENTURE LOSS (90,123) (90,247) (302,308)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS 5,903 8,420 14,995
----------- ----------- -----------
NET LOSS $ (84,220) $ (81,827) $ (287,313)
=========== =========== ===========
Net loss per limited partnership unit (Note 1) $ (2.87) $ (2.79) $ (9.79)
=========== =========== ===========
</TABLE>
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<PAGE> 340
See Accompanying Notes 18
SIERRA PACIFIC DEVELOPMENT FUND
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Limited Partners Total
------------------------------- General Partners'
Per Unit Total Partner Equity
-------- ----- ------- ------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1997 $62.49 $ 1,834,321 $ 0 $ 1,834,321
Net loss (9.79) (287,313) (287,313)
------ ----------- --------- -----------
Partners' equity - December 31, 1997 52.70 1,547,008 0 1,547,008
Net loss (2.79) (81,827) (81,827)
------ ----------- --------- -----------
Partners' equity - December 31, 1998 49.91 1,465,181 0 1,465,181
Net loss (2.87) (84,220) -- (84,220)
------ ----------- --------- -----------
Partners' equity - December 31, 1999 $47.04 $ 1,380,961 $ 0 $ 1,380,961
====== =========== ========= ===========
</TABLE>
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<PAGE> 341
See Accompanying Notes 19
SIERRA PACIFIC DEVELOPMENT FUND
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (84,220) $ (81,827) $(287,313)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 337,049 370,805 409,297
Minority interest's share of consolidated
joint venture loss (5,903) (8,420) (14,995)
Bad debt expense 26,916 0 0
(Increase) decrease in rent receivable (4,331) 16,672 31,202
Increase in other assets (70,753) (68,258) (43,633)
Decrease in accrued and other liabilities (17,194) (18,493) (75,217)
--------- --------- ---------
Net cash provided by operating activities 181,564 210,479 19,341
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (36,680) (78,467) (91,878)
--------- --------- ---------
Net cash used in investing activities (36,680) (78,467) (91,878)
--------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions from minority investor 40,000 85,300 168,500
Distributions to minority investor (87,000) (178,000) (25,000)
Principal payments on note payable (47,138) (43,096) (39,400)
--------- --------- ---------
Net cash (used in) provided by financing
activities (94,138) (135,796) 104,100
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 50,746 (3,784) 31,563
--------- --------- ---------
CASH AND CASH EQUIVALENTS -
Beginning of year 83,408 87,192 55,629
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of
year $ 134,154 $ 83,408 $ 87,192
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 152,916 $ 156,959 $ 160,655
========= ========= =========
</TABLE>
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<PAGE> 342
SIERRA PACIFIC DEVELOPMENT FUND
(A California Limited Partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Development Fund (the "Partnership") was organized on February
13, 1981 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate certain real properties. S-P
Properties, Inc. is the General Partner and manager of the Partnership. On
December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance
Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc.
Finance Factors, Inc. was a subsidiary of CGS Real Estate Company, Inc., a
national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company,
Inc.
The Partnership's first real estate investment was for the acquisition of land
and development of a 41,000 square foot office project in San Bernardino,
California known as Sierra Commercenter. This property was subsequently sold by
the Partnership. In 1983, the Partnership acquired land in San Ramon, California
as the first step in development of the Sierra Creekside office project (the
"Property"), a 47,800 square foot building that was completed in October 1984.
In February 1994, the Partnership created a California general partnership
(Sierra Creekside Partners) with Sierra Mira Mesa Partners ("SMMP") to
facilitate cash contributions by SMMP for the continued development and
operation of the Sierra Creekside property. The Partnership contributed the
Property and SMMP contributed cash to this newly formed California general
partnership. At December 31, 1999, the Partnership's remaining real estate asset
is a 93.45% interest in Sierra Creekside Partners.
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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
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<PAGE> 343
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of the Partnership
and Sierra Creekside Partners, a majority owned California general partnership
(see Note 4). All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and note payable. The fair value of cash and cash equivalents,
receivables, and accounts payable approximates the carrying value due to the
short term nature of these items. In the opinion of management, the fair value
of the note payable approximates the carrying value as the interest rate is
based on a floating index. The amounts due from affiliates are not fair valued
due to the related party nature of this receivable.
Income-Producing Property
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from one to thirty years. Tenant improvements incurred at the initial leasing of
the properties are depreciated over ten years and tenant improvements incurred
at the re-leasing of the properties are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. Effective
January 1, 1995, the Partnership implemented Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
Impairments totaling $1,000,000 were recognized prior to 1995 as appraisals
indicated other than temporary declines in value.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently
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<PAGE> 344
subjective, the amounts ultimately realized at disposition may differ materially
from the net carrying value as of December 31, 1999. The cash flows used to
determine fair value and net realizable value are based on good faith estimates
and assumptions developed by management. Unanticipated events and circumstances
may occur and some assumptions may not materialize; therefore, actual results
may vary from the estimates and the variances may be material. The Partnership
may provide additional write-downs which could be material in subsequent years
if real estate markets or local economic conditions change.
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- rent due but not yet received.
Calculation of Equity and Net Income (Loss) Per Limited Partnership Unit
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by the number of
limited partnership units outstanding, 29,354 for all periods presented.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development
and operation of commercial real estate.
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<PAGE> 345
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other assets:
Prepaid expenses $ 14,906 $ 14,196
Deferred loan costs, net of accumulated amortization of
$36,365 in 1999 and $28,122 in 1998 86,020 54,263
Deferred leasing costs, net of accumulated
amortization of $227,612 in 1998 and $175,256 in
1998 137,271 184,129
-------- --------
$238,197 $252,588
======== ========
Accrued and other liabilities:
Accounts payable $ 2,684 $ 7,488
Accrued expenses 0 16,603
Security deposits 49,592 42,986
Interest payable 12,549 12,902
Other 0 2,040
-------- --------
$ 64,825 $ 82,019
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income (as defined in the partnership agreement) collected from the
properties. Management fees paid to affiliates for the years ended December 31,
1999, 1998 and 1997 were $39,654, $41,516 and $33,559, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $50,428, $38,922 and $34,870 for such services for the years ended
December 31, 1999, 1998 and 1997, respectively. Additionally, the Partnership
reimbursed affiliates for construction supervision costs incurred by the
affiliates. For the years ended December 31, 1999, 1998 and 1997 the affiliates
received $0, $6,209 and $12,358, respectively, for tenant improvements
supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, affiliates of the General Partner are paid initial
leasing costs. For the years ended December 31, 1999, 1998 and 1997 these fees
amounted to $2,875, $42,738 and $19,097, respectively, and were recorded as
deferred leasing costs.
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<PAGE> 346
During 1996, the Partnership made a non-interest bearing loan to an affiliate in
the amount of $26,916. This loan was uncollectible and subsequently written off
to bad debt expense in 1999.
4. INCOME-PRODUCING PROPERTY
At December 31, 1999 and 1998, the total cost and accumulated depreciation of
the property are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 1,555,033 $ 1,555,033
Building and improvements 4,291,935 4,358,584
----------- -----------
Total 5,846,968 5,913,617
Accumulated depreciation (2,289,481) (2,140,905)
Valuation allowance (Note 1) (1,000,000) (1,000,000)
----------- -----------
Net $ 2,557,487 $ 2,772,712
=========== ===========
</TABLE>
During 1999 and 1998, the Partnership removed $103,329 and $101,860,
respectively, from its buildings and improvements and related accumulated
depreciation accounts for fully depreciated property.
On February 1, 1994, the Partnership formed a California general partnership
with Sierra Mira Mesa Partners ("SMMP"), an affiliate. The joint venture, known
as Sierra Creekside Partners ("SCP"), was formed to develop and operate the
Sierra Creekside property. The Partnership had a 79.2% equity interest with its
contribution of Sierra Creekside. Such interest was computed based upon the
estimated fair value of SCP's net assets at the date of formation of the joint
venture. SMMP was allocated a 20.8% initial equity interest in SCP in exchange
for its $745,000 cash contribution ($147,359, net, through December 31, 1996).
SMMP made additional cash contributions amounting to $168,500, $85,300 and
$40,000 and received distributions amounting to $25,000, $178,000 and $87,000
during 1997, 1998 and 1999, respectively. The percentage interests of the
Partnership and Sierra Mira Mesa Partners are to be adjusted every January 1st
during the term of Sierra Creekside Partners, beginning January 1, 1995.
Accordingly, as of January 1, 1997, 1998 and 1999, the Partnership's interest in
SCP was changed to 95.04%, 90.67% and 93.45%, respectively. On January 1, 2000,
the Partnership's interest will be increased to 94.92% and SMMP's interest will
be decreased to 5.08% to reflect the 1999 contributions and distributions. Under
the terms of the SCP joint venture agreement, SMMP will receive preferential
cash distributions of available "Distributable Funds" from the operation of SCP
or sale of its property to the extent of its capital contributions. Additional
Distributable Funds are allocable to the Partnership to the extent of the deemed
fair value of its property contribution, and the remainder to the Partnership
and SMMP in proportion to their respective equity interests. The excess of cash
distributions to SMMP over cash contributions from SMMP and income or loss
allocated to SMMP is reported as an asset in the Partnership's balance sheet.
F-130
<PAGE> 347
Future minimum base rental income, under the existing operating leases for the
Sierra Creekside property, to be recognized on a straight-line basis and amounts
to be received on a cash basis are as follows:
<TABLE>
<CAPTION>
Straight-line Cash
Year Ending December 31, Basis Basis
------------------------ ----- -----
<S> <C> <C>
2000 $ 799,950 $ 808,869
2001 579,738 596,785
2002 380,580 400,408
2003 134,902 141,055
2004 1,998 2,032
------------- -----------
Total $ 1,897,168 $ 1,949,149
============= ===========
</TABLE>
The Partnership relied on three tenants to generate 44% of total 1999 rental
income. The breakdown for these three tenants' industry segments and rental
income contribution is as follows: 16% for a tenant in the construction
industry, 13% billing and collection services, and 15% banking.
5. NOTE PAYABLE
At December 31, 1999, note payable consisted of one loan with a bank with an
original principal balance of $1,850,000. The note bore interest at 3.5% above
the 11th District Cost of Funds Index with a minimum of 9% and a maximum of 14%
(9% at December 31, 1999). The note was secured by substantially all of the
assets of the Partnership. The maturity date of the note was July 1, 2005.
On January 25, 2000, the bank note was repaid. On the same date, the Partnership
entered into a new loan agreement with General Electric Capital Corporation
("GECC") in the amount of $4,250,000. The lender funded $4,050,000 at closing
and held back $200,000 to be drawn upon to help finance future tenant
improvements and leasing costs. This loan, which is secured by the Sierra
Creekside property, bears interest at 2.75% above the GECC Composite Commercial
Paper Rate (8.52% at December 31, 1999). Principal and interest payments are due
monthly based on a 30-year amortization. The loan matures January 31, 2005.
Annual maturities on the GECC loan are: $23,983 in 2000; $31,183 in 2001;
$34,030 in 2002; $37,138 in 2003; $40,529 in 2004; and $3,883,137 thereafter.
The Partnership is exposed to interest rate fluctuations associated with the
loan.
6. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
F-131
<PAGE> 348
Upon any sale, refinancing or other dispositions of the Partnership's real
property, allocations of the proceeds are distributed to the Limited Partners
until each has received 100% of his Adjusted Capital Contributions plus a 15%
per annum cumulative return on such invested capital. Any remaining proceeds
shall be distributed 80% to the Limited Partners and 20% to the General Partner.
F-132
<PAGE> 349
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund
We have audited the consolidated financial statements of Sierra Pacific
Development Fund, a California limited partnership, (the "Partnership") as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999 and have issued our report thereon dated February 25, 2000.
Such consolidated financial statements and report are included in your 1999
Annual Report to the Limited Partners and are incorporated herein by reference.
Our audits also included the financial statement schedules of Sierra Pacific
Development Fund, listed in Item E of the Table of Contents. These financial
statement schedules are the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-133
<PAGE> 350
SCHEDULE II
SIERRA PACIFIC DEVELOPMENT FUND
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Income -
Producing
Properties
----------
<S> <C>
Allowance for loss - January 1, 1997 $1,000,000
Provision charged to costs and expenses (1) 0
----------
Allowance for loss - December 31, 1997 1,000,000
Provision charged to costs and expenses (1) 0
----------
Allowance for Loss - December 31, 1998 1,000,000
Provision charged to costs and expenses (1) 0
----------
Allowance for loss - December 31, 1999 $1,000,000
==========
</TABLE>
(1) See Note 1 to the consolidated financial statements incorporated by
reference to the Annual Report to the Limited Partners attached as an
Exhibit.
F-134
<PAGE> 351
SCHEDULE III
SIERRA PACIFIC DEVELOPMENT FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Initial Cost Improvements Gross Amount at
to Partnership (1) Capitalized Which carried at close of period
Encumb- Improve- After Acquisi- Improve- Total
Description rances Land ments tion (2) Land ments (3)(4)(5)(6)
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Creekside
(4)
San Ramon,
California $1,673,186 $1,555,033 $6,079,539 $1,555,033 $4,291,935 $5,846,968
</TABLE>
<TABLE>
<CAPTION>
Accum. Date Date Deprec.
Description Deprec. (6) Constructed Acquired Life
<S> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Creekside
(4)
San Ramon,
California $2,289,481 10/84 03/83 1-30 yrs.
</TABLE>
(1) The initial cost represents the original purchase price of the
property.
(2) The Partnership has capitalized property development costs.
(3) Also represents cost for Federal Income Tax purposes.
(4) On February 1, 1994, the property was transferred to a joint venture,
Sierra Creekside Partners. The Partnership has an equity interest of
93.45% and Sierra Mira Mesa Partners, an affiliate, has a 6.55% equity
interest at December 31, 1999.
F-135
<PAGE> 352
(5) A valuation allowance of $1,000,000 was established as the appraised
value of the property declined below book value. See Notes 1 and 4 to
the consolidated financial statements incorporated by reference to the
Annual Report to the Limited Partners attached as an Exhibit.
(6) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1999 is as follows:
F-136
<PAGE> 353
<TABLE>
<CAPTION>
Total Real Estate Accumulated
Carrying Value Depreciation
<S> <C> <C>
Balance - January 1, 1997 $7,303,973 $3,080,645
Additions during the year 91,878 334,450
Deductions:
Write off fully depreciated assets (1,458,841) (1,458,841)
----------- -----------
Balance - December 31, 1997 5,937,010 1,956,254
Additions during the year 78,467 286,511
Deductions:
Write off fully depreciated assets (101,860) (101,860)
----------- -----------
Balance - December 31, 1998 5,913,617 2,140,905
Additions during the year 36,680 251,905
Deductions:
Write off fully depreciated assets (103,329) (103,329)
----------- -----------
Balance - December 31, 1999 $5,846,968 $2,289,481
=========== ===========
</TABLE>
F-137
<PAGE> 354
E. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED JUNE 30, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED) DECEMBER 31, 1999
----------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................... $ 108,848 $ 134,154
Receivables:
Unbilled rent ............................... 52,726 51,981
Billed rent ................................. 14,992 8,640
Income-producing property - net of
accumulated depreciation and valuation
allowance of $3,231,848 and $3,289,481,
respectively ................................. 2,442,996 2,557,487
Other assets - net of accumulated amortization
of $187,078 and $263,977, respectively ....... 277,408 238,197
Excess distributions to minority Partner ....... 2,490,568 128,513
----------- -----------
Total Assets ................................... $ 5,387,538 $ 3,118,972
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities .................. $ 108,346 $ 64,825
Notes payable .................................. 4,040,218 1,673,186
----------- -----------
Total Liabilities .............................. 4,148,564 1,738,011
----------- -----------
Partners' equity (deficit):
General Partner .............................. (82,191) 0
Limited Partners:
30,000 units authorized,
29,354 issued and
outstanding ............................. 1,321,165 1,380,961
----------- -----------
Total Partners' equity ......................... 1,238,974 1,380,961
----------- -----------
Total Liabilities and Partners' equity ......... $ 5,387,538 $ 3,118,972
</TABLE>
F-138
<PAGE> 355
SIERRA PACIFIC DEVELOPMENT FUND
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ................................................ $ 489,777 $ 448,066 $ 260,337 $ 233,294
------------ ------------ ------------ ------------
Total revenues ....................................... 489,777 448,066 260,337 233,294
------------ ------------ ------------ ------------
EXPENSES:
Operating expenses ........................................... 268,936 247,077 114,756 120,726
Depreciation and amortization ................................ 160,035 174,227 78,993 87,922
Interest ..................................................... 164,372 76,814 91,491 38,277
------------ ------------ ------------ ------------
Total costs and expenses ............................. 593,343 498,118 285,240 246,925
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY LOSS ................................. (103,566) (50,052) (24,903) (13,631)
EXTRAORDINARY LOSS FROM WRITE-OFF
OF DEFERRED LOAN COSTS ....................................... (46,020) 0 0 0
------------ ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS ........................... (149,586) (50,052) (24,903) (13,631)
------------ ------------ ------------ ------------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS .............................. 7,599 3,279 1,265 893
------------ ------------ ------------ ------------
NET LOSS ....................................................... $ (141,987) $ (46,773) $ (23,638) $ (12,738)
============ ============ ============ ============
Per limited partnership unit:
Loss before extraordinary loss ............................... $ (3.24) $ (1.59) $ (0.80) $ (0.43)
Extraordinary loss ........................................... (1.55) 0 0 0
------------ ------------ ------------ ------------
Net loss per limited partnership unit .......................... $ (4.79) $ (1.59) $ (0.80) $ (0.43)
============ ============ ============ ============
</TABLE>
F-139
<PAGE> 356
SIERRA PACIFIC DEVELOPMENT FUND
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
---------------------------- GENERAL PARTNERS'
PER UNIT TOTAL PARTNER EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Proceeds from sale of
partnership units ................................................ $ 500.00 $ 14,677,000 $ 14,677,000
Underwriting commissions
and other organization expenses .................................. (60.29) (1,769,862) (1,769,862)
Cumulative net income (loss)
(to December 31, 1998) ........................................... (223.05) (6,547,484) $ 14,600 (6,532,884)
Cumulative distributions
(to December 31, 1998) ........................................... (166.75) (4,894,473) (14,600) (4,909,073)
------------ ------------ ------------ ------------
Partners' equity - January 1, 1999 ................................. 49.91 1,465,181 0 1,465,181
Net loss ........................................................... (2.87) (84,220) (84,220)
------------ ------------ ------------ ------------
Partners' equity - January 1, 2000 (audited) ....................... 47.04 1,380,961 0 1,380,961
Transfer among general partner and limited partners................. 2.26 80,771 (80,771) 0
Net loss (unaudited) ............................................... (4.79) (140,567) (1,420) (141,987)
------------ ------------ ------------ ------------
Partners' equity (deficit) - June 30, 2000 (unaudited) ............. $ 44.51 $ 1,321,165 $ (82,191) $ 1,238,974
</TABLE>
F-140
<PAGE> 357
SIERRA PACIFIC DEVELOPMENT FUND
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (141,987) $ (46,773)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization .................................... 160,035 174,227
Extraordinary loss from write-off of deferred
loan costs ..................................................... 46,020 0
Minority interest's share of consolidated
joint venture loss ............................................. (7,599) (3,279)
(Increase) decrease in receivables ............................... (7,097) 4,186
Increase in other assets ......................................... (18,339) (17,138)
Increase (decrease) in accrued and other liabilities ............. 43,521 (13,463)
------------ ------------
Net cash provided by operating activities ........................ 74,554 97,760
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions .................................. 0 (9,642)
------------ ------------
Net cash used in investing activities ............................ 0 (9,642)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable secured by property ................... 4,050,000 0
Principal payments on notes payable .............................. (1,682,968) (23,041)
Payments on deferred loan costs .................................. (112,436) 0
Contributions from minority partner .............................. 78,091 0
Distributions to minority partner ................................ (2,432,547) 0
Loan to affiliate ................................................ 0 (47,000)
------------ ------------
Net cash used in financing activities ............................ (99,860) (70,041)
------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS .............................................. (25,306) 18,077
CASH AND CASH EQUIVALENTS
Beginning of period .............................................. 134,154 83,408
------------ ------------
CASH AND CASH EQUIVALENTS
End of period .................................................... $ 108,848 $ 101,485
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for real estate taxes ................. $ 36,473 $ 36,816
============ ============
Cash paid during the period for interest .......................... $ 146,360 $ 76,986
============ ============
</TABLE>
F-141
<PAGE> 358
SIERRA PACIFIC DEVELOPMENT FUND
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
------------------------------------------
1. ORGANIZATION
In February 1994, Sierra Pacific Development Fund (the Partnership) created a
general partnership (Sierra Creekside Partners) with Sierra Mira Mesa Partners
(SMMP) to facilitate cash contributions by SMMP for the continued development
and operation of the Sierra Creekside property (the Property). The Partnership
Agreement of Sierra Creekside Partners (the Agreement) was amended effective
January 1, 1995 to consider both contributions and distributions when
calculating each partners' percentage interest at January 1 of each year.
Accordingly, on January 1, 2000, the Partnership's interest in Sierra Creekside
Partners was increased from 93.45% to 94.92% to reflect 1999 contributions and
distributions.
2. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements include
the accounts of the Partnership and Sierra Creekside Partners at June 30, 2000.
All significant intercompany balances and transactions have been eliminated in
consolidation.
In the opinion of the Partnership's management, these unaudited financial
statements reflect all adjustments which are necessary for a fair presentation
of its financial position at June 30, 2000 and results of operations and cash
flows for the periods presented. All adjustments included in these statements
are of a normal and recurring nature. 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, 1999.
3. RELATED PARTY TRANSACTIONS
Included in the financial statements for the six months ended June 30, 2000 and
1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
June 30
-------
1999 2000
---- ----
<S> <C> <C>
Management fees $ 21,235 $ 20,245
Administrative fees 20,398 30,739
</TABLE>
F-142
<PAGE> 359
4. PARTNERS' EQUITY
Equity and net loss per limited partnership unit is determined by dividing the
limited partners' share of the Partnership's equity and net loss by the number
of limited partnership units outstanding, 29,354.
During the quarter ended March 31, 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% is allocated to the general partner. Management does not believe
that the effect of this transfer is significant.
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the general partner, is in
the process of developing a plan pursuant to which the property owned by the
Partnership would be combined with the properties of other real estate
partnerships managed by CGS and its affiliates. These limited partnerships own
office properties, industrial properties, shopping centers, and residential
apartment properties. It is expected that the acquirer would in the future
qualify as a real estate investment trust. Limited partners would receive shares
of common stock in the acquirer, which would be listed on a national securities
exchange or the NASDAQ national market system.
F-143
<PAGE> 360
SIERRA PACIFIC DEVELOPMENT FUND II
HISTORICAL FINANCIAL DATA
F-144
<PAGE> 361
Sierra Pacific Development Fund II
Table of Contents
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and Results
of Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts . . .
2. Schedule III - Real estate and accumulated depreciation . . .
F. Unaudited Financial Statements - Six Months Ended June 30, 2000
and 1999
F-145
<PAGE> 362
A. SELECTED HISTORICAL FINANCIAL DATA OF SIERRA PACIFIC DEVELOPMENT FUND
II
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 1,736 $ 1,778 $ 1,841 $ 2,298 $ 2,356 $ 1,194 $ 1,267
Interest and other income 346 350 339 375 410 205 237
------- ------- ------- ------- ------- ------- -------
Total revenues 2,082 2,128 2,180 2,673 2,766 1,399 1,504
======= ======= ======= ======= ======= ======= =======
EXPENSES:
Property operating 907 968 1,068 1,039 2,312 793 885
Management and advisory fees 87 90 93 119 112 -- --
Real estate and other taxes 325 334 311 344 373 -- --
Depreciation and amortization 517 633 787 891 869 435 441
Interest expense 462 465 436 439 437 214 223
------- ------- ------- ------- ------- ------- -------
</TABLE>
F-146
<PAGE> 363
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total expenses 2,298 2,490 2,695 2,832 4,103 1,442 1,549
======= ======= ======= ======= ======= ======= =======
Net income (loss) before
partnership's share of
unconsolidated joint venture
income (loss) (216) (362) (515) (159) (1,337) (43) (46)
------- ------- ------- ------- ------- ------- -------
Partnership's share of
unconsolidated joint venture
income (loss) (307) 162 (285) (15) 160 89 101
------- ------- ------- ------- ------- ------- -------
Net income (loss) $ (523) $ (200) $ (800) $ (174) $(1,177) $ 46 $ 55
======= ======= ======= ======= ======= ======= =======
</TABLE>
F-146
<PAGE> 364
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average number of units outstanding 87 87 87 87 87 87 87
Income (loss) per unit (6.04) (2.30) (9.24) (2.01) (13.59) 0.53 0.63
Ratio of earnings to fixed charges (1) -- -- -- -- -- 1.21 1.25
Deficiency of earnings to cover fixed
charges (2) 523 200 800 174 1,177 -- --
Cash distributions (200) (300) (50) -- -- -- --
Total properties owned at end of period 3 3 3 3 3 3 3
Book value per limited partnership unit 161 156 146 144 131 145 132
Per unit value assigned for the consolidation 145
BALANCE SHEET DATA:
Cash and cash equivalents $ 203 $ 23 $ 70 $ 71 $ 261 $ 48 $ 109
Real estate held for investment, net 10,900 11,206 11,212 10,899 10,591 10,748 10,325
Mortgages/notes receivable, net 2,164 2,164 2,454 2,773 3,063 2,773 3,633
Accounts receivable, net 407 360 356 364 378 589 647
Investment in/due from partnerships 5,494 5,857 4,368 4,200 4,037 4,286 3,156
Other assets 508 620 1,017 1,036 874 990 865
Total assets, at book value 19,676 20,230 19,477 19,343 19,204 19,434 18,735
</TABLE>
F-148
<PAGE> 365
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets, at valued assigned for the
consolidation 54
Total liabilities 5,620 6,674 6,771 6,811 7,849 6,856 7,326
General partners deficit -- -- -- -- -- -- (63)
Limited partners equity 14,056 13,556 12,706 12,532 11,355 12,578 11,472
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net (1,338) (180) 47 1 190 (23) (151)
Cash (used in) provided by operating
activities (842) 401 (673) 242 85 (118) (447)
</TABLE>
(5) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
the amortization of debt issuance costs and that portion of operating
rental expense representing interest.
(6) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges
of 1.0
F-149
<PAGE> 366
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - DECEMBER 31, 1999, 1998 AND 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1999, the Partnership owns three
properties, Sierra Westlakes, Sierra Southwest Pointe and 5850 San Felipe. The
Partnership sold its interest in the Sierra Technology property on December 31,
1994. In addition, the Partnership holds a 33.01% interest in Sierra Mira Mesa
Partners ("SMMP"). SMMP owns an office building - Sierra Mira Mesa in San Diego,
California.
Results of Operations:
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Rental income increased by $59,000, or 3%, for the year ended December 31, 1999
when compared to the prior year, primarily due to an increase in rental rates at
5850 San Felipe and Sierra Southwest Pointe. The weighted-average effective
annual rent per square foot, on an accrual basis, increased from $11.36 to
$11.82 at 5850 San Felipe and from $5.11 to $5.53 at Sierra Southwest Pointe in
1999. Rental rates at Sierra Westlakes remained unchanged. This increase was
partially offset due a decrease in occupancy at Sierra Southwest Pointe from 94%
at December 31, 1998 to 78% at December 31, 1999. Occupancy at 5850 San Felipe
and Sierra Westlakes remained comparable between the two years.
Total operating expenses increased by $1,274,000, or 53%, in comparison to the
prior year, principally due to the settlement of a lawsuit against the
Partnership. As stipulated in the settlement agreement, not withstanding other
terms and conditions, the Partnership agreed to pay the plaintiff's attorney
fees of $1,000,000. These fees and other legal costs associated with the lawsuit
were included in operating expenses for the year ended December 31, 1999. The
increase in total operating expenses was also attributable to higher
administrative costs and maintenance and repair expenses incurred during the
year. In addition, a loan made to an affiliate in 1996 and a rent receivable
balance from a former tenant was deemed uncollectible and subsequently
written-off to bad debt expense in 1999. Further, property taxes rose primarily
as a result of an increase in the assessed value of 5850 San Felipe and Sierra
Southwest Pointe.
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The Partnership's share of income (loss) from its investment in SMMP was
$160,000 for the year ended December 31, 1999 compared to $(15,000) for the
prior year. SMMP generated income for the years ended December 31, 1999 and
1998. The Partnership's loss from its investment in SMMP in the prior year was
largely due to a $76,000 adjustment recorded in the first quarter of 1998 to
correct an understatement of its share of unconsolidated joint venture loss in
1997.
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
Rental income increased $457,000, or 25%, primarily as a result of near maximum
occupancy at 5850 San Felipe. Occupancy at the building has risen over the past
two years from 72% at December 31, 1996 to 96% at December 31, 1998. Occupancy
at Sierra Southwest Pointe and Sierra Westlakes remained comparable between the
two years. The increase in rental income is also attributable to increased
rental rates at the buildings. The weighted-average effective annual rent per
square foot, on an accrual basis, increased from $10.86 to $11.36 at 5850 San
Felipe and from $4.48 to $5.11 at Sierra Southwest Pointe during 1998. Rental
rates at Sierra Westlakes remained comparable.
Total operating expenses increased by $133,000, or 6%, when compared to the
prior year. Depreciation and amortization increased primarily as a result of
depreciation and amortization expenses on additional tenant improvements and
lease costs associated with the increased occupancy at 5850 San Felipe. The
increase in occupancy also resulted in higher utilities and management fees. In
addition, property taxes were higher principally due to an increase in the
assessed value of 5850 San Felipe. The increase in total operating expenses was
partially offset by a decrease in legal fees. The Partnership incurred higher
legal fees in 1997 defending litigation against the Partnership.
The Partnership recorded a $15,000 loss in 1998 from its investment in SMMP.
SMMP generated income for the year ended December 31, 1998, however the
Partnership had understated its share of unconsolidated joint venture loss in
the prior year and recorded a $76,000 adjustment in the first quarter of 1998.
In 1997, the Partnership recorded a $285,000 loss from investment in SMMP. The
loss generated by SMMP in 1997 was primarily the result of its share of loss
from its joint venture partner, Sierra Vista Partners ("SVP"). SVP sold the
Sierra Vista property in October 1997 and recorded a $968,000 loss from property
disposition.
Liquidity and Capital Resources:
The Partnership generated cash from operations of $85,000 during 1999. In 1999,
the Partnership paid $387,000 for property additions and $59,000 for leasing
commissions. The Partnership's joint venture, SMMP, made net distributions of
$326,000 to assist with the funding of these expenditures.
In January 1999, the $1,300,000 mortgage note on the Sierra Southwest Pointe
property matured. In August 1999, the note was paid and a new $1,500,000 loan
agreement was
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entered into with the same lender. The new mortgage bears interest at 8.35% per
annum and calls for monthly principal and interest payments of $11,927. Such
payments shall continue until September 2009, when the indebtedness is due in
full. Net proceeds will primarily be used to pay accrued liabilities and to fund
future capital expenditures. The loan is secured by a trust deed on the Sierra
Southwest Pointe property.
The Partnership is in an illiquid position at December 31, 1999 with cash and
billed rents of $401,000 and current liabilities of $1,362,000, which includes
accrued legal fees of $1,000,000 (See "Legal Proceedings"). In February and
March 2000, the Partnership made scheduled payments totaling $500,000 of the
accrued legal fees. The remaining $500,000 is due by December 31, 2000.
The Partnership's primary capital requirements will be for the construction of
new tenant space. It is anticipated that these requirements will be funded from
the operation of the properties and distributions from SMMP.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership did not experience any major system failures or disruptions in
operations over the year 2000 transition. All systems have continued to operate
as normal.
The Partnership did not separately track internal costs related to the Year 2000
issue and Partnership management believes these amounts did not have a material
impact on the Partnership's financial position or results of operations.
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The Partnership employs a property management company to manage, operate and
lease the properties. The management company did not experience any major
systems failures or disruptions in operations at the property. The Partnership
remains confident that no Year 2000 issues with the property management company
or other third parties will arise in the future although no guarantees can be
made to that effect.
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C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(a) OVERVIEW
The following discussion should be read in conjunction with Sierra Pacific
Development Fund II's (the Partnership) Financial Statements and Notes thereto
appearing elsewhere in this Form 10-Q.
The Partnership currently owns three properties; 5850 San Felipe, Sierra
Westlakes, and Sierra Southwest Pointe. In addition, the Partnership holds a
30.17% interest in Sierra Mira Mesa Partners (SMMP).
(b) RESULTS OF OPERATIONS
Rental income for the six months and three months ended June 30, 2000 increased
by approximately $73,000, or 6%, and by approximately $129,000, or 23%,
respectively, when compared to the same periods in the prior year. These
increases were primarily due to higher common area maintenance fees billed at
5850 San Felipe. Supplemental billings were made in the second quarter to
recover higher than anticipated prior year common area maintenance fees.
Further, rental rates rose at 5850 San Felipe and Sierra Southwest Pointe. These
increases in rental income were partially offset by lower occupancy at Sierra
Southwest Pointe. Occupancy at Sierra Southwest Pointe decreased from 85% at
June 30, 1999 to 73% at June 30, 2000. At 5850 San Felipe, occupancy rose
slightly from 98% to 100% between the same periods. Sierra Westlakes remained
75% occupied.
Operating expenses for the six months ended June 30, 2000 increased by
approximately $92,000, or 12%, in comparison to the corresponding period in
prior year, in large part due to an increase in legal fees associated with the
settlement of a lawsuit against the Partnership. Further, higher maintenance and
repairs costs and accounting and auditing fees were incurred during the period.
This increase was partially offset by a decrease in administrative costs.
Operating expenses for the quarter ended June 30, 2000 decreased by
approximately $30,000, or 7%, principally as a result of lower administrative
costs and data processing fees.
The Partnership's share of unconsolidated joint venture income was approximately
$101,000 for the six months ended June 30, 2000 compared to approximately
$90,000 for the corresponding period in the prior year.
(c) LIQUIDITY AND CAPITAL RESOURCES
In December 1999, a lawsuit was settled against the Partnership that provided
for a complete release of the Partnership, general partners and all affiliates.
As part of the settlement, the Partnership agreed to pay the plaintiff's
attorneys' fees of $1,000,000. In the first quarter of 2000, the Partnership
made scheduled payments totaling $500,000, with the remaining $500,000 due by
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December 31, 2000.
The Partnership is in an illiquid position as of June 30, 2000 with cash and
billed rents of approximately $298,000 and current liabilities of approximately
$953,000, which includes the remaining legal liability of $500,000.
The Partnership's primary capital requirements will be for the construction of
new tenant space and the remaining legal obligation. It is anticipated that
these requirements will be funded from the operations of the properties and
distributions from SMMP.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
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AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund II
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Development Fund II and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in partners' equity and cash flows for each of
the three years in the period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund II and subsidiary as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
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<PAGE> 373
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 260,963 $ 71,180
Receivables:
Note, net of deferred gain of
$736,271 (Notes 3 and 4) 3,062,629 2,772,729
Unbilled rent (Notes 1 and 4) 239,271 277,328
Billed rent (Note 1) 140,211 79,259
Due from affiliates (Note 3) 1,013,698 1,005,459
Accounts receivable 0 7,946
Income-producing properties - net of
accumulated depreciation and
valuation allowance of $3,728,719 in 1999
and $3,117,658 in 1998 (Notes 1, 4 and 6) 10,590,651 10,899,304
Investment in unconsolidated joint venture
(Notes 1 and 5) 3,023,177 3,193,894
Other assets (Notes 1, 2 and 3) 873,728 1,035,815
----------- -----------
Total Assets $19,204,328 $19,342,914
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Notes 2 and 8) $ 1,452,577 $ 579,821
Notes payable (Note 6) 6,397,116 6,231,204
----------- -----------
Total Liabilities 7,849,693 6,811,025
----------- -----------
Partners' equity (Notes 1 and 7):
General Partner 0 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding 7,426,335 8,196,299
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding 3,928,300 4,335,590
----------- -----------
Total Partners' equity 11,354,635 12,531,889
----------- -----------
Total Liabilities and Partners' equity $19,204,328 $19,342,914
=========== ===========
</TABLE>
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See Accompanying Notes 22
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 2,356,436 $ 2,297,908 $ 1,841,050
Interest income (Note 3) 409,717 375,420 338,722
----------- ----------- -----------
Total revenues 2,766,153 2,673,328 2,179,772
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 869,457 890,846 786,905
Property taxes and insurance 372,696 343,864 311,475
Administrative fees (Note 3) 283,875 244,116 216,177
Maintenance and repairs 328,528 293,874 295,358
Utilities 204,376 215,449 173,500
Management fees (Note 3) 112,161 118,976 93,168
Legal and accounting (Note 8) 1,227,643 130,252 215,138
General and administrative 59,304 36,549 53,955
Salaries and payroll taxes 36,000 36,000 36,000
Renting expenses 17,179 13,761 23,333
Bad debt expense 76,021 0 0
Other operating expenses 79,139 69,151 54,473
----------- ----------- -----------
Total operating expenses 3,666,379 2,392,838 2,259,482
Interest 437,352 439,499 435,818
----------- ----------- -----------
Total expenses 4,103,731 2,832,337 2,695,300
----------- ----------- -----------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE INCOME (LOSS) (1,337,578) (159,009) (515,528)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME (LOSS)(Note 5) 160,324 (14,912) (284,878)
----------- ----------- -----------
NET LOSS $(1,177,254) $ (173,921) $ (800,406)
=========== =========== ===========
Net loss per limited partnership unit(Note 1) $ (13.59) $ (2.01) $ (9.24)
=========== =========== ===========
</TABLE>
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<PAGE> 375
See Accompanying Notes 23
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Partners Total
------------------------------------------------ General Partners'
Class A Class B Total Per Unit Partner Equity
------------ ------------ ------------ --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Partners' equity -
January 1, 1997 $ 8,866,234 $ 4,689,982 $ 13,556,216 $ 156.45 $ 0 $ 13,556,216
Net loss (523,493) (276,913) (800,406) (9.24) (800,406)
Distributions (32,692) (17,308) (50,000) (0.58) (50,000)
------------ ------------ ------------ --------- ------- ------------
Partners' equity -
December 31, 1997 8,310,049 4,395,761 12,705,810 146.63 0 12,705,810
Net loss (113,750) (60,171) (173,921) (2.01) (173,921)
------------ ------------ ------------ --------- ------- ------------
Partners' equity -
December 31, 1998 8,196,299 4,335,590 12,531,889 144.62 0 12,531,889
Net loss (769,964) (407,290) (1,177,254) (13.59) (1,177,254)
------------ ------------ ------------ --------- ------- ------------
Partners' equity -
December 31, 1999 $ 7,426,335 $ 3,928,300 $ 11,354,635 $ 131.03 $ 0 $ 11,354,635
============ ============ ============ ========== ======= ============
</TABLE>
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<PAGE> 376
See Accompanying Notes 24
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,177,254) $ (173,921) $ (800,406)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation and amortization 869,457 890,846 786,905
Undistributed (income) loss of unconsolidated
joint venture (160,324) 14,912 284,878
Bad debt expense 76,021 0 0
(Increase) decrease in rent receivable (64,370) (437) 3,526
Increase in other receivables (324,739) (343,229) (240,672)
Increase in other assets (6,618) (212,500) (646,387)
Increase (decrease) in accrued and other
liabilities 872,756 65,831 (60,658)
----------- ----------- -----------
Net cash provided by (used in) operating
activities 84,929 241,502 (672,814)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (387,242) (416,813) (676,666)
Capital contributions to unconsolidated joint
venture (44,000) (8,490) (293,000)
Distributions from unconsolidated joint venture 370,184 211,490 1,580,800
----------- ----------- -----------
Net cash (used in) provided by investing
activities (61,058) (213,813) 611,134
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions 0 0 (50,000)
Funding of note payable secured by property 1,500,000 0 1,300,000
Principal payments on notes payable (1,334,088) (26,299) (1,141,492)
----------- ----------- -----------
Net cash provided by (used in) financing
activities 165,912 (26,299) 108,508
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 189,783 1,390 46,828
CASH AND CASH EQUIVALENTS - Beginning of year 71,180 69,790 22,962
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 260,963 $ 71,180 $ 69,790
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 437,352 $ 443,823 $ 455,666
=========== =========== ===========
</TABLE>
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<PAGE> 377
In 1999, 1998 and 1997, interest receivable of $347,222, $373,078 and $379,298,
respectively, was added to the principal balance of the related notes receivable
from affiliates. These transactions are noncash items not reflected in the above
statements of cash flows.
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<PAGE> 378
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
(A California Limited Partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Development Fund II (the "Partnership") was organized on April
29, 1983 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate commercial and industrial real
properties. S-P Properties, Inc. is the General Partner and manager of the
Partnership. On December 30, 1994, all of the outstanding stock of TCP, Inc. was
sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P
Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company,
Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged
with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate
Company, Inc.
The Partnership's activities during the preceding five years have involved the
ownership and operation of four real estate projects in Texas: Sierra Technology
Center in Austin, Texas; Sierra Westlakes in San Antonio, Texas; Sierra
Southwest Pointe in Houston, Texas; and 5850 San Felipe in Houston, Texas.
In December 1997, Sierra Southwest Pointe LLC ("SSPLLC") was formed with the
Partnership being the sole member. This company was formed solely to engage in
the following activities: a) to acquire from Sierra Pacific Development Fund II
the property known as Sierra Southwest Pointe, b) to own, hold, sell, assign,
transfer, operate, lease, mortgage, pledge and otherwise deal with the Property,
c) to exercise all powers enumerated in the Delaware Limited Liability Company
Act necessary or convenient to conduct, promotion or attainment of the business
or purposes otherwise set forth. Title to the Sierra Southwest Pointe property
was transferred from the Partnership to SSPLLC. The accounts of SSPLLC are
consolidated into the financial statements of the Partnership since the date of
formation and all significant intercompany transactions are eliminated in
consolidation.
In December 1994, the Partnership sold Sierra Technology Center for $6,000,000.
The sale proceeds were received in cash, a note receivable from the buyer, and
equity in the 5850 San Felipe property.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership was
formed between the Partnership and Sierra Pacific Pension Investors '84
(SPPI'84).
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<PAGE> 379
SMMP was initially created to develop and operate the office building known as
Sierra Mira Mesa in San Diego, California. The Partnership's initial ownership
interest in SMMP was 51%; the remaining 49% was owned by SPPI'84. 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. In
conjunction with this amendment, the general partners forgave the December 31,
1996 balances of advances due from SMMP and included these amounts as
adjustments to their respective equity accounts. As a result, the sharing ratio
in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and 33.01%, respectively,
for the Partnership and 54.42%, 66.26% and 66.99%, respectively, for SPPI'84. On
January 1, 2000, the sharing ratio will be decreased to 30.17% for the
Partnership and increased to 69.83% for SPPI'84 to reflect the 1999
contributions and distributions.
SMMP also holds an 88.12% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 35.10%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 6.55% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 33.32% interest in Sierra Vista Partners
(a California general partnership with Sierra Pacific Development Fund III
formed in 1994).
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximates the carrying value due to the
short term nature of these items. In the opinion of management, the estimated
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<PAGE> 380
fair value of the notes payable, based on market rates at December 31, 1999, is
$5,975,000. Management does not fair value the amounts due from affiliates due
to the related party nature of this receivable.
Income-Producing Properties
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from one to thirty years. Tenant improvements incurred at the initial leasing of
the properties are depreciated over ten years and tenant improvements incurred
at the re-leasing of the properties are depreciated over the life of the related
lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
Prior to 1995, the Partnership assessed impairment of income-producing
properties based upon appraised values and established provisions for impairment
where appraisals indicated other than temporary declines in value. Effective
January 1, 1995, the Partnership implemented Statement of Financial Accounting
Standards No. 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (the "Statement"). The Partnership
regularly evaluates long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the asset may not be
recoverable. Future cash flows are estimated and compared to the carrying amount
of the asset to determine if an impairment has occurred. If the sum of the
expected future cash flows is less than the carrying amount of the asset, the
Partnership shall recognize an impairment loss in accordance with the Statement.
No such impairments have been recognized by the Partnership since 1995.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore, actual results may vary from
the estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Investment in Unconsolidated Joint Venture
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the Partnerships' share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
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<PAGE> 381
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- rent due but not yet received.
Calculation of Equity and Net Income (Loss) Per Limited Partnership Unit
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by the number of
limited partnership units outstanding, 56,674 Class A and 29,979 Class B.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which were effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development
and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998 is as follows:
F-165
<PAGE> 382
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Other assets:
Prepaid expenses $ 21,203 $ 20,192
Deferred loan costs, net of accumulated amortization
Of $41,467 in 1999 and $25,859 in 1998 153,167 117,044
Deferred leasing costs, net of accumulated amortization
Of $352,207 in 1999 and $259,518 in 1998 511,143 605,302
Tax and insurance impounds 155,388 111,533
Tenant improvements reserves 22,827 171,454
Deposits 10,000 10,290
---------- ----------
$ 873,728 $1,035,815
========== ==========
Accrued and other liabilities:
Accounts payable $ 115,967 $ 231,525
Security deposits 90,974 90,891
Accrued expenses 233,136 225,264
Unearned rental income 0 19,641
Interest payable 12,500 12,500
Accrued legal liability 1,000,000 0
---------- ----------
$1,452,577 $ 579,821
========== ==========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner receives a management fee of 5% of the gross
rental income collected from the properties. Management fees paid to affiliates
for the years ended December 31, 1999, 1998 and 1997 were $112,161, $118,976 and
$93,168, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $292,790, $252,201 and $232,399 for such services for the years ended
December 31, 1999, 1998 and 1997, respectively. The Partnership reimbursed the
affiliate for construction supervision costs incurred by the affiliate. For the
years ended December 31, 1999, 1998 and 1997 the affiliate received $0, $16,754
and $50,083, respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, affiliates of the General Partner are paid initial
leasing costs. For the years ended December 31, 1999, 1998 and 1997 these fees
amounted to $53,746, $49,811 and $225,240, respectively, and were recorded as
deferred leasing costs.
During 1993, the Partnership loaned funds to a former affiliate of the General
Partner in the form of demand notes. Interest was paid at rates approximately
100 basis points above certificate of deposit rates established by major
commercial banks. The loans reached a maximum of $1,100,000. The loans were
reduced to $812,000 at December 31, 1994 and the interest rate was fixed at 6%.
In 1999, 1998 and 1997, interest receivable of $57,322, $54,078 and $89,298 was
added to the principal balance of the note. Interest income of $57,322, $54,078,
and $48,720 was recognized in 1999, 1998, and 1997, respectively, related to
this note. The balance outstanding at December 31, 1999 is $1,012,698. The note
is guaranteed by the owners of CGS Real Estate Company, Inc. (See Note 8).
F-166
<PAGE> 383
Two affiliates of the General Partner lease a total of 22,841 square feet of
5850 San Felipe, a property of the Partnership. The terms of the leases are
consistent with the current market conditions for office space in the area of
the property. During the years ended December 31, 1999, 1998, and 1997, the
Partnership recognized rental income of $219,760, $219,760, and $162,099 related
to these leases.
As further described in Note 4, in 1994 the Partnership sold a property to an
affiliate of the General Partner for cash of $3,100,000 and a $2,900,000 trust
deed note. The original note called for monthly interest only payments and bore
interest of 10% per annum until December 1997, when the entire indebtedness was
due in full. In each of the three years ended December 31, 1999, maturity has
been extended for additional one-year terms. In 1999, 1998 and 1997, interest
receivable of $289,900, $319,000 and $290,000, respectively, was added to the
principal balance of the note. All other terms of the original note remained
unchanged. The Partnership recognized interest income of $350,900, $319,000 and
$290,000 related to the note during 1999, 1998 and 1997, respectively. The
December 31, 1999 principal balance was $3,798,900. The note is secured by a
second lien on the property and management believes the collateral has
sufficient value to recover the Partnership's net investment in the note after
satisfaction of the first lien holder (See Note 8).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $50,083. This advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
properties are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 4,263,746 $ 4,263,746
Building and improvements 10,055,624 9,753,216
------------ ------------
Total 14,319,370 14,016,962
Accumulated depreciation (3,278,719) (2,667,658)
Valuation allowance (450,000) (450,000)
------------ ------------
Net $ 10,590,651 $ 10,899,304
============ ============
</TABLE>
F-167
<PAGE> 384
During 1999 and 1998, the Partnership removed $84,834 and $1,467,901,
respectively, from its buildings and improvements and related accumulated
depreciation accounts for fully depreciated property.
On December 30, 1994, the Sierra Technology Center property, with a historical
cost basis of $3,849,228, was sold for $6,000,000 ($3,100,000 cash down-payment
and $2,900,000 trust deed note) to an affiliate of Finance Factors, Inc. In a
related transaction, on December 30, 1994, the Partnership purchased 5850 San
Felipe, an office building in Houston, Texas for $5,000,000 from an affiliate of
Finance Factors, Inc. The Partnership paid $973,713 as cash down-payment and
assumed a first trust deed note with a balance of $4,026,287. In accordance with
Emerging Issues Task Force No. 87-29, "Exchange of Real Estate Involving Boot",
the fair value of the assets and liabilities transferred in the two transactions
was allocated between a monetary and a non-monetary component. Accordingly, the
historical cost of the San Felipe building was reduced by $243,068, representing
the non-monetary portion of the gain on sale of the Sierra Technology Center.
The monetary portion of the gain on sale was recorded in accordance with
Statement of Financial Accounting Standards No. 66 "Accounting For Sales of Real
Estate" using the installment method and the Partnership recorded a gain of
$539,835 (net of selling costs and unamortized loan fees and lease costs). A
deferred gain of $736,271 will be recognized as principal payments on the trust
deed note are received.
Future minimum base rental income, under the existing operating leases for the
properties, to be recognized on a straight-line basis and amounts to be received
on a cash basis are as follows:
<TABLE>
<CAPTION>
Straight-line Cash
Year Ending December 31, Basis Basis
------------------------ ---------- ----------
<S> <C> <C>
2000 $2,194,606 $2,243,117
2001 1,849,946 1,899,848
2002 1,449,297 1,496,860
2003 850,661 902,009
2004 730,684 771,611
Thereafter 1,562,321 1,563,341
---------- ----------
Total $8,637,515 $8,876,786
========== ==========
</TABLE>
Approximately 18% of 1999 rental revenues were generated from a Sears, Roebuck
and Company.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between the Partnership and Sierra Pacific Pension Investors '84, an
affiliate, to develop and operate the real property known as Sierra Mira Mesa,
an office building, located in San Diego, California. The property contains
89,560 square feet and is 100% leased at December 31, 1999. At December 31, 1999
the Partnership's interest in SMMP
F-168
<PAGE> 385
is 33.01%; the remaining 66.99% interest was owned by Sierra Pacific Pension
Investors '84.
The Partnership's investment in SMMP as of December 31, 1999 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Equity interest $2,878,145 $3,044,004
Investment advisory and
other fees, less accumulated
amortization of $63,160 and
$58,302 in 1999 and 1998,
respectively $ 145,032 $ 149,890
---------- ----------
Investment in unconsolidated
joint venture $3,023,177 $3,193,894
========== ==========
</TABLE>
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned California general partnership for the
years ended December 31, 1999 and 1998. The condensed balance sheets at December
31, 1999 and 1998, and the condensed statements of operations for the years
ended December 31, 1999, 1998 and 1997 for SMMP are as follows:
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 319,400 $ 14,064
Rent receivable 1,198,515 1,226,156
Due from affiliates 2,451,227 2,233,158
Income-producing property,
net of accumulated depreciation 8,723,396 9,000,294
Investment in unconsolidated joint ventures 2,526,875 1,640,460
Other assets 793,658 897,993
------------ ------------
$ 16,013,071 $ 15,012,125
============ ============
Liabilities and General Partners' Equity
Accrued and other liabilities $ 101,104 $ 251,990
Notes payable 6,179,038 5,418,414
------------ ------------
</TABLE>
F-169
<PAGE> 386
<TABLE>
<S> <C> <C>
Total Liabilities 6,280,142 5,670,404
------------ ------------
Minority interest in joint venture (340,614) (332,996)
------------ ------------
General Partners' equity 10,073,543 9,674,717
------------ ------------
Total Liabilities and General Partners' equity $ 16,013,071 $ 15,012,125
============ ============
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 2,126,106 $ 1,883,630 $ 1,919,582
Other income 224,308 205,781 184,168
----------- ----------- -----------
Total revenues 2,350,414 2,089,411 2,103,750
----------- ----------- -----------
Expenses:
Operating expenses 800,654 754,978 742,548
Depreciation and amortization 587,070 581,956 825,911
Interest 450,177 438,711 463,804
----------- ----------- -----------
Total expenses 1,837,901 1,775,645 2,032,263
----------- ----------- -----------
Income before Partnership's share of unconsolidated
joint venture losses 512,513 313,766 71,487
Partnership's share of unconsolidated joint
venture losses (36,405) (131,897) (855,349)
----------- ----------- -----------
Income (loss) before minority interest's share of
consolidated joint venture loss (income) 476,108 181,869 (783,862)
----------- ----------- -----------
Minority interest's share of consolidated joint
venture loss (income) 7,618 (787) (7,906)
----------- ----------- -----------
Net income (loss) $ 483,726 $ 181,082 $ (791,768)
=========== =========== ===========
</TABLE>
As of December 31, 1999, SMMP also holds a 35.10% interest in Sorrento II
Partners (a California general partnership with Sierra Pacific Institutional
Properties V formed in
F-170
<PAGE> 387
1993), a 6.55% interest in Sierra Creekside Partners (a California general
partnership with Sierra Pacific Development Fund formed in 1994), and a 33.32%
interest in Sierra Vista Partners (a California general partnership with Sierra
Pacific Development Fund III formed in 1994).
F-171
<PAGE> 388
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 272,657 $ 85,792
Rent receivable 588,742 542,527
Due from affiliates 0 47,666
Income-producing property,
net of accumulated depreciation 8,109,927 8,343,438
Other assets 1,897,050 1,320,667
----------- -----------
Total Assets $10,868,376 $10,340,090
=========== ===========
Liabilities and General Partners' Equity
Accrued and other liabilities $ 350,272 $ 520,646
Note payable 1,673,186 1,720,324
----------- -----------
Total Liabilities 2,023,458 2,240,970
----------- -----------
Ground lessors' equity in income-producing
property 3,000,000 3,000,000
----------- -----------
General Partners' equity 5,844,918 5,099,120
----------- -----------
Total Liabilities and General Partners' equity $10,868,376 $10,340,090
=========== ===========
</TABLE>
F-172
<PAGE> 389
Condensed Combined Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 2,112,254 $ 1,734,403 $ 2,294,859
Interest income 34,540 0 0
Other income 15,151 93,668 9,698
----------- ----------- -----------
Total revenues 2,161,945 1,828,071 2,304,557
----------- ----------- -----------
Expenses:
Operating expenses 1,407,262 1,302,968 1,755,826
Depreciation and amortization 779,142 829,081 1,321,177
Interest 152,563 156,636 459,763
----------- ----------- -----------
Total expenses 2,338,967 2,288,685 3,536,766
----------- ----------- -----------
Loss before loss from property disposition (177,022) (460,614) (1,232,209)
Loss from property disposition 0 0 (967,764)
----------- ----------- -----------
Net loss $ (177,022) $ (460,614) $(2,199,973)
=========== =========== ===========
</TABLE>
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners included herein.
6. NOTES PAYABLE
At December 31, 1999 and 1998, notes payable consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note payable, due in monthly interest only payments
at LIBOR rate + 300 basis points collateralized by certain
land and buildings. This note was paid in August 1999 0 1,300,000
Mortgage note payable, due in monthly interest only payments
at 5%, collateralized by certain land and buildings. This
note matures in April 2004 3,000,000 3,000,000
Mortgage note payable, due in monthly installments with
interest at 9%, collateralized by certain land and buildings
This note matures in March 2006 1,902,438 1,931,204
---------- ----------
Mortgage note payable, due in monthly installments with
interest at 8.35%, collateralized by certain land and buildings
This note matures in September 2009 1,494,678 0
---------- ----------
$6,397,116 $6,231,204
========== ==========
</TABLE>
F-173
<PAGE> 390
Annual maturities of notes payable as of December 31, 1999, are: $44,343 in
2000; $52,788 in 2001; $57,632 in 2002; $62,921 in 2003; $3,068,345 in 2004; and
$3,111,087 thereafter.
7. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
Upon any sale, refinancing or other disposition of the Partnership's real
properties, allocations and distributions are made after each Limited Partner
has received 100% of his Adjusted Capital Contributions plus a 15% per annum
cumulative return on such invested capital. Any remaining proceeds shall be
distributed 85% to the Limited Partners and 15% to the General Partner.
Distributions of the remaining proceeds to the Limited Partners shall be made in
a manner such that Limited Partners holding Class A Units shall receive
distributions 15% greater than the distributions received by the holders of
Class B Units.
8. LITIGATION
In November 1995, a limited partner of the Partnership, on their own behalf and
on behalf of all others similarly situated, filed a lawsuit against S-P
Properties, Inc., the General Partner of the Partnership, among others, in the
Superior Court of the State of California, County of Los Angeles (the "Court").
This suit alleged breach of fiduciary duty and breach of contract. The
Plaintiff's claims relate to three loans made to affiliates, two by the
Partnership and one by Sierra Mira Mesa Partners ("SMMP"), which were allegedly
improper or made below market rates. The Plaintiffs were seeking unspecified
compensatory and punitive damages and removal of the General Partner.
In September 1997, the Court denied the Plaintiff's motion for class
certification, but granted the Plaintiff leave to file an amended complaint. The
Partnership demurred to all class action allegations in the amended complaint.
The Court granted the demurred without leave to amend, thereby reducing the
Plaintiff's allegations to a derivative suit.
In December 1999, as a compromise to all claims asserted in what became a
derivative action on behalf of the Partnership, the parties agreed to enter into
a Mutual Compromise and Settlement ("the Settlement"). The Settlement provides
for a complete release of the Partnership, general partners and all affiliates.
As part of the material terms of the Settlement, S-P Properties, as the
F-174
<PAGE> 391
general partner of the Partnership, on or before December 31, 2000, will call
and collect the two demand notes with balances of $1,012,698 and $3,798,900,
respectively, at December 31, 1999 and a portion of the SMMP loan (the date of
collection being referred to herein as the "Payment Date"). In the case of the
SMMP loan, the amount due being that percentage of the loan that is equal to the
Partnership's interest in SMMP, and in any event no less than thirty percent
(30%). The loan proceeds received by the Partnership, totaling approximately
$5,600,000, will be distributed on a per-unit basis to the limited partners and
assignees of the Partnership of record as of the Payment Date. The Partnership
will pay Plaintiff's attorneys' fees of $1,000,000. Such attorneys' fees have
been accrued as of December 31, 1999 and are included in accrued and other
liabilities on the consolidated balance sheet. The Plaintiff, on behalf of the
Partnership, will dismiss the entire action with prejudice. The court approved
the Settlement on February 9, 2000.
S-P Properties, Inc. has denied and continues to deny that it has committed any
violations of law, and states that it has entered into the Settlement solely to
eliminate the burden and expense of further litigation.
F-175
<PAGE> 392
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Development Fund II
We have audited the consolidated financial statements of Sierra Pacific
Development Fund II and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999 and have issued our report thereon dated
February 25, 2000. Such consolidated financial statements and reports are
included in your 1999 Annual Report to the Limited Partners and are incorporated
herein by reference. Our audits also included the financial statement schedules
of Sierra Pacific Development Fund II, listed in Item E of the Table of
Contents. These financial statement schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-176
<PAGE> 393
SCHEDULE II
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Income -
Producing
Properties
<S> <C>
Allowance for loss - January 1, 1997 $ 450,000
Provision charged to costs and expenses (1) 0
---------
Allowance for loss - December 31, 1997 450,000
Provision charged to costs and expenses (1) 0
---------
Allowance for Loss - December 31, 1998 450,000
Provision charged to costs and expenses (1) 0
---------
Allowance for loss - December 31, 1999 $ 450,000
=========
</TABLE>
(1) See Notes 1 and 4 to consolidated financial statements incorporated by
reference to the Annual Report to the Limited Partners attached as an Exhibit.
F-177
<PAGE> 394
SCHEDULE III
SIERRA PACIFIC DEVELOPMENT FUND II AND SUBSIDIARY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Initial Cost Improvements Gross Amount at
to Partnership (1) Capitalized Which carried at close of period
------------------ --------------------------------
Encumb- Improve- After Acquis- Improve-
Description rances Land ments ition (2) Land ments
----------- ------ ---- ----- --------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $3,000,000 $1,950,000 $2,806,932 $2,428,165 $1,950,000 $5,162,296
Sierra Southwest Pointe
Houston, Texas 1,494,678 570,124 2,279,488 495,844 570,124 2,561,913
Sierra Westlakes Development
Houston, Texas 1,902,438 1,743,622 3,759,827 1,743,622 2,331,415
---------- ---------- ---------- ---------- ---------- -----------
TOTAL $6,397,116 $4,263,746 $5,086,420 $6,683,836 $4,263,746 $10,055,624
========== ========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total Accumulated Date Date Depreciation
Description (3)(4)(5) Depreciation(5) Constructed Acquired Life
----------- --------- --------------- ----------- -------- ----
<S> <C> <C> <C> <C> <C>
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $7,112,296 $1,437,594 3/77 12/94 1-30 yrs.
Sierra Southwest Pointe
Houston, Texas 3,132,037 765,965 8/72 7/91 2-30 yrs.
Sierra Westlakes Development
Houston, Texas 4,075,037 1,075,160 10/85 8/84 1-30 yrs.
----------- ----------
TOTAL $14,319,370 $3,278,719
=========== ==========
</TABLE>
(1) The initial cost represents the original purchase price of the
property.
F-178
<PAGE> 395
(2) The Partnership has capitalized property development costs.
(3) Also represents costs for Federal Income Tax purposes.
(4) A valuation allowance of $450,000 was established as the appraised
value of the properties declined below book value. See Notes 1 and 4 to
the financial statements incorporated by reference to the Annual Report
to the Limited Partners attached as an exhibit.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1999 is as follows:
F-179
<PAGE> 396
<TABLE>
<CAPTION>
Total Real Estate Accumulated
Carrying Value Depreciation
<S> <C> <C>
Balance - January 1, 1997 $ 14,428,604 $ 2,772,155
Additions during the year 676,666 670,736
Write off fully depreciated assets (37,220) (37,220)
------------ ------------
Balance - December 31, 1998 15,068,050 3,405,671
Additions during the year 416,813 729,888
Write off fully depreciated assets (1,467,901) (1,467,901)
------------ ------------
Balance - December 31, 1998 14,016,962 2,667,658
Additions during the year 387,242 695,895
Write off fully depreciated assets (84,834) (84,834)
------------ ------------
Balance - December 31, 1999 $ 14,319,370 $ 3,278,719
============ ============
</TABLE>
F-180
<PAGE> 397
<TABLE>
<CAPTION>
Decrease
Partnership in Equity
Property name and Location Rentable Appraised Equity from Dis- Current
Square Occupancy Value of Note Before counting Value
Footage % Property (1) Payable Discounts Note Payable Equity
<S> <C> <C> <C> <C> <C> <C> <C>
I. INCOME-PRODUCING
PROPERTIES:
5850 San Felipe
Houston, Texas 101,868 87% $5,000,000 $3,000,000 $973,714 $ 973,714
Sierra Southwest Pointe
Houston, Texas 100,723 89% 2,850,000 1,300,000 $1,628,030 $(12,220) 1,615,810
Sierr Westlakes Development
Houston, Texas 95,370 75% 3,800,000 1,957,503 3,800,000 3,800,000
----------- ---------- ---------- -------- ---------
Total $11,650,000 $6,257,503 $6,401,744 $(12,220) 6,389,524(3)
=========== ========== ========== ========
II. NOTE RECEIVABLE (4) 2,900,000
III. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE (5)
4,883,229
IV. OTHER ASSETS AND LIABILITIES - NET (6)
779,378
-----------
V. CURRENT VALUE BASIS EQUITY $14,952,131
===========
</TABLE>
F-181
<PAGE> 398
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa
Partners and subsidiary, a California general partnership, (the "Partnership")
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Mira Mesa
Partners and subsidiary as of December 31, 1999 and 1998, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-182
<PAGE> 399
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 319,400 $ 14,064
Receivables:
Unbilled rent (Notes 1 and 4) 1,114,598 1,226,156
Billed rent (Note 1) 83,917 0
Due from affiliates, net (Note 3) 2,451,227 2,233,158
Income-producing property - net of accumulated
depreciation of $3,564,380 in 1999 and
$3,273,970 in 1998 (Notes 1, 4 and 6) 8,723,396 9,000,294
Investment in unconsolidated joint ventures
(Notes 1 and 5) 2,526,875 1,640,460
Other assets (Notes 1, 2 and 3) 793,658 897,993
------------ ------------
Total Assets $ 16,013,071 $ 15,012,125
============ ============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 101,104 $ 251,990
Notes payable (Note 6) 6,179,038 5,418,414
------------ ------------
Total Liabilities 6,280,142 5,670,404
------------ ------------
Minority interest in consolidated joint venture
(Note 1) (340,614) (332,996)
General Partners' equity (Note 1) 10,073,543 9,674,717
------------ ------------
Total Liabilities and General Partners' equity $ 16,013,071 $ 15,012,125
============ ============
</TABLE>
F-183
<PAGE> 400
See Accompanying Notes 37
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 2,126,106 $ 1,883,630 $ 1,919,582
Interest income 224,308 205,781 174,764
Other income 0 0 9,404
----------- ----------- -----------
Total revenues 2,350,414 2,089,411 2,103,750
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization 587,070 581,956 825,911
Property taxes and insurance 98,611 97,781 92,347
Administrative fees (Note 3) 121,889 111,206 104,580
Maintenance and repairs 233,615 240,965 228,890
Management fees (Note 3) 119,166 109,725 101,558
Utilities 135,301 135,077 138,203
Legal and accounting 24,767 27,657 47,242
General and administrative 16,122 7,443 12,677
Renting expenses 0 0 309
Bad debt expense 4,770 0 0
Other operating expenses 46,413 25,124 16,742
----------- ----------- -----------
Total operating expenses 1,387,724 1,336,934 1,568,459
Interest 450,177 438,711 463,804
----------- ----------- -----------
Total expenses 1,837,901 1,775,645 2,032,263
----------- ----------- -----------
INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE LOSSES 512,513 313,766 71,487
----------- ----------- -----------
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT
VENTURE LOSSES (Note 5) (36,405) (131,897) (855,349)
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE LOSS (INCOME) 476,108 181,869 (783,862)
----------- ----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT
VENTURE LOSS (INCOME) 7,618 (787) (7,906)
----------- ----------- -----------
NET INCOME (LOSS) $483,726 $181,082 (791,768)
=========== =========== ===========
</TABLE>
F-184
<PAGE> 401
See Accompanying Notes 38
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
General Partners
------------------------------------------------
Sierra Pacific Sierra Pacific
Development Pension
Fund II Investors '84 Total
--------------- ------------------------------
<S> <C> <C> <C>
General Partners' equity - January 1, 1997 $ 4,679,005 $ 4,495,515 $ 9,174,520
Transfer of advances 155,590 1,311,300 1,466,890
Net loss (284,878) (506,890) (791,768)
Contributions 293,000 1,551,843 1,844,843
Distributions (1,580,800) (247,800) (1,828,600)
--------------- ---------------- -------------
General Partners' equity - December 31, 1997 3,261,917 6,603,968 9,865,885
Net income (loss) (14,912) 195,994 181,082
Contributions 8,490 42,000 50,490
Distributions (211,490) (211,250) (422,740)
--------------- ---------------- -------------
General Partners' equity - December 31, 1998 3,044,005 6,630,712 9,674,717
Net income 159,678 324,048 483,726
Contributions 44,000 539,784 583,784
Distributions (370,184) (298,500) (668,684)
--------------- ---------------- -------------
General Partners' equity - December 31, 1999 $ 2,877,499 $ 7,196,044 $ 10,073,543
=============== ================ =============
</TABLE>
F-185
<PAGE> 402
See Accompanying Notes 39
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 483,726 $ 181,082 $ (791,768)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 587,070 581,956 825,911
Undistributed losses of
unconsolidated joint ventures 36,405 131,897 855,349
Minority interest in consolidated
joint venture (loss) income (7,618) 787 7,906
Bad debt expense 4,770 0 0
Decrease (increase) in rent receivable 27,641 60,853 (100,191)
Increase in due from affiliates (222,839) (202,581) (168,779)
(Increase) decrease in other assets (45,022) (215,974) 55,566
(Decrease) increase in accrued and other
liabilities (150,886) 183,225 (35,663)
----------- ----------- -----------
Net cash provided by operating activities 713,247 721,245 648,331
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (160,815) (346,113) (231,484)
Capital contributions to unconsolidated
joint ventures (1,027,820) (350,900) (2,315,041)
Distributions received from unconsolidated joint 105,000 372,312 2,439,098
ventures
----------- ----------- -----------
Net cash used in investing activities (1,083,635) (324,701) (107,427)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from General
Partners 583,784 50,490 1,844,843
Cash distributions (668,684) (422,740) (1,828,600)
</TABLE>
F-186
<PAGE> 403
<TABLE>
<S> <C> <C> <C>
Funding of note payable secured by
property 1,637,500 0 0
Principal payments on notes payable (876,876) (254,638) (339,460)
----------- ----------- -----------
Net cash provided by (used in) financing
activities 675,724 (626,888) (323,217)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 305,336 (230,344) 217,687
CASH AND CASH EQUIVALENTS -
Beginning of year 14,064 244,408 26,721
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -
End of year $ 319,400 $ 14,064 $ 244,408
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 439,792 $ 439,756 $ 470,608
=========== =========== ===========
</TABLE>
In 1999, 1998, and 1997 interest receivable of $222,839, $202,581, and $338,020,
respectively, was added to the principal balance of the related note receivable
from affiliate. These transactions are noncash items not reflected in the above
statement of cash flows.
F-187
<PAGE> 404
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84") to develop and operate the real property known
as Sierra Mira Mesa, an office building, located in San Diego, California. The
property contains 89,560 square feet and is 100% leased at December 31, 1999.
Per the terms of the partnership agreement, SPDFII and SPPI'84 shared in
earnings, contributions and distributions in a ratio of 51% to 49%,
respectively. 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. In conjunction with this amendment, the general partners
forgave the December 31, 1996 balances of advances due from SMMP and included
these amounts as adjustments to their respective equity accounts. As a result,
the sharing ratio in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and
33.01%, respectively, for SPDFII and 54.42%, 66.26% and 66.99%, respectively,
for SPPI'84. On January 1, 2000, the sharing ratio will be decreased to 30.17%
for SPDFII and increased to 69.83% for SPPI'84 to reflect the 1999 contributions
and distributions.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84.
On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to
Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties,
Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a
national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company,
Inc.
SMMP also holds investments in other industrial/commercial properties through
its investments in unconsolidated joint ventures. Refer to Note 5 for additional
information.
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income
F-188
<PAGE> 405
and expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned joint venture as of December 31, 1999. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximate the carrying value due to the short
term nature of these items. In the opinion of management, the fair value of the
notes payable approximates the carrying value as the interest rate is based on
market rates at December 31, 1999. Management does not fair value the amounts
due from affiliates due to the related party nature of this receivable.
Income-Producing Properties
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
The Partnership regularly evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Future cash flows are estimated and compared to
the carrying amount of the asset to determine if an impairment has occurred. If
the sum of the expected future cash flows is less than the carrying amount of
the
F-189
<PAGE> 406
asset, the Partnership shall recognize an impairment loss in accordance with the
Statement. No such impairment has been recognized by the Partnership.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Investment in Unconsolidated Joint Ventures
The investment in unconsolidated joint ventures is stated at cost and is
adjusted for the Partnership's share in earnings or losses and cash
contributions to or distributions from the joint ventures (equity method).
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; (b) billed rent -
rent due but not yet received.
F-190
<PAGE> 407
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other assets:
Prepaid expenses $ 7,383 $ 21,070
Deferred loan costs, net of accumulated
amortization of $49,842 in 1999 and $226,318 in 1998 168,225 133,878
Deferred leasing costs, net of accumulated
amortization of $531,945 in 1999 and $414,395 in 1998 507,000 637,028
Tax impounds 26,831 23,728
Tenant improvement reserves
84,219 82,289
-------- --------
$793,658 $897,993
======== ========
Accrued and other liabilities:
Accounts payable $ 51,008 $192,455
Security deposits 17,922 17,922
Accrued expenses 0 8,101
Interest payable 32,174 20,982
Unearned rental income 0 12,530
-------- --------
$101,104 $251,990
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the
gross rental income collected from the property. This fee amounted to $119,166,
$109,725, and $101,558 respectively, for the years ended December 31, 1999,
1998, and 1997. This fee was recorded as part of the operating expenses of the
property.
SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by
the affiliate for services provided to SMMP such as accounting, data processing
and similar services. The affiliate was reimbursed $122,239, $111,206, and
$104,580 respectively, for such services for the years ended December 31, 1999,
1998, and 1997. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended December 31,
1999, 1998, and 1997, the affiliate received $28,201, $1,327, and $11,154
respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SMMP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1999, 1998, and 1997, these fees amounted to
$0, $63,492, and $3,656 respectively, and were recorded as deferred leasing
costs.
F-191
<PAGE> 408
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in
the form of demand notes. Such liabilities were assumed by Finance Factors, Inc.
which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995,
Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has
assumed the note. The annual interest rate of the loans was variable at bank
prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000
at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This
loan was amended effective January 1, 1995 fixing the interest rate at 10%. On
December 31, 1999, 1998 and 1997, interest receivable of $222,839, $202,581 and
$338,020, respectively, was added to the principal balance of the loan. No
interest related to this loan was due to the Partnership at December 31, 1999
and 1998. The principal balance outstanding at December 31, 1999 is $2,451,227.
The loan is guaranteed by the owners of CGS Real Estate Company, Inc. In
connection with the settlement of a lawsuit by SPDFII, the Partnership will call
a portion of the note receivable from Bancor Real Estate Company, Inc. The
portion called will be that percentage of the loan that is equal to SPDFII's
ownership interest in the Partnership, in any event no less than 30%. Such funds
that are collected will be distributed to SPDFII in accordance with the lawsuit
settlement.
During 1995 and 1996, the Partnership received non-interest bearing short-term
advances from SPPI'84 of $1,300,000 and $11,300, respectively. These advances
were reclassed to equity in 1997 (See Note 1).
In 1996, the Partnership received a short-term, non-interest bearing loan from
SPDFII in the amount of $155,590. This loan was reclassed to equity in 1997 (See
Note 1).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $4,770. The advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
See Note 6 for note payable transactions with related parties.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
properties are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $ 3,786,458 $ 3,786,458
Building and improvements 8,501,318 8,487,806
------------ ------------
Total 12,287,776 12,274,264
Accumulated depreciation (3,564,380) (3,273,970)
------------ ------------
Net $ 8,723,396 $ 9,000,294
============ ============
</TABLE>
F-192
<PAGE> 409
During 1999 and 1998, the Partnership removed $147,303 and $1,784,496,
respectively, from its building and improvements and related accumulated
depreciation accounts for fully depreciated property.
Future minimum base rental income, under the existing operating leases for the
Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line
basis and amounts to be received on a cash basis are as follows:
<TABLE>
<CAPTION>
Year Ending Straight-line Cash
December 31, Basis Basis
----------------------- ------------- -------------
<S> <C> <C>
2000 $ 2,029,716 $ 2,246,281
2001 2,023,332 2,339,768
2002 2,014,332 2,437,297
2003 595,285 677,208
2004 179,747 184,288
Thereafter 593,192 665,360
-------------- --------------
Total $ 7,435,604 $ 8,550,202
============== ==============
</TABLE>
In each of the three years in the period ending December 31, 1999, two tenants
accounted for the majority of the Partnership's rental income. A state
governmental agency associated with workers compensation insurance accounted for
rental income of 69%, 78%, and 67% in 1999, 1998 and 1997, respectively; a
tenant in the communications sector accounted for rental income of 13%, 15% and
13% in 1999, 1998 and 1997, respectively.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 1999:
- a 35.10% equity interest in Sorrento II Partners ("SIIP"), a joint venture
formed on October 1, 1993 with Sierra Pacific Institutional Properties V,
an affiliate, to develop and operate Sierra Sorrento II, an industrial
building located in San Diego, California. SMMP's investment in SIIP as of
December 31, 1999 and 1998 is $2,647,872 and $1,711,089, respectively.
SMMP's share of the net loss of SIIP for the three years ended December 31,
1999, 1998 and 1997 is $30,637, $143,251 and $59,066, respectively;
- a 6.55% equity interest in Sierra Creekside Partners ("SCP"), a joint
venture formed on February 1, 1994 with Sierra Pacific Development Fund, an
affiliate, to develop and operate Sierra Creekside, a commercial office
building in San Ramon, California. SMMP's investment in SCP as of December
31, 1999 and 1998 is $(128,513) and $(75,610), respectively. SMMP's share
of the net loss of SCP for the three years ended December 31, 1999, 1998
and 1997 is $5,903, $8,420 and $14,995, respectively;
F-193
<PAGE> 410
- a 33.32% equity interest in Sierra Vista Partners ("SVP"), a joint venture
formed on February 1, 1994 with Sierra Pacific Development Fund III, an
affiliate, to develop and operate Sierra Vista, an industrial building in
Anaheim, California. SMMP's investment in SVP as of December 31, 1999 and
1998 is $7,516 and $4,981, respectively. SMMP's share of the net income
(loss) of SVP for the three years ended December 31, 1999, 1998 and 1997 is
$135, $19,774 and $(781,288), respectively. The Sierra Vista property was
sold in October 1997.
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 272,657 $ 85,792
Rent receivable 588,742 542,527
Due from affiliate 0 47,666
Income-producing property, net of accumulated
depreciation 8,109,927 8,343,438
Other assets 1,897,050 1,320,667
----------- -----------
Total Assets $10,868,376 $10,340,090
=========== ===========
Liabilities and General Partners' Equity
Accrued and other liabilities $ 350,272 $ 520,646
Note payable 1,673,186 1,720,324
----------- -----------
Total Liabilities 2,023,458 2,240,970
----------- -----------
Ground lessors' equity in income-producing property
3,000,000 3,000,000
----------- -----------
General Partners' equity 5,844,918 5,099,120
----------- -----------
Total Liabilities and General Partners' equity $10,868,376 $10,340,090
=========== ===========
</TABLE>
F-194
<PAGE> 411
Condensed Combined Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 2,112,254 $ 1,734,403 $ 2,294,859
Interest income 34,540 0 0
Other income 15,151 93,668 9,698
----------- ----------- -----------
Total revenues 2,161,945 1,828,071 2,304,557
----------- ----------- -----------
Expenses:
Operating expenses 1,407,262 1,302,968 1,755,826
Depreciation and amortization 779,142 829,081 1,321,177
Interest 152,563 156,636 459,763
----------- ----------- -----------
Total expenses 2,338,967 2,288,685 3,536,766
----------- ----------- -----------
Net loss before disposition of property (177,022) (460,614) (1,232,209)
Loss from property disposition 0 0 (967,764)
----------- ----------- -----------
Net loss $ (177,022) $ (460,614) $(2,199,973)
=========== =========== ===========
</TABLE>
6. NOTES PAYABLE
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note payable, due in monthly installments with interest at 7.74% per
annum, collateralized by the real property known as Sierra Mira Mesa. This note
matures in October 2010. $4,543,984 $4,802,191
Mortgage note payable to affiliate, due in monthly installments with interest
fixed at 9.34% per annum through October 1998, at which time the rate converted
to the one-year treasury rate plus 375 basis points. This note, which was
collateralized by the real property known as Sorrento I, was paid in August
1999. 0 616,223
Mortgage note payable, due in monthly installments with interest at
8.75% per annum, collateralized by the Sorrento I property. The note
matures in September 2009. 1,635,054 0
---------- ----------
$6,179,038 $5,418,414
========== ==========
</TABLE>
F-195
<PAGE> 412
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the Sorrento I mortgage note, due in July 1998, and security documents
from the bank in May 1996. In connection with the purchase of the bank note and
security documents by CGS, the Partnership made a principal payment to the bank
of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS
Agreement"). The CGS Agreement, collaterized by real and personal property,
called for monthly interest payments through December 1996 and monthly principal
and interest payments thereafter until maturity on May 31, 2016. The interest
rate is fixed at 9.34% per annum for the first year of the note and will
thereafter be the one year Treasury rate plus 375 basis points. A pre-payment in
the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate
converted to the one-year treasury rate plus 375 basis points. The note was
amortized over a 210-month term and payments were $6,048 per month, principal
and interest inclusive until maturity in March 2015.
In August 1999, the CGS note with an outstanding balance of $607,693 was paid.
On the same date, SIP entered into a new loan agreement with Finova Realty
Capital, Inc. in the amount of $1,637,500. This loan, which is secured by the
Sorrento I property, bears interest at 8.75% per annum. Monthly payments of
$12,882, consisting of both principal and interest, are due until maturity in
September 2009. The note balance as of December 31, 1999 was $1,635,054. In
connection with the repayment of the CGS note, SIP paid $29,528 to CGS related
to late fees which were included in other operating expenses in the statement of
operations for 1999.
As of December 31, 1999, annual maturities on notes payable are: $290,909 in
2000; $314,372 in 2001; $339,729 in 2002; $367,133 in 2003; $396,749 in 2004;
and $4,470,146 thereafter.
F-196
<PAGE> 413
UNAUDITED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED) DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................... $ 109,490 $ 260,963
Receivables:
Note, net of deferred gain of $736,271 ..... 3,632,946 3,062,629
Unbilled rent .............................. 222,696 239,271
Billed rent ................................ 188,230 140,211
Due from affiliates ........................ 1,013,698 1,013,698
Interest ................................... 236,473 0
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $3,991,052 and $3,728,719,
respectively ............................... 10,324,783 10,590,651
Investment in unconsolidated joint venture ... 2,141,531 3,023,177
Other assets - net of accumulated amortization
of $434,421 and $393,674, respectively ..... 865,279 873,728
------------ ------------
Total Assets ................................. $ 18,735,126 $ 19,204,328
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities ................ $ 952,632 $ 1,452,577
Notes payable ................................ 6,373,119 6,397,116
------------ ------------
Total Liabilities ............................ 7,325,751 7,849,693
------------ ------------
Partners' equity (deficit):
General Partner ............................ (63,458) 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding .......... 7,503,640 7,426,335
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding .......... 3,969,193 3,928,300
------------ ------------
Total Partners' equity ....................... 11,409,375 11,354,635
------------ ------------
Total Liabilities and Partners' equity ....... $ 18,735,126 $ 19,204,328
============ ============
</TABLE>
F-197
<PAGE> 414
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ............................. $ 1,266,942 $ 1,194,025 $ 699,215 $ 569,806
Interest income ........................... 236,944 204,768 122,573 102,364
----------- ----------- ----------- -----------
Total revenues ......... 1,503,886 1,398,793 821,788 672,170
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses ........................ 885,750 793,426 374,645 404,314
Depreciation and amortization ............. 440,882 434,505 223,056 218,741
Interest .................................. 223,270 214,322 111,504 106,539
----------- ----------- ----------- -----------
Total costs and expenses 1,549,902 1,442,253 709,205 729,594
----------- ----------- ----------- -----------
(LOSS) INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE INCOME ........................... (46,016) (43,460) 112,583 (57,424)
----------- ----------- ----------- -----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME ..................... 100,756 89,769 45,745 59,894
----------- ----------- ----------- -----------
NET INCOME .................................. $ 54,740 $ 46,309 $ 158,328 $ 2,470
=========== =========== =========== ===========
Net income per limited partnership unit ..... $ 0.63 $ 0.53 $ 1.81 $ 0.03
=========== =========== =========== ===========
</TABLE>
F-198
<PAGE> 415
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
---------------------------- GENERAL PARTNERS'
PER UNIT CLASS A CLASS B TOTAL PARTNER EQUITY
-------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Proceeds from sale of
partnership units .............. $250.00 $ 14,392,000 $ 7,579,000 $ 21,971,000 $ 21,971,000
Underwriting commissions
and other organization expenses (33.68) (1,939,045) (1,021,124) (2,960,169) (2,960,169)
Repurchase of 1,231 partnership
units ......................... 0.06 (177,934) (66,167) (244,101) (244,101)
Cumulative net income (loss)
(to December 31, 1998) ......... (6.96) (393,677) (208,839) (602,516) $ 46,674 (555,842)
Cumulative distributions
(to December 31, 1998) ......... (64.80) (3,685,045) (1,947,280) (5,632,325) (46,674) (5,678,999)
------- ------------ ------------ ------------ ------------ ------------
Partners' equity - January 1, 1999 144.62 8,196,299 4,335,590 12,531,889 0 12,531,889
Net loss ......................... (13.59) (769,964) (407,290) (1,177,254) (1,177,254)
------- ------------ ------------ ------------ ------------ ------------
Partners' equity -
January 1, 2000 (audited) ...... 131.03 7,426,335 3,928,300 11,354,635 0 11,354,635
Transfer among general partner and
limited partners ............... 0.74 41,861 22,144 64,005 (64,005) 0
Net income (unaudited) ........... 0.63 35,444 18,749 54,193 547 54,740
------- ------------ ------------ ------------ ------------ ------------
Partners' equity (deficit) -
June 30, 2000 (unaudited) ..... $132.40 $ 7,503,640 $ 3,969,193 $ 11,472,833 $ (63,458) $ 11,409,375
======= ============ ============ ============ ============ ============
</TABLE>
F-199
<PAGE> 416
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................... $ 54,740 $ 46,309
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization ................. 440,882 434,505
Partnership's share of unconsolidated
joint venture income ........................ (100,756) (89,769)
Increase in rent receivable ................... (31,444) (28,359)
Increase in interest receivable ............... (236,473) (203,876)
Decrease in other receivables ................. 0 7,946
Increase in other assets ...................... (73,665) (35,967)
Decrease in accrued and other liabilities ..... (499,945) (249,356)
----------- -----------
Net cash used in operating activities ......... (446,661) (118,567)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to affiliate of the general partner ...... (570,317) 0
Payments for property additions ............... (90,471) (198,863)
----------- -----------
Net cash used in investing activities ......... (660,788) (198,863)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable ........... (23,997) (11,674)
Contributions to unconsolidated joint venture . (23,000) 0
Distributions from unconsolidated joint venture 1,002,973 0
Borrowings from affiliate ..................... 0 306,184
----------- -----------
Net cash provided by financing activities ..... 955,976 294,510
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......... (151,473) (22,920)
CASH AND CASH EQUIVALENTS - Beginning of period ... 260,963 71,180
----------- -----------
CASH AND CASH EQUIVALENTS - End of period ......... $ 109,490 $ 48,260
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for property taxes $ 223,178 $ 210,731
=========== ===========
Cash paid during the period for interest ...... $ 223,270 $ 191,335
=========== ===========
</TABLE>
F-200
<PAGE> 417
SIERRA PACIFIC DEVELOPMENT FUND II
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of Sierra Pacific Development Fund II's (the Partnership)
management, these unaudited financial statements reflect all adjustments which
are necessary for a fair presentation of its financial position at June 30, 2000
and results of operations and cash flows for the periods presented. All
adjustments included in these statements are of a normal and recurring nature.
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, 1999.
2. RELATED PARTY TRANSACTIONS
Included in the financial statements for the six months ended June 30, 2000 and
1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
June 30
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Management fees $ 62,065 $ 55,105
Administrative fees 143,040 163,402
Leasing fees 46,960 12,173
</TABLE>
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners (SMMP) was formed in 1985 between the Partnership and
Sierra Pacific Pension Investors '84 (SPPI'84), 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 51%; the remaining 49% was owned by SPPI'84. 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 June 30, 2000 the
Partnership's interest in SMMP is 30.17%; the remaining 69.83% interest is owned
by SPPI'84.
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 six months ended June 30, 2000 and
1999 follows:
F-201
<PAGE> 418
<TABLE>
<CAPTION>
June 30
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Rental income $ 1,096,679 $ 1,059,081
Total revenues 1,220,016 1,170,121
Operating expenses 446,008 361,757
Share of unconsolidated
joint venture income (loss) 81,931 (36,566)
Net income 326,619 269,349
</TABLE>
As of June 30, 2000, SMMP holds a 43.92% interest in Sorrento II Partners
(SIIP), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993; a 5.08% interest in Sierra Creekside Partners
(SCP), a California general partnership with Sierra Pacific Development Fund
formed in 1994; and a 33.36% 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 six months ended June 30,
2000 and 1999 follows:
<TABLE>
<CAPTION>
SCP SVP SIIP
-----------------------------------------------------------------------------------
June 30 June 30 June 30
-----------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 489,777 $ 448,066 $ 0 $ 0 $ 699,130 $ 554,777
Total revenues 489,777 448,066 0 11,907 710,335 554,777
Operating expenses 268,936 247,078 13,735 14,577 236,241 243,567
Extraordinary loss (46,020) 0 0 0 0 0
Net (loss) income (149,586) (50,053) (13,735) (2,670) 214,281 (92,300)
</TABLE>
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
(loss) by the number of limited partnership units outstanding, 56,674 Class A
and 29,979 Class B.
During the quarter ended March 31, 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% is allocated to the general partner. Management does not believe
that the effect of this transfer is significant.
F-202
<PAGE> 419
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the general partner, is in
the process of developing a plan pursuant to which the properties owned by the
Partnership would be combined with the properties of other real estate
partnerships managed by CGS and its affiliates. These limited partnerships own
office properties, industrial properties, shopping centers, and residential
apartment properties. It is expected that the acquirer would in the future
qualify as a real estate investment trust. Limited partners would receive shares
of common stock in the acquirer, which would be listed on a national securities
exchange or the NASDAQ national market system.
F-203
<PAGE> 420
SIERRA PACIFIC DEVELOPMENT FUND III
HISTORICAL FINANCIAL DATA
F-204
<PAGE> 421
Table of Contents
I. Sierra Pacific Development Fund III
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition
and Results of Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Quarters Ended June 30, 2000 and
1999.
D. Audited Financial Statements - December 31, 1999, 1998 and
1997
E. Unaudited Financial Statements - Six Months Ended June 30,
2000 and 1999
F-205
<PAGE> 422
A. SELECTED HISTORICAL FINANCIAL DATA OF SIERRA PACIFIC DEVELOPMENT FUND III
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 615 $ 736 $ 558 $ -- $ -- $ 12 $ --
Interest and other income -- -- 1 94 15 -- --
---- ---- ---- ---- ---- ---- ----
Total revenues 615 736 559 94 15 12 --
==== ==== ==== ==== ==== ==== ====
EXPENSES:
Property operating 402 406 386 37 15 14 14
Management and advisory fees 38 39 40 -- -- -- --
Real estate and other taxes 94 70 63 -- -- -- --
Depreciation and amortization 471 546 464 -- -- -- --
Interest expense 311 264 299 -- -- -- --
---- ---- ---- ---- ---- ---- ----
Total expenses 1,316 1,325 1,252 37 15 14 14
===== ===== ===== ==== ==== ==== ====
</TABLE>
F-206
<PAGE> 423
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
JUNE 30,
----------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
-------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before loss on
sale of property and equity in
earnings (losses) of
non-consolidated partnerships (701) (589) (693) 56 -- (2) (14)
Loss on sale of property -- -- (967) -- -- -- --
Equity in earnings (losses) of
non-consolidated partnerships (265) 413 8 1 (8) (1) (7)
-------- ------- -------- -------- -------- -------- --------
Net income (loss) before minority
interest (966) (176) (1,652) 57 (7) (3) (21)
Minority interest 173 223 781 (19) -- 1 5
-------- ------- -------- -------- -------- -------- --------
Net income (loss) $ (793) $ 47 $ (871) $ 38 $ (7) $ (2) $ (16)
======== ======= ======== ======== ======== ======== ========
</TABLE>
F-207
<PAGE> 424
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average number of units outstanding 37 37 64 -- -- -- --
Income (loss) per unit (21.71) 1.28 (13.60) -- -- -- --
Ratio of earnings to fixed charges (1) -- 1.18 -- -- -- -- --
Deficiency of earnings to cover fixed
charges (2) 793 -- 871 -- 7 2 16
Cash distributions to minority investors (57) -- (2,152) (109) (14) -- (9)
Total properties owned at end of period 1 1 -- -- -- -- --
Book value per limited partnership unit 12 13 -- -- -- -- --
Per unit value assigned for the consolidation
BALANCE SHEET DATA:
Cash and cash equivalents $ 16 $ 97 $ 15 $ 1 $ 4 $ 1 $ 1
Real estate held for investment, net 5,700 5,828 -- -- -- -- --
Accounts receivable, net 84 187 6 -- -- -- --
Investment in/due from partnership -- 5 -- -- -- -- --
Other assets 260 155 -- -- -- -- --
</TABLE>
F-208
<PAGE> 425
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets, at book value 6,060 6,272 21 1 4 1 12
Total assets, at valued assigned for the
consolidation 744
Total liabilities 4,339 3,978 338 333 341 336 348
General partners deficit -- -- (374) (337) (344) (340) (361)
Limited partners equity 450 497 -- -- -- -- --
Other equity 1,271 1,797 57 5 7 4 14
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 12 81 (83) (14) 3 -- (3)
Cash provided by (used in) operating
activities (313) (163) (508) 58 -- (3) (14)
</TABLE>
F-209
<PAGE> 426
(1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes
and fixed charges. Fixed charges consist of interest on indebtedness,
the amortization of debt issuance costs and that portion of operating
rental expense representing interest.
(2) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges
of 1.0
F-210
<PAGE> 427
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - DECEMBER 31, 1999, 1998 AND 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1999, the Partnership owned a 66.68%
interest in Sierra Vista Partners, which operated the Sierra Vista property,
which was sold in October 1997. In addition, the Partnership held an 11.88%
interest in Sorrento I Partners ("SIP"), which operates the Sorrento I property.
Results of Operations:
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
No rental income was recorded for the years ended December 31, 1999 and 1998 due
to the sale of the Property in 1997. Other income of $15,000 was recorded in
1999 principally as a result of refunds associated with prior year operations.
In 1998, the Partnership received $94,000 associated with an adjustment to the
refinancing of the debt on the Sierra Vista property that took place prior to
the sale of the property in 1997. This amount was recorded as other income.
Operating expenses for the year ended December 31, 1999 were $15,000, which
consisted primarily of accounting and auditing costs. In 1998, operating
expenses amounted to $37,000.
The Partnership's remaining real estate investment is an 11.88% minority
interest in the Sorrento I property. The Partnership's share of (loss) income
from its investment in SIP was $(8,000) for the year ended December 31, 1999
compared to $1,000 for the year ended December 31, 1998. In accordance with the
Sorrento I partnership agreement, the Partnership's share of loss was allocated
in proportion to its ownership interest for the year ended December 31, 1999.
F-211
<PAGE> 428
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
No rental income was recorded for the year ended December 31, 1998 due to the
sale of the Property in the prior year. In 1997, rental income was $558,000. In
1998, the Partnership received a cash payment of $94,000, recorded as other
income, related to an adjustment to the refinancing of the debt on the Sierra
Vista property that took place prior to the sale of the property in 1997.
Operating expenses for the year ended December 31, 1998 were $37,000, which
consisted primarily of accounting and other general and administrative expenses.
Operating expenses in the prior year were $952,000. No interest expense was
incurred in 1998 due to the sale of the Property in the prior year. The
Partnership's loan was transferred and assumed by the buyer of the property at
the time of sale.
The Partnership's share of income from its investment in SIP was $1,000 for the
year ended December 31, 1998 compared to $8,000 for the year ended December 31,
1997. In accordance with the Sorrento I partnership agreement, income resulting
from its operations is first allocated to the General Partners in proportion to
the relative amounts of net cumulative losses until such allocation of income
equals the previously allocated net cumulative losses. Then, profits are
allocated in proportion to the distributions made to the General Partners during
the year. As such, SIP allocated the Partnership 43.04% of its income, and the
other General Partner, SMMP, received 56.96% of its income for each of the years
ending December 31, 1998 and 1997.
Liquidity and Capital Rescues:
The Partnership received net cash proceeds of $2,141,000 from the sale of the
property in 1997. In accordance with the Sierra Vista Partners joint venture
agreement, these proceeds were distributed to Sierra Mira Mesa Partners
("SMMP"). Under the terms of the agreement, SMMP receives preferential cash
distributions of available "Distributable Funds" from the sale of the property
to the extent of its capital contributions. SMMP had made net contributions of
$3,335,000 to the Partnership through the sale date.
As of December 31, 1999, the Partnership is in a liquid position with cash of
$4,000 and no current liabilities.
One tenant began leasing the entire 43,100 rentable square feet of the Sorrento
I property in 1996. This lease commenced May 1, 1996 and expires April 30, 2003.
The current base rent called for under this lease is $23,204 per month and shall
increase in subsequent periods. The lease contains an option to extend for an
additional five years.
F-212
<PAGE> 429
In August 1999, SIP repaid its $607,693 loan balance to CGS Real Estate Company,
Inc. and entered into a new loan agreement with Finova Realty Capital, Inc. in
the amount of $1,637,500. The loan is collateralized by the Sorrento I property
and bears interest at 8.75% per annum. Monthly payments of $12,882, consisting
of both principal and interest, are due until maturity in September 2009. The
majority of the loan proceeds were distributed to SMMP in accordance with the
partnership agreement.
In accordance with the SIP joint venture agreement, cash distributions of
available "Distributable Funds" shall first be distributed to SMMP as a return
of capital in proportion to its aggregate unreturned contributed capital and
then to the Partnership in proportion to its aggregate unreturned contributed
capital. Any remaining proceeds shall first be distributed pro rata in
proportion to the partners' positive balances in their capital accounts and then
in accordance with their percentage interest.
Sierra Vista Partners and Sorrento I Partners were formed, in part, to provide
the projects with a source of cash for tenant improvements and lease
commissions. As required, the Partnership's joint venture partner (SMMP) either
advances or contributes cash to meet the Partnership's requirements. SMMP has
adequate resources to make the necessary advances during the foreseeable future.
The Partnership's primary capital requirements will be for the continued
development and operation of the Sorrento I property. It is anticipated that
these requirements will be funded from the operations of the property and the
Partnership's joint venture partner (SMMP).
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership did not experience any major system failures or disruptions in
operations over the year 2000 transition. All systems have continued to operate
as normal.
F-213
<PAGE> 430
The Partnership did not separately track internal costs related to the Year 2000
issue and Partnership management believes these amounts did not have a material
impact on the Partnership's financial position or results of operations.
The Partnership employs a property management company to manage, operate and
lease the property. The management company did not experience any major systems
failures or disruptions in operations at the property. The Partnership remains
confident that no Year 2000 issues with the property management company or other
third parties will arise in the future although no guarantees can be made to
that effect.
F-214
<PAGE> 431
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(a) OVERVIEW
The following discussion should be read in conjunction with Sierra Pacific
Development Fund III's (the Partnership) Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Form 10-Q.
The Partnership currently owns a 66.64% interest in the Sierra Vista Partnership
which operated the Sierra Vista property (the Property). The Property was sold
in October 1997. The Partnership's remaining real estate investment is a 16.76%
minority interest in Sorrento I Partners (SIP), which operates the Sierra
Sorrento I property. The Partnership records its interest in SIP as an
investment in unconsolidated joint venture and accounts for such investment on
the equity method.
(b) RESULTS OF OPERATIONS
No income was recorded for the six months and three months ended June 30, 2000.
The Partnership recorded other income of $11,907 during the first quarter of
1999 as a result of a refund associated with 1998 operations. No rental income
has been generated since the sale of the Property in 1997.
Operating expenses for the six months ended June 30, 2000 decreased by $842, or
6%, when compared to the same period in the prior year. Operating expenses
consisted primarily of accounting and auditing costs. The majority of these
costs were incurred during the first quarter of each respective year.
The Partnership's share of loss from its investment in SIP was $7,341 for the
six months ended June 30, 2000 compared to $682 for the same period in the prior
year. This increase in loss was in large part due to higher interest expense
associated with the refinance of the Sierra Sorrento I property in August 1999.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Partnership is in a liquid position with cash of $1,044
and no current liabilities.
The Partnership's primary capital requirements are for the continued development
and operation of the Sierra Sorrento I property. It is anticipated that these
requirements will be funded from the operations of the Property and the
Partnership's joint venture partner, Sierra Mira Mesa Partners (SMMP). As
required, SMMP either advances or contributes cash to meet these requirements.
SMMP has adequate resources to make the necessary advances during the
foreseeable future. During the six months ended June 30, 2000, the Partnership
received net contributions of
F-215
<PAGE> 432
approximately $11,000 from SMMP. These proceeds were used to pay operating
expenses incurred during the period.
Certain factors raise substantial doubt about the Partnership's ability to
continue as a going concern. As shown in the financial statements, the
Partnership has no operating assets and its only remaining real estate
investment is its minority interest in SIP. The other partner in SIP, SMMP, will
receive preferential distributions from SIP until its contributed capital is
returned. The Partnership does not anticipate receiving any cash distributions
from SIP in the near future. Management believes the Partnership will be able to
obtain any cash needed to fund future overhead expenditures from related parties
until such time as the Partnership engages in new activities or a decision is
made to liquidate the Partnership.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
F-216
<PAGE> 433
D. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Development Fund III
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Development Fund III, a California limited partnership, (the "Partnership") as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in partners' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Development Fund III as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying 1999 financial statements have been prepared assuming that the
Partnership will continue as a going concern. As described in Note 1 to the
financial statements, the Partnership's reduced operations, Partner's capital
deficiency, and lack of funds to pay operating expenses raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-217
<PAGE> 434
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Development Fund III (the "Partnership") was organized on June 5,
1984 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate certain commercial and
industrial real properties. S-P Properties, Inc. is the General Partner and
manager of the Partnership. On December 30, 1994, all of the outstanding stock
of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of the common
stock of S-P Properties, Inc. Finance Factors was a subsidiary of CGS Real
Estate Company, Inc., a national real estate company. In July 1995, Finance
Factors, Inc. merged with Bancor Real Estate Company, Inc., another subsidiary
of CGS Real Estate Company, Inc.
In February 1985, the Partnership acquired land in San Diego, California as the
first step in the development of Sierra Sorrento I. This 43,100 square foot
industrial/warehouse project was completed in February 1986. In October 1986,
the Partnership acquired land in Anaheim, California for the development of
Sierra Vista. This property, a 102,855 square foot industrial/office project,
was completed in April 1988.
In April 1993, the Partnership created a California general partnership
(Sorrento I Partners) with Sierra Mira Mesa Partners ("SMMP") to facilitate cash
contributions by SMMP for the continued development and operation of the Sierra
Sorrento I property. In February 1994, the Partnership formed a California
general partnership with SMMP known as Sierra Vista Partners ("SVP") to
facilitate cash contributions by SMMP for the continued development and
operation of the Sierra Vista property. The Partnership contributed the
properties and SMMP contributed cash to these newly formed partnerships. SMMP
has made additional contributions each year to these partnerships since
inception.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale. In
accordance with the SVP joint venture agreement, these proceeds were distributed
to SMMP. Under the terms of the agreement, SMMP receives preferential cash
distributions of available "Distributable Funds" from the sale of the property
to the extent of its capital contributions. SMMP had made net contributions of
$3,335,204 to the Partnership through the sale date.
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Going Concern Considerations
The Partnership has no operating assets and its only remaining real estate
investment is 11.88% interest in Sorrento I Partners ("SIP"). The other partner
in SIP, SMMP, will receive preferential distributions from SIP until its
contributed capital is returned. The Partnership does not anticipate receiving
any cash distributions from SIP in the near future. Management anticipates the
operations of the Partnership will not require significant amounts of cash in
the future and any cash requirements of SIP will be funded by SMMP. Management
believes the Partnership will be able to obtain any cash needed to fund future
overhead expenditures from related parties until such time as the Partnership
engages in new activities or a decision is made to liquidate the Partnership.
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements include the accounts of the Partnership
and Sierra Vista Partners, a majority owned joint venture as of December 31,
1999 (see Note 3). All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents. The fair value of the cash and cash
equivalents approximate the carrying value due to their short term nature.
Investment in Unconsolidated Joint Venture
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<PAGE> 436
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the partnership's share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
Rental Income
Rental income is recognized on a straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standard No. 13, "Accounting for Leases."
Calculation of Equity (Deficit) and Net Income (Loss) Per Limited Partnership
Unit
Equity (deficit) and net income (loss) per limited partnership unit are
determined by dividing the Limited Partners' equity and net income (loss) by
36,521, the number of limited partnership units outstanding for all periods.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development
and operation of commercial real estate.
2. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the properties. Management fees paid to
affiliates for the year ended December 31, 1997 was $40,248. No such costs were
incurred in 1999 or 1998.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $75,530 for such services for the year ended December 31, 1997. No
such costs were incurred in 1999 or 1998. Additionally, the Partnership
reimbursed the affiliate for construction supervision costs incurred by the
affiliate. For the year ended December 31, 1997 the affiliate received $64,904
for tenant improvements supervisory costs. No such costs were incurred in 1999
or 1998.
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<PAGE> 437
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the year ended December 31, 1997 these fees amounted to
$76,984 and were recorded as deferred leasing costs. No such costs were incurred
in 1999 or 1998.
In consideration for services rendered with respect to obtaining new financing,
an affiliate of the General Partner is paid broker fees. For the year ended
December 31, 1997, these fees amounted to $61,000 and were recorded as deferred
loan costs. These fees were written off with the sale of the Sierra Vista
property in 1997. No such fees were incurred in 1999 or 1998.
3. INCOME-PRODUCING PROPERTIES
On April 1, 1993, the Sierra Sorrento I property was transferred to a joint
venture called Sorrento I Partners (Note 4). The historical cost basis of the
property and related assets at the date of transfer was $2,662,877 and the
outstanding balance of the related debt was $2,986,024 with accrued interest of
$22,824.
On February 1, 1994, the Partnership formed a joint venture with Sierra Mira
Mesa Partners ("SMMP"), an affiliate. The joint venture, known as Sierra Vista
Partners ("SVP"), was formed as a California general partnership to develop and
operate the Sierra Vista property. The Partnership had an 81.5% equity interest
with its contribution of Sierra Vista. Such interest was computed based upon the
estimated fair value of SVP's net assets at the date of formation of the joint
venture. SMMP was allocated an 18.5% initial equity interest in SVP in exchange
for its $600,000 cash contribution ($2,355,161, net, through December 31, 1996).
SMMP made additional cash contributions amounting to $1,193,141, $36,900, and
$16,400 and received distributions amounting to $2,152,098, $108,656 and $14,000
during 1997, 1998 and 1999, respectively. The percentage interests of the
Partnership and SMMP are to be adjusted every January 1st during the term of
SVP, beginning January 1, 1995. Accordingly, as of January 1, 1997, 1998 and
1999, the Partnership's interest in SVP was changed to 52.95%, 65.49% and
66.68%, respectively, and SMMP's interest was changed to 47.05%, 34.51%, and
33.32% respectively. On January 1, 2000, the Partnership's interest in SVP will
be decreased to 66.64% and SMMP's interest will be increased to 33.36%.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received net cash proceeds of $2,140,598 from the sale for its
52.95% interest in this property and the purchaser assumed the Partnership's
$3,044,397 debt on the property. The Partnership also incurred additional
selling costs and credited security deposits and prorata rents for October 1997
to the buyer. In accordance with the SVP joint venture agreement, these proceeds
were distributed to SMMP. Under the terms of the agreement, SMMP receives
preferential cash distributions of available "Distributable Funds" from the sale
of the property to the extent of its capital contributions. SMMP had made net
contributions of $3,335,204 to the Partnership through the sale date. In 1998,
the Partnership received a cash payment of $94,000, recorded as other income,
related to an adjustment to the refinancing of the debt on the Sierra Vista
property that took place prior to the sale of the property in 1997. Other income
of $15,000 was recorded in 1999 principally as a result of refunds associated
with prior year operations.
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4. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sorrento I Partners ("SIP") was formed on April 1, 1993 between the Partnership
and SMMP, an affiliate, to develop and operate the real property known as
Sorrento I, an industrial building located in San Diego, California. One tenant
began leasing the entire 43,100 rentable square feet of Sorrento I in 1996.
Rental income of $23,636 per month is recognized under this lease, which expires
in April 2003.
At December 31, 1999, the Partnership has an 11.88% equity interest with its
contribution of Sorrento I and the related debt; SMMP has an 88.12% equity
interest with its $2,326,477 net cash contributions through 1998. In accordance
with the SIP joint venture agreement, proceeds shall first be distributed to
SMMP as a return of capital in proportion to its aggregate unreturned
contributed capital and then to the Partnership in proportion to its aggregate
unreturned contributed capital. Any remaining proceeds shall first be
distributed pro rata in proportion to the partners' positive balances in their
capital accounts and then in accordance with their percentage interest.
SIP had a non-recourse bank note payable with an original principal balance of
$3,000,000 collateralized by real and personal property that included a
discounted payoff option of $1,500,000. CGS Real Estate Company, Inc. ("CGS"),
an affiliate of the General Partner, acquired the note and security documents
from the bank in May 1996. In connection with the purchase of the bank note and
security documents by CGS, SIP made a principal payment to the bank of $750,000
and entered into a $750,000 note agreement with CGS.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate
converted to the one-year treasury rate plus 375 basis points. The note was
amortized over a 210-month term and payments were $6,048 per month, principal
and interest, inclusive until maturity in March 2015.
In August 1999, the CGS note, with an outstanding balance of $607,693, was
repaid. On the same date, SIP entered into a new loan agreement with Finova
Realty Capital, Inc. in the amount of $1,637,500. This loan, which is secured by
the Sorrento I property, bears interest at 8.75% per annum. Monthly payments of
$12,882, consisting of both principal and interest, are due until maturity in
September 2009. The note balance as of December 31, 1999 was $1,635,054.
Reference is made to the audited financial statements of Sorrento I Partners
included herein.
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<PAGE> 439
5. PARTNERS' EQUITY (DEFICIT)
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations had been
allocated to the General Partner through December 31, 1996. During 1997, the
General Partner was allocated losses to the extent they were in excess of the
Limited Partners' capital balances since the Limited Partners cannot be
allocated losses in excess of their balances. As such, the profit recognized in
1998 and the loss recognized in 1999 was allocated to the General Partner.
Upon any sale, refinancing or other dispositions of the Partnership's real
properties, allocations and distributions will be made to the Limited Partners
until they have received distributions from the sale or financing proceeds in an
amount equal to 100% of their unreturned capital. Thereafter, distributions
generally will be allocated 1% to the General Partner and 99% to the Limited
Partners until the Limited Partners have received distributions from all sources
equal to the sum of their respective priority distributions (an amount equal to
15% per annum cumulative on each Limited Partner's unreturned capital).
However, after the Limited Partners have received distributions of sale or
financing proceeds equal to their unreturned capital plus distributions from all
sources equal to a cumulative but not compounded return of 6% per annum on their
unreturned capital, the General Partner may be entitled to special distributions
not to exceed 3% of the gross sales prices of properties sold by the
Partnership. Thereafter, the General Partners will be entitled to receive
incentive distributions which, when aggregated with the 1% distributions to the
General Partner described in the preceding sentence, will equal 20% of the total
net sale or financing proceeds available for distribution to the Partners. Any
remaining sale or financing proceeds will be distributed to the Limited
Partners.
The proceeds from the sale of the Sierra Vista property were required to be
distributed to SMMP under the provisions of the joint venture agreement with
SMMP and thus were not allocated in accordance with the provisions described
above.
F-223
<PAGE> 440
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Partners of
Sierra Pacific Development Fund III
We have audited the consolidated financial statements of Sierra Pacific
Development Fund III, a California limited partnership, (the "Partnership"), as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999 and have issued our report thereon dated February 25,
2000. Such consolidated financial statements and report are included in your
1999 Annual Report to the Limited Partners and are incorporated herein by
reference. Our audits also included the financial statement schedule of Sierra
Pacific Development Fund III, listed in Item 14. The financial statement
schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-224
<PAGE> 441
SCHEDULE II - FORM 10-K
SIERRA PACIFIC DEVELOPMENT FUND III
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Income -
Producing
Properties
----------
<S> <C>
Allowance for loss - January 1, 1997 $ 1,600,000
Reduction due to sale of property (1) (1,600,000)
----------
Allowance for loss - December 31, 1997 0
Provision charged to costs and expenses 0
----------
Allowance for loss - December 31, 1998 0
Provision charged to costs and expenses 0
----------
Allowance for loss - December 31, 1999 $ 0
===========
</TABLE>
(1) See Notes 1 and 3 to the consolidated financial statements incorporated by
reference to the Annual Report to the Limited Partners attached as an Exhibit.
F-225
<PAGE> 442
SORRENTO I PARTNERS
(A CALIFORNIA GENERAL PARTNERSHIP)
BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998 AND STATEMENTS OF OPERATIONS,
CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT) AND CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 AND INDEPENDENT
AUDITORS' REPORT
F-226
<PAGE> 443
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sorrento I Partners
We have audited the accompanying balance sheets of Sorrento I Partners, a
California general partnership, (the "Partnership") as of December 31, 1999 and
1998, and the related statements of operations, changes in general partners'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sorrento I Partners as of
December 31, 1999 and 1998, and the results of its operations and cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-227
<PAGE> 444
SORRENTO I PARTNERS
(A California General Partnership)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 249,534 $ 1,765
Receivables:
Unbilled rent (Notes 1 and 4) 50,533 45,345
Other 0 14,572
Due from affiliates (Note 3) 0 4,770
Income-producing property - net of accumulated
depreciation of $741,797 in 1999 and
$639,739 in 1998 (Notes 1, 4 and 5) 2,240,981 2,337,761
Other assets (Notes 1 and 2) 154,108 112,191
---------- ----------
Total Assets $2,695,156 $2,516,404
========== ==========
LIABILITIES AND GENERAL PARTNERS' EQUITY
----------------------------------------
Accounts payable $ 13,690 $ 20,537
Notes payable (Note 5) 1,635,054 616,223
---------- ----------
Total Liabilities 1,648,744 636,760
---------- ----------
General Partners' equity (Notes 1 and 6) 1,046,412 1,879,644
---------- ----------
Total Liabilities and General Partners' equity $2,695,156 $2,516,404
========== ==========
</TABLE>
F-228
<PAGE> 445
See Accompanying Notes 27
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 283,985 $ 282,322 $ 283,635
Other income 0 0 9,404
------- ------- -------
Total revenues 283,985 282,322 293,039
------- ------- -------
Expenses:
Operating expenses:
Depreciation and amortization 130,639 127,662 127,662
Property taxes and insurance 6,639 7,762 2,847
Administrative fees (Note 3) 45,025 38,922 34,860
Maintenance and repairs 42 395 49
Management fees (Note 3) 16,707 17,189 15,762
Legal and accounting 15,809 17,650 22,803
General and administrative 9,947 7,413 5,677
Bad debt expense 4,770 0 0
Other operating expenses 29,884 5,574 1,894
------- ------- -------
Total operating expenses 259,462 222,567 211,554
Interest 88,648 57,926 63,123
------- ------- -------
Total expenses 348,110 280,493 274,677
------- ------- -------
NET (LOSS) INCOME $ (64,125) $ 1,829 $ 18,362
========= ========= =========
</TABLE>
F-229
<PAGE> 446
See Accompanying Notes 28
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CHANGES IN GENERAL PARTNERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
General Partners
----------------
Sierra Pacific Sierra
Development Mira Mesa
Fund III Partners Total
-------- -------- -----
<S> <C> <C> <C>
General Partners' equity (deficit) - January 1, 1997 $(341,689) $2,333,942 $1,992,253
Net income 7,906 10,456 18,362
Contributions 0 141,000 141,000
Distributions 0 (164,300) (164,300)
-------- ---------- ----------
General Partners' equity (deficit) - December 31, 1997 (333,783) 2,321,098 1,987,315
Net income 787 1,042 1,829
Contributions 0 8,500 8,500
Distributions 0 (118,000) (118,000)
-------- ---------- ----------
General Partners' equity (deficit) - December 31, 1998 (332,996) 2,212,640 1,879,644
Net loss (7,618) (56,507) (64,125)
Contributions 0 65,313 65,313
Distributions 0 (834,420) (834,420)
-------- ---------- ----------
General Partners' equity (deficit) - December 31, 1999 $(340,614) $1,387,026 $1,046,412
======== ========== ==========
</TABLE>
F-230
<PAGE> 447
See Accompanying Notes 29
SORRENTO I PARTNERS
(A California General Partnership)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $ (64,125) $ 1,829 $ 18,362
Adjustments to reconcile net (loss) income
to cash provided by operating activities:
Depreciation and amortization 130,639 127,662 127,662
Bad debt expense 4,770 0 0
Increase in rent receivable (5,188) (10,439) (20,944)
Decrease (increase) in other receivables 14,572 (271) (139)
(Increase) decrease in other assets (70,498) 0 8,114
(Decrease) increase in accrued and other
liabilities (6,847) 4,413 (8,269)
---------- --------- ---------
Net cash provided by operating activities 3,323 123,194 124,786
---------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for property additions (5,278) 0 0
---------- --------- ---------
Net cash used in investing activities (5,278) 0 0
---------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Contributions by the General Partners 65,313 8,500 141,000
Distributions to the General Partners (834,420) (118,000) (164,300)
Funding of note payable secured by property
1,637,500 0 0
Principal payments on notes payable (618,669) (15,604) (118,173)
---------- --------- ---------
Net cash provided by (used in) financing
activities 249,724 (125,104) (141,473)
---------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 247,769 (1,910) (16,687)
---------- --------- ---------
CASH AND CASH EQUIVALENTS - Beginning of period 1,765 3,675 20,362
---------- --------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 249,534 $ 1,765 $ 3,675
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 76,328 $ 57,926 $ 68,961
========== ========= =========
</TABLE>
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<PAGE> 448
SORRENTO I PARTNERS
(A California General Partnership)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sorrento I Partners ("SIP") was formed as a California general partnership on
April 1, 1993 between Sierra Mira Mesa Partners ("SMMP") and Sierra Pacific
Development Fund III ("SPDFIII") to develop and operate the real property known
as Sorrento I, an industrial building, located in San Diego, California. The
property contains 43,100 square feet and is located adjacent to Sierra Mira Mesa
office building, which is owned and operated by Sierra Mira Mesa Partners. In
1993, SMMP contributed cash of $383,836 ($2,459,277, net through December 31,
1996) for a 55.03% interest in SIP and SPDFIII contributed the property and all
associated encumbrances for a 44.97% interest. During 1997, 1998 and 1999, SMMP
contributed an additional $141,000, $8,500 and $65,313 and received
distributions amounting to $164,300, $118,000 and 834,420 respectively. The
partnership agreement calls for a recalculation of the percentage ownership
interest each year on January 1st to account for the Partner's aggregate capital
contributions and distributions since inception through the prior year.
Accordingly, as of January 1, 1997, 1998 and 1999 SPDFIII's interest in SIP was
changed to 11.31%, 11.41% and 11.88%, respectively. On January 1, 2000,
SPDFIII's interest will be increased to 16.76% and SMMP's interest will be
reduced to 83.24% to reflect the 1999 contributions and distributions.
S-P Properties, Inc. is the General Partner of SPDFIII and of SMMP's general
partners, Sierra Pacific Development Fund II and Sierra Pacific Pension
Investors '84. On December 30, 1994, all of the outstanding stock of TCP, Inc.
was sold to Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P
Properties, Inc. Finance Factors was a subsidiary of CGS Real Estate Company,
Inc., a national real estate company. In July 1995, Finance Factors, Inc. merged
with Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate
Company, Inc.
Basis of Financial Statements
SIP maintains its books and prepares its financial statements in accordance with
generally accepted accounting principles. However, SIP prepares its tax returns
on the accrual basis of accounting as defined by the Internal Revenue Code with
adjustments to reconcile book and taxable income (loss) for differences in the
treatment of certain income and expense items. The accompanying financial
statements do not reflect any provision for federal or state income taxes since
such taxes are the obligation of the individual partners.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported
F-232
<PAGE> 449
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of SIP at December 31, 1999 and 1998 consist of cash
and cash equivalents, receivables, due from affiliates, accounts payable and
notes payable. The fair value of cash and cash equivalents, receivables and
accounts payable approximates the carrying value due to the short term nature of
these items. In the opinion of management, the fair value of the note payable
approximates the carrying value based on market rates at December 31, 1999. The
fair value of the amounts due from affiliates are not fair valued due to the
related party nature of this receivable.
Income-Producing Properties
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from seven to thirty years. Tenant improvements incurred at the initial leasing
of the property are depreciated over the lessor of ten years or the life of the
lease and tenant improvements incurred at the re-leasing of the property are
depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
SIP regularly evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. Future cash flows are estimated and compared to the carrying
amount of the asset to determine if an impairment has occurred. If the sum of
the expected future cash flows is less than the carrying amount of the asset,
SIP shall recognize an impairment loss in accordance with the Statement. No such
impairments have been recognized by the Partnership.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
F-233
<PAGE> 450
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. SIP may provide additional
write-downs which could be material in subsequent years if real estate markets
or local economic conditions change.
OTHER ASSETS
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; an (b) billed rent -
rent due but not yet received.
F-234
<PAGE> 451
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other assets:
Deferred loan costs, net of accumulated
amortization of $2,007 in 1999 and $128 in 1998 $ 46,550 $ 890
Deferred leasing costs, net of accumulated
amortization of $93,876 in 1999 and $68,191 in 1998 85,616 111,301
Prepaid expenses 560 0
Tax impounds 2,675 0
Reserves 18,707 0
-------- --------
$154,108 $112,191
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income (as defined in the partnership agreement) collected from the
property. Management fees paid to affiliates for the years ended December 31,
1999, 1998, and 1997 were $16,707, $17,189, and $15,762, respectively.
SIP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by the
affiliate for services provided to SIP such as accounting, data processing and
similar services. The affiliate was reimbursed $45,025, $38,922, and $34,860,
respectively, for such services for the years ended December 31, 1999, 1998 and
1997.
During 1996, SIP made a non-interest bearing advance to an affiliate in the
amount of $4,770. This advance was deemed uncollectible and subsequently written
off to bad debt expense in 1999.
See Note 5 for note payable transactions with related parties.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
property are as follows:
F-235
<PAGE> 452
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land $1,305,518 $1,305,518
Building and improvements 1,677,260 1,671,982
--------- ---------
Total 2,982,778 2,977,500
Accumulated depreciation (741,797) (639,739)
--------- ---------
Net $2,240,981 $2,337,761
========== ==========
</TABLE>
Future minimum base rental income to be recognized on a straight-line basis and
amounts to be received on a cash basis are as follows:
<TABLE>
<CAPTION>
Year Ending Straight-line Cash
December 31, Basis Basis
------------ ----- -----
<S> <C> <C>
2000 $283,635 $289,584
2001 283,635 295,152
2002 283,635 306,960
2003 94,546 104,288
-------- --------
Total $945,451 $995,984
======== ========
</TABLE>
SIP relied on one tenant for 100% of rental income for 1999, 1998 and 1997,
respectively. The lease agreement requires the tenant to pay expenses such as
utilities, insurance and property taxes related to the property. The principal
business of the tenant is research and development in the communications sector.
5. NOTES PAYABLE
SIP had a non-recourse bank note payable with an original principal balance of
$3,000,000 collateralized by real and personal property that included a
discounted payoff option of $1,500,000.
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the note and security documents from the bank in May 1996. In
connection with the purchase of the bank note and security documents by CGS, SIP
made a principal payment to the bank of $750,000 and entered into a $750,000
note agreement with CGS (the "CGS Agreement"). The CGS Agreement, collaterized
by real
F-236
<PAGE> 453
and personal property, called for monthly interest payments through December
1996 and monthly principal and interest payments thereafter until maturity on
May 31, 2016. The interest rate was fixed at 9.34% per annum for the first year
of the note and thereafter converted to the one-year Treasury rate plus 375
basis points. A pre-payment in the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate
converted to the one-year treasury rate plus 375 basis points. The note was
amortized over a 210-month term and payments were $6,048 per month, principal
and interest inclusive, until maturity in March 2015.
In August 1999, the CGS note with an outstanding balance of $607,693 was repaid.
On the same date, SIP entered into a new loan agreement with Finova Realty
Capital, Inc. in the amount of $1,637,500. This loan, which is secured by the
Sorrento I property, bears interest at 8.75% per annum. Monthly payments of
$12,882, consisting of both principal and interest, are due until maturity in
September 2009. The note balance as of December 31, 1999 was $1,635,054. In
connection with the repayment of the CGS note, SIP paid $29,528 to CGS related
to late fees which were included in other operating expenses in the statement of
operations for 1999.
Annual maturities on the Finova loan as of December 31, 1999 are: $11,993 in
2000; $13,085 in 2001; $14,277 in 2002; $15,578 in 2003; $16,997 in 2004; and
$1,563,124 thereafter.
6. GENERAL PARTNERS' EQUITY (DEFICIT)
In accordance with the partnership agreement, accrual basis losses resulting
from operations of the partnership are first allocated to the General Partners
in proportion to the relative amounts of net cumulative partnership profits
until such allocated losses equal the previously allocated net cumulative
partnership profits. Then, losses are allocated in proportion to the Partners'
percentage interests as computed January 1st of the year in which the loss
occurred.
Likewise, accrual basis profits resulting from operations of the partnership are
first allocated to the General Partners in proportion to the relative amounts of
net cumulative partnership losses until such allocation of profits equals the
previously allocated net cumulative partnership losses. Then, profits are
allocated in proportion to the distributions made to the Partners during the
year.
Upon dissolution of the partnership, any proceeds should be distributed first to
Sierra Mira Mesa as a return of capital in proportion to its aggregate
unreturned capital contributed and then to Sierra Pacific Development Fund III
in proportion to its aggregate unreturned capital contributed. Any remaining
proceeds shall be first distributed pro rata in proportion to the Partners'
positive balances in their capital accounts and then in accordance with their
percentage interest in the year of dissolution.
F-237
<PAGE> 454
G. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED JUNE 30, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND III
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED) DECEMBER 31, 1999
----------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ............ $ 1,044 $ 3,722
--------- ---------
Total Assets ......................... $ 1,044 $ 3,722
========= =========
LIABILITIES AND PARTNERS' EQUITY
Investment in unconsolidated
joint venture ...................... $ 347,955 $ 340,614
--------- ---------
Total Liabilities .................... 347,955 340,614
--------- ---------
Minority interest in consolidated
joint venture ...................... 13,991 7,516
--------- ---------
Partners' equity (deficit):
General Partner .................... (360,902) (344,408)
Limited Partners:
60,000 units authorized,
36,521 issued and outstanding .... 0 0
--------- ---------
Total Partners' equity (deficit) ..... (360,902) (344,408)
--------- ---------
Total Liabilities and Partners' equity $ 1,044 $ 3,722
========= =========
</TABLE>
F-238
<PAGE> 455
SIERRA PACIFIC DEVELOPMENT FUND III
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Other income ................................................. $ 0 $11,907 $ 0 $ 0
-------- ------- ----- -----
Total revenues .......................................... 0 11,907 0 0
-------- ------- ----- -----
EXPENSES:
Operating expenses ........................................... 13,735 14,577 70 780
-------- ------- ----- -----
Total costs and expenses ................................ 13,735 14,577 70 780
-------- ------- ----- -----
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE LOSS ........................... (13,735) (2,670) (70) (780)
-------- ------- ----- -----
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSS .......................................... (7,341) (682) (852) (115)
-------- ------- ----- -----
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS .......................... (21,076) (3,352) (922) (895)
-------- ------- ----- -----
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS .............................. 4,582 890 23 260
-------- ------- ----- -----
NET LOSS ....................................................... $(16,494) $(2,462) $(899) $(635)
======== ======= ===== =====
Net loss per limited partnership unit .......................... $ 0 $ 0 $ 0 $ 0
======== ======= ===== =====
</TABLE>
F-239
<PAGE> 456
SIERRA PACIFIC DEVELOPMENT FUND III
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
------------------------ GENERAL PARTNERS'
PER UNIT TOTAL PARTNER EQUITY
-------- ----- ------- ------
<S> <C> <C> <C> <C>
Proceeds from sale of
partnership units ........................................ $ 250.00 $ 9,222,500 $ 9,222,500
Underwriting commissions
and other organization expenses .......................... (37.00) (1,364,985) (1,364,985)
Repurchase of 369 partnership units ........................ (0.18) (85,005) (85,005)
Cumulative net income (loss)
(to December 31, 1998) ................................... (201.63) (7,363,663) $(315,520) (7,679,183)
Cumulative distributions
(to December 31, 1998) ................................... (11.19) (408,847) (21,522) (430,369)
-------- ----------- --------- -----------
Partners' equity (deficit) - January 1, 1999 ............... 0 0 (337,042) (337,042)
Net loss ................................................... 0 0 (7,366) (7,366)
-------- ----------- --------- -----------
Partners' equity (deficit) - January 1, 2000 (audited) ..... 0 0 (344,408) (344,408)
Net loss ................................................... 0 0 (16,494) (16,494)
-------- ----------- --------- -----------
Partners' equity (deficit) - June 30, 2000 (unaudited) ..... $ 0 $ 0 $(360,902) $ (360,902)
======== =========== ========= ===========
</TABLE>
F-240
<PAGE> 457
SIERRA PACIFIC DEVELOPMENT FUND III
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................... $(16,494) $(2,462)
Adjustments to reconcile net loss
to cash used in operating activities:
Partnership's share of unconsolidated
joint venture loss ....................... 7,341 682
Minority interest's share of consolidated
joint venture loss ....................... (4,582) (890)
-------- -------
Net cash used in operating activities ...... (13,735) (2,670)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from affiliate ........................ 0 2,400
Contributions from minority investor ....... 20,000 0
Distributions to minority investor ......... (8,943) 0
-------- -------
Net cash provided by financing activities .. 11,057 2,400
-------- -------
NET DECREASE IN CASH
AND CASH EQUIVALENTS ....................... (2,678) (270)
CASH AND CASH EQUIVALENTS
Beginning of period ......................... 3,722 935
-------- -------
CASH AND CASH EQUIVALENTS
End of period ............................... $ 1,044 $ 665
======== =======
</TABLE>
F-241
<PAGE> 458
SIERRA PACIFIC DEVELOPMENT FUND III
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION
In April 1993, Sierra Pacific Development Fund III (the Partnership) created a
general partnership (Sorrento I Partners (SIP)) with Sierra Mira Mesa Partners
(SMMP) to facilitate cash contributions by SMMP for the continued development
and operation of the Sierra Sorrento I property (the Property). In February
1994, the Partnership formed a joint venture with SMMP known as Sierra Vista
Partners to facilitate cash contributions by SMMP for the continued development
and operation of the Sierra Vista property.
The Partnership Agreements of SIP and Sierra Vista Partners (the Agreements)
were amended effective January 1, 1995 to consider both contributions and
distributions when calculating each partners' percentage interest at January 1
of each year as called for by the Agreements. Accordingly, on January 1, 2000,
the Partnership's interest in SIP was increased from 11.88% to 16.76% and the
Partnership's interest in Sierra Vista Partners was decreased from 66.68% to
66.64% to reflect 1999 contributions and distributions.
In October 1997, the Sierra Vista property was sold for $5,630,000. The
Partnership received cash proceeds of $2,141,000 from the sale and the purchaser
assumed the Partnership's debt on the property. In accordance with the joint
venture agreement, these proceeds were distributed to SMMP. Under the terms of
the agreement, SMMP receives preferential cash distributions of available
Distributable Funds (as defined) from the sale of the property to the extent of
its capital contributions. SMMP had made net contributions of $3,335,000 to the
Partnership through the sale date.
The Partnership's remaining real estate investment is a 16.76% minority interest
in SIP. Because the Partnership owns less than 50% of this entity, it records
its interest in SIP as an investment in an unconsolidated joint venture using
the equity method of accounting.
Certain factors raise substantial doubt about the Partnership's ability to
continue as a going concern. As shown in the financial statements, the
Partnership has no operating assets and its only remaining real estate
investment is its minority interest in SIP. The other partner in SIP, SMMP, will
receive preferential distributions from SIP until its contributed capital is
returned. The Partnership does not anticipate receiving any cash distributions
from SIP in the near future. Management believes the Partnership will be able to
obtain any cash needed to fund future overhead expenditures from related parties
until such time as the Partnership engages in new activities or a decision is
made to liquidate the Partnership.
F-242
<PAGE> 459
2. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements include
the accounts of the Partnership and Sierra Vista Partners, a majority owned
joint venture at June 30, 2000. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of the Partnership's management, these unaudited financial
statements reflect all adjustments which are necessary for a fair presentation
of its financial position at June 30, 2000 and results of operations and cash
flows for the periods presented. All adjustments included in these statements
are of a normal and recurring nature. 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, 1999.
3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
SIP was formed on April 1, 1993 between the Partnership and SMMP, an affiliate,
to develop and operate the Property, an industrial building located in San
Diego, California. At June 30, 2000, the Partnership has a 16.76% equity
interest in SIP. This investment is accounted for using the equity method.
Summarized income statement information for SIP for the six months ended June
30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
June 30
-------
2000 1999
---- ----
<S> <C> <C>
Rental income $155,262 $141,818
Total revenue 155,262 141,818
Operating expenses 60,477 55,969
Net loss 43,804 5,737
</TABLE>
4. PARTNERS' EQUITY (DEFICIT)
Equity and net loss per limited partnership unit is determined by dividing the
limited partners' share of the Partnership's equity and net loss by the number
of limited partnership units outstanding, 36,521.
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the general partner, is in
the process of developing a plan pursuant to which the property owned by SIP
would be combined with the properties of other real estate partnerships managed
by CGS and its affiliates. These limited partnerships own office properties,
industrial properties, shopping centers, and residential apartment properties.
It is expected that the acquirer would in the future qualify as a real estate
F-243
<PAGE> 460
investment trust. Limited partners would receive shares of common stock in the
acquirer, which would be listed on a national securities exchange or the NASDAQ
national market system
F-244
<PAGE> 461
SIERRA PACIFIC PENSION INVESTOR'S 84
HISTORICAL FINANCIAL DATA
F-245
<PAGE> 462
Sierra Pacific Pension Investors '84
Table of Contents
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and Results of
Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts . . .
2. Schedule III - Real estate and accumulated depreciation . . .
F. Unaudited Financial Statements - Six Months Ended June 30, 2000 and 1999
F-246
<PAGE> 463
A. SELECTED HISTORICAL FINANCIAL DATA OF SIERRA PACIFIC PENSION INVESTORS '84
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 437 $476 $ 473 $ 504 $ 623 $320 $273
Interest and other income 277 193 198 222 187 112 79
----- ---- ----- ----- ----- ---- ----
Total revenues 714 669 671 726 810 432 352
===== ==== ===== ===== ===== ==== ====
EXPENSES:
Property operating 267 237 214 218 295 226 214
Management and advisory fees 27 28 36 33 36 -- --
Real estate and other taxes 111 125 122 139 142 -- --
Depreciation and amortization 306 237 236 259 249 138 74
Interest expense -- -- 115 148 137 69 64
----- ---- ----- ----- ----- ---- ----
Total expenses 711 627 723 797 859 433 352
===== ==== ===== ===== ===== ==== ====
</TABLE>
F-247
<PAGE> 464
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
----- ---- ----- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before
gain on sale of property
and equity in earnings
(losses) of
non-consolidated
partnerships 3 42 (52) (71) (49) -- --
Gain on sale of property 151 -- -- -- 83 83 --
Equity in earnings
(losses) of non
consolidated
partnerships (296) 156 (507) 196 323 180 233
Net income (loss) $(142) $198 $(559) $ 125 $ 357 $263 $233
----- ---- ----- ----- ----- ---- ----
</TABLE>
F-248
<PAGE> 465
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average number of
units outstanding 77,000 77,000 77,000 77,000 77,000 77,000 77,000
Income (loss) per unit (1.84) 2.57 (7.26) 1.62 4.64 3.41 3.03
Ratio of earnings to fixed charges (1) -- -- -- 1.84 3.61 4.8 4.58
Deficiency of earnings to
cover fixed charges (2) 142 -- 559 -- -- -- --
Cash distributions (200) (200) (50) -- -- -- --
Cash distributions per unit 2.60 2.60 0.65 -- -- -- --
Total properties owned at end
of period (3) 1 1 1 1 1 1 1
Book value per limited
partnership unit 122 122 114 116 121 119 126
Per unit value assigned for
the consolidation 236
</TABLE>
F-249
<PAGE> 466
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- ------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 255 $ 42 $ 27 $ 10 $ 32 $ 77 $ 11
Real estate held for
investment, net 1,524 1,429 1,373 1,212 1,174 1,221 1,153
Mortgages/notes receivable, net 1,698 1,698 2,005 2,228 1,459 1,367 1,459
Accounts receivable, net 115 251 50 43 47 79 156
Investment in/due from 5,772 5,974 6,768 6,791 7,304 7,435 7,286
partnerships
Other assets 133 116 252 274 792 566 941
Total assets, at book value 9,497 9,510 10,475 10,558 10,808 10,745 11,006
Total assets, at valued
assigned for the consolidation 26,889
Total liabilities 80 96 1,670 1,628 1,521 1,552 1,486
General partners deficit -- -- -- -- -- -- (184)
Limited partners equity 9,417 9,414 8,805 8,930 9,287 9,193 9,704
CASH FLOW DATA:
Increase (decrease) in cash
and equivalents, net (88) (213) (15) (17) 21 67 (20)
Cash provided by (used in)
operating activities 86 133 (97) (67) 497 (253) (205)
</TABLE>
F-250
<PAGE> 467
1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
2) Deficiency to cover fixed charges is the amount of earnings that would be
required to achieve a ratio of earnings to fixed charges of 1.0.
3) Sierra Pacific Pension Investors '84, in addition to owning one building,
owns a 66.99% interest in Sierra Mira Mesa Partners (SMMP), which owns
Sierra Mira Mesa, an office building in San Diego, California. Through its
ownership interest in SMMP, the Partnership also has an indirect 59.03%
interest in a partnership that owns an industrial property known as
Sorrento I in San Diego, California
F-251
<PAGE> 468
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - DECEMBER 31, 1999, 1998 AND 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations include certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1999, the Partnership owns Sierra
Valencia, an industrial office building in Tucson, Arizona. The Partnership also
owns a 66.99% interest in Sierra Mira Mesa Partners ("SMMP"). SMMP owns an
office building - Sierra Mira Mesa in San Diego, California.
Results of Operations:
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Rental income increased by $119,000, or 24%, principally due to higher rental
rates and common area maintenance charges. One tenant, whose lease accounted for
19,255 square feet, vacated in 1998. This space was re-leased to two new tenants
at higher rental rates. The weighted-average effective rent per square foot, on
an accrual basis, increased from $6.99 at December 31, 1998 to $7.19 at December
31, 1999. The Property was 86% occupied at December 31, 1999.
Total operating expenses increased by $73,000, or 11%, when compared to the
prior year. This increase was partially attributable to the write-off of a loan
made to an affiliate in 1996. The loan was deemed uncollectible and subsequently
written-off to bad debt expense in 1999. In addition, higher administrative
costs incurred in 1999 attributed to the increase in total operating expenses.
This increase was partially offset by a decrease in depreciation and
amortization expenses associated with the write-off of fully depreciated
building and tenant improvements.
In 1999, the Partnership received a principal pay-down of $943,000 on its note
receivable from affiliate and recognized $83,000 of its deferred gain associated
with the note.
The Partnership's share of income from investment in SMMP increased by $127,000,
primarily due to improved operations of SMMP's rental properties and its joint
ventures.
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
F-252
<PAGE> 469
Rental income increased by $31,000, or 6%, principally due to an increase in
rental rates. The weighted-average effective rent per square foot, on an accrual
basis, increased from $6.07 at December 31, 1997 to $6.99 at December 31, 1998.
One tenant, whose lease accounted for 19,255 square feet, vacated in 1998. This
space was re-leased to two new tenants at higher rental rates. Occupancy at
December 31, 1998 and 1997 remained constant at 99%.
Total operating expenses increased by $41,000, or 7%, when compared to the prior
year. Depreciation and amortization expenses increased primarily due to
additional tenant improvements and lease costs associated with the new tenants
at the Property. Further, higher property taxes were attributable to an increase
in the assessed value of the Property.
The Partnership recognized interest expense in the amount of $148,000 for the
year in comparison to $115,000 in the prior year. This increase was the result
of a full year of interest expense on two loan agreements entered into in 1997.
The Partnership's share of income from investment in SMMP was $196,000 in 1998,
which includes a $76,000 adjustment to account for the Partnership's share of an
overstatement of SMMP's unconsolidated joint venture loss in the prior year. In
1997, the Partnership recorded a $507,000 loss from investment in SMMP. The loss
generated by SMMP in 1997 was primarily the result of its share of loss from its
joint venture partner, Sierra Vista Partners ("SVP"). SVP sold the Sierra Vista
property in October 1997 and recorded a $968,000 loss from property disposition.
Liquidity and Capital Resources:
In 1997, the Partnership entered into two loan agreements totaling $1,604,000.
The loans are secured by the Sierra Valencia property. The proceeds of these
loans were primarily used to satisfy the liquidity requirements of SMMP. The
Property was previously unencumbered.
Excluding collections of the note receivable, the Partnership used cash of
$355,000 in its operating activities and paid $157,000 for property additions
and lease commissions in 1999. The Partnership is in an illiquid position at
December 31, 1999 with cash and billed rents of $34,000 and current liabilities
of $102,000. The Partnership anticipates cash required to meet debt obligations,
operating expenses and costs for construction of new tenant space will be funded
from the operations of the Property and distributions from SMMP.
Inflation:
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
F-253
<PAGE> 470
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership did not experience any major system failures or disruptions in
operations over the year 2000 transition. All systems have continued to operate
as normal.
The Partnership did not separately track internal costs related to the Year 2000
issue and Partnership management believes these amounts did not have a material
impact on the Partnership's financial position or results of operations.
The Partnership employs a property management company to manage, operate and
lease the property. The management company did not experience any major systems
failures or disruptions in operations at the property. The Partnership remains
confident that no Year 2000 issues with the property management company or other
third parties will arise in the future although no guarantees can be made to
that effect.
F-254
<PAGE> 471
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(a) OVERVIEW
The following discussion should be read in conjunction with the Sierra Pacific
Pension Investors '84's (the Partnership) Financial Statements and Notes thereto
appearing elsewhere in this Form 10-Q.
The Partnership currently owns one property, Sierra Valencia (the Property). In
addition, the Partnership holds a 69.83% interest in Sierra Mira Mesa Partners
(SMMP), which is maintained on the equity method of accounting.
(b) RESULTS OF OPERATIONS
Rental income for the six months ended June 30, 2000 decreased by approximately
$47,000, or 15%, when compared to the corresponding period in 1999, principally
due to a decrease in occupancy from 100% at June 30, 1999 to 84% at June 30,
2000. Rental income for the three months ended June 30, 2000 decreased by
approximately $52,000, or 30%, primarily as a result of the decrease in
occupancy. Further, common area maintenance fee billings were lower during the
second quarter of 2000 compared to the second quarter of the prior year.
Interest income for the six months and three months ended June 30, 2000,
decreased by approximately $33,000, or 29%, and by approximately $12,000, or
22%, respectively, in comparison to the same period in the prior year. In May
1999, the Partnership received a $943,000 principal payment on its trust deed
note receivable.
Operating expenses decreased by approximately $12,000, or 5%, for the six months
ended June 30, 2000, principally as a result of lower administrative costs and
legal expenses. This decrease was partially offset by an increase in property
taxes accrued during the period. Operating expenses for the three months ended
June 30, 2000 decreased by approximately $18,000, or 17%, principally due to the
decrease in administrative and legal costs. This decrease was partially offset
by higher accounting and auditing costs incurred during the quarter.
Depreciation and amortization expenses for the six months and three months ended
June 30, 2000 decreased by approximately $64,000, or 46%, and by approximately
$32,000, or 46%, respectively, in comparison to the corresponding period in
1999, primarily due to fully depreciated capitalized tenant improvements.
The Partnership's share of unconsolidated joint venture income increased by
approximately $53,000, or 29%, for the six months ended June 30, 2000, when
compared to the same period in the 1999. This increase in income generated by
SMMP was in large part attributable to its share of Sorrento II Partners' (SIIP)
income. SIIP, which SMMP accounts for as an unconsolidated joint venture
investment on the equity method, recorded an increase in income due to, among
F-255
<PAGE> 472
other factors, higher common area maintenance fees recovery revenue and a
decrease in operating expenses during the six months ended June 30, 2000.
(c) LIQUIDITY AND CAPITAL
The Partnership received a $943,000 principal payment on its trust deed note
receivable in May 1999. These funds were principally used to satisfy the
liquidity requirements of SMMP.
As of June 30, 2000, the Partnership is in an illiquid position. Total cash and
billed receivables amount to approximately $43,000 compared to approximately
$128,000 of accrued and other liabilities. The Partnership anticipates cash
required to meet debt obligations, operating expenses and costs for the
construction of new tenant space will be funded from the operations of the
Property and distributions from SMMP.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
F-256
<PAGE> 473
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Pension Investors '84
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Pension Investors '84 and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in partners' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Pension Investors '84 and subsidiary as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-257
<PAGE> 474
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
------------- ------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 31,562 $ 10,122
Receivables:
Note, net of deferred gain of $132,471 and
$215,786, respectively (Notes 3 and 4) 1,459,139 2,227,627
Unbilled rent (Notes 1 and 4) 44,708 42,331
Billed rent (Note 1) 2,762 962
Due from affiliates (Note 3) 0 47,466
Income-producing property - net of
accumulated depreciation and valuation
allowance of $2,864,363 in 1999 and
$3,741,937 in 1998, respectively (Notes 4 and 6) 1,174,239 1,212,015
Investment in unconsolidated joint venture (Notes 1 7,303,940 6,743,274
and 5)
Other assets (Notes 1, 2 and 3) 791,968 274,381
----------- -----------
Total Assets $10,808,318 $10,558,178
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 122,891 $ 143,487
Notes payable (Note 6) 1,398,368 1,484,983
----------- -----------
Total Liabilities 1,521,259 1,628,470
----------- -----------
</TABLE>
F-258
<PAGE> 475
<TABLE>
<S> <C> <C>
Partners' equity (Notes 1 and 7):
General Partner 0 0
Limited Partners:
80,000 units authorized, 77,000 issued and
outstanding 9,287,059
8,929,708
----------- -----------
Total Partners' equity 9,287,059
8,929,708
----------- -----------
Total Liabilities and Partners' equity $10,808,318 $10,558,178
=========== ===========
</TABLE>
F-259
<PAGE> 476
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 622,524 $ 504,016 $ 473,408
Interest income (Note 3) 187,405 222,138 197,578
--------- --------- ---------
Total revenues 809,929 726,154 670,986
--------- --------- ---------
EXPENSES:
Operating expenses:
Depreciation and amortization 249,067 258,718 236,395
Property taxes and insurance 141,531 139,225 121,953
General and administrative 39,848 33,353 44,028
Legal and accounting 60,322 62,651 55,960
Administrative fees (Note 3) 84,970 51,699 45,684
Maintenance and repairs 40,182 40,688 36,639
Management fees (Note 3) 36,373 33,341 35,768
Utilities 16,272 15,526 14,609
Bad debt expense 46,342 0 0
Other operating expenses 7,297 14,349 17,685
--------- --------- ---------
Total operating expenses 722,204 649,550 608,721
--------- --------- ---------
</TABLE>
F-260
<PAGE> 477
<TABLE>
<S> <C> <C> <C>
Interest 137,091 147,712 114,696
--------- --------- ---------
Total expenses 859,295 797,262 723,417
--------- --------- ---------
LOSS BEFORE GAIN FROM PROPERTY (49,366) (71,108) (52,431)
DISPOSITION
GAIN FROM PROPERTY DISPOSITION (Note 4) 83,315 0 0
--------- --------- ---------
INCOME (LOSS) BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE INCOME (LOSS) 33,949 (71,108) (52,431)
--------- --------- ---------
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
INCOME (LOSS) (Note 5) 323,402 195,994 (506,889)
--------- --------- ---------
NET INCOME (LOSS) $ 357,351 $ 124,886 $(559,320)
========= ========= =========
Net income (loss) per limited
partnership unit (Note 1) $ 4.64 $ 1.62 $ (7.26)
========= ========= =========
</TABLE>
F-261
<PAGE> 478
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Limited Partners Total
--------------------------- General Partners'
Per Unit Total Partner Equity
-------- ----- ------- ------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1997 $122.26 $ 9,414,142 $ 0 $9,414,142
Net loss (7.26) (559,320) (559,320)
Distributions (0.65) (50,000) (50,000)
------- ----------- --------- ----------
Partners' equity December 31, 1997 114.35 8,804,822 0 8,804,822
Net income 1.62 124,886 124,886
------- ----------- --------- ----------
Partners' equity December 31, 1998 115.97 8,929,708 0 8,929,708
Net income 4.64 357,351 357,351
------- ----------- --------- ----------
Partners' equity - December 31, 1999 $120.61 $ 9,287,059 $ 0 $9,287,059
======= =========== ========= ==========
</TABLE>
F-262
<PAGE> 479
See Accompanying Notes
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 357,351 $ 124,886 $ (559,320)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 249,067 258,718 236,395
Gain from property disposition (83,315) 0 0
Undistributed (income) loss of
unconsolidated joint venture (323,402) (195,994) 506,889
Bad debt expense 46,342 0 0
(Increase) decrease in rent receivable (4,177) 6,739 41,958
Decrease (increase) in note receivable 851,803 (222,128) (148,298)
Increase in other assets (577,252) (74,181) (186,025)
(Decrease) increase in accrued and other liabilities (19,472) 35,443 11,693
--------- --------- -----------
Net cash provided by (used in) operating activities 496,945 (66,517) (96,708)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (147,606) (42,614) (126,289)
Capital contributions to unconsolidated joint
venture (539,784) (42,000) (1,551,843)
Distributions from unconsolidated
joint venture 298,500 211,250 247,800
--------- --------- -----------
Net cash (used in) provided by investing activities (388,890) 126,636 (1,430,332)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Funding of notes payable secured by property 0 0 1,604,000
Principal payments on notes payable (86,615) (77,151) (41,866)
Cash distributions 0 0 (50,000)
--------- --------- -----------
Net cash (used in) provided by financing activities (86,615) (77,151) 1,512,134
--------- --------- -----------
</TABLE>
F-263
<PAGE> 480
<TABLE>
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 21,440 (17,032) (14,906)
CASH AND CASH EQUIVALENTS - Beginning of year 10,122 27,154 42,060
--------- --------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 31,562 $ 10,122 $ 27,154
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 137,574 $ 148,142 $ 102,738
========= ========= ===========
</TABLE>
In 1999, 1998 and 1997, interest receivable of $91,610, $222,128 and $307,759
was added to the principal balance of the related note receivable. These
transactions are noncash items not reflected in the above statements of cash
flows.
F-264
<PAGE> 481
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Pension Investors '84 (the "Partnership") was organized on June
5, 1984 in accordance with the provisions of the California Uniform Limited
Partnership Act to acquire, develop and operate certain real properties. S-P
Properties, Inc. is the General Partner and manager of the Partnership. On
December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to Finance
Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties, Inc.
Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a national
real estate company. In July 1995, Finance Factors, Inc. merged with Bancor Real
Estate Company, Inc., another subsidiary of CGS Real Estate Company, Inc.
The Partnership's activities during the preceding five years have involved the
ownership and operation of two real estate projects in Arizona: Sierra Spectrum
in Phoenix, Arizona and Sierra Valencia in Tucson, Arizona. In December 1994,
the Partnership sold Sierra Spectrum.
On March 7, 1997 Sierra Valencia LLC ("SVLLC") was formed with the Partnership
being the sole member. This company was formed solely to engage in the following
activities: a) to acquire from Sierra Pacific Pension Investors '84 the property
known as Sierra Valencia, b) to own, hold, sell, assign, transfer, operate,
lease, mortgage, pledge and otherwise deal with the Property, c) to exercise all
powers enumerated in the Delaware Limited Liability Company Act necessary or
convenient to conduct, promotion or attainment of the business or purposes
otherwise set forth. Title to the Sierra Valencia property was transferred from
the Partnership to SVLLC. The accounts of SVLLC are consolidated into the
financial statements of the Partnership since the date of formation and all
significant intercompany transactions are eliminated in consolidation.
In 1985 Sierra Mira Mesa Partners ("SMMP"), a California general partnership was
formed between the Partnership and Sierra Pacific Development Fund II
("SPDFII"). SMMP was initially created to develop and operate the office
building known as Sierra Mira Mesa 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. In
F-265
<PAGE> 482
conjunction with this amendment, the general partners forgave the December 31,
1996 balances of advances due from SMMP and included these amounts as
adjustments to their respective equity accounts. As a result, the sharing ratio
in effect for 1997, 1998 and 1999 was 54.42%, 66.26% and 66.99%, respectively,
for the Partnership and 45.58%, 33.74% and 33.01%, respectively, for SPDFII. On
January 1, 2000, the sharing ratio will be increased to 69.83% for the
Partnership and decreased to 30.17% for SPDFII to reflect the 1999 contributions
and distributions.
SMMP also holds an 88.12% interest in Sorrento I Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1993), a 35.10%
interest in Sorrento II Partners (a California general partnership with Sierra
Pacific Institutional Properties V formed in 1993), a 6.55% interest in Sierra
Creekside Partners (a California general partnership with Sierra Pacific
Development Fund formed in 1994), and a 33.32% interest in Sierra Vista Partners
(a California general partnership with Sierra Pacific Development Fund III
formed in 1994).
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, note receivables, due from
affiliates, accounts payable and notes payable. The fair value of cash and cash
equivalents, receivables and accounts payable approximates the carrying value
due to the short term nature of these items. In the opinion on management, the
fair value of the notes payable approximates the carrying value based on market
rates at December 31, 1999. The note receivable and the amounts due from
affiliates are not fair valued due to the related party nature of these
receivables.
F-266
<PAGE> 483
Income-Producing Properties
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
The Partnership regularly evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Future cash flows are estimated and compared to
the carrying amount of the asset to determine if impairment has occurred. If the
sum of the expected future cash flows is less than the carrying amount of the
asset, the Partnership shall recognize an impairment loss. An impairment of
$1,880,000 was recognized prior to 1995 as appraisals indicated an other than
temporary decline in value.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Investment in Unconsolidated Joint Venture
The investment in unconsolidated joint venture is stated at cost and is adjusted
for the Partnerships' share in earnings or losses and cash contributions to or
distributions from the joint venture (equity method).
Other Assets
Deferred leasing costs represent costs incurred to lease the property and are
amortized over the life of the related lease using the straight line method of
accounting.
F-267
<PAGE> 484
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; and (b) billed rent
- rent due but not yet received.
Calculation of Equity and Net Income (Loss) Per Limited Partnership Unit
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by the number of
limited partnership units outstanding, 77,000 for all periods.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development,
and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Other assets:
Prepaid expenses $584,537 $ 3,341
Tax and insurance impounds 35,645 25,185
Tenant improvements reserves 22,736 46,586
</TABLE>
F-268
<PAGE> 485
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred loan costs, net of accumulated amortization of
$25,051 in 1999 and $15,863 in 1998 66,608 75,795
Deferred leasing costs, net of accumulated amortization of
$147,093 in 1999 and $132,440 in 1998 82,442 123,474
-------- --------
$791,968 $274,381
======== ========
Accrued and other liabilities:
Accounts payable $ 34,558 $ 44,401
Accrued expenses 67,368 72,028
Security deposits 20,965 27,058
-------- --------
$122,891 $143,487
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income collected from the properties. Management fees for the years
ended December 31, 1999, 1998 and 1997 were $21,105, $20,103, and $21,799,
respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $91,885, $72,284 and $63,910 for such services for the years ended
December 31, 1999, 1998 and 1997, respectively. Additionally, the Partnership
reimbursed the affiliates for construction supervision costs incurred by the
affiliates. For the years ended December 31, 1999, 1998, and 1997, the
affiliates received $2,131, $0 and $10,504, respectively, for tenant
improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of
Partnership properties, an affiliate of the General Partner is paid initial
leasing costs. For the year ended December 31, 1997, these fees amounted to
$19,109 and were recorded as deferred leasing costs. No such costs were incurred
in 1999 or 1998.
Prior to 1997, the Partnership made non-interest bearing short-term advances to
Sierra Mira Mesa Partners of $1,311,300. These advances were forgiven and
reclassed to investment in Sierra Mira Mesa Partners in 1997 (See Note 1).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $47,466. This advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
As further described in Note 4, in 1994 the Partnership sold a property to an
affiliate of the General Partner for cash of $800,000 and a $3,200,000 trust
deed note. This note calls for monthly interest only payments and bears interest
of 10% per annum. In 1997 and 1998 interest
F-269
<PAGE> 486
receivable of $307,759 and $222,128, respectively, was added to the principal
balance of the note and maturity was extended for additional one-year terms. In
1999, the Partnership received a principal paydown of $943,413. The maturity
date was extended to December 31, 2000 and interest receivable of $91,610 was
added to the principal balance of the note. All other terms of the original note
remained unchanged. Interest income related to this note of $187,227, $222,128,
and $196,136 was recognized during the years ended December 31, 1999, 1998, and
1997, respectively. The December 31, 1999 balance of the note was $1,591,610 and
is secured by a second lien on the property. Management believes the collateral
has sufficient value to recover the Partnership's net investment in the note
after satisfaction of the first lien holder.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
property are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 977,677 $ 977,677
Building and improvements 3,060,925 3,976,275
----------- -----------
Total 4,038,602 4,953,952
Accumulated depreciation (984,363) (1,861,937)
Valuation allowance (Note 1) (1,880,000) (1,880,000)
----------- -----------
Net $ 1,174,239 $ 1,212,015
=========== ===========
</TABLE>
In 1999 and 1998, the Partnership removed $1,062,956 and $18,649, respectively,
from its building and improvements and related accumulated depreciation accounts
for fully depreciated property.
On December 30, 1994, the Sierra Spectrum property, with a historical cost basis
of $2,993,134, was sold for $4,000,000 ($800,000 cash down-payment and a
$3,200,000 trust deed note) to an affiliate of Finance Factors, Inc. The gain on
sale was recorded using the installment method and the Partnership recorded a
deferred gain of $367,296 at December 31, 1994, which will be recognized as
principal payments on the trust deed note are received. During the year ended
December 31, 1995, the Partnership received principal payments of $1,317,928 on
the trust deed note and recognized $151,510 of the deferred gain related to this
transaction. In 1999, the Partnership received a principal payment of $943,413
and recognized an additional $83,315 of the deferred gain. As of December 31,
1999 the remaining deferred gain was $132,471.
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<PAGE> 487
Future minimum base rental income, under the existing operating leases for the
Sierra Valencia property, to be recognized on a straight-line basis and amounts
to be received on a cash basis are as follows:
<TABLE>
<CAPTION>
Straight-line Cash
Year Ending December 31, Basis Basis
------------------------ ------------ ----------
<S> <C> <C>
2000 $ 489,906 $ 493,918
2001 373,286 387,320
2002 147,990 159,030
2003 85,754 99,651
2004 28,668 30,393
----------- ----------
Total $ 1,125,604 $1,170,312
=========== ==========
</TABLE>
The Partnership relied on three tenants to generate approximately 51% of total
1999 rental revenues. The breakdown of these three tenants' industry segments
and rental income contribution is as follows: 16% - optics research and
development; 15% - telecommunications manufacturing; and 20% - healthcare
administration.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between the Partnership and Sierra Pacific Development Fund II, an
affiliate, to develop and operate the real property known as Sierra Mira Mesa,
an office building, located in San Diego, California. The property contains
89,560 square feet and is 100% leased at December 31, 1999. At December 31, 1999
the Partnership's interest in SMMP was 66.99%; the remaining 33.01% interest was
owned by Sierra Pacific Development Fund II.
The Partnership's investment in SMMP as of December 31, 1999 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Equity interest $7,195,398 $6,630,711
Investment advisory and
other fees, less accumulated
amortization of $145,683 and
$141,662 in 1999 and 1998,
respectively 108,542 112,563
---------- ----------
</TABLE>
F-271
<PAGE> 488
<TABLE>
<S> <C> <C>
Investment in unconsolidated
joint venture $7,303,940 $6,743,274
========== ==========
</TABLE>
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned California general partnership for the
years ended December 31, 1999 and 1998. The condensed balance sheets at December
31, 1999 and 1998, and the condensed statements of operations for the years
ended December 31, 1999, 1998 and 1997 for SMMP follow:
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 319,400 $ 14,064
Rent receivable 1,198,515 1,226,156
Due from affiliates 2,451,227 2,233,158
Income-producing property, net of accumulated
depreciation 8,723,396 9,000,294
Investment in unconsolidated joint ventures 2,526,875 1,640,460
Other assets 793,658 897,993
------------- ------------
Total Assets $ 16,013,071 $ 15,012,125
============ ============
Liabilities and General Partners' Equity
Accrued and other liabilities $ 101,104 $ 251,990
Notes payable 6,179,038 5,418,414
------------ ------------
Total Liabilities 6,280,142 5,670,404
------------ ------------
Minority interest in joint venture (340,614) (332,996)
-------------- ------------
</TABLE>
F-272
<PAGE> 489
<TABLE>
<S> <C> <C>
General Partners' equity 10,073,543 9,674,717
------------ ------------
Total Liabilities and General Partners' equity $ 16,013,071 $ 15,012,125
============ ============
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income $ 2,126,106 $ 1,883,630 $ 1,919,582
Other income 224,308 205,781 184,168
--------- --------- ---------
Total revenues 2,350,414 2,089,411 2,103,750
--------- --------- ---------
Expenses:
Operating expenses 800,654 754,978 742,548
Depreciation and amortization 587,070 581,956 825,911
Interest 450,177 438,711 463,804
--------- --------- ---------
Total expenses 1,837,901 1,775,645 2,032,263
========= ========= =========
Income before Partnership's share of unconsolidated
venture losses 512,513 313,766 71,487
Partnership's share of unconsolidated joint venture
losses (36,405) (131,897) (855,349)
--------- --------- ---------
Income (loss) before minority interest's share of
consolidated joint venture loss (income) 476,108 181,869 (783,862)
--------- --------- ---------
Minority interest's share of consolidated joint venture
loss (income) 7,618 (787) (7,906)
--------- --------- ---------
Net income (loss) $ 483,726 $ 181,082 $ (791,768)
========= ========= =========
</TABLE>
As of December 31, 1999, SMMP holds a 35.10% interest in Sorrento II Partners (a
California general partnership with Sierra Pacific Institutional Properties V
formed in 1993), a 6.55% interest in Sierra Creekside Partners (a California
general partnership with Sierra Pacific Development Fund formed in
F-273
<PAGE> 490
1994), and a 33.32% interest in Sierra Vista Partners (a California general
partnership with Sierra Pacific Development Fund III formed in 1994).
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 272,657 $ 85,792
Rent receivable 588,742 542,527
Due from affiliates 0 47,666
Income-producing property, net of accumulated
depreciation 8,109,927 8,343,438
Other assets 1,897,050 1,320,667
----------- -----------
Total Assets $10,868,376 $10,340,090
=========== ===========
Liabilities and General Partners' Equity
Accrued and other liabilities $ 350,272 $ 520,646
Note payable 1,673,186 1,720,324
----------- -----------
Total Liabilities 2,023,458 2,240,970
----------- -----------
Ground lessors' equity in income producing property 3,000,000 3,000,000
----------- -----------
General Partners' equity 5,844,918 5,099,120
----------- -----------
Total Liabilities and General Partners' equity $10,868,376 $10,340,090
=========== ===========
</TABLE>
F-274
<PAGE> 491
Condensed Combined Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income $ 2,112,254 $ 1,734,403 $ 2,294,859
Interest income 34,540 0 0
Other income 15,151 93,668 9,698
----------- ----------- -----------
Total revenues 2,161,945 1,828,071 2,304,557
=========== =========== ===========
Expenses:
Operating expenses 1,407,262 1,302,968 1,755,826
Depreciation and amortization 779,142 829,081 1,321,177
Interest 152,563 156,636 459,763
----------- ----------- -----------
Total expenses 2,338,967 2,288,685 3,536,766
----------- ----------- -----------
Loss before loss from property disposition (177,022) (460,614) (1,232,209)
Loss from property disposition 0 0 (967,764)
----------- ----------- -----------
Net loss $ (177,022) $ (460,614) $(2,199,973)
=========== =========== ===========
</TABLE>
Reference is made to the audited financial statements of Sierra Mira Mesa
Partners included herein.
6. NOTES PAYABLE
On March 27, 1997, Sierra Valencia LLC entered into a loan agreement with First
Union Bank of North Carolina in the amount of $1,404,000. This loan, which is
secured by a first lien on the Sierra Valencia property, bears interest at 9.25%
per annum and calls for monthly principal and interest payments of $12,024 on
the first day of each month. Such payments shall continue until April 2007, when
the indebtedness is due in full. There is a 1% premium for prepayment of this
note. As of December 31, 1999 the loan balance was $1,366,244.
On April 15, 1997, the Partnership entered into a loan agreement with IDM
Participating Income Company II, an affiliate of the general partner, in the
amount of $200,000. This loan is secured by a second lien on the Sierra Valencia
property. This note bears a variable interest rate determined by the Federal
Reserve of San Francisco's discount rate prevailing on the 25th day of
F-275
<PAGE> 492
the month preceding the payment due date plus a 3% premium. The interest rate
can be adjusted the last day of March, June, September and December of each year
until note agreement is fulfilled. The minimum rate will be 12.12%. The maximum
rate will be 15.15%. The current interest rate paid is 12.12%. Monthly payment
of $6,659, consisting of both interest and principal, commenced on May 15, 1997
and shall continue until April 15, 2000, when the indebtedness is paid in full.
As of December 31, 1999, the loan balance was $32,124.
The annual maturities of the notes payable as of December 31, 1999 are $50,809
in 2000, $20,488 in 2001, $22,466 in 2002, $24,634 in 2003, $27,012 in 2004, and
$1,252,959 thereafter.
The Partnership is exposed to interest rate fluctuations on $32,124 of variable
rate debt at December 31, 1999.
7. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
Upon any sale, refinancing or other disposition of the Partnership's real
property, distributions will be made to the Limited Partners until they have
received distributions from the sale or financing proceeds in an amount equal to
100% of their unreturned capital. Thereafter, distributions generally will be
divided 1% to the General Partner and 99% to the Limited Partners until the
Limited Partners have received distributions equal to 15% per annum cumulative
on each Limited Partner's unreturned capital. However, after the Limited
Partners have received distributions from the sale or financing proceeds equal
to their unreturned capital plus distributions from all sources equal to a
cumulative but not compounded return of 6% per annum on their unreturned
capital, the General Partner may be entitled to special distributions not to
exceed 3% of the gross sales prices of property sold by the Partnership.
Thereafter, the General Partner will be entitled to receive incentive
distributions which, when aggregated with the 1% distributions to the General
Partner described in the preceding sentence, will equal 10% of the total net
sale or financing proceeds available for distribution to the Partners. Any
remaining sale or financing proceeds will be distributed to the Limited
Partners.
F-276
<PAGE> 493
E. SIERRA MIRA MESA PARTNERS AND SUBSIDIARY AUDITED FINANCIAL STATEMENTS
Sierra Mira Mesa Partners and Subsidiary
(A California General Partnership)
Consolidated balance sheets as of December 31, 1999 and 1998 and statements of
operations, changes in general partners' equity and cash flows for each of the
three years in the period ended December 31, 1999 and Independent Auditors'
Report
F-277
<PAGE> 494
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Mira Mesa Partners
We have audited the accompanying consolidated balance sheets of Sierra Mira Mesa
Partners and subsidiary, a California general partnership, (the "Partnership")
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in partners' equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Mira Mesa
Partners and subsidiary as of December 31, 1999 and 1998, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-278
<PAGE> 495
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
--------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 319,400 $ 14,064
Receivables:
Unbilled rent (Notes 1 and 4) 1,114,598 1,226,156
Billed rent (Note 1) 83,917 0
Due from affiliates, net (Note 3) 2,451,227 2,233,158
Income-producing property - net of accumulated
depreciation of $3,564,380 in 1999 and
$3,273,970 in 1998 (Notes 1, 4 and 6) 8,723,396 9,000,294
Investment in unconsolidated
joint ventures (Notes 1 and 5) 2,526,875 1,640,460
Other assets (Notes 1, 2 and 3) 793,658 897,993
------------ ------------
Total Assets $ 16,013,071 $ 15,012,125
============ ============
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 101,104 $ 251,990
Notes payable (Note 6) 6,179,038 5,418,414
------------ ------------
Total Liabilities 6,280,142 5,670,404
------------ ------------
Minority interest in consolidated
joint venture (Note 1) (340,614) (332,996)
General Partners' equity (Note 1) 10,073,543 9,674,717
------------ ------------
Total Liabilities and General Partners' equity $ 16,013,071 $ 15,012,125
============ ============
</TABLE>
See Accompanying Notes
F-279
<PAGE> 496
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income (Note 1) $ 2,126,106 $ 1,883,630 $ 1,919,582
Interest income 224,308 205,781 174,764
Other income 0 0 9,404
----------- ----------- -----------
Total revenues 2,350,414 2,089,411 2,103,750
----------- ----------- -----------
Expenses:
Operating expenses:
Depreciation and amortization 587,070 581,956 825,911
Property taxes and insurance 98,611 97,781 92,347
Administrative fees (Note 3) 121,889 111,206 104,580
Maintenance and repairs 233,615 240,965 228,890
Management fees (Note 3) 119,166 109,725 101,558
Utilities 135,301 135,077 138,203
Legal and accounting 24,767 27,657 47,242
General and administrative 16,122 7,443 12,677
Renting expenses 0 0 309
Bad debt expense 4,770 0 0
Other operating expenses 46,413 25,124 16,742
----------- ----------- -----------
Total operating expenses 1,387,724 1,336,934 1,568,459
Interest 450,177 438,711 463,804
----------- ----------- -----------
Total expenses 1,837,901 1,775,645 2,032,263
----------- ----------- -----------
INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE LOSSES 512,513 313,766 71,487
----------- ----------- -----------
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
LOSSES (Note 5) (36,405) (131,897) (855,349)
----------- ----------- -----------
INCOME (LOSS) BEFORE MINORITY
INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE LOSS (INCOME) 476,108 181,869 (783,862)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLDATED JOINT VENTURE LOSS
(INCOME) 7,618 (787) (7,906)
----------- ----------- -----------
NET INCOME (LOSS) $ 483,726 $ 181,082 $ (791,768)
=========== =========== ===========
</TABLE>
See Accompanying Notes
F-280
<PAGE> 497
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
----------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN GENERAL PARTNERS'
EQUITY
For the Years Ended December
31, 1999, 1998 and 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
General Partners
-------------------------------------------------------------
Sierra Pacific Sierra Pacific
Development Pension
Fund II Investors '84 Total
----------- ----------- ------------
<S> <C> <C> <C>
General Partners' equity - January 1, 1997 $ 4,679,005 $ 4,495,515 $ 9,174,520
Transfer of advances 155,590 1,311,300 1,466,890
Net loss (284,878) (506,890) (791,768)
Contributions 293,000 1,551,843 1,844,843
Distributions (1,580,800) (247,800) (1,828,600)
----------- ----------- ------------
General Partners' equity - December 31, 1997 3,261,917 6,603,968 9,865,885
Net income (loss) (14,912) 195,994 181,082
Contributions 8,490 42,000 50,490
Distributions (211,490) (211,250) (422,740)
----------- ----------- ------------
General Partners' equity - December 31, 1998 3,044,005 6,630,712 9,674,717
Net income 159,678 324,048 483,726
Contributions 44,000 539,784 583,784
Distributions (370,184) (298,500) (668,684)
----------- ----------- ------------
General Partners' equity - December 31, 1999 $ 2,877,499 $ 7,196,044 $ 10,073,543
=========== =========== ============
</TABLE>
See Accompanying Notes
F-281
<PAGE> 498
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 483,726 $ 181,082 $ (791,768)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 587,070 581,956 825,911
Undistributed losses of unconsolidated joint
ventures 36,405 131,897 855,349
Minority interest in consolidated joint
venture (loss) income (7,618) 787 7,906
Bad debt expense 4,770 0 0
Decrease (increase) in rent receivable 27,641 60,853 (100,191)
Increase in due from affiliates (222,839) (202,581) (168,779)
(Increase) decrease in other assets (45,022) (215,974) 55,566
----------- --------- -----------
(Decrease) increase in accrued and other
liabilities (150,886) 183,225 (35,663)
----------- --------- -----------
Net cash provided by operating activities 713,247 721,245 648,331
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (160,815) (346,113) (231,484)
Capital contributions to unconsolidated
joint ventures (1,027,820) (350,900) (2,315,041)
Distributions received from unconsolidated
joint ventures 105,000 372,312 2,439,098
----------- --------- -----------
Net cash used in investing activities (1,083,635) (324,701) (107,427)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from General Partners 583,784 50,490 1,844,843
Cash distributions (668,684) (422,740) (1,828,600)
Funding of note payable secured by property 1,637,500 0 0
Principal payments on notes payable (876,876) (254,638) (339,460)
----------- --------- -----------
Net cash provided by (used in) financing activities 675,724 (626,888) (323,217)
----------- --------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 305,336 (230,344) 217,687
CASH AND CASH EQUIVALENTS - Beginning of year 14,064 244,408 26,721
----------- --------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 319,400 $ 14,064 $ 244,408
=========== ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 439,792 $ 439,756 $ 470,608
=========== ========= ===========
</TABLE>
In 1999, 1998, and 1997 interest receivable of $222,839, $202,581, and $338,020,
respectively, was added to the principal balance of the related note receivable
from affiliate. These transactions are noncash items not reflected in the above
statement of cash flows.
F-282
<PAGE> 499
SIERRA MIRA MESA PARTNERS AND SUBSIDIARY
(A California General Partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Mira Mesa Partners ("SMMP"), a California general partnership, was formed
in 1985 between Sierra Pacific Development Fund II ("SPDFII") and Sierra Pacific
Pension Investors '84 ("SPPI'84") to develop and operate the real property known
as Sierra Mira Mesa, an office building, located in San Diego, California. The
property contains 89,560 square feet and is 100% leased at December 31, 1999.
Per the terms of the partnership agreement, SPDFII and SPPI'84 shared in
earnings, contributions and distributions in a ratio of 51% to 49%,
respectively. 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. In conjunction with this amendment, the general partners
forgave the December 31, 1996 balances of advances due from SMMP and included
these amounts as adjustments to their respective equity accounts. As a result,
the sharing ratio in effect for 1997, 1998 and 1999 was 45.58%, 33.74% and
33.01%, respectively, for SPDFII and 54.42%, 66.26% and 66.99%, respectively,
for SPPI'84. On January 1, 2000, the sharing ratio will be decreased to 30.17%
for SPDFII and increased to 69.83% for SPPI'84 to reflect the 1999 contributions
and distributions.
S-P Properties, Inc. is the General Partner and manager of SPDFII and SPPI'84.
On December 30, 1994, all of the outstanding stock of TCP, Inc. was sold to
Finance Factors, Inc. TCP, Inc. owns all of the common stock of S-P Properties,
Inc. Finance Factors was a subsidiary of CGS Real Estate Company, Inc., a
national real estate company. In July 1995, Finance Factors, Inc. merged with
Bancor Real Estate Company, Inc., another subsidiary of CGS Real Estate Company,
Inc.
SMMP also holds investments in other industrial/commercial properties through
its investments in unconsolidated joint ventures. Refer to Note 5 for additional
information.
Basis of Financial Statements
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to
F-283
<PAGE> 500
reconcile book and taxable income (loss) for differences in the treatment of
certain income and expense items. The accompanying financial statements do not
reflect any provision for federal or state income taxes since such taxes are the
obligation of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements of SMMP include the accounts of SMMP and
Sorrento I Partners, a majority owned joint venture as of December 31, 1999. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, due from affiliates, accounts
payable and notes payable. The fair value of cash and cash equivalents,
receivables and accounts payable approximate the carrying value due to the short
term nature of these items. In the opinion of management, the fair value of the
notes payable approximates the carrying value as the interest rate is based on
market rates at December 31, 1999. Management does not fair value the amounts
due from affiliates due to the related party nature of this receivable.
Income-Producing Properties
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the properties are depreciated over ten years and tenant improvements
incurred at the re-leasing of the properties are depreciated over the life of
the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
F-284
<PAGE> 501
The Partnership regularly evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Future cash flows are estimated and compared to
the carrying amount of the asset to determine if an impairment has occurred. If
the sum of the expected future cash flows is less than the carrying amount of
the asset, the Partnership shall recognize an impairment loss in accordance with
the Statement. No such impairment has been recognized by the Partnership.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Investment in Unconsolidated Joint Ventures
The investment in unconsolidated joint ventures is stated at cost and is
adjusted for the Partnership's share in earnings or losses and cash
contributions to or distributions from the joint ventures (equity method).
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Deferred loan costs represent costs incurred to obtain financing and are
amortized over the life of the related loan using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Rent receivable consists of (a) unbilled rent - the difference between rent
recognized on the straight-line method and actual cash due; (b) billed rent -
rent due but not yet received.
F-285
<PAGE> 502
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1999 and 1998, is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Other assets:
Prepaid expenses $ 7,383 $ 21,070
Deferred loan costs, net of accumulated amortization
of $49,842 in 1999 and $226,318 in 1998 168,225 133,878
Deferred leasing costs, net of accumulated amortization
of $531,945 in 1999 and $414,395 in 1998 507,000 637,028
Tax impounds 26,831 23,728
Tenant improvement reserves 84,219 82,289
-------- --------
$793,658 $897,993
======== ========
Accrued and other liabilities:
Accounts payable $ 51,008 $192,455
Security deposits 17,922 17,922
Accrued expenses 0 8,101
Interest payable 32,174 20,982
Unearned rental income 0 12,530
-------- --------
$101,104 $251,990
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of S-P Properties, Inc. receives a management fee of 5.5% of the
gross rental income collected from the property. This fee amounted to $119,166,
$109,725, and $101,558 respectively, for the years ended December 31, 1999,
1998, and 1997. This fee was recorded as part of the operating expenses of the
property.
SMMP reimburses an affiliate of S-P Properties, Inc. for expenses incurred by
the affiliate for services provided to SMMP such as accounting, data processing
and similar services. The affiliate was reimbursed $122,239, $111,206, and
$104,580 respectively, for such services for the years ended December 31, 1999,
1998, and 1997. Additionally, SMMP reimbursed an affiliate for construction
supervision costs incurred by the affiliate. For the years ended
F-286
<PAGE> 503
December 31, 1999, 1998, and 1997, the affiliate received $28,201, $1,327, and
$11,154 respectively, for tenant improvements supervisory costs.
In consideration for services rendered with respect to initial leasing of SMMP's
property, an affiliate of S-P Properties, Inc. is paid initial leasing costs.
For the years ended December 31, 1999, 1998, and 1997, these fees amounted to
$0, $63,492, and $3,656 respectively, and were recorded as deferred leasing
costs.
During 1993, SMMP loaned funds to a former affiliate of S-P Properties, Inc. in
the form of demand notes. Such liabilities were assumed by Finance Factors, Inc.
which acquired S-P Properties, Inc. as of December 30, 1994. In July 1995,
Finance Factors, Inc. merged with Bancor Real Estate Company, Inc. who has
assumed the note. The annual interest rate of the loans was variable at bank
prime plus 2-1/4% - 3% with a minimum rate of 9%. The loans totaled $2,360,000
at December 31, 1993 and were reduced to $1,687,787 at December 31, 1994. This
loan was amended effective January 1, 1995 fixing the interest rate at 10%. On
December 31, 1999, 1998 and 1997, interest receivable of $222,839, $202,581 and
$338,020, respectively, was added to the principal balance of the loan. No
interest related to this loan was due to the Partnership at December 31, 1999
and 1998. The principal balance outstanding at December 31, 1999 is $2,451,227.
The loan is guaranteed by the owners of CGS Real Estate Company, Inc. In
connection with the settlement of a lawsuit by SPDFII, the Partnership will call
a portion of the note receivable from Bancor Real Estate Company, Inc. The
portion called will be that percentage of the loan that is equal to SPDFII's
ownership interest in the Partnership, in any event no less than 30%. Such funds
that are collected will be distributed to SPDFII in accordance with the lawsuit
settlement.
During 1995 and 1996, the Partnership received non-interest bearing short-term
advances from SPPI'84 of $1,300,000 and $11,300, respectively. These advances
were reclassed to equity in 1997 (See Note 1).
In 1996, the Partnership received a short-term, non-interest bearing loan from
SPDFII in the amount of $155,590. This loan was reclassed to equity in 1997 (See
Note 1).
During 1996, the Partnership made a non-interest bearing advance to an affiliate
in the amount of $4,770. The advance was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
See Note 6 for note payable transactions with related parties.
4. INCOME-PRODUCING PROPERTIES
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
properties are as follows:
F-287
<PAGE> 504
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Land $ 3,786,458 $ 3,786,458
Building and improvements 8,501,318 8,487,806
------------ ------------
Total 12,287,776 12,274,264
Accumulated depreciation (3,564,380) (3,273,970)
------------ ------------
Net $ 8,723,396 $ 9,000,294
============ ============
</TABLE>
During 1999 and 1998, the Partnership removed $147,303 and $1,784,496,
respectively, from its building and improvements and related accumulated
depreciation accounts for fully depreciated property.
Future minimum base rental income, under the existing operating leases for the
Sierra Mira Mesa and Sorrento I properties, to be recognized on a straight-line
basis and amounts to be received on a cash basis are as follows:
<TABLE>
<CAPTION>
Year Ending Straight-line Cash
December 31, Basis Basis
------------ ----- -----
<S> <C> <C>
2000 $ 2,029,716 $ 2,246,281
2001 2,023,332 2,339,768
2002 2,014,332 2,437,297
2003 595,285 677,208
2004 179,747 184,288
Thereafter 593,192 665,360
------------- ------------
Total $ 7,435,604 $ 8,550,202
============= ============
</TABLE>
In each of the three years in the period ending December 31, 1999, two tenants
accounted for the majority of the Partnership's rental income. A state
governmental agency associated with workers compensation insurance accounted for
rental income of 69%, 78%, and 67% in 1999, 1998 and 1997, respectively; a
tenant in the communications sector accounted for rental income of 13%, 15% and
13% in 1999, 1998 and 1997, respectively.
5. INVESTMENT IN UNCONSOLIDATED JOINT VENTURES
SMMP holds the following investments accounted for under the equity method at
December 31, 1999:
F-288
<PAGE> 505
- a 35.10% equity interest in Sorrento II Partners ("SIIP"), a joint venture
formed on October 1, 1993 with Sierra Pacific Institutional Properties V,
an affiliate, to develop and operate Sierra Sorrento II, an industrial
building located in San Diego, California. SMMP's investment in SIIP as of
December 31, 1999 and 1998 is $2,647,872 and $1,711,089, respectively.
SMMP's share of the net loss of SIIP for the three years ended December 31,
1999, 1998 and 1997 is $30,637, $143,251 and $59,066, respectively;
- a 6.55% equity interest in Sierra Creekside Partners ("SCP"), a joint
venture formed on February 1, 1994 with Sierra Pacific Development Fund, an
affiliate, to develop and operate Sierra Creekside, a commercial office
building in San Ramon, California. SMMP's investment in SCP as of December
31, 1999 and 1998 is $(128,513) and $(75,610), respectively. SMMP's share
of the net loss of SCP for the three years ended December 31, 1999, 1998
and 1997 is $5,903, $8,420 and $14,995, respectively;
- a 33.32% equity interest in Sierra Vista Partners ("SVP"), a joint venture
formed on February 1, 1994 with Sierra Pacific Development Fund III, an
affiliate, to develop and operate Sierra Vista, an industrial building in
Anaheim, California. SMMP's investment in SVP as of December 31, 1999 and
1998 is $7,516 and $4,981, respectively. SMMP's share of the net income
(loss) of SVP for the three years ended December 31, 1999, 1998 and 1997 is
$135, $19,774 and $(781,288), respectively. The Sierra Vista property was
sold in October 1997.
The following is a summary of aggregated financial information for all
investments owned by SMMP which are accounted for under the equity method:
Condensed Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Assets
Cash and cash equivalents $ 272,657 $ 85,792
Rent receivable 588,742 542,527
Due from affiliate 0 47,666
Income-producing property, net of accumulated
Depreciation 8,109,927 8,343,438
Other assets 1,897,050 1,320,667
----------- -----------
Total Assets $10,868,376 $10,340,090
=========== ===========
</TABLE>
F-289
<PAGE> 506
<TABLE>
<S> <C> <C>
LIABILITIES AND GENERAL PARTNERS' EQUITY
Accrued and other liabilities $ 350,272 $ 520,646
Note payable 1,673,186 1,720,324
----------- -----------
Total Liabilities 2,023,458 2,240,970
----------- -----------
Ground lessors' equity in income-producing property 3,000,000 3,000,000
----------- -----------
General Partners' equity 5,844,918 5,099,120
--------- ---------
Total Liabilities and General Partners' equity $10,868,376 $10,340,090
=========== ===========
</TABLE>
Condensed Combined Statements of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental income $ 2,112,254 $ 1,734,403 $ 2,294,859
Interest income 34,540 0 0
Other income 15,151 93,668 9,698
----------- ----------- -----------
Total revenues 2,161,945 1,828,071 2,304,557
----------- ----------- -----------
Expenses:
Operating expenses 1,407,262 1,302,968 1,755,826
Depreciation and amortization 779,142 829,081 1,321,177
Interest 152,563 156,636 459,763
----------- ----------- -----------
Total expenses 2,338,967 2,288,685 3,536,766
----------- ----------- -----------
Net loss before disposition of property (177,022) (460,614) (1,232,209)
Loss from property disposition 0 0 (967,764)
----------- ----------- -----------
Net loss $ (177,022) $ (460,614) $(2,199,973)
=========== =========== ===========
</TABLE>
F-290
<PAGE> 507
6. NOTES PAYABLE
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Mortgage note payable, due in monthly installments with interest at 7.74% per
annum, collateralized by the real property known as Sierra
Mira Mesa. This note matures in October 2010. $4,543,984 $4,802,191
Mortgage note payable to affiliate, due in monthly installments with interest
fixed at 9.34% per annum through October 1998, at which time the rate converted
to the one-year treasury rate plus 375 basis points. This note, which was
collateralized by the real property known as Sorrento I, was paid in August 1999. 0 616,223
Mortgage note payable, due in monthly installments with interest at
8.75% per annum, collateralized by the Sorrento I property. The note
matures in September 2009. 1,635,054 0
---------- ----------
$6,179,038 $5,418,414
========== ==========
</TABLE>
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the General Partner,
acquired the Sorrento I mortgage note, due in July 1998, and security documents
from the bank in May 1996. In connection with the purchase of the bank note and
security documents by CGS, the Partnership made a principal payment to the bank
of $750,000 and entered into a $750,000 note agreement with CGS (the "CGS
Agreement"). The CGS Agreement, collaterized by real and personal property,
called for monthly interest payments through December 1996 and monthly principal
and interest payments thereafter until maturity on May 31, 2016. The interest
rate is fixed at 9.34% per annum for the first year of the note and will
thereafter be the one year Treasury rate plus 375 basis points. A pre-payment in
the amount of $105,000 was paid in April 1997.
A modification agreement was entered into on September 30, 1997. The interest
rate remained fixed at 9.34% through October 1998, at which time the rate
converted to the one-year treasury rate plus 375 basis points. The note was
amortized over a 210-month term and payments were $6,048 per month, principal
and interest inclusive until maturity in March 2015.
In August 1999, the CGS note with an outstanding balance of $607,693 was paid.
On the same date, SIP entered into a new loan agreement with Finova Realty
Capital, Inc. in the amount of $1,637,500. This loan, which is secured by the
Sorrento I property, bears interest at 8.75% per annum. Monthly payments of
$12,882, consisting of both principal and interest, are due until maturity in
September 2009. The note balance as of December 31, 1999 was $1,635,054. In
connection with the repayment of the CGS note, SIP paid $29,528 to CGS related
to late fees which were included in other operating expenses in the statement of
operations for 1999.
As of December 31, 1999, annual maturities on notes payable are: $290,909 in
2000; $314,372 in 2001; $339,729 in 2002; $367,133 in 2003; $396,749 in 2004;
and $4,470,146 thereafter.
F-291
<PAGE> 508
F. FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
To the Partners of
Sierra Pacific Pension Investors '84
We have audited the consolidated financial statements of Sierra Pacific Pension
Investors '84 and subsidiary, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999 and have issued our report thereon dated
February 25, 2000. Such consolidated financial statements and report are
included in your 1999 Annual Report to the Limited Partners and are incorporated
herein by reference. Our audits also included the financial statement schedules
of Sierra Pacific Pension Investors '84, listed in Item E of the Table of
Contents. These financial statement schedules are the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-292
<PAGE> 509
SCHEDULE II
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31,
1999, 1998 and 1997
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income -
Producing
Properties
----------
<S> <C>
Allowance for loss - January 1, 1997 $1,880,000
Provision charged to costs and expenses (1) 0
----------
Allowance for loss - December 31, 1997 1,880,000
Provision charged to costs and expenses (1) 0
----------
Allowance for Loss - December 31, 1998 1,880,000
Provision charged to costs and expenses (1) 0
----------
Allowance for loss - December 31, 1999 $1,880,000
==========
</TABLE>
F-293
<PAGE> 510
SCHEDULE III
SIERRA PACIFIC PENSION INVESTORS '84 AND SUBSIDIARY
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Initial Cost Gross Amount at
to Partnership (1) Improvements Which carried at close of period
------------------ Capitalized -------------------------------
After
Encumb- Improve- Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (3)(4)(5)
----------- ------ ---- ----- ------------ ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME - PRODUCING:
Sierra Valencia
Tucson, AZ $1,398,368 $977,677 4,201,837 $977,677 3,060,925 4,038,602
</TABLE>
<TABLE>
<CAPTION>
Accum. Date Date Deprec.
Description Deprec. (5) Constructed Acquired Life
----------- ----------- ----------- -------- ----
<S> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME - PRODUCING:
Sierra Valencia
Tucson, AZ 984,363 11/87 9/85 3-30 yrs.
</TABLE>
(1) The initial cost represents the original purchase price of the property.
(2) The Partnership has capitalized property development costs.
(3) Also represents costs for Federal Income Tax purposes.
(4) A valuation allowance of $1,880,000 was established as the appraised value
of the properties declined
F-294
<PAGE> 511
below book value. See Notes 1 and 4 to the financial statements
incorporated by reference to the Annual Report to the Limited Partners
attached as an exhibit.
(5) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Total Real Estate Accumulated
Carrying Value Depreciation
-------------- ------------
<S> <C> <C>
Balance - January 1, 1997 $ 4,803,698 $ 1,494,933
Additions during the year 126,289 182,431
----------- -----------
Balance - December 31, 1997 4,929,987 1,677,364
Additions during the year 42,614 203,222
Write off fully depreciated assets (18,649) (18,649)
----------- -----------
Balance - December 31, 1998 4,953,952 1,861,937
Additions during the year 147,606 185,382
Write off fully depreciated assets (1,062,956) (1,062,956)
----------- -----------
Balance - December 31, 1999 $ 4,038,602 $ 984,363
=========== ===========
</TABLE>
F-295
<PAGE> 512
G. UNAUDITED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
SIERRA PACIFIC PENSION INVESTORS '84
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000
(UNAUDITED) DECEMBER 31, 1999
----------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .......................... $ 11,115 $ 31,562
Receivables:
Note receivable, net of deferred gain of $132,471 1,459,139 1,459,139
Unbilled rent ................................... 44,306 44,708
Billed rent ..................................... 31,718 2,762
Interest ........................................ 79,581 0
Income-producing property - net of
accumulated depreciation and valuation
allowance of $2,836,134 and $2,864,363
respectively ..................................... 1,152,855 1,174,239
Investment in unconsolidated joint venture ......... 7,286,134 7,303,940
Other assets - net of accumulated amortization
of $170,301 and $172,144, respectively ........... 941,152 791,968
------------ -----------
Total Assets ....................................... $ 11,006,000 $10,808,318
============ ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities ...................... $ 127,733 $ 122,891
Notes payable ...................................... 1,358,189 1,398,368
------------ -----------
Total Liabilities .................................. 1,485,922 1,521,259
------------ -----------
Partners' equity (deficit):
General Partner .................................. (184,026) 0
Limited Partners:
80,000 units authorized,
77,000 issued and outstanding .................. 9,704,104 9,287,059
------------ -----------
Total Partners' equity ............................. 9,520,078 9,287,059
------------ -----------
Total Liabilities and Partners' equity ............. $ 11,006,000 $10,808,318
============ ===========
</TABLE>
F-296
<PAGE> 513
SIERRA PACIFIC PENSION INVESTORS '84
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental income .................................................. $ 272,542 $ 319,871 $ 124,057 $ 176,212
Interest income ................................................ 79,586 112,399 39,793 51,311
------------ ------------ ------------ ------------
Total revenues ........................................ 352,128 432,270 163,850 227,523
------------ ------------ ------------ ------------
EXPENSES:
Operating expenses ............................................. 213,674 225,780 85,600 103,604
Depreciation and amortization .................................. 73,957 138,033 37,602 69,684
Interest expense ............................................... 64,682 69,274 32,114 34,505
------------ ------------ ------------ ------------
Total costs and expenses .............................. 352,313 433,087 155,316 207,793
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE GAIN FROM
PROPERTY DISPOSITION ........................................... (185) (817) 8,534 19,730
GAIN FROM PROPERTY DISPOSITION ................................... 0 83,315 0 83,315
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE PARTNERSHIP'S
SHARE OF JOINT VENTURE INCOME .................................. (185) 82,498 8,534 103,045
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE INCOME ........................................... 233,204 180,217 105,878 121,547
------------ ------------ ------------ ------------
NET INCOME ....................................................... $ 233,019 $ 262,715 $ 114,412 $ 224,592
============ ============ ============ ============
Net income per limited partnership unit .......................... $ 3.00 $ 3.41 $ 1.48 $ 2.92
============ ============ ============ ============
</TABLE>
F-297
<PAGE> 514
SIERRA PACIFIC PENSION INVESTORS '84
(A LIMITED PARTNERSHIP)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
---------------------------- GENERAL PARTNERS'
PER UNIT TOTAL PARTNER EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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, 1998) ........................................... (75.23) (5,792,901) $ 133,334 (5,659,567)
Cumulative distributions
(to December 31, 1998) ........................................... (21.43) (1,650,006) (133,334) (1,783,340)
------------ ------------ ------------ ------------
Partners' equity - January 1, 1999 ................................ 115.97 8,929,708 0 8,929,708
Net income ......................................................... 4.64 357,351 357,351
------------ ------------ ------------ ------------
Partners' equity - January 1, 2000 (audited) ...................... 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 (unaudited) ............................................. 3.00 230,689 2,330 233,019
------------ ------------ ------------ ------------
Partners' equity (deficit) - June 30, 2000 (unaudited) ............. $ 126.03 $ 9,704,104 $ (184,026) $ 9,520,078
============ ============ ============ ============
</TABLE>
F-298
<PAGE> 515
SIERRA PACIFIC PENSION INVESTORS '84
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................... $ 233,019 $ 262,715
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization .......................................................... 73,957 138,033
Partnership's share of unconsolidated joint
venture income ....................................................................... (233,204) (180,217)
Gain from property disposition ......................................................... 0 (83,315)
Increase in rent receivable ............................................................ (28,554) (18,435)
Increase in interest receivable ........................................................ (79,581) (16,610)
Increase in other assets ............................................................... (175,735) (321,786)
Increase (decrease) in accrued and other liabilities ................................... 4,842 (33,849)
--------------- ---------------
Net cash used in operating activities .................................................. (205,256) (253,464)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ........................................................ (24,012) (114,476)
Payments received on note receivable ................................................... 0 943,413
--------------- ---------------
Net cash (used in) provided by investing activities .................................... (24,012) 828,937
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable .................................................... (40,179) (42,231)
Capital contributions to unconsolidated joint venture .................................. (34,000) 0
Distributions from unconsolidated joint venture ........................................ 283,000 0
Loan to affiliate ...................................................................... 0 (466,283)
--------------- ---------------
Net cash provided by (used in) financing activities .................................... 208,821 (508,514)
--------------- ---------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................................... (20,447) 66,959
CASH AND CASH EQUIVALENTS - Beginning of period
Beginning of period .................................................................... 31,562 10,122
--------------- ---------------
CASH AND CASH EQUIVALENTS - End of period
End of period .......................................................................... $ 11,115 $ 77,081
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for real estate taxes ...................................... $ 56,324 $ 50,396
=============== ===============
Cash paid during the period for interest ............................................... $ 65,257 $ 69,863
=============== ===============
</TABLE>
F-299
<PAGE> 516
SIERRA PACIFIC PENSION INVESTORS `84
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
--------------------------------------------------------------------------------
1. BASIS OF FINANCIAL STATEMENTS
In the opinion of Sierra Pacific Pension Investors `84's (the Partnership)
management, these unaudited financial statements reflect all adjustments which
are necessary for a fair presentation of its financial position at June 30, 2000
and results of operations and cash flows for the periods presented. All
adjustments included in these statements are of a normal and recurring nature.
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, 1999.
2. RELATED PARTY TRANSACTIONS
Included in the financial statements for the six months ended June 30, 2000 and
1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
June 30
----------------------
2000 1999
------- -------
<S> <C> <C>
Management fees $ 7,882 $ 9,689
Administrative fees 37,881 55,320
Construction fees 0 2,131
</TABLE>
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 June 30, 2000 the
Partnership's interest in SMMP was 69.83%; the remaining 30.17% 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 six months ended June 30, 2000 and
1999 follows:
F-300
<PAGE> 517
<TABLE>
<CAPTION>
June 30
---------------------------------
2000 1999
---------------------------------
<S> <C> <C>
Rental income $1,096,679 $ 1,059,081
Total revenues 1,220,016 1,170,121
Operating expenses 446,008 361,757
Share of unconsolidated
joint venture income (loss) 81,931 (36,566)
Net income 326,619 269,349
</TABLE>
As of June 30, 2000, SMMP holds a 43.92% interest in Sorrento II Partners
(SIIP), a California general partnership with Sierra Pacific Institutional
Properties V formed in 1993; a 5.08% interest in Sierra Creekside Partners
(SCP), a California general partnership with Sierra Pacific Development Fund
formed in 1994; and a 33.36% 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 six months ended June 30,
2000 and 1999 follows:
<TABLE>
<CAPTION>
SCP SVP SIIP
--------------------------------------------------------------------------------------------
June 30 June 30 June 30
--------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 489,777 $ 448,066 $ 0 $ 0 $ 699,130 $554,777
Total revenues 489,777 448,066 0 11,907 710,335 554,777
Operating expenses 268,936 247,078 13,735 14,577 236,241 243,567
Extraordinary loss 46,020 0 0 0 0 0
Net (loss) income (149,586) (50,053) (13,735) (2,670) 214,281 (92,300)
</TABLE>
4. PARTNERS' EQUITY
Equity and net income 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 the quarter ended March 31, 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% is allocated to the general partner. Management does not believe
that the effect of this transfer is significant.
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the general partner, is in
the process of developing a plan pursuant to which the property owned by the
Partnership would be combined
F-301
<PAGE> 518
with the properties of other real estate partnerships managed by CGS and its
affiliates. These limited partnerships own office properties, industrial
properties, shopping centers, and residential apartment properties. It is
expected that the acquirer would in the future qualify as a real estate
investment trust. Limited partners would receive shares of common stock in the
acquirer, which would be listed on a national securities exchange or the NASDAQ
national market system.
F-302
<PAGE> 519
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
HISTORICAL FINANCIAL DATA
F-303
<PAGE> 520
Table of Contents
Sierra Pacific Institutional Properties V
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and Results
of Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Unaudited Financial Statements - Six Months Ended June 30, 2000 and 1999
F-304
<PAGE> 521
A. SELECTED HISTORICAL FINANCIAL DATA OF SIERRA PACIFIC INSTITUTIONAL
PROPERTIES V
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 923 $ 991 $ 979 $ 815 $ 1,193 $ 555 $ 699
Interest and other income -- -- -- -- 35 -- 11
-------- -------- -------- -------- -------- -------- --------
Total revenues 923 991 979 815 1,228 555 710
======== ======== ======== ======== ======== ======== ========
EXPENSES:
Property operating 220 246 238 255 283 243 237
Management and advisory fees 47 54 60 50 69 -- --
Ground Lease 383 383 382 374 410 187 29
Real estate and other taxes 108 91 89 105 111 -- --
Depreciation and amortization 423 447 447 458 442 217 230
-------- -------- -------- -------- -------- -------- --------
Total expenses 1,181 1,221 1,216 1,242 1,315 647 496
======== ======== ======== ======== ======== ======== ========
Net income (loss) before minority interest (258) (230) (237) (427) (87) (92) 214
Minority interest 52 62 59 143 30 32 (94)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ (206) $ (168) $ (178) $ (284) $ (57) $ (60) $ 120
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-305
<PAGE> 522
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average number of units outstanding 31 31 31 31 31 31 31
Income (loss) per unit (6.70) (5.46) (5.79) (9.22) (1.84) (1.95) 3.90
Ratio of earnings to fixed charges (1) -- -- -- -- -- -- 13.42
Deficiency of earnings to cover fixed charges(2) 206 168 178 284 57 60 --
Cash distributions to minority investors (24) (191) (262) (86) (4) -- (250)
Total properties owned at end of period 1 1 1 1 1 1 1
Book value per limited partnership unit 85 79 74 64 63 63 69
Per unit value assigned for the consolidation 159
BALANCE SHEET DATA:
Cash and cash equivalents $ 67 $ 9 $ 23 $ 3 $ 135 $ 39 $ 34
Real estate held for investment, net 6,333 5,992 5,630 5,571 5,552 5,678 5,672
Accounts receivable, net 401 490 476 486 528 473 496
Investment in/due from partnerships -- 19 19 19 -- 19 --
Other assets 329 276 1,065 1,068 1,659 959 281
Total assets, at book value 7,130 6,786 7,213 7,147 7,874 7,168 6,483
Total assets, at value assigned for the Consolidation 6,145
</TABLE>
F-306
<PAGE> 523
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------------------------------------- ----------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total liabilities 216 248 220 439 285 551 23
General partners deficit -- -- -- -- -- -- (53)
Limited partners equity 2,627 2,459 2,282 1,997 1,941 1,938 2,114
Other equity 4,287 4,079 4,711 4,711 5,648 4,679 4,399
CASH FLOW DATA:
Increase (decrease) in cash and equivalents, net 64 (58) 15 (20) 132 36 (101)
Cash (used in) provided by operating activities (96) 159 (647) 177 (493) 53 418
</TABLE>
(9) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
(10) Deficiency of earnings to cover fixed charges is the amount of earnings
that would be required to achieve a ratio of earnings to fixed charges of
1.0
F-307
<PAGE> 524
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - DECEMBER 31, 1999, 1998 AND 1997
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes certain forward looking statements reflecting the
Partnership's expectations in the near future; however, many factors which may
affect the actual results, especially changing regulations, are difficult to
predict. Accordingly, there is no assurance that the Partnership's expectations
will be realized.
Overview:
The following discussion should be read in conjunction with the Selected
Financial Data and the Partnership's Consolidated Financial Statements and Notes
thereto incorporated by reference to the Annual Report to the Limited Partners
attached as an Exhibit. As of December 31, 1999, the Partnership owned a 64.90%
interest in Sierra Sorrento II, an industrial property located in San Diego,
California.
Results of Operations:
Comparison of year ended December 31, 1999 to year ended December 31, 1998.
Rental income increased by $378,000, or 46%, principally as a result of 100%
occupancy for the entire year. During the first seven months of 1998, 29,150
square feet of the Property was vacant. A single tenant leased 22,150 square
feet in August 1998 and the remaining 7,000 square feet in December 1998. The
weighted-average annual rent per square foot, on an accrual basis, was $11.04 at
December 31, 1999 compared to $10.95 at December 31, 1998.
The Partnership made additional ground lease prepayments totaling $825,000 in
1999. Effective October 1999, all minimum base rent amounts becoming payable
under the terms of the lease were to be applied against the prepaid balance
until such time that the prepaid balance is extinguished plus interest at the
rate of 10% per annum. Interest income of $35,000 was recorded in 1999 as a
result.
Total operating expenses increased by $73,000, or 6%, in comparison to the prior
year, primarily due to an increase in ground lease expense, management fees and
administrative costs. Additionally, a loan made to an affiliate in 1996 was
deemed uncollectible and written-off to bad debt expense in 1999. Ground lease
expense rose as a result of higher additional rents becoming due effective
January 1999 in accordance with the lease agreement. The increase in management
fees is attributable to the higher rental income. The increase in total
operating expenses was partially offset by a decrease in depreciation and
amortization, and by lower maintenance and repair costs incurred in 1999.
Comparison of year ended December 31, 1998 to year ended December 31, 1997.
F-308
<PAGE> 525
Rental income decreased by $164,000, or 17%, primarily due to lower occupancy
during the first seven months of 1998. One tenant, whose lease accounted for
22,150 square feet of the Property, expired December 31, 1997. This vacant space
was re-leased to a tenant in the second quarter of 1998 and rent commenced in
late August. This same tenant began leasing an additional 7,000 square feet in
December 1998. The Property was 100% occupied at December 31, 1998. The
weighted-average annual rent per square foot, on an accrual basis, increased
from $10.12 at December 31, 1997 to $10.95 at December 31, 1998 as a result of
higher rental rates.
Total operating expenses increased by $26,000, or 2%, when compared to 1997.
Depreciation and amortization, maintenance and repairs, and other operating
expenses increased due to costs associated with the new tenant. Further,
property taxes were higher due to an increase in the assessed value of the
Property. The increase in total operating expenses was partially offset due to a
decrease in management fees and legal fees. Management fees were lower as a
result of the decrease in rental income. Legal fees were higher in 1997 due to
professional fees associated with the property's ground lease.
Liquidity and Capital Resources:
On October 1, 1993, the Partnership created a California general partnership
(Sorrento II Partners) with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to
facilitate cash contributions by SMMP for the continued development and
operation of the Sorrento II property. SMMP has adequate resources to make the
necessary advances during the foreseeable future. During 1999, SMMP contributed
a total of $971,420 to the Partnership and received distributions of $4,000 from
the Partnership.
The Partnership used cash in operations of $493,000 and paid $343,000 for
building and tenant improvements in 1999. At December 31, 1999, the Partnership
is in a liquid position with cash and billed rents of $211,000 and current
liabilities of $84,000.
In February 2000, the Partnership purchased the Sorrento II land holdings from
CGS Real Estate, Inc. for $3,500,000 and the ground lease subsequently
terminated. The Partnership paid cash of $2,174,255 and was credited its current
prepaid balance of $1,325,745. SMMP contributed the majority of the cash for the
land purchase.
The Partnership's primary capital requirements will be for construction of new
tenant space. It is anticipated that these requirements and any operating
capital requirements will be funded from operations of the Property and SMMP.
Inflation:
F-309
<PAGE> 526
The Partnership's long-term leases contain provisions designed to mitigate the
adverse impact of inflation on its results from operations. Such provisions may
include escalation clauses related to Consumer Price Index increases.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Partnership's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. As a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with Year 2000 requirements.
The Partnership did not experience any major system failures or disruptions in
operations over the year 2000 transition. All systems have continued to operate
as normal.
The Partnership did not separately track internal costs related to the Year 2000
issue and Partnership management believes these amounts did not have a material
impact on the Partnership's financial position or results of operations.
The Partnership employs a property management company to manage, operate and
lease the property. The management company did not experience any major systems
failures or disruptions in operations at the property. The Partnership remains
confident that no Year 2000 issues with the property management company or other
third parties will arise in the future although no guarantees can be made to
that effect.
F-310
<PAGE> 527
C. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Six Months Ended June 30, 2000 and 1999
(a) OVERVIEW
The following discussion should be read in conjunction with Sierra Pacific
Institutional Properties V's (the Partnership) Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Form 10-Q.
The Partnership currently owns a 56.08% interest in the Sorrento II Partnership,
which operates the Sorrento II property (the Property) in San Diego, California.
(b) RESULTS OF OPERATIONS
Rental income for the six months and three months ended June 30, 2000 increased
by approximately $144,000, or 26%, and by approximately $19,000, or 6%,
respectively, in comparison to the corresponding periods in 1999. These
increases were principally the result of higher common area maintenance fees
billed between the periods. Supplemental billings were made in 2000 to recover
higher than anticipated prior year common area maintenance fees. The Property
was 100% occupied at June 30, 2000 and June 30, 1999.
Total operating expenses for the six months and three months ended June 30, 2000
decreased by approximately $7,000, or 3%, and by approximately $9,000 or 7%,
respectively, when compared to the same periods in the prior year. These
decreases were primarily due to lower administrative costs and other operating
expenses incurred between the periods.
(c) LIQUIDITY AND CAPITAL RESOURCES
The Partnership is in a liquid position at June 30, 2000 with cash and billed
receivables of approximately $113,000 and accrued and other liabilities of
approximately $23,000. A source of cash is available through advances from the
minority owner of the property, Sierra Mira Mesa Partner (SMMP). SMMP has
adequate resources to make any necessary advances during the foreseeable future.
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
F-311
<PAGE> 528
AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Sierra Pacific Institutional Properties V
We have audited the accompanying consolidated balance sheets of Sierra Pacific
Institutional Properties V, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and the related consolidated
statements of operations, changes in partners' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Pacific
Institutional Properties V as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-312
<PAGE> 529
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A California Limited Partnership)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 134,781 $ 3,203
Receivables:
Unbilled rent (Notes 1 and 4) 451,414 486,238
Billed rent (Note 1) 76,707 0
Due from affiliates (Note 3) 0 18,995
Prepaid ground lease (Note 3) 1,344,540 683,000
Income-producing property - net of
accumulated depreciation of
$2,195,937 in 1999 and $2,760,889
in 1998 (Note 4) 5,552,440 5,570,726
Other assets (Notes 1, 2 and 3) 314,313 385,079
---------- ----------
Total Assets $7,874,195 $7,147,241
========== ==========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities (Note 2) $ 90,908 $ 252,764
Ground lease payable (Note 1) 194,539 185,863
---------- ----------
Total Liabilities 285,447 438,627
---------- ----------
Ground lessor's equity in
income producing property (Note 3) 3,000,000 3,000,000
---------- ----------
Minority interest in
consolidated joint venture (Note 4) 2,647,872 1,711,089
---------- ----------
Partners' equity (Notes 1 and 5):
General Partner 0 0
Limited Partners:
140,000 units authorized,
30,777 issued and
outstanding 1,940,876 1,997,525
---------- ----------
Total Partners' equity 1,940,876 1,997,525
---------- ----------
Total Liabilities and Partners' equity $7,874,195 $7,147,241
========== ==========
</TABLE>
F-313
<PAGE> 530
See Accompanying Notes 16
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income (Note 1) $ 1,193,082 $ 814,801 $ 979,052
Interest income (Note 3) 34,540 0 0
----------- ----------- -----------
Total revenues 1,227,622 814,801 979,052
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 442,093 458,276 447,453
Ground lease (Note 3) 409,607 373,805 381,826
Property taxes and insurance 111,292 104,621 89,444
Maintenance and repairs 67,996 80,758 66,599
Administrative fees (Note 3) 87,110 74,059 65,163
Management fees (Note 3) 69,072 49,919 59,515
Legal and accounting 29,722 29,742 61,781
General and administrative 17,661 15,055 13,655
Utilities 23,211 26,250 22,029
Renting expenses 0 0 1,981
Bad debt expense (Note 3) 18,995 0 0
Other operating expenses 38,149 29,295 6,723
----------- ----------- -----------
Total operating expenses 1,314,908 1,241,780 1,216,169
----------- ----------- -----------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS (87,286) (426,979) (237,117)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS 30,637 143,251 59,066
----------- ----------- -----------
NET LOSS $ (56,649) $ (283,728) $ (178,051)
=========== =========== ===========
Net loss per limited partnership unit (Note 1) $ (1.84) $ (9.22) $ (5.79)
=========== =========== ===========
</TABLE>
F-314
<PAGE> 531
See Accompanying Notes 17
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Limited Partners Total
--------------------------- General Partners'
Per Unit Total Partner Equity
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 1997 $ 79.91 $ 2,459,304 $ 0 $ 2,459,304
Net loss (5.79) (178,051) (178,051)
----------- ----------- ----------- -----------
Partners' equity - December 31, 1997 74.12 2,281,253 0 2,281,253
Net loss (9.22) (283,728) (283,728)
----------- ----------- ----------- -----------
Partners' equity - December 31, 1998 64.90 1,997,525 0 1,997,525
Net loss (1.84) (56,649) (56,649)
----------- ----------- ----------- -----------
Partners' equity - December 31, 1999 $ 63.06 $ 1,940,876 $ 0 $ 1,940,876
=========== =========== =========== ===========
</TABLE>
F-315
<PAGE> 532
See Accompanying Notes 18
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (56,649) $(283,728) $(178,051)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation and amortization 442,093 458,276 447,453
Minority interest's share of unconsolidated
joint venture loss (30,637) (143,251) (59,066)
Bad debt expense 18,995 0 0
(Increase) decrease in rent receivable (41,883) (9,960) 13,687
Increase in prepaids and other assets (671,833) (62,463) (844,087)
(Decrease) increase in accrued and other
liabilities (153,180) 218,183 (27,122)
--------- --------- ---------
Net cash (used in) provided by operating
activities (493,094) 177,057 (647,186)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (342,748) (340,376) (29,313)
--------- --------- ---------
Net cash used in investing activities (342,748) (340,376) (29,313)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to minority investor (4,000) (85,657) (262,000)
Contributions from minority investor 971,420 228,700 953,400
--------- --------- ---------
Net cash provided by financing activities 967,420 143,043 691,400
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 131,578 (20,276) 14,901
CASH AND CASH EQUIVALENTS - Beginning of year 3,203 23,479 8,578
--------- --------- ---------
CASH AND CASH EQUIVALENTS - End of year $ 134,781 $ 3,203 $ 23,479
========= ========= =========
</TABLE>
F-316
<PAGE> 533
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A California Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sierra Pacific Institutional Properties V (the "Partnership") was organized
on October 8, 1985 in accordance with the provisions of the California
Uniform Limited Partnership Act to acquire and operate commercial and
industrial real properties. S-P Properties, Inc. is the General Partner and
manager of the Partnership. On December 30, 1994, all of the outstanding
stock of TCP, Inc. was sold to Finance Factors, Inc. TCP, Inc. owns all of
the common stock of S-P Properties, Inc. Finance Factors was a subsidiary of
CGS Real Estate Company, Inc., a national real estate company. In July 1995,
Finance Factors, Inc. merged with Bancor Real Estate Company, Inc., another
subsidiary of CGS Real Estate Company, Inc.
The Partnership acquired land in August 1987 for the development of an 88,073
square foot office property in San Diego, California known as Sierra Sorrento
II. This development consists of two separate buildings; a two-story building
consisting of 29,500 usable square feet that was completed in November 1988 and
a two-story building consisting of 58,573 usable square feet that was completed
in May 1989.
On October 1, 1993, the Partnership created a California general partnership
(Sorrento II Partners) with Sierra Mira Mesa Partners ("SMMP"), an affiliate, to
facilitate cash contributions by SMMP for the continued development and
operation of the Sorrento II property. The Partnership contributed the Sierra
Sorrento II property and cash and SMMP contributed cash to the newly formed
partnership. At December 31, 1999, the Partnership's remaining asset is a 64.90%
interest in Sorrento II Partners.
On July 8, 1997, the Sorrento II land was purchased from Lincoln National Life
Insurance Company by CGS Real Estate Company, Inc., an affiliate of the General
Partner. On September 24, 1997, all rights, title and interest in the ground
lease were transferred and assigned to CGS Real Estate Company, Inc. ("Ground
Lessor") (See Note 3).
On February 1, 2000, the Partnership purchased the land holdings from CGS Real
Estate Company, Inc. for $3,500,000 and the ground lease was subsequently
terminated. The Partnership paid cash of $2,174,255 and was credited its current
prepaid balance of $1,325,745.
Basis of Financial Statements
F-317
<PAGE> 534
The Partnership maintains its books and prepares its financial statements in
accordance with generally accepted accounting principles. However, the
Partnership prepares its tax returns on the accrual basis of accounting as
defined by the Internal Revenue Code with adjustments to reconcile book and
taxable income (loss) for differences in the treatment of certain income and
expense items. The accompanying financial statements do not reflect any
provision for federal or state income taxes since such taxes are the obligation
of the individual partners.
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
The consolidated financial statements include the accounts of the Partnership
and Sorrento II Partners, a majority owned California general partnership (see
Note 4). All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid, short-term investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Partnership at December 31, 1999 and 1998
consist of cash and cash equivalents, receivables, due from affiliates, and
accounts payable. The fair value of cash and cash equivalents, receivables, and
accounts payable approximates the carrying value due to the short term nature of
these items. The amounts due from affiliates are not fair valued due to the
related party nature of this receivable.
Income-Producing Property
Property and tenant improvements are carried at cost and depreciated on the
straight-line method over the estimated lives of the related assets, ranging
from three to thirty years. Tenant improvements incurred at the initial leasing
of the property are depreciated over the lessor of ten years or the lease term
and tenant improvements incurred at the re-leasing of the property are
depreciated over the life of the related lease.
Expenditures for repairs and maintenance are charged against income as incurred.
Improvements and major renewals are capitalized. Costs and the related
accumulated depreciation of assets sold or retired are removed from the accounts
in the year of disposal or when fully depreciated and any resulting gain or loss
is reflected in income.
The Partnership regularly evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Future
F-318
<PAGE> 535
cash flows are estimated and compared to the carrying amount of the asset to
determine if an impairment has occurred. If the sum of the expected future cash
flows is less than the carrying amount of the asset, the Partnership shall
recognize an impairment loss in accordance with the Statement. No such
impairment has been recognized by the Partnership.
Because the determination of fair value is based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying value as of December 31, 1999. The cash flows used to determine fair
value and net realizable value are based on good faith estimates and assumptions
developed by management. Unanticipated events and circumstances may occur and
some assumptions may not materialize; therefore actual results may vary from the
estimates and the variances may be material. The Partnership may provide
additional write-downs which could be material in subsequent years if real
estate markets or local economic conditions change.
Other Assets
Deferred leasing costs represent costs incurred to lease properties and are
amortized over the life of the related lease using the straight line method of
accounting.
Rental Income and Rent Receivable
Rental income is recognized on the straight-line method over the term of the
related operating lease in accordance with the provisions of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases".
Unbilled rent receivable represents the difference between rent recognized on
the straight-line method and actual cash due.
Ground Lease Payable
Ground lease payable represents the difference between rent recognized on the
straight-line method in accordance with the provisions of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" and actual cash due and
paid by that date.
Calculation of Equity and Net Income (Loss) Per Limited Partnership Unit
Equity and net income (loss) per limited partnership unit are determined by
dividing the Limited Partners' equity and net income (loss) by 30,777, the
number of limited partnership units outstanding for all periods.
F-319
<PAGE> 536
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
These SFAS's, which are effective for the Partnership's fiscal year ending
December 31, 1998, establish additional disclosure requirements but do not
affect the measurement of the results of operations. During the periods
presented, the Partnership did not have any items of comprehensive income. The
adoption of SFAS No. 131 had no effect on the Partnership's financial statements
as the Partnership operates in only one segment, the acquisition, development
and operation of commercial real estate.
2. DETAILS OF CERTAIN BALANCE SHEET ACCOUNTS
Additional information regarding certain balance sheet accounts, at December 31,
1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Other assets:
Prepaid expenses $ 5,626 $ 45,741
Deferred leasing costs, net of
accumulated amortization of $306,675 in
1999 and $225,616 in 1998 308,687 339,338
-------- --------
$314,313 $385,079
======== ========
Accrued and other liabilities:
Accounts payable $ 43,980 $ 83,801
Unearned rental income 23,800 152,150
Security deposits 7,249 7,249
Other 15,879 9,564
-------- --------
$ 90,908 $252,764
======== ========
</TABLE>
3. GENERAL PARTNER AND RELATED PARTY TRANSACTIONS
An affiliate of the General Partner may receive a management fee of 6% of the
gross rental income (as defined in the partnership agreement) collected from the
properties. Management fees paid to affiliates for the years ended December 31,
1999, 1998 and 1997 were $69,072, $49,919 and $59,515, respectively.
An affiliate of the General Partner is entitled to reimbursement for expenses
incurred by the affiliate for services provided to the Partnership such as
accounting, legal, data processing and similar services. The affiliate was
reimbursed $89,275, $77,844 and $69,720 for such services for the years ended
December 31, 1999, 1998, and 1997, respectively. In consideration for services
rendered with respect to initial leasing of Partnership properties, an affiliate
is paid initial leasing costs. For the years ended December 31, 1999 and 1998, a
total of $16,293 and $74,504, respectively, was paid for initial leasing costs.
No such costs were incurred in 1997. Additionally, the Partnership reimbursed
the affiliate for construction supervision costs incurred
F-320
<PAGE> 537
by the affiliate. For the years ended December 31, 1999, 1998, and 1997, the
affiliate received $0, $22,511, and $1,998, respectively, for tenant
improvements supervisory costs.
The Partnership sold the Sierra Sorrento II land holdings to Lincoln National
Life Insurance Company for $3,000,000 on February 1, 1989. Upon ownership
transfer, the Partnership entered into a 40 year ground lease with the insurance
company. The Sierra Sorrento II land lease requires initial minimum payments of
$25,000 per month commencing February 1989. The terms of the ground lease
require scheduled rent increases over the lease term and additional ground rent.
Subject to the provisions of the ground lease, the Partnership has the right to
sell the property (land and buildings) to a third party. Upon ownership transfer
the ground lease will terminate. Upon sale, the Ground Lessor is entitled to
remuneration of the prior $3,000,000 investment prior to distribution of
proceeds to the Partnership. The Ground Lessor will also participate in the
appreciation of the property (upon sale) based on a formula contained in the
ground lease agreement. On July 8, 1997, the land was purchased from Lincoln
National Life Insurance Company by CGS Real Estate Company, Inc., an affiliate
of the General Partner. On September 24, 1997, all rights, title and interest in
the ground lease were transferred and assigned to CGS Real Estate Company, Inc.
("Ground Lessor").
In October 1997, the Partnership prepaid $900,000 of the ground lease to CGS
Real Estate Company, Inc. in exchange of an amendment reducing the minimum rent
required under the lease from $360,000 to $330,000 per year from 1999 to 2008.
The minimum basic rent effective January 1, 2009 through December 31, 2028
remained unchanged at $360,000 per year. The November 1997, December 1997, and
January 1998 rent amounts payable under the terms of the lease were applied
against the prepaid balance. Effective February 1998, rent amounts were to be
paid at the rate of $18,000 per month until such time that the prepaid balance
was extinguished.
In 1999, the Partnership made additional ground lease prepayments totaling
$825,000. Effective October 1999, all minimum base rent amounts becoming payable
were to be applied against the prepaid balance until such time that the prepaid
balance is extinguished plus interest at the rate of 10% per annum. Interest
income of $34,540 was recorded in 1999 as a result. The prepaid balance at
December 31, 1999 was $1,344,540.
On February 1, 2000, the Partnership purchased the land holdings from CGS Real
Estate Company, Inc. for $3,500,000 and the ground lease subsequently
terminated. The Partnership paid cash of $2,174,255 and was credited its current
prepaid balance of $1,325,745.
During 1996, the Partnership made a non-interest bearing loan to an affiliate in
the amount of $18,995. The loan was deemed uncollectible and subsequently
written off to bad debt expense in 1999.
F-321
<PAGE> 538
4. INCOME-PRODUCING PROPERTY
At December 31, 1999 and 1998 the total cost and accumulated depreciation of the
property are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land $ 2,569,815 $ 2,569,815
Building and 5,178,562 5,761,800
improvements ----------- -----------
Total 7,748,377 8,331,615
Accumulated depreciation (2,195,937) (2,760,889)
----------- -----------
Net $ 5,552,440 $ 5,570,726
=========== ===========
</TABLE>
During 1999 and 1998, the Partnership removed $925,986 and $28,663,
respectively, from its buildings and improvements and related depreciation
accounts for fully depreciated property.
Sierra Sorrento II experienced a land ownership transfer in February 2000 (See
Note 3).
On October 1, 1993, the Partnership formed a joint venture with SMMP, an
affiliate. The joint venture, known as Sorrento II Partners ("SIIP"), was formed
as a California general partnership to develop and operate the Sierra Sorrento
II property. The Partnership had an 83.2% equity interest with its contribution
of Sierra Sorrento II and $115,000 in cash. Such interest was computed based
upon the estimated fair value of SIIP's net assets at the date of formation of
the joint venture. SMMP was allocated a 16.8% initial equity interest in SIIP in
exchange for its $710,000 cash contribution ($1,324,400, net, through December
31, 1996). SMMP made additional cash contributions amounting to $953,400,
$228,700, and $971,420, and received distributions amounting to $262,000,
$85,657 and $4,000 during 1997, 1998 and 1999, respectively. The percentage
interests of the Partnership and SMMP are to be adjusted every January 1st
during the term of SIIP, beginning January 1, 1995. Accordingly, as of January
1, 1997, 1998 and 1999, the Partnership's interest in SIIP was changed to
75.09%, 66.45% and 64.90%, respectively, and SMMP's interest was changed to
24.91%, 33.55% and 35.10%, respectively. On January 1, 2000, the Partnership's
interest will be decreased to 56.08% and SMMP's interest will be increased to
43.92% to reflect the 1999 contributions and distributions. Under the terms of
the SIIP joint venture agreement, SMMP will receive preferential cash
distributions of available "Distributable Funds" from the operation of SIIP or
sale of its property to the extent of its capital contributions. Additional
Distributable Funds are allocable to the Partnership to the extent of the deemed
fair value of its property contribution, and the remainder to the Partnership
and SMMP in proportion to their respective equity interests.
Future minimum base rental income, under the existing operating leases for the
Sierra Sorrento II property, to be recognized on a straight-line basis and
amounts to be received on a cash basis are as follows:
F-322
<PAGE> 539
<TABLE>
<CAPTION>
Straight-line Cash
Year Ending December 31, Basis Basis
------------------------ ------------- -----------
<S> <C> <C>
2000 $ 972,183 $1,052,120
2001 972,183 1,086,440
2002 972,183 1,118,346
2003 530,098 576,160
2004 441,680 479,230
Thereafter 257,645 285,090
----------- -----------
Total $4,145,972 $4,597,386
=========== ===========
</TABLE>
In 1999, 56% of rental income was generated from an electronics manufacturer and
44% was from a media and marketing company. In 1998, the electronics
manufacturer generated 82% of rental income and the remaining 18% was from the
media and marketing company. In 1997, 65% of all rental income was from the
electronics manufacturer and 35% was from a tenant in the healthcare sector.
5. PARTNERS' EQUITY
Accrual basis profits and losses resulting from operations of the Partnership
are allocated 99% to the Limited Partners and 1% to the General Partner.
Currently, the Partnership does not meet the criteria for distributing cash to
the General Partner, and it cannot reasonably predict when the criteria will be
met. Accordingly, no accrual basis profits and losses from operations were
allocated to the General Partner.
Upon any sale or other disposition of the Partnership's real properties,
distributions will be made to the Limited Partners until they have received
distributions from sales proceeds in an amount equal to 100% of their unreturned
capital. Thereafter, distributions generally will be divided 1% to the General
Partner and 99% to the Limited Partners until the Limited Partners have received
distributions from all sources equal to the sum of their respective priority
distributions (an amount equal to not less than 12% per annum cumulative, but
not compounded, on each Limited Partners' unreturned capital). Thereafter, the
General Partner will be entitled to receive incentive distributions which, when
aggregated with the 1% distributions to the General Partner described above, are
equal to 10% of the total net sale proceeds available for distribution to the
Partners. Any remaining sale proceeds will be distributed to the Limited
Partners.
F-323
<PAGE> 540
E. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED JUNE 30, 2000 AND 1999
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A LIMITED PARTNERSHIP)
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................... $ 33,703 $ 134,781
Receivables:
Unbilled rent .............................. 417,070 451,414
Billed rent ................................ 79,264 76,707
Prepaid ground lease ......................... 0 1,344,540
Income-producing property - net of
accumulated depreciation of $2,383,649
and $2,195,937, respectively ............... 5,672,235 5,552,440
Other assets - net of accumulated amortization
of $349,335 and $306,675, respectively ..... 280,430 314,313
----------- -----------
Total Assets ................................. $ 6,482,702 $ 7,874,195
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities ................ $ 22,573 $ 90,908
Ground lease payable ......................... 0 194,539
----------- -----------
Total Liabilities ............................ 22,573 285,447
----------- -----------
Ground lessor's equity in income-
producing property ......................... 0 3,000,000
----------- -----------
Minority interest in consolidated
joint venture ............................. 4,399,084 2,647,872
----------- -----------
Partners' equity (deficit):
General Partner ............................ (53,152) 0
Limited Partners:
140,000 units authorized,
30,777 issued and
outstanding .............................. 2,114,197 1,940,876
----------- -----------
Total Partners' equity ....................... 2,061,045 1,940,876
----------- -----------
Total Liabilities and Partners' equity ....... $ 6,482,702 $ 7,874,195
=========== ===========
</TABLE>
F-324
<PAGE> 541
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To the Partners of
Sierra Pacific Institutional Properties V
We have audited the consolidated financial statements of Sierra Pacific
Institutional Properties V, a California limited partnership, (the
"Partnership") as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999 and have issued our report thereon dated
February 25, 2000. Such consolidated financial statements and report are
included in your 1999 Annual Report to the Limited Partners and are incorporated
herein by reference. Our audits also included the financial statement schedule
of Sierra Pacific Institutional Properties V, listed in Item 14. This financial
statement schedule is the responsibility of the Partnership's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-325
<PAGE> 542
SCHEDULE III - FORM 10-K
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Initial Cost Improvements Gross Amount at
to Partnership (1) Capitalized Which carried at close of period
------------------ After ------------------------------------
Encumb- Improve- Acquis- Improve- Total
Description Rances Land ments ition (2) Land ments (3)(4)(6)
----------- ------ ---- ----- --------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OFFICE
BUILDING-
INCOME
-PRODUCING:
Sierra
Sorrento II (3)
San Diego,
California $3,000,000 $2,420,186 0 $ 6,133,211 $2,569,815 $ 5,178,562 $7,748,377
</TABLE>
<TABLE>
<CAPTION>
Accum. Date Date Deprec.
Description Deprec. (5) Constructed Acquired Life
----------- ----------- ----------- -------- ----
<S> <C> <C> <C> <C>
OFFICE
BUILDING-
INCOME
-PRODUCING:
Sierra
Sorrento II
San Diego,
California $ 2,195,937 (5) 8/87 3-30 yrs.
</TABLE>
(1) The initial cost represents the original purchase price of the property.
(2) The Partnership has capitalized property development costs.
(3) On February 1, 1989, the Sierra Sorrento II land was sold for $3,000,000
and leased back from the buyer. Sales and Leaseback costs of $149,629 were
capitalized. Because the sale and leaseback transaction contains many
characteristics of a joint venture, the Partnership accounts for this
arrangement under the method of accounting described in Note 4 to the
consolidated financial statements incorporated by reference to the Annual
Report to the Limited Partners attached as an Exhibit. On October 1, 1993,
the property was transferred to a general partnership, Sorrento II
Partners. The Partnership has an equity interest of 64.90% and Sierra Mira
Mesa Partners, an affiliate, has a 35.10% interest at December 31, 1999.
(4) For Federal Income Tax purposes, the total cost of the Property (net of
the ground lessor's equity) is $4,748,377.
(5) Construction on a two-story building ("Building B"), 29,500 usable square
footage, was completed in November 1988. Construction on a two-story
building ("Building A") 58,573 usable square footage, was completed in May
1989
(6) Reconciliation of total real estate carrying value and accumulated
depreciation for the three years ended December 31, 1999 is as follows:
F-326
<PAGE> 543
<TABLE>
<CAPTION>
Total Real
Estate Accumulated
Carrying Value Depreciation
-------------- ------------
<S> <C> <C>
Balance - January 1, 1997 $ 7,990,589 $ 1,998,154
Additions during the year 29,313 392,152
----------- -----------
Balance - December 31, 1997 8,019,902 2,390,306
Additions during the year 340,376 399,246
Deductions:
Write off fully depreciated assets (28,663) (28,663)
----------- -----------
Balance - December 31, 1998 8,331,615 2,760,889
Additions during the year 342,748 361,033
Deductions:
Write off fully depreciated assets (925,986) (925,986)
----------- -----------
Balance - December 31, 1999 $ 7,748,377 $ 2,195,937
=========== ===========
</TABLE>
F-327
<PAGE> 544
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 AND
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental income ........................................ $ 699,130 $ 554,777 $ 313,286 $ 294,711
Interest income ...................................... 11,205 0 0 0
--------- --------- --------- ---------
Total revenues ..................... 710,335 554,777 313,286 294,711
--------- --------- --------- ---------
EXPENSES:
Operating expenses ................................... 236,241 243,567 111,479 119,989
Ground lease ......................................... 29,441 186,902 0 93,451
Depreciation and amortization ........................ 230,372 216,608 115,186 110,180
--------- --------- --------- ---------
Total costs and expenses ........... 496,054 647,077 226,665 323,620
--------- --------- --------- ---------
INCOME (LOSS) BEFORE MINORITY INTEREST'S
SHARE OF CONSOLIDATED JOINT VENTURE
(INCOME) LOSS ........................................ 214,281 (92,300) 86,621 (28,909)
--------- --------- --------- ---------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE
(INCOME) LOSS ........................................ (94,112) 32,397 (38,044) 10,147
--------- --------- --------- ---------
NET INCOME (LOSS) ...................................... $ 120,169 $ (59,903) $ 48,577 $ (18,762)
========= ========= ========= =========
Net income (loss) per limited partnership unit ......... $ 3.87 $ (1.95) $ 1.57 $ (0.61)
========= ========= ========= =========
</TABLE>
F-328
<PAGE> 545
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ 120,169 $ (59,903)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization .......................................... 230,372 216,608
Minority interest's share of consolidated
joint venture income (loss) .......................................... 94,112 (32,397)
Decrease in rent receivable ............................................ 31,787 13,592
Decrease in prepaids and other assets .................................. 10,018 69,562
Decrease in accrued and other liabilities .............................. (68,894) (154,783)
----------- -----------
Net cash provided by operating activities .............................. 417,564 52,679
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions ........................................ (2,175,742) (284,053)
----------- -----------
Net cash used in investing activities .................................. (2,175,742) (284,053)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor ................................... 1,907,000 0
Distributions to minority investor ..................................... (249,900) 0
Loan from affiliate .................................................... 0 267,420
----------- -----------
Net cash provided by financing activities .............................. 1,657,100 267,420
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS ................................................... (101,078) 36,046
CASH AND CASH EQUIVALENTS -
Beginning of period .................................................... 134,781 3,203
----------- -----------
CASH AND CASH EQUIVALENTS -
End of period .......................................................... $ 33,703 $ 39,249
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for real estate taxes ...................... $ 44,488 $ 40,384
=========== ===========
</TABLE>
F-329
<PAGE> 546
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED PARTNERS TOTAL
------------------------ GENERAL PARTNERS'
PER UNIT TOTAL PARTNER EQUITY
-------- ----- ------- ------
<S> <C> <C> <C> <C>
Proceeds from sale of
partnership units .................................... $250.00 $ 7,694,250 -- $ 7,694,250
Underwriting commissions
and other organization expenses ...................... (37.21) (1,145,333) -- (1,145,333)
Cumulative net income (loss)
(to December 31, 1998) ............................... (145.20) (4,468,631) $ 9,193 (4,459,438)
Cumulative distributions
(to December 31, 1998) ............................... (2.69) (82,761) (9,193) (91,954)
------- ----------- ----------- -----------
Partners' equity - January 1, 1999 ..................... 64.90 1,997,525 0 1,997,525
Net loss ............................................... (1.84) (56,649) (56,649)
------- ----------- ----------- -----------
Partners' equity - January 1, 2000 (audited) ........... 63.06 1,940,876 0 1,940,876
Transfer among general partner and limited partners .... 1.77 54,354 (54,354) 0
Net income ............................................. 3.87 118,967 1,202 120,169
------- ----------- ----------- -----------
Partners' equity (deficit) - June 30, 2000 (unaudited) . $ 68.70 $ 2,114,197 $ (53,152) $ 2,061,045
======= =========== =========== ===========
</TABLE>
F-330
<PAGE> 547
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-------------------------------------------------------------------------------
1. ORGANIZATION
In October 1993, Sierra Pacific Institutional Properties V (the Partnership)
created a general partnership (Sorrento II Partners) with Sierra Mira Mesa
Partners (SMMP) to facilitate cash contributions by SMMP for the continued
development and operation of the Sorrento II property. The Partnership Agreement
of Sorrento II Partners (the Agreement) was amended effective January 1, 1995 to
consider both contributions and distributions when calculating each partners'
percentage interest at January 1 of each year. Accordingly, on January 1, 2000,
the Partnership's interest in Sorrento II Partners was decreased from 64.90% to
56.08% to reflect 1999 contributions and distributions.
2. BASIS OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated condensed financial statements include
the accounts of the Partnership and Sorrento II Partners, a majority-owned joint
venture at June 30, 2000. All significant intercompany balances and transactions
have been eliminated in consolidation.
In the opinion of the Partnership's management, these unaudited financial
statements reflect all adjustments which are necessary for a fair presentation
of its financial position at June 30, 2000 and results of operations and cash
flows for the periods presented. All adjustments included in these statements
are of a normal and recurring nature. 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, 1999.
3. RELATED PARTY TRANSACTIONS
Included in the financial statements for the six months ended June 30, 2000 and
1999 are affiliate transactions as follows:
F-331
<PAGE> 548
<TABLE>
<CAPTION>
June 30
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Management fees $ 40,565 $34,102
Administrative fees 40,795 49,897
</TABLE>
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
(loss) by the number of limited partnership units outstanding, 30,777.
During the quarter ended March 31, 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% is allocated to the general partner. Management does not believe
that the effect of this transfer is significant.
5. PENDING TRANSACTION
CGS Real Estate Company, Inc. (CGS), an affiliate of the general partner, is in
the process of developing a plan pursuant to which the property owned by the
Partnership would be combined with the properties of other real estate
partnerships managed by CGS and its affiliates. These limited partnerships own
office properties, industrial properties, shopping centers, and residential
apartment properties. It is expected that the acquirer would in the future
qualify as a real estate investment trust. Limited partners would receive shares
of common stock in the acquirer, which would be listed on a national securities
exchange or the NASDAQ national market system.
F-332
<PAGE> 549
NOONEY INCOME FUND LTD., L.P.
HISTORICAL FINANCIAL DATA
F-333
<PAGE> 550
Table of Contents
I. Nooney Income Fund Ltd., L.P.
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and
Results of Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Unaudited Financial Statements - Six Months Ended June 30, 2000
and 1999
F-334
<PAGE> 551
A. SELECTED HISTORICAL FINANCIAL DATA OF NOONEY INCOME FUND LTD., L.P.
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS JUNE 30,
----------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income . $1,689 $1,778 $1,772 $1,852 $2,087 $1,022 $1,036
Interest and other income ......... 19 20 24 16 29 -- 20
------ ------ ------ ------ ------ ------ ------
Total revenues .................... 1,708 1,798 1,796 1,868 2,116 1,022 1,056
====== ====== ====== ====== ====== ====== ======
EXPENSES:
Property operating ................ 588 681 662 733 820 363 336
Management and advisory fees ...... 102 107 107 112 125 74 76
Real estate and other taxes ....... 200 247 274 250 253 126 136
Depreciation and amortization ..... 495 466 443 434 403 202 203
Interest expense .................. 135 122 117 106 93 45 52
------ ------ ------ ------ ------ ------ ------
</TABLE>
F-335
<PAGE> 552
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS JUNE 30,
----------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total expenses .................... 1,520 1,623 1,603 1,635 1,694 810 803
====== ====== ====== ====== ====== ====== ======
Net income ........................ $ 188 $ 175 $ 193 $ 233 $ 422 $ 212 $ 253
====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ ------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average limited
partnership units outstanding 15,180 15,180 15,180 15,180 15,180 15,180 15,180
Limited partnership income
per unit 11.01 9.57 10.74 12.72 27.55 11.61 14.03
Ratio of earnings to
fixed charges (1) 2.39 2.43 2.65 3.20 5.54 5.71 5.87
Cash distributions (211) (316) (316) (422) -- -- --
Cash distribution
per unit (2) 12.50 18.75 18.75 25.00 -- -- --
Total properties owned
at end of period 2 2 2 2 2 2 2
Book value per limited
partnership unit 364 354 346 334 362 334 365
Per unit value assigned
for the consolidation 683
</TABLE>
F-336
<PAGE> 553
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 657 $ 797 $ 865 $ 805 $ 1,237 $ 1,066 $ 1,490
Real estate held for
investment, net 6,137 5,836 5,661 5,537 5,329 5,394 5,264
Accounts receivable, net 117 175 115 97 172 123 206
Other assets 118 75 72 124 134 134 156
Total assets,
at book value 7,029 6,883 6,713 6,563 6,872 6,717 7,116
Total assets, at valued
assigned for the consolidation 12,198
Total liabilities 1,662 1,657 1,610 1,648 1,535 1,590 1,526
General partners deficit (86) (88) (90) (91) (88) 51 56
Limited partners equity 5,453 5,314 5,193 5,006 5,425 5,076 5,534
CASH FLOW DATA:
Increase (decrease) in cash
and equivalents, net (88) 140 68 (61) 433 261 253
Cash provided by operating
activities 628 635 680 680 615 313 378
</TABLE>
1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest
2) Cash distributions based on investment income per unit and Cash
distributions based on return of capital per unit were added to arrive at
the cash distribution per unit
F-337
<PAGE> 554
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - DECEMBER 31, 1999, 1998, AND 1997
Liquidity and Capital Resources
Cash on hand as of December 31, 1999 was $1,237,294, an increase of $432,555
from the year ended December 31, 1998. The Registrant expects the capital
expenditures during the year 2000 will be adequately funded by current cash
reserves and the properties' operating cash flow. The anticipated capital
expenditures in 2000 by property are as follows:
<TABLE>
<CAPTION>
Other Leasing
Capital Capital Total
------- ------- -----
<S> <C> <C> <C>
Oak Grove Commons $ 85,000 $ 44,608 $129,608
Leawood Fountain Plaza (76%) -0- 233,847 233,847
-------- -------- --------
$ 85,000 $278,455 $363,455
======== ======== ========
</TABLE>
At Oak Grove Commons and Leawood Fountain Plaza, leasing capital has been
budgeted for tenant improvements and lease commissions for new and renewal
tenants. The other capital at Oak Grove Commons has been budgeted for
restoration of mansard roofs over entry doors and masonry reconstruction.
The Registrant reviews cash reserves on a regular basis prior to beginning
scheduled capital improvements. In the event there are not adequate funds, the
capital improvement will be postponed until such funds are available.
The future liquidity of the Registrant is dependent on its ability to fund
future capital expenditures and mortgage payments from operations and cash
reserves, maintain occupancy, and negotiate with lenders the refinancing of
mortgage debt as it matures.
Results of Operations
The results of operations for the Registrants properties for the years ended
December 31, 1999, 1998 and 1997 are detailed in the schedule below. Expenses of
the Registrant are excluded.
<TABLE>
<CAPTION>
Oak Grove Leawood Fountain
Commons Plaza (76%)
------- -----------
1999
----
<S> <C> <C>
Revenues $ 962,519 $1,139,297
Expenses 650,142 847,391
---------- ----------
Net Income $ 312,377 $ 291,906
========== ==========
</TABLE>
F-338
<PAGE> 555
<TABLE>
<CAPTION>
Oak Grove Leawood Fountain
Commons Plaza (76%)
------- -----------
1998
----
<S> <C> <C>
Revenues $879,643 $974,977
Expenses 745,030 835,485
-------- --------
Net Income $134,613 $139,492
======== ========
1997
----
Revenues $886,520 $898,955
Expenses 709,258 835,526
-------- --------
Net Income $177,262 $ 63,429
======== ========
</TABLE>
1999 COMPARISONS BY PROPERTY
At Oak Grove Commons, revenues increased $82,876 due to an increase in base
rental revenue of $83,823. This increase can be attributed to both the increased
occupancy level and rental rates. Expenses at Oak Grove Commons decreased from
the prior year due to decreases in interest expense ($13,284), depreciation and
amortization ($50,296), fire and crime prevention ($22,186), repairs and
maintenance-building ($7,434), common area related expenses ($8,480), legal fees
($8,400), and parking lot expense ($7,732). These decreases were partially
offset by increases in real estate tax expense ($7,000), snow removal ($7,383),
management fees ($4,300), and landscaping expense ($3,988). The decrease in
depreciation and amortization can be attributed to contra-depreciation entries
depreciating the property write down which was recorded at the partnership level
prior to 1999. All property write downs have been recorded at the property level
in 1999. The decrease in fire and crime prevention can be attributed to upgrades
to the fire alarm system in 1998, not necessary in 1999. The decrease in
interest expense is due to the declining principal balance. Oak Grove Commons
has a first mortgage with a floating rate of LIBOR + 3%. The loan balance as of
December 31, 1999 was $1,125,002. The loan matures July 1, 2000. The Registrant
is planning to renew this loan for an additional two years under similar terms.
At Leawood Fountain Plaza, revenues increased ($164,320) when comparing 1999
year-end results to the prior year. The increase in revenue can be attributed to
increases in base rental revenues ($79,690), escalation revenues ($78,865), and
interest income ($12,840). These increases were partially offset by a decrease
in other revenues ($7,075). The increase in base rental revenues is due to
increased rental rates. The increase in interest income is attributable to the
Registrant recording interest income at the property level in 1999. In 1998 and
1997 interest income was recorded at the partnership level. Expenses increased
$11,906 when compared to the prior year. Increases were reflected in heating and
air-conditioning costs ($22,359), repairs and maintenance-general building
related expenses ($16,256), plumbing repairs ($15,351), fire and crime
prevention ($9,623), management fees ($9,077), painting and decorating expense
($12,717), and parking lot expenses ($7,147). These increases were partially
offset by decreases in snow removal ($6,822), amortization
F-339
<PAGE> 556
and depreciation expense ($68,360), contract cleaning services ($4,436), and
various other operating expenses ($1,006). The increase in heating and
air-conditioning expense is due to the repairs and replacements necessary in
1999 to upgrade the current heating and air conditioning system. The increase in
repairs and maintenance-building can be attributed to masonry and roof repairs,
as well as skylight replacement. These items were expensed in 1999 for exterior
improvements at the property. The increased plumbing expenses are a result of
major plumbing repairs necessary during 1999 at one of the restrooms located at
the property. Interior hallway and door painting performed only in 1999 resulted
in the painting and decorating increase when compared to 1998. The decrease in
depreciation and amortization is due to the contra-depreciation entries now
being recorded at the property level as explained in the previous property
comparison.
The occupancy rates as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Oak Grove Commons 100% 95% 86%
Leawood Fountain Plaza 93% 97% 89%
</TABLE>
During the fourth quarter, the occupancy level at Oak Grove Commons increased to
100%. During the quarter, two new tenants leased 8,164 square feet and one
tenant renewed its lease for 9,100 square feet. For the year, leasing activity
consisted of six new leases for tenants occupying 21,493 square feet, four
tenants renewing their leases for 21,316 square feet, and four tenants vacating
14,343 square feet. Oak Grove Commons has no tenants who occupy more than 10% of
the available space.
During the fourth quarter at Leawood Fountain Plaza, occupancy decreased from
98% to 93%. During the quarter, four tenants renewed their leases for 5,324
square feet, and one tenant vacated 4,470 square feet. During the year, the
Registrant signed one new lease for 737 square feet, renewed seven tenants
leases for 17,857 square feet, and one tenant vacated 4,470 square feet. The
property has two major tenants, one who occupies 14% of the space with a lease
which expires in October 2001 and the other major tenant occupies 11% of the
space with a lease which expires in July 2004.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Registrant deems the Property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the Property, including disposal
value, if any, is less than its carrying amount. If the Property is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the Property exceeds its fair value. Fair value is based on quoted market
prices in active markets, if available. If quoted market prices are not
available, an estimate of fair value is based on the best information available,
including prices for similar properties or the results of valuation techniques
such as discounting estimated future cash flows. Considerable management
judgment
F-340
<PAGE> 557
is necessary to estimate fair value. Accordingly, actual results could vary
significantly from such estimates.
F-341
<PAGE> 558
Year 2000 issues
Information Technology Systems
The Registrant did not experience any information technology hardware or
software disruptions or failure as a result of the Year 2000. Subsequent to
December 31, 1999, the Registrant's "IT" systems have continued to operate, as
normal, at the management office and both of the Registrant's properties.
Non-Information Technology Systems
None of the non-information systems at the Registrant's two properties
experienced any disruptions or failures as a result of the Year 2000. These
systems included elevators, heating, ventilating, air conditioning (HVAC)
systems, and locks. These and other like systems continue to operate as normal
in the year 2000.
The Registrant did not separately track internal costs related to the Year 2000
issue. The changing of the century did not have a material impact on the
Registrant's financial condition or results of its operations.
Material Third Parties Systems Failures
The Registrant did not experience any material impact related to third party
system failures for the Year 2000 issue at either of its two properties.
Payments from tenants did not appear to be delayed due to the Year 2000
conversion. The Registrant remains confident that no third party material issues
will arise in the future.
1999 Comparisons
Consolidated revenues for the Registrant were $2,115,814 for the year ended 1999
and $1,867,865 for the year ended 1998. The consolidated revenues increased
$247,949 when comparing the two year-end periods. This increase is primarily due
to an increase in base rental revenue at Oak Grove Commons and increases in both
base rental and escalation revenues at Leawood Fountain Plaza, as mentioned in
the property comparisons. The Registrant's consolidated expenses were $1,693,360
and $1,634,724 for the years ended December 31, 1999 and 1998, respectively.
Consolidated expenses increased $58,636 when comparing the two year-end periods,
due to increases in management fees ($13,708), repairs and maintenance related
expenses ($99,045), utilities ($5,575), and real estate taxes ($3,312). These
increases were partially offset by decreases in interest expense ($13,284),
depreciation and amortization ($30,544), and other operating expenses ($19,176).
The increase in repairs and maintenance related expenses is primarily due to the
upgrades and repairs at Leawood Fountain Plaza, as mentioned in the property
comparisons. The decrease in depreciation and amortization is attributed to
fully depreciated and amortized assets. The decrease in other operating expenses
is primarily due to a decrease in common area and fire/crime prevention expenses
at Oak Grove Commons, as mentioned in the property comparisons. Net income in
1999 increased
F-342
<PAGE> 559
$189,313 when comparing to prior year. Cash flow provided from operations was
$615,393 for the year ended 1999, as compared to $679,538 for the year ended
1998. The cash flow provided during 1999 allowed the Registrant to fund capital
expenditures of $158,139 and reduce the debt for Oak Grove Commons by $24,699.
1998 Comparisons
Consolidated revenues for the Registrant were $1,867,865 for the year ended 1998
and $1,795,659 for the year ended 1997. The consolidated revenues increased
$72,206 when compared to the prior year. This increase in revenue was due to an
increase in rental income at Leawood Fountain Plaza. The Registrants
consolidated expenses were $1,634,850 and $1,602,528 for the years ended
December 31, 1998, and December 31, 1997, respectively, a difference of $32,196.
The increase in consolidated expenses is due to an increase in other operating
expenses ($56,275), an increase in utilities ($9,833), partially offset by
decreases in real estate taxes ($23,867), depreciation and amortization
($9,455), and interest expense ($10,976). Net income for 1998 increased $40,010
when compared to the prior year. Cash flow provided from operations was $679,538
for the year ended 1998 as compared to $680,360 for the year ended 1997. The
cash flow provided during 1998 allowed the Registrant to fund capital
expenditures of $270,969, distribute $421,818 to the partners, and reduce Oak
Grove Commons debt by $47,299.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operations in fiscal years 1999, l998 and 1997 and are not expected to
materially affect the Registrant's operation in 2000.
Interest Rates
Interest rates on floating rate debt fluctuated throughout 1998 and 1999. Future
increases in the prime interest rate can adversely affect the operations of the
Registrant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments. The Registrant
had no holdings of derivative financial or commodity instruments at December 31,
1999. A review of the Registrants other financial instruments and risk exposures
at that date revealed that the Registrant had minor exposure to interest rate
risk due to the floating rate first mortgage debt of $1,125,002. The Registrant
utilized sensitivity analyses to assess the potential effect of this risk and
concluded that near-term changes in interest rates should not materially
adversely affect the Registrants financial position, results of operations or
cash flows.
F-343
<PAGE> 560
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
It should be noted that this 10-Q contains forward-looking information (as
defined in the Private Securities Litigation Reform Act of 1995) that involves
risk and uncertainty, including trends in the real estate investment market,
projected leasing and sales, and the future prospects for the Registrant. Actual
results could differ materially from those contemplated by such statements.
Liquidity and Capital Resources
Cash on hand as of June 30, 2000 is $1,489,966, an increase of $252,672 from the
year ended December 31, 1999. For the six month period ended June 30, 2000 net
cash provided by operating activities was $377,962. Cash was used for tenant
improvements in the amount of $113,891 and payments on mortgage notes payable
were made in the amount of $11,399. The Registrant expects the properties to
adequately fund anticipated capital expenditures for the remainder of 2000. The
anticipated capital expenditures are as follows:
<TABLE>
<CAPTION>
Other Capital Leasing Capital Total
------------- --------------- -----
<S> <C> <C> <C>
Oak Grove Commons $ 85,000 $ 2,703 $ 87,703
Leawood Fountain Plaza (76%) 0 87,286 87,286
-------- -------- --------
$ 85,000 $ 89,989 $174,989
======== ======== ========
</TABLE>
Oak Grove Commons' and Leawood Found Plaza's Leasing Capital includes funds for
tenant alterations and lease commissions for new and renewal leases. Other
Capital expenditures at Oak Grove Commons include the restoration of mansard
roofs over entry doors and masonry reconstruction. The Registrant reviews cash
reserves on a regular basis, prior to beginning scheduled capital improvements.
In the event there is not adequate funds, the capital improvement will be
postponed until such funds are available.
Results of Property Operations
F-344
<PAGE> 561
The results of operations for the Registrant's properties for the quarters ended
June 30, 2000 and 1999 are detailed in the schedule below. Expenses and revenues
of the Registrant are excluded.
<TABLE>
<CAPTION>
Oak Grove Commons Leawood Fountain Plaza (76%)
----------------- ----------------------------
<S> <C> <C>
Second Quarter 2000
Revenues $261,748 $275,201
Expenses 163,336 214,037
-------- --------
Net Income $ 98,412 $ 61,164
======== ========
Second Quarter 1999
Revenues $253,605 $268,133
Expenses 166,760 229,418
-------- --------
Net Income $ 86,845 $ 38,715
======== ========
</TABLE>
For the quarter ended June 30, 2000 and 1999, Oak Grove Commons had net income
of $98,412 and $86,845 respectively. This represents an increase in net income
of $11,567. Revenues increased $8,143 when comparing the two quarters, primarily
due to increases in base rental revenue ($5,876), interest income ($4,557), and
termination fee revenue ($15,400). These increases were partially offset by a
decrease in common area maintenance revenue ($17,597). The increased termination
fee revenue can be attributed to the early lease vacate of a former tenant at
the property. The decrease in common area maintenance revenues is related to
lower incurred reimbursable expenses. Expenses at Oak Grove Commons were
$163,336 for the quarter ended June 30, 2000 and $166,760 for the quarter ended
June 30, 1999. The decrease in expenses of $3,424 can primarily be attributable
to a decrease in real estate tax ($5,330), vacancy related expenses ($3,898),
and parking lot expenses ($2,585), partially offset by increases in interest
expense ($4,815), and bad debt expense ($3,308). The decrease in real estate tax
expense is due to a decrease in the annual tax amount due based on the most
recent property valuation.
At Leawood Fountain Plaza, net income increased from $38,715 for the quarter
ended June 30, 1999 to $61,164 for the quarter ended June 30, 2000. This
represents an increase in net income of $22,449. Revenues increased $7,068
primarily due to an increase in rental revenue ($5,366) and interest income
($3,367), partially offset by a decrease in escalation revenue ($1,743).
Expenses for the quarter ended June 30, 1999 were $229,418 and expenses for the
quarter ended June 30, 2000 were $214,037 representing a decrease in expenses of
F-345
<PAGE> 562
$15,381. This decrease in expenses is a result of decreases in parking lot
expenses ($8,588), depreciation and amortization expense ($23,552), partially
offset by an increase in real estate tax expense of ($15,141), and various other
operating expenses ($1,618). The decrease in parking lot expense is due to
parking lot sealing necessary in 1999 only. The decrease in depreciation and
amortization is due to fully amortized assets. The increase in real estate tax
expense can be attributed to appeal fees incurred by the Registrant in an effort
to lower the valuation and corresponding annual tax.
The occupancy levels at the Registrant's properties during the second quarter of
1999 remained high. These high levels can be attributed to the Registrant's
ability to lease space as it becomes available. The occupancy levels at the
Registrant's properties are listed below.
<TABLE>
<CAPTION>
Occupancy levels as of June 30,
-------------------------------
Property 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
Oak Grove Commons 98% 97% 98%
Leawood Fountain Plaza (76%) 98% 98% 94%
</TABLE>
Occupancy at Oak Grove Commons decreased 2% during the second quarter to 98%.
Leasing activity consisted of one tenant vacating their lease for 2,770 square
feet and two renewed their leases for 6,759 square feet. Oak Grove Commons has
no tenant occupying more than 10% of the available space.
During the second quarter of 2000, leasing activity at Leawood Fountain Plaza
consisted of the Registrant renewing one lease for 946 square feet and the
Registrant signing one new lease with a tenant for 4,470 square feet. The
occupancy increased to 98% throughout the quarter. The property has two major
tenants occupying 14% and 10% of the available space on leases which expire in
October 2001 and July 2004, respectively.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Registrant deems the Property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the Property, including disposal
value, if any, is less than its carrying amount. If the Property is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the Property exceeds its fair value. Fair value is based on quoted market
prices in active markets, if available. If quoted market prices are not
available, an estimated of fair value is based on the best information
available, including prices for similar properties or the results of valuation
techniques such as discounting estimated future cash flows. Considerable
management judgement is necessary to estimate fair value. Accordingly, actual
results could vary significantly from such estimates.
F-346
<PAGE> 563
2000 Comparison
At June 30, 2000, the Registrant's consolidated revenues for the quarter ended
and six month period ended are $538,215 and $1,056,165, respectively. Revenues
increased $15,874 and $33,956 when compared to the quarter and six month period
ended June 30, 1999. The increase in revenues can primarily be attributable to
increases in base rental revenue and interest income at both Oak Grove Commons
and Leawood Fountain Plaza. An increase in Termination Fee revenue and a
decrease in common area maintenance revenues were also reflected at Leawood
Fountain Plaza, as previously addressed in the property comparisons.
Consolidated expenses for the quarter ended June 30, 2000 and the quarter ended
June 30, 1999 are $410,948 and $418,237, respectively. For the six month period
ended June 30, 2000 and the six month period ended June 30, 1999, consolidated
expenses are $803,184 and 809,970, respectively. The decrease in expenses for
the three month period in the amount of $7,739 can primarily be attributed to
decreases in professional services expense ($15,513), insurance ($1,401),
parking lot and landscaping expense ($11,865), office general expenses ($4,020),
vacancy related expenses ($4,867), and other operating expenses ($3,257). These
decreased expenses were partially offset by increases in interest expense
($4,815), depreciation and amortization ($7,249), real estate tax expense
($9,811), utilities ($4,528), cleaning expense ($4,792), and payroll expense
($2,342). The decrease in professional services is due to lower legal costs
incurred regarding partnership related matters. The decreases in parking lot and
landscaping expenses and vacancy expenses, as well as the increases in interest
expenses, depreciation and amortization, and real estate tax have all been
previously addressed in the property comparisons. The decrease in expenses for
the six month period in the amount of $6,786 can be attributable to decreases in
repairs and maintenance related expenses ($1,331), professional services
($8,355),insurance ($4,490), parking lot and landscaping expenses ($9,735),
office general expenses ($3,539), vacancy expense ($6,128), and other operating
expense ($12,273). These decreased expenses were partially offset by increases
in interest expense ($7,149), depreciation and amortization expense ($1,446),
real estate tax expense ($10,613), management fees ($1,771), utilities ($6,532),
cleaning expenses ($7,212), and payroll expenses ($4,342). The decrease in other
operating expense is primarily due to decreases in snow removal and common area
related expenses.
1999 Comparison
At June 30, 1999, the Registrant's consolidated revenues for the quarter ended
and six month period ended are $522,341 and $1,022,209, respectively. Revenues
increased $63,916 and $143,395 when compared to the quarter and six month period
ended June 30, 1998. The increase in revenues can be primarily attributable to
increase in base rental revenue at Oak Grove commons and Leawood Fountain Plaza
in addition to an increase in common area maintenance revenue at Oak Grove.
F-347
<PAGE> 564
Consolidated expenses for the quarter ending June 30, 1999 and the quarter ended
June 30, 1998 are $418,237 and $388,458, respectively. For the six month period
ended June 30, 1999 and the six month period ended June 30, 1998, consolidated
expenses are $809,970 and $740,372, respectively. The increase in expenses for
the three month period of $29,779 can be attributable to management fees
($4,048), repairs and maintenance-building ($13,282), professional services
($17,410), payroll ($4,586), insurance ($2,783), and parking lot ($17,268).
These increases were partially offset by decreases in interest expense ($6,270),
depreciation/amortization ($12,812), and vacancy expense ($8,741). The increase
in repairs and maintenance is primarily due to additional interior and exterior
work at Leawood Fountain Plaza. The additional professional services incurred
during 2nd quarter 1999 are related to costs at the partnership level. The
increase in parking lot and landscaping are mainly due to sealing work done at
Leawood Fountain Plaza. The decrease in depreciation and amortization can be
attributed to fully depreciated and amortized assets.
Vacancy costs were greater during 1998 due to lower occupancy levels at Leawood
Fountain Plaza. The increase in expenses of $69,598 for the six month period can
be attributed to increases in management fees ($8,785), repairs and maintenance
($26,630), professional services ($25,333), payroll ($9,562), insurance
($6,209), parking lot ($17,515), office expenses ($1,571), and other operating
expenses ($14,582). These increases were partially offset by decreases in
interest ($11,052), depreciation/amortization ($18,891), real estate tax expense
($3,719), and vacancy expense ($6,186). The increase in management fees are due
to the related increased revenue level. In addition to the repairs and
maintenance increase addressed above, there was also an increase reflected in
heating , ventilation, and air-conditioning repairs in 1st quarter 1999, which
contributed to the six month increase. The increase in payroll is due to
additional office personnel at the site levels. The increase in other operating
expenses is primarily due to fire/crime prevention related expenses and snow
removal.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operations.
F-348
<PAGE> 565
D. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Nooney Income Fund Ltd., L.P.:
We have audited the accompanying balance sheets of Nooney Income Fund Ltd., L.P.
(a limited partnership) as of December 31, 1999 and 1998, and the related
statements of operations, partners' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedule immediately following the financial statements.
These financial statements and financial statement schedule are the
responsibility of the Partnership's general partners. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Partnership's general partners, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nooney Income Fund Ltd., L.P. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, MO
February 22, 2000
F-349
<PAGE> 566
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
BALANCE SHEETS - DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,237,294 $ 804,739
ACCOUNTS RECEIVABLE (includes $42,671 and
$6,925 due from related party in 1999 and
1998, respectively) 171,996 97,104
PREPAID EXPENSES 14,948 12,332
INVESTMENT PROPERTY:
Land 1,946,169 1,946,169
Buildings and improvements 8,654,403 8,601,373
------------ ------------
10,600,572 10,547,542
Less accumulated depreciation (5,271,378) (5,010,424)
------------ ------------
5,329,194 5,537,118
DEFERRED EXPENSES - At amortized cost 118,876 111,293
------------ ------------
TOTAL $ 6,872,308 $ 6,562,586
============ ============
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 79,070 $ 186,291
Accrued real estate taxes 185,415 180,361
Refundable tenant deposits 145,711 131,577
Mortgage note payable 1,125,002 1,149,701
------------ ------------
Total liabilities 1,535,198 1,647,930
PARTNERS' EQUITY 5,337,110 4,914,656
------------ ------------
TOTAL $ 6,872,308 $ 6,562,586
============ ============
</TABLE>
F-350
<PAGE> 567
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Rental and other income $2,086,824 $1,851,792 $1,772,253
Interest 28,990 16,073 23,406
---------- ---------- ----------
Total revenues 2,115,814 1,867,865 1,795,659
---------- ---------- ----------
EXPENSES:
Interest 93,177 106,461 117,437
Depreciation and amortization 403,005 433,549 443,004
Real estate taxes 253,148 249,836 273,703
Property management fees - related party 125,314 111,606 107,130
Repairs and maintenance 232,309 133,264 127,354
Utilities 123,689 118,114 108,281
Other operating expenses (includes $25,000
in each year to related party) 462,718 481,894 425,619
---------- ---------- ----------
Total expenses 1,693,360 1,634,724 1,602,528
---------- ---------- ----------
NET INCOME $ 422,454 $ 233,141 $ 193,131
========== ========== ==========
NET INCOME ALLOCATION:
General partners $ 4,262 $ 39,944 $ 30,127
Limited partners 418,192 193,197 163,004
LIMITED PARTNERS DATA:
Net income per unit $ 27.55 $ 12.72 $ 10.74
========== ========== ==========
Cash distributions - investment income per unit $ - $ 12.72 $ 10.74
========== ========== ==========
Cash distributions - return of capital per unit $ - $ 12.28 $ 8.01
========== ========== ==========
Weighted average limited partnership
units outstanding 15,180 15,180 15,180
========== ========== ==========
</TABLE>
F-351
<PAGE> 568
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
BALANCE (DEFICIT), JANUARY 1, 1997 $ 5,314,386 $ (87,894) $ 5,226,492
Net income 163,004 30,127 193,131
Cash distributions (284,625) (31,665) (316,290)
----------- ----------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1997 5,192,765 (89,432) 5,103,333
Net income 193,197 39,944 233,141
Cash distributions (379,625) (42,193) (421,818)
----------- ----------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1998 5,006,337 (91,681) 4,914,656
Net income 418,192 4,262 422,454
----------- ----------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1999 $ 5,424,529 $ (87,419) $ 5,337,110
=========== =========== ===========
</TABLE>
F-352
<PAGE> 569
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 422,454 $ 233,141 $ 193,131
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 366,063 395,206 405,604
Amortization of deferred expenses 36,942 38,343 37,400
Net changes in accounts affecting operations:
Accounts receivable (74,892) 17,934 60,287
Prepaid expenses (2,616) (1,812) 302
Deferred expenses (44,525) (88,341) (34,452)
Accounts payable and accrued expenses (107,221) 78,082 (1,296)
Accrued real estate taxes 5,054 (4,575) 14,238
Refundable tenant deposits 14,134 11,560 5,146
----------- ----------- -----------
Net cash provided by operating activities 615,393 679,538 680,360
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Net additions to investment property (158,139) (270,969) (231,208)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners -- (421,818) (316,290)
Payments on mortgage note payable (24,699) (47,299) (64,800)
----------- ----------- -----------
Net cash used in financing activities (24,699) (469,117) (381,090)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 432,555 (60,548) 68,062
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 804,739 865,287 797,225
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 1,237,294 $ 804,739 $ 865,287
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION - Cash
paid for interest $ 101,625 $ 98,013 $ 117,437
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-353
<PAGE> 570
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS
Nooney Income Fund Ltd., L.P. (the "Partnership") is a limited partnership
organized under the laws of the State of Missouri on October 12, 1983 for the
purpose of investing in income-producing real properties, such as shopping
centers, office buildings, warehouses and other commercial properties. The
Partnership's portfolio is comprised of an office/warehouse complex located in
Downers Grove, Illinois (Oak Grove Commons) which generated 47.7% of rental and
other income for the year ended December 31, 1999, and an office complex in
Leawood, Kansas (Leawood Fountain Plaza) which generated 52.3% of rental and
other income for the year ended December 31, 1999.
The Partnership owns 100% of Oak Grove Commons and a 76% undivided interest in
Leawood Fountain Plaza. The Partnership's proportionate share of the results of
operations of Leawood Fountain Plaza is included in the statements of operations
of the Partnership. The Partnership's proportionate share of the assets and
liabilities of Leawood Fountain Plaza is included in the balance sheets
presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include only those assets, liabilities and results of
operations of the partners which relate to the business of the Partnership. The
statements do not include any assets, liabilities, revenues or expenses
attributable to the partners' individual activities. No provision has been made
for federal and state income taxes since these taxes are the personal
responsibility of the partners.
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 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.
Prior to October 31, 1997, the corporate general partner was a wholly owned
subsidiary of Nooney Company. One of the individual general partners was an
officer, director and shareholder of Nooney Company. The other individual
general partner's spouse's estate was a shareholder of Nooney Company. Nooney
Krombach Company, a wholly owned subsidiary of Nooney Company, managed the
Partnership's real estate for a management fee. Property management fees paid to
Nooney Krombach Company were $90,260 for the year ended November 30, 1997.
Additionally, the Partnership paid Nooney Krombach Company $20,833 in 1997 as
reimbursement for management services and indirect expenses in connection with
the management of the Partnership.
F-354
<PAGE> 571
On October 31, 1997, Nooney Company sold its wholly owned subsidiary, Nooney
Investors, Inc., the corporate general partner of the Partnership to S-P
Properties, Inc., a California corporation, which in turn is a wholly owned
subsidiary of CGS Real Estate Company, Inc., a Texas corporation.
Simultaneously, Gregory J. Nooney, Jr., an individual general partner and PAN,
Inc., a corporate general partner, sold their economic interests to S-P
Properties, Inc. and resigned as general partners. CGS Real Estate also
purchased the real estate management business of Nooney Krombach Company and
formed Nooney, Inc. to perform the management of the Partnership.
In September 1999, Nooney, Inc. changed its name to American Spectrum Midwest,
Inc. and began doing business under the new name at that time. Ownership
remained unchanged. Property management fees paid to American Spectrum Midwest,
Inc. were $121,143, $111,606 and $16,870 for the years ended December 31, 1999,
1998 and 1997, respectively. Additionally, the Partnership paid American
Spectrum Midwest, Inc. $25,000 in 1999 and 1998 and $4,167 in 1997 as
reimbursement for management services and indirect expenses in connection with
the management of the Partnership.
The Partnership considers all highly liquid debt instruments with a maturity of
three months or less at date of purchase to be cash equivalents.
Investment property is recorded at the lower of cost or net realizable value.
The Partnership reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Partnership considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Partnership deems the property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the property, including disposal
value if any, is less than its carrying amount. If the property is determined to
be impaired, the loss is measured as the amount by which the carrying amount of
the property exceeds its fair value. Fair value is based on quoted market prices
in active markets, if available. If quoted market prices are not available, an
estimate of fair value is based on the best information available, including
prices for similar properties or the results of valuation techniques such as
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate fair value. Accordingly, actual results could vary
significantly from such estimates.
Buildings and improvements are depreciated over their estimated useful lives (30
years) using the straight-line method. Tenant alterations are depreciated over
the term of the lease on a straight-line basis.
Deferred expenses consist of lease fees amortized over the terms of their
respective leases.
Lease agreements are accounted for as operating leases and rentals from such
leases are reported as revenues ratably over the terms of the leases. Certain
lease agreements provide for rent concessions. At December 31, 1999 accounts
receivable include approximately $48,000 ($39,000 in 1998) of accrued rent
concessions which is not yet due under the terms of various lease agreements.
F-355
<PAGE> 572
Net Operating Cash Income, as defined in the Partnership Agreement, is
distributed quarterly as follows: (1) 90% pro rata to all partners based upon
the relationship of original capital contributions of all the partners; (2) 9%
to the individual general partners as their annual partnership management fee;
and (3) 1% to the individual general partners.
For financial statement and income tax reporting, the income from operations is
allocated as follows: first, a special allocation of gross income to the
individual general partners in the amount that Net Operating Cash Income
distributed to the individual general partners under (2) and (3) above exceeds
1% of net operating cash income for the period; then, 1% to the individual
general partners and the remainder pro rata to all partners based upon the
relationship of original capital contributions of all of the partners.
Limited partnership per unit computations are based on the weighted average
number of limited partnership units outstanding during the period.
The Partnership adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires entities to report changes in equity that result from transactions and
economic events other than those with shareholders. The Partnership had no other
comprehensive income items, accordingly net income and comprehensive income are
the same.
3. MORTGAGE NOTE PAYABLE
Mortgage note payable at December 31 consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable to bank, principal due in monthly installments
of $1,900 plus interest at 3% over the thirty-day LIBOR
rate (8.83% at December 31, 1999) to July 2000 when
remaining principal is due $ 1,125,002 $ 1,149,701
=========== ===========
</TABLE>
Management intends to refinance the note payable under similar terms by
extending the due date.
The mortgage note is collateralized by a first deed of trust on Oak Grove
Commons which has a net book value of approximately $2,895,000 at December 31,
1999.
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" the estimated fair value
of mortgage notes payable with maturities greater than one year is determined
based on rates currently available to the Partnership for mortgage notes with
similar terms and remaining maturities as the present value of expected cash
flows. The carrying amount equals its estimated fair value due to the variable
nature of the debt and the terms are consistent with those the Partnership could
currently obtain.
F-356
<PAGE> 573
4. RENTAL REVENUES UNDER OPERATING LEASES
Minimum future rental revenues under noncancelable operating leases in effect as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 1,660,000
2001 1,278,000
2002 789,000
2003 421,000
2004 225,000
Thereafter 215,000
-----------
Total $ 4,588,000
===========
</TABLE>
In addition, certain lease agreements require tenant participation in certain
operating expenses. The income is recorded in the same period that the related
expense is incurred. Tenant participation in expenses included in revenues were
not significant for the years ended December 31, 1999, 1998 and 1997.
5. FEDERAL INCOME TAX STATUS
The general partners believe, based on opinion of legal counsel, that Nooney
Income Fund Ltd., L.P. is considered a partnership for income tax purposes.
Selling commissions and offering expenses incurred in connection with the sale
of limited partnership units are not deductible for income tax purposes and
therefore increase the partners' bases. Investment properties are depreciated
for income tax purposes using rates which differ from rates used for computing
depreciation for financial statement reporting. Rents received in advance are
includable in taxable income in the year received. Rent concessions, recognized
ratably over lease terms for financial statement purposes, are includable in
taxable income in the year rents are received. Losses in connection with the
writedown of investment property are not recognized for income tax purposes
until the property is disposed.
F-357
<PAGE> 574
The comparison of financial statement and income tax reporting is as follows:
<TABLE>
<CAPTION>
Financial Income
Statement Tax
--------- ---
<S> <C> <C>
1999:
Net income $ 422,454 $ 343,949
Partners' equity 5,337,110 6,418,634
1998:
Net income (loss) $ 233,141 $ (45,152)
Partners' equity 4,914,656 6,074,685
1997:
Net income (loss) $ 193,131 $ (59,230)
Partners' equity 5,103,333 6,541,529
</TABLE>
6. BUSINESS SEGMENTS (IN THOUSANDS)
The Partnership has two reportable operating segments: Leawood Fountain Plaza
and Oak Grove Commons. In 1998 and 1997, the Partnership's management evaluated
performance of each segment based on profit or loss from operations before
allocation of property writedowns, general and administrative expenses, unusual
and extraordinary items, and interest. In 1999, the Partnership began evaluating
each segment's operations including allocation of property write-downs and
interest income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies (see Note 2).
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Leawood Fountain Plaza $1,139.3 $ 975.0 $ 899.0
Oak Grove Commons 962.5 879.6 886.5
-------- -------- --------
$2,101.8 $1,854.6 $1,785.5
======== ======== ========
Operating profit:
Leawood Fountain Plaza $ 292.1 $ 139.5 $ 63.4
Oak Grove Commons 312.4 134.6 177.3
-------- -------- --------
$ 604.5 $ 274.1 $ 240.7
======== ======== ========
</TABLE>
F-358
<PAGE> 575
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Capital expenditures:
Leawood Fountain Plaza $ 106.7 $ 74.7 $ 90.9
Oak Grove Commons 51.4 196.3 140.3
-------- -------- --------
$ 158.1 $ 271.0 $ 231.2
======== ======== ========
Depreciation and amortization:
Leawood Fountain Plaza $ 219.3 $ 287.6 $ 289.3
Oak Grove Commons 198.0 248.3 256.1
-------- -------- --------
$ 417.3 $ 535.9 $ 545.4
======== ======== ========
Assets:
Leawood Fountain Plaza $2,998.2 $4,674.1
Oak Grove Commons 3,498.6 3,818.8
-------- --------
$6,496.8 $8,429.9
======== ========
</TABLE>
Reconciliations of segment data to the Partnership's consolidated data follow:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Segments $2,101.8 $1,854.6 $1,785.5
Corporate and other 14.0 13.3 10.2
-------- -------- --------
$2,115.8 $1,867.9 $1,795.7
======== ======== ========
Net income (loss):
Segments $ 604.5 $ 274.1 $ 240.7
Other income (expense) 14.0 13.0 8.4
General and administrative expenses (196.0) (54.0) (55.8)
-------- -------- --------
$ 422.5 $ 233.1 $ 193.3
======== ======== ========
</TABLE>
F-359
<PAGE> 576
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Depreciation and amortization:
Segments $ 417.3 $ 535.9 $ 545.4
Corporate and other (14.3) (102.4) (102.4)
-------- -------- --------
$ 403.0 $ 433.5 $ 443.0
======== ======== ========
Assets:
Segments $6,496.8 $8,492.9
Corporate and other 375.5 (1,930.3)
-------- --------
$6,872.3 $6,562.6
======== ========
</TABLE>
* * * * *
F-360
<PAGE> 577
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D
----------- ------------ ------------------------------------------ -----------
Initial Cost to Partnership Costs Capitalized
------------------------------------------ Subsequent
Buildings and to
Description Encumbrances Land Improvements Total Acquisition
----------- ------------ ---- ------------ ----- -----------
<S> <C> <C> <C> <C> <C>
Oak Grove Commons
Office/Warehouse Complex $ 1,125,002 $ 936,122 $ 4,282,447 $ 5,218,569 $ (22,652)
Downers Grove, Illinois
Leawood Fountain Plaza
Office Complex (76%
undivided interest), 1,010,047 6,306,150 7,316,197 (1,911,542)
Leawood, Kansas
----------- ----------- ----------- ----------- -----------
Total $ 1,125,002 $ 1,946,169 $10,588,597 $12,534,766 $(1,934,194)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Column E
-----------------------------------------
Gross Amounts at Which
Carried at Close of Period
-----------------------------------------
Buildings and
Land Improvements Total
---- ------------ -----
<S> <C> <C> <C>
Oak Grove Commons
Office/Warehouse Complex $ 936,122 $ 4,259,795 $ 5,195,917
Downers Grove, Illinois
Leawood Fountain Plaza
Office Complex (76%
undivided interest), 1,010,047 4,394,608 5,404,655
Leawood, Kansas
----------- ----------- -----------
Total $ 1,946,169 $ 8,654,403 $10,600,572
=========== =========== ===========
</TABLE>
F-361
<PAGE> 578
<TABLE>
<CAPTION>
Column F Column G Column H Column I
----------- ------------ -------- ---------------------
Life on which
Depreciation
Accumulated Date of Date in Latest Income
Deprecation Construction Acquired Statement is Computed
----------- ------------ -------- ---------------------
<S> <C> <C> <C> <C>
Oak Grove Commons
Office/Warehouse Complex
Downers Grove, Illinois $ 2,300,744 1972, 1976 1/24/84 30 years
Leawood Fountain Plaza
Office Complex (76%
undivided interest),
Leawood, Kansas 2,970,634 1982, 1983 2/20/85 30 years
-----------
Total $ 5,271,378
===========
</TABLE>
(1) Amounts shown are net of assets written-off and the following writedowns:
<TABLE>
<S> <C>
Oak Grove Commons
Office/Warehouse Complex $ 693,000
Leawood Fountain Plaza Office
Complex 2,389,000
</TABLE>
F-362
<PAGE> 579
NOONEY INCOME FUND LTD., L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(A) Reconciliation of amounts in Column E:
Balance at beginning of period $ 10,547,542 $ 10,393,196 $ 10,251,103
Add - Cost of improvements 158,139 270,969 231,208
Less - Cost of disposals (105,109) (116,623) (89,115)
------------ ------------ ------------
Balance at end of period $ 10,600,572 $ 10,547,542 $ 10,393,196
============ ============ ============
(B) Reconciliation of amounts in Column F:
Balance at beginning of period $ 5,010,424 $ 4,731,841 $ 4,415,352
Add - Provision during the period 366,063 395,206 405,604
Less - Depreciation on disposals (105,109) (116,623) (89,115)
------------ ------------ ------------
Balance at end of period $ 5,271,378 $ 5,010,424 $ 4,731,841
============ ============ ============
(C) The aggregate cost of real estate owned
for federal income tax purposes $ 13,682,572 $ 13,629,542 $ 13,475,196
============ ============ ============
</TABLE>
F-363
<PAGE> 580
E. UNAUDITED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
ASSETS: (Unaudited) 1999
----------- ----
<S> <C> <C>
Cash $ 1,489,966 $ 1,237,294
Accounts receivable 206,251 171,996
Prepaid expenses and deposits 23,062 14,948
Investment property, at cost:
Land and improvements 1,946,169 1,946,169
Buildings 8,733,893 8,654,403
----------- -----------
10,680,062 10,600,572
Less accumulated depreciation 5,415,980 5,271,378
----------- -----------
5,264,082 5,329,194
Deferred expenses - at amortized cost 132,743 118,876
----------- -----------
$ 7,116,104 $ 6,872,308
=========== ===========
LIABILITIES AND PARTNERS' EQUITY:
Liabilities:
Accounts payable and accrued expenses $ 83,959 $ 79,070
Accrued real estate taxes 184,526 185,415
Mortgage notes payable 1,113,603 1,125,002
Refundable tenant deposits 143,925 145,711
----------- -----------
1,526,013 1,535,198
Partners' equity 5,590,091 5,337,110
----------- -----------
$ 7,116,104 $ 6,872,308
=========== ===========
</TABLE>
F-364
<PAGE> 581
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rental and other income $ 529,049 $ 522,341 $1,036,222 $1,022,205
Interest 9,166 0 19,943 4
---------- ---------- ---------- ----------
538,215 522,341 1,056,165 1,022,209
EXPENSES:
Interest 26,641 21,826 52,304 45,155
Depreciation and amortization 108,064 100,815 203,459 202,013
Real estate taxes 73,980 64,169 136,387 125,774
Property management fees paid to
American Spectrum Midwest 32,019 31,277 62,967 61,196
Reimbursement to American Spectrum
Midwest for partnership management
services and indirect expenses 6,250 6,250 12,500 12,500
Repairs & maintenance 29,347 30,442 53,922 55,253
Professional services 25,506 41,019 52,288 60,643
Utilities 29,512 24,984 58,780 52,248
Cleaning 18,820 14,028 33,335 26,123
Payroll 17,474 15,132 36,226 31,884
Insurance 9,218 10,619 18,892 23,382
Parking lot/landscaping 15,605 27,470 23,380 33,115
Office general 5,310 9,330 12,324 15,863
Vacancy expense 716 5,583 3,257 9,385
Other operating expenses 12,036 15,293 43,163 55,436
---------- ---------- ---------- ----------
410,498 418,237 803,184 809,970
---------- ---------- ---------- ----------
NET INCOME $ 127,717 $ 104,104 $ 252,981 $ 212,239
========== ========== ========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 7.05 $ 5.67 $ 14.03 $ 11.61
========== ========== ========== ==========
PARTNERS' EQUITY:
Beginning of period $5,462,374 $5,022,791 $5,337,110 $4,914,656
Net income 127,717 104,104 252,981 212,239
---------- ---------- ---------- ----------
End of period $5,590,091 $5,126,895 $5,590,091 $5,126,895
========== ========== ========== ==========
</TABLE>
F-365
<PAGE> 582
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 252,981 $ 212,239
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 203,459 202,013
Changes in assets and liabilities:
Increase in accounts receivable (34,255) (26,103)
Increase in prepaid expenses (8,114) (10,632)
Increase in deferred expenses (38,323) (19,769)
Increase (decrease) in accounts payable 4,889 (56,156)
(Decrease) increase in accrued real estate
taxes (889) 805
(Decrease) increase in refundable tenant
deposits (1,786) 10,739
----------- -----------
Total adjustments 124,981 100,897
----------- -----------
Net cash provided by operating activities 377,962 313,136
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Net additions to investment property (113,891) (39,092)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on mortgage notes payable (11,399) (13,299)
----------- -----------
NET INCREASE IN CASH 252,672 260,745
----------- -----------
CASH
Beginning of period 1,237,294 804,739
----------- -----------
CASH
End of period 1,489,966 1,065,484
=========== ===========
</TABLE>
F-366
<PAGE> 583
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE A:
Refer to the Registrant's financial statements for the fiscal year ended
December 31, 1999 which are contained in the Registrant's Annual report on Form
10-K, for a description of the accounting policies which have been continued
without change except as noted below. Also, refer to the footnotes to those
statements for additional details of the Registrant's financial condition. The
details in those notes have not changed except as a result of normal
transactions in the interim or as noted below.
NOTE B:
The financial statements include only those assets, liabilities, and results of
operations of the partners which relate to the business of Nooney Income Fund.,
L.P. The statements do not include assets, liabilities, revenues or expenses
attributable to the partners' individual activities. No provision has been made
for federal and state income taxes since these taxes are the responsibilities of
the partners. In the opinion of the general partners, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in financial position at
June 30, 2000 and for all periods presented have been made. The results of
operations for the three and six month periods ended June 30, 2000, are not
necessarily indicative of the results which may be expected for the entire year.
NOTE C:
The Registrant's properties are managed by American Spectrum Midwest (formerly
Nooney, Inc.), a wholly-owned subsidiary of CGS Real Estate Company. Nooney
Income Investments,
F-367
<PAGE> 584
Inc., a general partner, is a wholly-owned subsidiary of S-P Properties, Inc.
S-P Properties, Inc is a wholly-owned subsidiary of CGS Real Estate Company.
NOTE D:
The earnings per limited partnership unit for the three and six month periods
ended June 30, 2000 and 1999 were computed on 15,180 units, the number of units
outstanding during the periods.
NOTE E:
CGS is continuing the process of developing a plan pursuant to which the
properties owned by the Registrant would be combined with the properties of
other real estate partnerships managed by CGS and its affiliates. These limited
partnerships own office properties, industrial properties, shopping centers, and
residential apartment properties. It is expected that the acquiror would in the
future qualify as a real estate investment trust. Limited partners would receive
shares of common stock in the acquiror which would be listed on a national
securities exchange or the NASDAQ national market system.
NOTE F:
The Registrant has no items of other comprehensive income, accordingly, net
income and other comprehensive income are the same.
NOTE G:
The Partnership has two reportable operating segments: Leawood Fountain Plaza
and Oak Grove Commons. In the second quarter of 1999, the Partnership's
management evaluated performance of each segment based on profit or loss from
operations before allocation of property write downs, general and administrative
expenses, unusual and extraordinary items, and interest. In 2000, the
Partnership's management is evaluating performance on each segment in this same
manner, in addition to including the allocation of property write downs.
F-368
<PAGE> 585
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Leawood Fountain Plaza (76%) $ 275,201 $ 268,133 $ 540,463 $ 535,118
Oak Grove Commons 261,748 253,605 513,966 485,262
---------- ---------- ---------- ----------
536,949 521,738 1,054,429 1,020,380
========== ========== ========== ==========
Operating Profit:
Leawood Fountain
Plaza (76%) $ 61,164 $ 38,715 $ 129,250 $ 88,973
Oak Grove Commons 98,412 86,845 180,696 145,698
---------- ---------- ---------- ----------
159,576 125,560 309,946 234,671
========== ========== ========== ==========
Capital Expenditures:
Leawood Fountain Plaza (76%) $ 102,834 $ 7,600 $ 105,645 $ 20,773
Oak Grove Commons 5,404 8,760 8,246 18,319
---------- ---------- ---------- ----------
108,238 16,360 113,891 39,092
========== ========== ========== ==========
Depreciation and Amortization:
Leawood Fountain Plaza (76%) $ 48,849 $ 72,401 $ 95,632 $ 148,054
Oak Grove Commons 59,215 59,780 107,827 116,690
---------- ---------- ---------- ----------
108,064 132,181 203,459 264,744
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Assets:
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Leawood Fountain Plaza (76%) $3,081,733 $2,998,208
Oak Grove Commons 3,630,596 3,498,609
---------- ----------
6,712,329 6,496,817
========== ==========
</TABLE>
F-369
<PAGE> 586
Reconciliation of segment data to the Partnerships's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Segments $ 536,949 $ 521,738 $ 1,054,429 $ 1,020,380
Corporate and other 1,266 603 1,736 1,829
----------- ----------- ----------- -----------
538,215 522,341 1,056,165 1,022,209
=========== =========== =========== ===========
Net Income:
Segments $ 159,576 $ 125,560 $ 309,946 $ 234,671
Corporate and other
income 1,266 603 1,737 1,829
General and admin
expenses (33,125) (22,059) (58,702) (24,261)
----------- ----------- ----------- -----------
Net income 127,717 104,104 252,981 212,239
=========== =========== =========== ===========
Depreciation and
Amortization
Segments $ 108,064 $ 132,181 $ 203,459 $ 264,744
Corporate and other 0 (31,366) 0 (62,731)
----------- ----------- ----------- -----------
108,064 100,815 203,459 202,013
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Assets:
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Segments $6,712,329 $6,496,817
Corporate and other 403,775 375,491
---------- ----------
7,116,104 6,872,308
========== ==========
</TABLE>
F-370
<PAGE> 587
NOONEY INCOME FUND LTD. II L.P.
HISTORICAL FINANCIAL DATA
F-371
<PAGE> 588
TABLE OF CONTENTS
I. Nooney Income Fund Ltd. II L.P.
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and Results
of Operations - December 31, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Quarters Ended June 30, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Unaudited Financial Statements - Six Months Ended June 30, 2000 and 1999
F-372
<PAGE> 589
A. SELECTED HISTORICAL FINANCIAL DATA OF NOONEY INCOME FUND LTD. II L.P.
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended December 31, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of June 30, 2000 and for the six months ended June
30, 2000 and 1999 have been derived from the unaudited financial statements of
the Partnership. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto which
follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------- -------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income $ 1,755 $ 3,502 $ 3,355 $ 3,681 $ 3,724 $ 1,786 $ 2,050
Interest and other income 32 8 2 -- 4 -- 2
------- ------- ------- ------- ------- ------- -------
Total revenues 1,787 3,510 3,357 3,681 3,728 1,786 2,052
======= ======= ======= ======= ======= ======= =======
EXPENSES:
Property operating 652 1,193 1,226 1,227 1,582 684 600
Management and advisory fees 107 211 202 215 217 126 142
Real estate and other taxes 367 755 598 535 544 442 258
Depreciation and amortization 450 653 671 755 766 362 402
Interest expense 1 614 596 584 554 269 301
------- ------- ------- ------- ------- ------- -------
Total expenses 1,577 3,426 3,293 3,317 3,663 1,883 1,703
======= ======= ======= ======= ======= ======= =======
Net Income...................(loss) $ 210 $ 84 $ 64 $ 364 $ 65 $ (97) $ 349
======= ======= ======= ======= ======= ======= =======
</TABLE>
F-373
<PAGE> 590
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average limited partnership units
outstanding 19,221 19,221 19,221 19,221 19,221 19,221 19,221
Limited partnership income (loss) per unit 10.17 3.69 2.66 17.83 3.34 (5.01) 17.99
Ratio of earnings to fixed charges (1) 211 1.14 1.11 1.62 1.12 -- 2.16
Deficiency of earnings to cover fixed
charges (2) -- -- -- -- -- 97 --
Cash distributions (255) (255) (255) (382) -- -- --
Cash distributions per unit 12.50 12.50 12.50 18.75 -- -- --
Total properties owned at end of period (3) 4 4 4 4 4 4 4
Book value per limited partnership unit 462 453 443 442 445 421 447
Per unit value assigned for the consolidation 806
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,092 $ 1,323 $ 1,378 $ 1,250 $ 1,190 $ 1,264 $ 1,354
Real estate held for investment, net 15,167 14,798 14,745 14,373 14,315 14,345 14,114
Accounts receivable, net 321 220 153 205 258 203 432
Other assets 224 132 288 302 346 309 414
Total assets, at book value 16,804 16,473 16,564 16,130 16,109 16,121 16,314
Total assets, at valued assigned for
the consolidation 23,360
Total liabilities 8,160 8,001 8,283 7,867 7,782 7,956 7,637
General partnership deficit (127) (128) (131) (131) (131) 82 87
Limited partnership equity 8,771 8,600 8,412 8,394 8,458 8,083 8,590
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net (26) 231 55 (129) (59) 14 164
Cash provided by operating activities 824 711 955 644 684 364 368
</TABLE>
1) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
2) Deficiency to cover fixed charges is the amount of earnings that would be
required to achieve a ratio of earnings to fixed charges of 1.0.
3) Nooney Income Fund Ltd. II, in addition to owning four buildings, owns a
24% interest in a partnership that owns LeaWood Fountain Plaza. Nooney
Income Fund Ltd., an affiliate of Nooney Income Fund Ltd. II, owns the
remaining 76% partnership interest
F-374
<PAGE> 591
B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - DECEMBER 31, 1999, 1998 AND 1997
Liquidity and Capital Resources
Cash on hand as of December 31, 1999 was $1,190,211, a decrease of $59,394 from
the year ended December 31, 1998. The Registrant expects the capital
expenditures during 2000 will be adequately funded by current cash reserves and
the properties' operating cash flow. The anticipated capital expenditures are as
follows:
<TABLE>
<CAPTION>
Other Leasing
Capital Capital Total
------- ------- -----
<S> <C> <C> <C>
NorthCreek Office Park $ 66,000 $ 65,831 $131,831
Tower Industrial Building -0- 0 -0-
Northeast Commerce Center 28,400 349,377 377,777
Countryside Office Park 23,390 93,659 117,049
Leawood Fountain Plaza (24%) -0- 73,847 73,847
-------- -------- --------
$117,790 $582,714 $700,504
======== ======== ========
</TABLE>
At NorthCreek Office Park, other capital has been budgeted for parking lot
restoration. Leasing capital is anticipated for tenant improvements and lease
commissions for new and renewal tenants.
At Northeast Commerce Center, other capital has been budgeted for parking lot
overlay and striping, and leasing capital has been budgeted for tenant
improvements and lease commissions for new tenants anticipated during the year
2000.
At Countryside Office Park, other capital has been budgeted for the restoration
of common area ceiling tiles and two new heating and air conditioning units.
Leasing capital has been budgeted for tenant improvements and lease commissions
for new and renewal tenants.
At Leawood Fountain Plaza, leasing capital has been budgeted for tenant
improvements and lease commissions for new and renewal tenants.
The Registrant reviews cash reserves on a regular basis prior to beginning
scheduled capital improvements. In the event there is not adequate funds, the
capital improvement will be postponed until such funds are available.
The Registrant believes that due to market conditions Countryside Office Park
should be sold. Management has increased the occupancy level to 90% at December
31, 1999, from 77% at year-end 1998. The Registrant, in the year 2000, is
evaluating sale and other options regarding the property due to the increased
occupancy level and improved market conditions in the surrounding area(s) during
the second half of 1999.
The future liquidity of the Registrant is dependent on its ability to fund
future capital expenditures and mortgage payments from operations and cash
reserves, maintain occupancy, and negotiate with lenders the refinancing of
mortgage debt as it matures.
F-375
<PAGE> 592
Results of Operations
The results of operations for the Registrant's properties for the years ended
December 31, 1999, 1998 and 1997 are detailed in the schedule below. Expenses of
the Registrant are excluded.
<TABLE>
<CAPTION>
NorthCreek Tower Northeast Countryside Leawood
Office Park Industrial Commerce Office Park Fountain
(100%) (100%) (100%) (100%) Plaza (24%)
------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
1999
Revenues $ 1,509,059 $ 203,106 $ 409,739 $ 1,220,581 $ 359,778
Expenses 1,165,131 118,441 623,696 1,231,047 267,597
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 343,928 $ 84,665 $ (213,957) $ (10,466) $ 92,181
1998
Revenues $ 1,377,291 $ 202,221 $ 692,068 $ 1,025,373 $ 307,888
Expenses 1,199,133 108,696 723,378 988,862 264,297
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 178,158 $ 93,525 $ (31,310) $ 36,511 $ 43,591
1997
Revenues $ 1,303,843 $ 196,947 $ 676,065 $ 905,834 $ 283,881
Expenses 1,222,155 106,565 625,690 975,298 263,850
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 81,688 $ 90,382 $ 50,375 $ (69,464) $ 20,031
</TABLE>
1999 PROPERTY COMPARISONS
At NorthCreek Office Park, revenues increased $131,768 when comparing 1999 to
1998. The increase in revenue is primarily due to increases in both base rental
revenue ($99,847) and escalation revenue ($34,190). The increase in base rent
can be attributed to increased rental rates. Increased reimbursable expenses in
1999, compared to that of 1998, resulted in the increased escalation revenue.
Expenses decreased $34,002 when comparing the two year-end periods, primarily
due to decreases in interest expense ($16,525), depreciation and amortization
($51,900), real estate tax ($15,783), and vacancy related expenses ($3,763).
These decreases were partially offset by increases in electric repair expense
($9,500), snow removal ($5,291), repairs and maintenance general building
($20,838), management fees ($7,907), and legal fees ($9,802). The decrease in
interest expense is due to a declining principal balance. The decrease in
depreciation and amortization can be attributed to contra-depreciation entries
depreciating the property write down which was recorded at the partnership level
prior to 1999. All property write downs have been recorded at the property level
in 1999. The decrease in real estate tax expense is due to lower annual taxes as
a result of a decrease in the property's appraised value by the taxing
authority. The increase in repairs and maintenance general building can be
attributed to renovations and updates in common areas of the property (hallways
and restrooms) done in 1999.
F-376
<PAGE> 593
The revenues at Tower Industrial Building remain stable as the building
continues to be occupied by a single tenant. Expenses increased $9,745 when
comparing the two year-end periods. This is primarily due to increases in real
estate tax ($1,697), general and administrative related expenses ($4,290), and
depreciation expense ($3,550).
Revenues at Northeast Commerce Center decreased when comparing 1999 to 1998 by
$282,329. A significant decrease of $328,668 was reflected in base rental
revenue. This decrease was partially offset by increases in escalation revenues
($31,989) and other miscellaneous revenues ($14,350). The decrease in base
rental revenues can be attributed to the property being only 50% occupied
throughout the entire year. Expenses decreased $99,682 when comparing the two
year-end periods, primarily due to decreases in interest expense ($8,413),
depreciation and amortization ($73,033), heating and air-conditioning expenses
($16,593), contract cleaning expenses ($29,757), and management fees ($16,940).
These decreases were partially offset by increases in vacancy related expenses
($50,886) and various other operating expenses ($5,831). The decreases in both
interest expense and depreciation and amortization is due to the reasons
mentioned above in the first property comparison. The decrease in heating and
air-conditioning costs can be attributed to major changes necessary to be made
to the heating and air conditioning system in 1998 and not in 1999. The
decreased contract cleaning expenses are a result of a former tenant, who used
this service exclusively, vacating. Management fees decreased as a direct result
of lower revenues. The increase in vacancy related expenses is due to costs
incurred during 1999 to rehabilitate vacant space for leasing.
At Countryside Office Park, revenues increased $195,208 primarily due to an
increase in base rental revenue ($161,889). This can be attributed to the higher
occupancy level as compared to that of the prior year. Expenses at Countryside
Office Park increased ($242,185) when comparing year-end results for 1999 to the
prior year, primarily due to increases in snow removal ($9,802), management fees
($10,530), parking lot expense ($3,382), professional services ($186,516),
administrative payroll ($9,065), and various other operating expenses ($2,016).
These increases were partially offset by decreases in interest expense ($5,108)
and amortization ($14,485). The significant increase in professional services is
due to real estate tax consulting fees paid during 1999 ($159,230) which will
ultimately result in a tax savings of $454,942 over a three-year period. The
decrease in amortization expense can be attributed to fully amortized tenant
improvements and lease commissions.
At Leawood Fountain Plaza, revenues increased ($51,890) when comparing 1999
year-end results to the prior year. The increase in revenue can primarily be
attributed to increases in base rental revenue ($25,166) and escalation revenue
($24,905). The increase in base rental revenue is due to increased rental rates.
Expenses during 1999 were relatively stable with only a $3,300 increase when
compared to the prior year.
The Registrant has a first mortgage with a floating interest rate of 3/4% over
the then published prime rate of the lender. The properties which are collateral
for this loan are NorthCreek Office Park, Countryside Office Park and Northeast
Commerce Center. The balance of the loan as of December 31, 1999 was $6,871,246.
The interest rate at year end was 9.25%. The mortgage note agreement provides
for a 3.25% interest rate on outstanding principal if a compensating balance is
maintained during the immediately preceding month. During 1999 the Partnership
decreased interest expense by approximately $59,000 from the compensating
balance clause.
F-377
<PAGE> 594
The occupancy levels at the Registrant"s properties as of December 31, 1999,
1998 and 1997 are detailed in the schedule below.
<TABLE>
<CAPTION>
Occupancy rates at December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NorthCreek Office Park 100% 100% 89%
Tower Industrial 100% 100% 100%
Northeast Commerce Center 49% 50% 94%
Countryside Executive Center 90% 77% 72%
Leawood Fountain Plaza 93% 87% 89%
</TABLE>
For the quarter ended December 31, 1999, occupancy at NorthCreek Office Park
increased to 100%. During the quarter, two tenants signed new leases for 2,894
square feet, and one tenant vacated 1,964 square feet. For the year, five
tenants signed new leases for 6,519 square feet, six tenants renewed their
leases for 14,380 square feet, and five tenants vacated 6,247 square feet.
NorthCreek Office Park has one major tenant which occupies space under two
leases which, together, comprise 33% of the available space. These leases both
expire in December 2003.
Tower Industrial Building is leased by a single tenant whose lease expires on
April 30, 2000. The Registrant currently has a signed renewal with this tenant
that will extend through December 2001.
At Northeast Commerce Center, one tenant vacated 11,000 square feet during the
quarter ended December 31, 1999. For the year ended December 31, 1999 two new
leases for 18,460 square feet were signed, one tenant vacated 11,000 square
feet, and one tenant downsized 11,000 square feet. Northeast Commerce Center has
two major tenants which occupy 23% and 11% of the space with lease expirations
of 2003 and 2006, respectively. The Registrant is working closely with a
Cincinnati brokerage firm to handle the leasing of the remaining 50,790 vacant
square feet.
Occupancy at Countryside Office Park increased to 90% during the fourth quarter
of 1999 and leasing activity consisted of three tenants signing new leases for
4,496 square feet, two tenants renewing their leases for 3,810 square feet, and
one tenant vacating 442 square feet. During 1999, nine tenants signed new leases
for 25,358 square feet, six tenants renewed their leases for 11,835 square feet,
and seven tenants vacated 13,625 square feet. There are two major tenants at
Countryside who occupy 14% and 13% of the vacant space with leases which expire
in 2005 and 2002, respectively.
During the fourth quarter at Leawood Fountain Plaza, occupancy decreased from
98% to 93%. During the quarter, four tenants renewed their leases for 5,324
square feet, and one tenant vacated 4,470 square feet. During the year, the
Registrant signed one new lease for 737 square feet, renewed seven tenants"
leases for 17,857 square feet, and one tenant vacated 4,470 square feet. The
property has two major tenants, one who occupies 14% of the space with a lease
which expires in October 2001 and the other major tenant occupies 11% of the
space with a lease which expires in July 2004.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary
F-378
<PAGE> 595
indicators of potential impairment. The Registrant deems the Property to be
impaired if a forecast of undiscounted future operating cash flows directly
related to the Property, including disposal value, if any, is less than its
carrying amount. If the Property is determined to be impaired, the loss is
measured as the amount by which the carrying amount of the Property exceeds its
fair value. Fair value is based on quoted market prices in active markets, if
available. If quoted market prices are not available, an estimate of fair value
is based on the best information available, including prices for similar
properties or the results of valuation techniques such as discounting estimated
future cash flows. Considerable management judgment is necessary to estimate
fair value. Accordingly, actual results could vary significantly from such
estimates.
Year 2000 issues
Information Technology Systems
The Registrant did not experience any information technology hardware or
software disruptions or failure as a result of the Year 2000. Subsequent to
December 31, 1999, the Registrant's "IT" systems have continued to operate, as
normal, at the management office and all five of the Registrant's properties.
Non-Information Technology Systems
None of the non-information systems at the Registrant's five properties
experienced any disruptions or failures as a result of the Year 2000. These
systems included elevators, heating, ventilating, air conditioning (HVAC)
systems, and locks. These and other like systems continue to operate as normal
in the year 2000.
The Registrant did not separately track internal costs related to the Year 2000
issue. The changing of the century did not have a material impact on the
Registrant's financial condition or results of its operations.
Material Third Parties' Systems Failures
The Registrant did not experience any material impact related to third party
system failures for the Year 2000 issue at any of its five properties. Payments
from tenants did not appear to be delayed due to the Year 2000 conversion. The
Registrant remains confident that no third party material issues will arise in
the future.
1999 Comparisons
For the year ended December 31, 1999, the Registrant's consolidated revenues
were $3,728,017 compared to $3,680,649 for the year ended December 31, 1998.
Revenues increased $47,368 when comparing the two years. This increase in
revenue is primarily due to an increase in base rental revenues at Countryside
Office Park and to increases in both base rental and escalation revenues at
NorthCreek and Leawood Fountain Plaza. Positive revenue results from these
properties were partially offset by a significant decrease in revenues at
Northeast Commerce Center, as mentioned in the property comparisons.
For the year ended December 31, 1999, consolidated expenses were $3,663,081 as
compared to $3,316,553 for the year ended 1998. Expenses increased $346,528 when
comparing the two
F-379
<PAGE> 596
year-end periods. This increase was primarily due to increases in depreciation
and amortization ($10,535), real estate taxes ($168,830), repairs and
maintenance related expenses ($107,812), and professional services ($85,738).
These increased expenses were partially offset by a decrease in interest
expenses ($30,046). The increase in professional services expense is primarily
due to consulting fees paid by Countryside Office Park, as mentioned in the
property comparisons. The increase in repairs and maintenance is mainly due to
increased snow removal and various maintenance costs at two of the Registrant's
properties, as also mentioned in the property comparisons. The increased
professional fees can be attributed primarily to additional legal costs incurred
at both the partnership and property levels. Net income for the year ended 1999
was $64,936 as compared to $364,096 for the year ended 1998.
During 1999, net cash provided by operating activities was $684,206. This cash
was used to provide capital improvements to the properties of $618,970, and
principal payments on the mortgage loan were made in the amount of $124,630.
1998 Comparisons
For the year ended December 31, 1998, the Registrant's consolidated revenues
were $3,680,649 compared to $3,356,773 for the year ended December 31, 1997.
Revenues increased $323,876 or 10% when comparing the two years. The increase in
revenue is due to an increase in base rental income at the Registrant's
properties.
For the year ended December 31, 1998, consolidated expenses were $3,316,553
compared to $3,293,186 for the year ended December 31, 1997. Thus, total
expenses increased $23,367. The increase in expenses was a result of an increase
in depreciation and amortization ($84,450), an increase in repair and
maintenance ($41,342), and an increase in other operating expenses ($48,189),
offset by a decrease in real estate taxes ($63,257) and a decrease in
professional services ($89,196). Net income was $364,096 as compared to $63,587
for the prior year. Net cash provided by operating activities was $643,655 for
the year ended December 31, 1998. The cash was used to provide capital
improvements to the properties of $289,092, pay distributions to partners of
$382,440 and decrease the outstanding balance of the mortgage loan by $100,656.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operations in fiscal 1999, 1998, and 1997 and are not expected to materially
affect the Registrant's operation in 2000.
Interest Rates
Interest rates on floating rate debt fluctuated throughout 1999. Future
increases in the prime interest rate can adversely affect the operations of the
Registrant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative
F-380
<PAGE> 597
Commodity Instruments. The Registrant had no holdings of derivative financial or
commodity instruments at December 31, 1999. A review of the Registrant's other
financial instruments and risk exposures at that date revealed that the
Registrant had minor exposure to interest rate risk due to the floating rate
first mortgage debt of $6,871,246. The Registrant utilized sensitivity analyses
to assess the potential effect of this risk and concluded that near-term changes
in interest rates should not materially adversely affect the Registrant's
financial position, results of operations or cash flows.
F-381
<PAGE> 598
C. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Six Months Ended June 30, 2000 and 1999
It should be noted that this 10-Q contains forward-looking information (as
defined in the Private Securities Litigation Reform Act of 1995) that involves
risk and uncertainty, including trends in the real estate investment market,
projected leasing and sales, and the future prospects for the Registrant. Actual
results could differ materially from those contemplated by such statements.
Liquidity and Capital Resources
Cash and cash equivalents on hand as of June 30, 2000, is $1,354,006 an increase
of $163,795 when compared to the year ended December 31, 1999. During the six
month period ending June 30, 2000, net cash provided by operating activities was
$368,334. Cash was used for capital and tenant improvements in the amount of
$147,016 and payment on mortgage notes payable in the amount of $57,523. Based
on the current cash balances and the properties' ability to provide operating
cash flow, the Registrant expects the properties to fund anticipated capital
expenditures for the remainder of 2000. The anticipated capital expenditures by
property are as follows:
<TABLE>
<CAPTION>
Other Capital Leasing Capital Total
------------- --------------- -----
<S> <C> <C> <C>
NorthCreek Office Park $ 44,000 $ 60,727 $104,727
Tower Industrial Building 0 0 0
Northeast Commerce Center 16,508 412,064 428,572
Countryside Office Park 16,000 14,838 30,838
Leawood Fountain Plaza (24%) 0 28,284 28,284
-------- -------- --------
$ 76,508 $515,913 $592,421
======== ======== ========
</TABLE>
Leasing Capital at all of the partnership's properties relates to tenant
improvements and lease commissions for new and renewal tenants. At Northeast
Commerce Center Other Capital includes heating and air-conditioning unit
installation and electrical upgrades. At Countryside Executive Center, Other
Capital relates to the replacement of common area ceiling tiles and new air
conditioning units. At NorthCreek Office Park, Other Capital is reserved for
parking lot resurfacing. The Registrant reviews cash reserves on a regular basis
prior to beginning scheduled capital improvements. In the event there is not
adequate funds, the capital improvement will be postponed until such funds
are available.
As previously disclosed, the Registrant felt that the market conditions existed
whereby Countryside Executive Center should be sold. Management has increased
the occupancy level to 91% at June 30, 2000 from 70% at June 30, 1999. The
Registrant is still evaluating the sale and other options regarding the property
based on the increased occupancy level and the improving market conditions in
the surrounding areas.
The future liquidity of the Registrant is dependent on its ability to fund
future capital expenditures and mortgage payments from operations and cash
reserves, maintain occupancy, and negotiate with lenders the refinancing of
mortgage debt as it matures.
Results of Operations by Property
The results of operations for the Registrant's properties for the quarters ended
June 30, 2000 and 1999 are detailed in the schedule below. Revenues and expenses
of the Registrant are excluded.
<TABLE>
<CAPTION>
Tower Northeast Countryside Leawood
NorthCreek Industrial Commerce Office Fountain
Office Park Building Center Park Plaza (24%)
----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
2nd Quarter 2000
Revenues $372,786 $54,970 $ 116,779 $ 463,640 $86,905
Expenses 292,037 32,456 140,901 271,164 67,590
-------- ------- --------- --------- -------
Net income (loss) $ 80,749 $22,514 $ (24,122) $ 192,476 $19,315
======== ======= ========= ========= =======
2nd Quarter 1999
Revenues $382,209 $50,450 $ 128,059 $ 277,023 $84,674
Expenses 326,822 27,774 164,413 410,255 72,448
-------- ------- --------- --------- -------
Net income (loss) $ 55,387 $22,676 $ (36,354) $(133,232) $12,226
======== ======= ========= ========= =======
</TABLE>
F-382
<PAGE> 599
At NorthCreek Office Park net income for the quarter ended June 30, 2000 was
$80,749 compared to net income of $55,387 in 1999. Revenues decreased $9,423
when comparing the two quarters. This decrease can be attributed to decreases in
both base rental and escalation revenues due to a slight decrease in the
occupancy level than that of prior year. Expenses decreased $34,785 when
comparing the two quarters. This decrease can primarily be attributed to
decreases in depreciation and amortization expense ($12,712), landscaping
expenses ($4,267), repairs and maintenance related expenses ($22,424), real
estate taxes ($3,000), and other operating expenses ($3,059), partially offset
by an increase in interest expense ($10,677). The decrease in depreciation and
amortization can be attributed to both fully amortized assets and the allocation
of the property write down, now being depreciated at the property level. The
decrease in repairs and maintenance related expenses is due to general building
common area improvement expenses incurred in 1999 only. The increase in interest
expense is a direct result of the rise in the variable interest rate than that
of prior year.
Operating results at Tower Industrial Building remained consistent, with only a
$162 decrease in net income when comparing the quarter ended June 30, 2000 to
the quarter ended June 30, 1999, however, there was an increase in revenues of
$4,520 and an increase in expenses of $4,682. The increase in revenues is due to
increases in both base rental and real estate tax revenue as a result of renewal
increases effective in 2000 for the property's one tenant. The increase in
expenses is primarily due to a higher annual tax assessed for the property. The
property continues to operate as anticipated.
For the quarter ended June 30, 2000 and 1999, revenues at Northeast Commerce
Center were $116,779 and $128,059, respectively. The decrease in revenues of
$11,280 can primarily be attributed to a decrease in escalation revenue
($25,262) and miscellaneous revenues ($7,500), partially offset by an increase
in base rental revenue ($21,498). The decrease in miscellaneous revenues is due
to a cancellation fee received during 2nd quarter of 1999 only. The decrease in
escalation revenue is due to a decrease in the amount of reimbursable expenses.
The increase in base rent can be attributed to the rise in the occupancy level
from that of prior year. The property's expenses for the quarter ended June 30,
2000 and 1999, were $140,901 and $164,413, respectively. The decrease in
expenses of $23,512 is primarily attributable to decreases in depreciation and
amortization expense ($11,580), real estate tax expense ($11,422), repairs and
maintenance related expenses ($2,474), and vacancy related expenses ($3,140).
These decreased expenses were partially offset by an increase in interest
expense ($5,435). The decrease in depreciation and amortization expense can be
attributed to the allocation of the property writedown now being depreciated at
the property level. The decreased real estate tax expense can be attributed to
lower annual taxes due for the property in 2000. The increase in interest
expense is a direct result of the rise in the variable interest rate than that
of prior year.
Revenues at Countryside Office Park were $463,640 for the quarter ended June 30,
2000 and $277,023 for the quarter ended June 30, 1999. The increase in revenue
of $186,617 when comparing the two periods, is primarily attributable to
increases in base rental revenue ($73,698), escalation revenue ($9,569), and
real estate tax revenue ($102,552). The increase in base rental and escalation
revenue can be attributed to the high occupancy level than that of prior year.
The increased real estate tax revenue is due to amounts billed to tenants for
their proportionate share of tax appeal fees paid that have resulted in a real
estate tax expense savings that span a five year period. Expenses at Countryside
Office Park were $271,164 and $410,255 for the quarters ended June 30, 2000 and
June 30, 1999, respectively. This decrease in
F-383
<PAGE> 600
expenses of $139,091 can be primarily attributable to decreases in real estate
tax expense ($165,740) due to the expense of the previously mentioned tax appeal
fee in 1999. No tax appeal fees have been expensed in 2000. Decreases were also
reflected in repairs and maintenance related expenses ($9,353) and vacancy
expenses ($6,954). These decreases were partially offset by increases in
management fee expense ($11,197), landscaping expense ($14,169), interest
expense ($3,300), and amortization expense ($14,126). The repairs and
maintenance decrease can primarily be attributed to lower heating and
air-conditioning and general building repair costs in the second quarter of 2000
than that of prior year. The increased management fee expense is a direct result
of the higher revenue level achieved from the increase in the property's
occupancy, than that of prior year. The increase in landscaping expense can be
attributed to exterior plant and flower installations in done in 2000 only. The
increase in amortization expense is due to additional tenant alterations and
lease commissions incurred as new tenants have been added to the property.
At Leawood Fountain Plaza, net income for the quarter ended June 30, 2000 and
the quarter ended June 30, 1999 was $19,315 and $12,226, respectively, resulting
in an increase in net income of $7,089. Revenues increased $2,231 and expenses
decreased $4,858 when comparing the two quarters. Slight increases were
reflected in both base rental and escalation revenues. Decreases were reflected
in parking lot and depreciation/amortization expense when compared to that of
prior year.
The occupancy levels at June 30 are as follows:
<TABLE>
<CAPTION>
Occupancy levels as of June 30,
------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Property
NorthCreek Office Park 96% 100% 95%
Tower Industrial Building 100% 100% 100%
Northeast Commerce Center 65% 50% 94%
Countryside Office Park 91% 70% 71%
Leawood Fountain Plaza (24%) 98% 98% 94%
</TABLE>
Leasing activity during the second quarter of 2000 at NorthCreek Office Park
consisted of one new tenant signing a lease for 912 square feet, one tenant
renewing their lease for 1,898 square feet and one tenant vacating 620 square
feet. Occupancy remained at 96% throughout the quarter. The office park has one
major tenant with two leases that together comprise 33% of the available space.
These leases both expire in December 2003.
The Tower Industrial Building remains 100% leased to a single tenant whose lease
expires on December 31, 2001.
At Northeast Commerce Center leasing activity during the quarter consisted of
one new tenant signing a lease for 16,150 square feet. The property increased
16% to 65% occupied throughout the quarter. The property has three major tenants
who occupy 23%, 11%, and 16% of the available space, with leases that expire in
September 2003, December 2006, and August 2005, respectively. The Registrant is
working with a local Cincinnati brokerage firm to handle the leasing of the
remaining space at the property.
F-384
<PAGE> 601
Leasing activity at Countryside Office Park consisted of two tenants renewing
2,283 square feet, and one tenant vacating 1,042 square feet. Occupancy
decreased by 1%, to 91% during the quarter. The property has two major tenants
who occupy 14% and 13% of the available space with leases expiring in 2005 and
2002, respectively.
During the second quarter of 2000, leasing activity at Leawood Fountain Plaza
consisted of the Registrant renewing one lease for 946 square feet and the
Registrant signing one new lease with a tenant for 4,470 square feet. The
occupancy increased to 98% throughout the quarter. The property has two major
tenants occupying 14% and 10% of the available space on leases which expire in
October 2001 and July 2004, respectively.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Registrant deems the Property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the Property, including disposal
value, if any, is less than its carrying amount. If the Property is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the Property exceeds its fair value. Fair value is based on quoted market
prices in active markets, if available. If quoted market prices are not
available, an estimated of fair value is based on the best information
available, including prices for similar properties or the results of valuation
techniques such as discounting estimated future cash flows. Considerable
management judgement is necessary to estimate fair value. Accordingly, actual
results could vary significantly from such estimates.
Results of Consolidated Operations 2000
Consolidated revenues for the three month period ended June 30, 2000 and 1999,
are $1,108,689 and $929,911, respectively. Consolidated revenues for the six
month period ended June 30, 2000 and 1999 are $2,052,220 and $1,785,526,
respectively. Revenues increased $178,778 for the three month period and
$266,694 for the six month period when comparing to that of prior year.
Consolidated revenues have increased primarily due to increases in base rental
and real estate tax revenues at Countryside Office Park as a result of the
higher occupancy level and the recapture in revenue of the real estate tax
appeal fees, as mentioned in the property comparisons. During the three month
periods ended June 30, 2000 and 1999, consolidated expenses were $840,822 and
$1,007,020, respectively. Consolidated expenses for the six month periods ended
June 30, 2000 and 1999 were $1,702,939 and $1,882,709, respectively.
Consolidated expenses decreased $166,198 and $179,770 for the three and six
month periods when compared to that of prior year. The decrease in expenses for
the three month period is primarily due to decreases in real estate tax expense
($176,429), repairs and maintenance related expenses ($35,267), insurance
($5,382), and other operating expenses ($7,159). These decreases were partially
offset by increases in interest expense ($19,412), depreciation and amortization
expense ($20,785), management fee expense ($10,360), and utility expense
($6,460). The decrease in real estate tax expense is due to lower annual taxes
at both Countryside Office Park and Northeast Commerce Center, as mentioned
previously in the property comparisons. The decreased repairs and maintenance
expenses are due to lower heating/air-conditioning and general building costs at
F-385
<PAGE> 602
Northcreek and Countryside, also mentioned in the property comparisons. The
increase in interest expense can be attributed to the increased interest rate at
three of the Registrant's properties, than that of prior year. The increase in
depreciation and amortization is due to the addition of capital and tenant
related assets since the same period of the prior year. The decrease in
consolidated expenses of $179,770 for the six month period is primarily due to
decreases in real estate tax expense ($184,539), repairs and maintenance related
expenses ($49,252), professional services ($18,091), insurance ($7,026), and
other operating expenses ($32,737). These decreases were partially offset by
increases in interest expense ($32,063), depreciation/amortization expense
($39,176), management fees ($15,914), utilities ($14,836), payroll ($2,171), and
cleaning expense ($6,814). The decrease in real estate tax expense and repairs
and maintenance, as well as the increases in interest and depreciation/
amortization have been addressed above in the three month period comparisons.
The decrease in professional services can be attributed to a decrease in
partnership related legal expenses than that of prior year. The decrease in
other operating expenses for the six month period is due to decreases in snow
removal and vacancy related expenses. The increase in management fees is
directly related to the increased revenues. The utility expense increase can be
attributed to increased electric expense at three of the Registrant's
properties.
Results of Consolidated Operations 1999
Consolidated revenues for the three month period ended June 30, 1999 and 1998,
are $929,911 and $899,041, respectively. Consolidated revenues for the six month
period ended June 30, 1999 and 1998 are $1,785,526 and $1,774,358,
respectively.Revenues increased $30,870 for the three month period and $11,168
for the six month period ended June 30, 1999 when compared to the prior period.
Consolidated revenues overall have increased primarily due to increases in
escalation revenue at Northeast Commerce Center and NorthCreek Office Park and
to increases in base rental revenue at NorthCreek Office Park, Countryside
Executive Center, and Leawood Fountain Plaza. These increases in revenue were
offset by a significant decrease in base rental income at Northeast Commerce
Center. During the three month periods ended June 30, 1999 and 1998,
consolidated expenses were $1,007,020 and $873,271. Consolidated expenses for
the six month periods ended June 30, 1999 and 1998 were $1,882,709 and
1,688,703, respectively. Consolidated expenses increased $133,749 and $194,636
for the three and six month periods when comparing to prior year. The increase
in expenses for the three month period is due to increases in real estate tax
expense ($149,800), repairs and maintenance ($23,403), and professional services
($9,180). These increases were partially offset by decreases in interest expense
($13,712), cleaning expense ($4,547), parking lot-landscaping expense ($10,017),
and other operating expenses ($21,306). The increase in real estate expense is
due to the tax appeal fee payment at Countryside. The increased repairs and
maintenance expenses are due to common area improvements made at NorthCreek
Office Park. The decrease in interest expense can be attributed to increased
principal payments from prior comparison period. The landscaping expense
decrease is due to the reduction in contracted service at Countryside Executive
Center. The decrease in other operating expenses is primarily due to a decrease
in common area related and fire/crime prevention expenses. The increase of
$194,636 for the six month period is due to increases in real estate tax expense
($134,789), repairs and maintenance ($39,418), professional services ($33,660),
payroll ($10,523),
F-386
<PAGE> 603
insurance ($3,404), and other operating expenses ($33,697). These increases were
partially offset by decreases in interest expense ($25,644), depreciation/
amortization ($16,312), cleaning expense ($14,304), and landscaping ($6,702).
The increase in real estate tax and repairs and maintenance, as well as the
decreases in interest and landscaping have been addressed above in the three
month comparisons. The increase in professional services can be attributed to an
increase in partnership related professional services in the first quarter of
1999. The increase in payroll for the six month period is due to additional
office personnel costs during 1st quarter 1999. The increase in other operating
expenses for the six month period is due to significant increases in snow
removal and vacancy related expense (primarily at Northeast Commerce Center).
The decrease in cleaning is due to the absence of monthly cleaning
reimbursements to the former major tenant at Northeast Commerce Center.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operations.
F-387
<PAGE> 604
D. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Nooney Income Fund Ltd. II, L.P.:
We have audited the accompanying balance sheets of Nooney Income Fund Ltd. II,
L.P. (a limited partnership) as of December 31, 1999 and 1998, and the related
statements of operations, partners' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1999. Our audits also included
the financial statement schedules listed in the index at Item 14(a)2. These
financial statements and financial statement schedules are the responsibility of
the Partnership's general partners. Our responsibility is to express an opinion
on these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Partnership's general partners, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nooney Income Fund, Ltd. II, L.P. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, MO
February 22, 2000
F-388
<PAGE> 605
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
BALANCE SHEETS - DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 1,190,211 $ 1,249,605
ACCOUNTS RECEIVABLE (net of allowance of $273,506
in 1999 and $255,409 in 1998) 257,599 205,323
PREPAID EXPENSES AND OTHER ASSETS 24,430 21,505
INVESTMENT PROPERTY:
Land 2,618,857 2,618,857
Buildings and improvements 13,997,112 13,618,572
----------- -----------
16,615,969 16,237,429
Less accumulated depreciation 5,162,333 4,691,263
----------- -----------
11,453,636 11,546,166
Investment property held for sale 2,860,890 2,826,591
----------- -----------
Total investment property 14,314,526 14,372,757
DEFERRED EXPENSES - At amortized cost 321,834 280,805
----------- -----------
TOTAL $16,108,600 $16,129,995
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 174,137 $ 160,061
Accrued real estate taxes 485,507 499,728
Refundable tenant deposits 250,231 211,787
Mortgage note payable 6,871,246 6,995,876
----------- -----------
Total liabilities 7,781,121 7,867,452
PARTNERS' EQUITY 8,327,479 8,262,543
----------- -----------
TOTAL $16,108,600 $16,129,995
=========== ===========
</TABLE>
See notes to financial statements.
F-389
<PAGE> 606
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental and other income $3,723,962 $3,680,649 $3,355,159
Interest 4,055 -- 1,614
---------- ---------- ----------
Total revenues 3,728,017 3,680,649 3,356,773
EXPENSES:
Interest 554,283 584,329 595,696
Depreciation and amortization 765,982 755,447 670,997
Real estate taxes 544,192 534,592 597,849
Property management fees - related party 216,862 215,198 201,992
Repairs and maintenance 442,418 334,606 293,264
Professional services 380,102 135,134 224,330
Other operating expenses (includes
$40,000 in each year to related party) 759,242 757,247 709,058
---------- ---------- ----------
Total expenses 3,663,081 3,316,553 3,293,186
---------- ---------- ----------
NET INCOME $ 64,936 $ 364,096 $ 63,587
========== ========== ==========
NET INCOME ALLOCATION:
General partners $ 649 $ 21,480 $ 12,529
Limited partners $ 64,287 $ 342,616 $ 51,058
LIMITED PARTNERS' DATA:
Net income per unit $ 3.34 $ 17.83 $ 2.66
========== ========== ==========
Cash distributions - Investment income
per unit $ -- $ 17.83 $ 2.66
========== ========== ==========
Cash distributions - Return of capital
per unit $ -- $ 0.92 $ 9.84
========== ========== ==========
Weighted average limited partnership
units outstanding 19,221 19,221 19,221
========== ========== ==========
</TABLE>
See notes to financial statements.
F-390
<PAGE> 607
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
----------- --------- -----------
<S> <C> <C> <C>
BALANCE (DEFICIT), JANUARY 1, 1997 $ 8,600,764 $(128,497) $ 8,472,267
Net income 51,058 12,529 63,587
Cash distribution (240,263) (14,704) (254,967)
----------- --------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1997 8,411,559 (130,672) 8,280,887
Net income 342,616 21,480 364,096
Cash distributions (360,394) (22,046) (382,440)
----------- --------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1998 8,393,781 (131,238) 8,262,543
Net income 64,287 649 64,936
----------- --------- -----------
BALANCE (DEFICIT), DECEMBER 31, 1999 $ 8,458,068 $(130,589) $ 8,327,479
=========== ========= ===========
</TABLE>
See notes to financial statements.
F-391
<PAGE> 608
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 64,936 $ 364,096 $ 63,587
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 677,201 660,875 604,818
Amortization of deferred expenses 88,781 94,572 66,179
Net changes in accounts affecting operations:
Accounts receivable (52,276) (52,373) 66,705
Prepaid expenses and other assets (2,925) (4,453) (6,864)
Deferred expenses (129,810) (104,353) (215,064)
Accounts payable and accrued expenses 14,076 (320,548) 377,278
Accrued real estate taxes (14,221) (57,174) (25,580)
Refundable tenant deposits 38,444 63,013 23,748
----------- ----------- -----------
Net cash provided by operating activities 684,206 643,655 954,807
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to investment property (618,970) (289,092) (551,260)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash distributions to partners -- (382,440) (254,967)
Mortgage principal payments (124,630) (100,656) (93,468)
----------- ----------- -----------
Net cash used in financing activities (124,630) (483,096) (348,435)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (59,394) (128,533) 55,112
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 1,249,605 1,378,138 1,323,026
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 1,190,211 $ 1,249,605 $ 1,378,138
=========== =========== ===========
</TABLE>
F-392
<PAGE> 609
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year for
interest $ 590,980 $ 537,963 $ 609,879
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-393
<PAGE> 610
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS
Nooney Income Fund Ltd. II, L.P. (the "Partnership") is a limited partnership
organized under the laws of the State of Missouri on February 13, 1985 for the
purpose of investing in income-producing real properties, such as shopping
centers, office buildings, warehouses and other commercial properties.
The Partnership's portfolio is comprised of a 24% undivided interest in an
office complex in Leawood, Kansas (Leawood Fountain Plaza); an office warehouse
in Mundelein, Illinois (Tower Industrial Building); a single story office
building in Palatine, Illinois (Countryside Office Park, formerly Countryside
Executive Center); an office/warehouse/showroom facility in Cincinnati, Ohio
(Northeast Commerce Center); and an office complex in Cincinnati, Ohio
(NorthCreek Office Park). The proportionate share of these properties owned by
the Partnership generated 9.6%, 5.5%, 33.0%, 11.1% and 40.8% of rental and other
income, respectively, for the year ended December 31, 1999. Effective October 1,
1998, the property known as Countryside Executive Center was renamed Countryside
Office Park.
It is management's intent to sell Countryside Office Park (Countryside) as soon
as practicable because of local market conditions, tax burdens and other factors
related specifically to this property.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include only those assets, liabilities and results of
operations of the partners which relate to the business of Nooney Income Fund
Ltd. II, L.P. The statements do not include any assets, liabilities, revenues or
expenses attributable to the partners' individual activities. No provision has
been made for federal and state income taxes since these taxes are the personal
responsibility of the partners.
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 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.
F-394
<PAGE> 611
Prior to October 31, 1997, the corporate general partner was a partially owned
subsidiary of Nooney Company. One of the individual general partners was an
officer, director and shareholder of Nooney Company. Another individual general
partner's spouse was a shareholder of Nooney Company. Nooney Company was also an
economic assignee of two former individual general partners. Nooney Krombach
Company, a wholly owned subsidiary of Nooney Company, managed the Partnership's
real estate for a management fee. Property management fees paid to Nooney
Krombach Company were $171,525 for the year ended December 31, 1997.
Additionally, the Partnership paid Nooney Krombach Company $33,334 in 1997 as
reimbursement for management services and indirect expenses in connection with
the management of the Partnership.
On October 31, 1997, Nooney Company sold its 75% interest in Nooney Income
Investments Two, Inc., the corporate general partner of the Registrant to S-P
Properties, Inc., a California corporation, which in turn is a wholly owned
subsidiary of CGS Real Estate Company, Inc., a Texas corporation.
Simultaneously, Gregory J. Nooney, Jr., an individual general partner and PAN,
Inc., a corporate general partner, sold their economic interests to S-P
Properties, Inc. and resigned as general partners. CGS Real Estate also
purchased the real estate management business of Nooney Krombach Company and
formed Nooney, Inc. to perform the management of the Partnership.
In September 1999, Nooney, Inc. changed its name to American Spectrum Midwest,
Inc. and began doing business under the new name at that time. Ownership
remained unchanged. Property management fees paid to American Spectrum Midwest,
Inc. were $216,862, $215,198 and $30,467 for the years ended December 31, 1999,
1998 and 1997, respectively. Additionally, the Partnership paid American
Spectrum Midwest, Inc. $40,000 in 1999 and 1998 and $6,666 in 1997 as
reimbursement for management services and indirect expenses in connection with
the Partnership.
Investment property is recorded at the lower of cost or net realizable value.
The Partnership reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Partnership considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Partnership deems the property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the property, including disposal
value if any, is less than its carrying amount. If the property is determined to
be impaired, the loss is measured as the amount by which the carrying amount of
the property exceeds its fair value. Fair value is based on quoted market prices
in active markets, if available. If quoted market prices are not available, an
estimate of fair value is based on the best information available, including
prices for similar properties or the results of valuation techniques such as
discounting estimated future cash flows. Considerable management judgment is
necessary to estimate fair value. Accordingly, actual results could vary
significantly from such estimates.
Buildings and improvements are depreciated over 30 years using the straight-line
method.
Lease agreements are accounted for as operating leases and rentals from such
leases are reported as revenues ratably over the terms of the leases. Certain
lease agreements provide for rent
F-395
<PAGE> 612
concessions. At December 31, 1999, accounts receivable include approximately
$145,000 ($121,500 in 1998) of accrued rent concessions which is not yet due
under the terms of various lease agreements.
F-396
<PAGE> 613
Included in rental and other income are amounts received from tenants under
provisions of lease agreements which require the tenants to pay additional rent
equal to specified portions of certain expenses such as real estate taxes,
insurance, utilities and common area maintenance. The income is recorded in the
same period that the related expense is incurred.
Net Operating Cash Income, as defined in the Partnership Agreement, is
distributed quarterly as follows: (1) 90% pro rata to the limited partners; (2)
9% to the individual general partners as their annual Partnership Management
Fee; and (3) 1% to the individual general partners.
In the event it is determined after the close of a fiscal year that the limited
partners have not received their 7-1/2% non-cumulative preference as defined in
the Partnership Agreement, then the individual general partners return to the
partnership a portion of their distributions received as their 9% annual
Partnership Management Fee until the limited partners have received their 7-1/2%
non-cumulative preference. The individual general partners are not required to
return any amount in excess of one-half of the 9% Partnership Management Fee
received. If Net Operating Cash Income for any fiscal year is not sufficient to
pay the limited partners any portion of their 7-1/2% non-cumulative preference,
the unpaid amount does not accrue to future fiscal years. The annual Partnership
Management Fee is a cumulative preference. The preferential return can be
distributed only through cash distributed as a result of a Major Capital Event
(as defined) or cash distributed upon dissolution of the partnership. Such
preferred distribution is only allowed after the general and limited partners
receive amounts equal to their adjusted capital accounts and the limited
partners receive an 11% cumulative return. Through December 31, 1999,
Partnership Management Fees totaling $316,180 have not been paid under the
limitations stated above. Based upon the priorities of cash to be distributed,
management believes that the likelihood of payment of the $316,180 is remote and
therefore the management fee was not accrued on the balance sheet.
For financial statement and income tax reporting, the income from operations is
allocated as follows: first, a special allocation of gross income to the
individual general partners in the amount equal to the annual partnership
management fee distributed to the individual general partners during the period;
then, the remainder is allocated 1% to the individual general partners and 99%
pro rata to the limited partners based upon the relationship of original capital
contributions of the limited partners.
Limited partnership per unit computations are based on the weighted average
number of limited partnership units outstanding during the period.
The Partnership considers all highly liquid debt instruments with a maturity of
three months or less at date of purchase to be cash equivalents.
Deferred expenses consist primarily of lease fees which are amortized over the
terms of their respective leases.
The Partnership adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires entities to report changes in equity that result from transactions and
economic events other than
F-397
<PAGE> 614
those with shareholders. The Partnership had no other comprehensive income
items, accordingly net income and other comprehensive income are the same.
F-398
<PAGE> 615
3. MORTGAGE NOTE PAYABLE
Mortgage note payable as of December 31, 1999 and 1998, consists of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Note payable to bank, principal of $9,587,
and interest due monthly at bank's prime
rate (9.25% at December 31, 1999) plus
.75% maturing December 28, 2002 $6,871,246 $6,995,876
========== ==========
</TABLE>
The mortgage note is collateralized by deeds of trust and assignment of rents on
investment property (Countryside, Northeast Commerce Center and NorthCreek
Office Park) with a net book value of $12,601,000 at December 31, 1999. The
mortgage note agreement provides for a 3.25% interest rate on outstanding
principal if a compensating balance is maintained during the immediately
preceding month. During 1999, 1998 and 1997, the Partnership decreased interest
expense by approximately $59,000, $64,000 and $60,000, respectively, from the
compensating balance clause.
Principal payments required during the next five years are as follows:
<TABLE>
<S> <C>
2000 $ 115,044
2001 132,000
2002 6,624,202
-----------
Total $ 6,871,246
===========
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Instruments", the estimated fair value of
mortgage notes payable with maturities greater than one year is determined based
on rates currently available to the Partnership for mortgage notes with similar
terms and remaining maturities. The carrying amount and estimated fair market
value of the Partnership's debt at December 31, 1999 and 1998 are equal due to
the adjustable rate feature of the note and the terms are consistent with those
the Partnership could currently obtain.
F-399
<PAGE> 616
4. RENTAL REVENUES UNDER OPERATING LEASES
Minimum future rental revenues under noncancelable operating leases in effect as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 3,047,000
2001 2,608,000
2002 1,928,000
2003 1,207,000
2004 437,000
Remainder 267,000
------------
Total $ 9,494,000
============
</TABLE>
In addition, certain lease agreements require tenant participation in certain
operating expenses. Tenant participation in expenses included in revenues
approximated $45,000, $61,000 and $43,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
5. FEDERAL INCOME TAX STATUS
The general partners believe, based on opinion of legal counsel, that Nooney
Income Fund Ltd. II, L.P. is considered a partnership for income tax purposes.
Selling commissions and offering expenses incurred in connection with the sale
of limited partnership units are not deductible for income tax purposes and
therefore increase the partners' bases. Investment properties are depreciated
for income tax purposes using rates which differ from rates used for computing
depreciation for financial statement reporting. Rents received in advance are
includable in taxable income in the year received. Rent concessions, recognized
ratably over lease terms for financial statement purposes, are includable in
taxable income in the year rents are received. Losses in connection with the
write-down of investment property are not recognized for tax purposes until the
property is disposed.
The comparison of financial statement and income tax reporting is as follows:
<TABLE>
<CAPTION>
Financial Income
Statement Tax
--------- ---
<S> <C> <C>
1999:
Net income (loss) $ 64,936 $ (145,635)
Partners' equity 8,327,479 13,178,376
1998:
Net income (loss) $ 364,096 $ (5,791)
Partners' equity 8,262,543 13,324,011
</TABLE>
F-400
<PAGE> 617
<TABLE>
<CAPTION>
Financial Income
Statement Tax
--------- ---
<S> <C> <C>
1997:
Net income (loss) $ 63,587 $ (8,137)
Partners' equity 8,280,887 13,712,242
</TABLE>
6. MAJOR TENANT
A substantial amount of the Partnership's revenue in 1999 was derived from one
major tenant whose rental amounted to approximately $405,000, or 11%, of total
revenues. A substantial amount of the Partnership's revenue in 1998 was derived
from two major tenants whose rentals amounted to approximately $427,000 and
$367,000 or 11.6% and 10.0%, respectively, of total revenues. A substantial
amount of the Partnership's revenue in 1997 was derived from two major tenants
whose rentals amounted to approximately $500,000 and $408,000 or 14.9% and
12.2%, respectively, of total revenues.
7. BUSINESS SEGMENTS (in thousands)
The Partnership has five reportable operating segments: Leawood Fountain Plaza,
Tower Industrial, Countryside Office Park, Northeast Commerce Center, and
NorthCreek Office Park. In 1998 and 1997, the Partnership's management evaluated
performance of each segment based on profit or loss from operations before
allocation of property writedowns, general and administrative expenses, unusual
and extraordinary items, and interest. In 1999, the Partnership began evaluating
each segment's operations including allocation of property writedowns. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2).
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Leawood Fountain Plaza $ 359.7 $ 307.9 $ 283.9
Tower Industrial 203.1 202.2 196.9
Countryside Office Park 1,220.6 1,025.4 905.8
Northeast Commerce Center 409.7 692.1 676.1
NorthCreek Office Park 1,509.1 1,377.3 1,303.8
---------- ---------- ----------
$ 3,702.2 $ 3,604.9 $ 3,366.5
========== ========== ==========
</TABLE>
F-401
<PAGE> 618
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Operating profit (loss):
Leawood Fountain Plaza $ 92.2 $ 43.6 $ 20.0
Tower Industrial 84.7 93.5 90.4
Countryside Office Park (10.5) 36.5 (69.5)
Northeast Commerce Center (214.0) (31.3) 50.4
NorthCreek Office Park 343.9 178.2 81.7
--------- --------- ---------
$ 296.3 $ 320.5 $ 173.0
========= ========= =========
Capital expenditures:
Leawood Fountain Plaza $ 33.6 $ 36.1 $ 29.0
Tower Industrial 192.8 -- --
Countryside Office Park 128.9 138.0 313.3
Northeast Commerce Center 219.2 -- 68.3
NorthCreek Office Park 44.5 115.0 140.7
--------- --------- ---------
$ 619.0 $ 289.1 $ 551.3
========= ========= =========
Depreciation and amortization:
Leawood Fountain Plaza $ 69.2 $ 90.8 $ 91.4
Tower Industrial 45.2 41.6 41.6
Countryside Office Park 137.3 151.8 72.0
Northeast Commerce Center 192.4 265.4 245.2
NorthCreek Office Park 307.4 359.3 374.3
--------- --------- ---------
$ 751.5 $ 908.9 $ 824.5
========= ========= =========
Assets:
Leawood Fountain Plaza $ 946.8 $ 1,476.0
Tower Industrial 985.9 914.8
Countryside Office Park 3,126.2 8,653.8
Northeast Commerce Center 3,512.7 4,606.2
NorthCreek Office Park 6,410.5 6,992.8
--------- ---------
$14,982.1 $22,643.6
========= =========
</TABLE>
F-402
<PAGE> 619
Reconciliations of segment data to the Partnership's consolidated data follow:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Segments $ 3,702.2 $ 3,604.9 $ 3,366.5
Corporate and other 25.8 75.7 (9.7)
--------- --------- ---------
$ 3,728.0 $ 3,680.6 $ 3,356.8
========= ========= =========
Net income:
Segments operating profit $ 296.3 $ 320.5 $ 173.0
Other income (expense) 25.8 75.7 (9.7)
General and administrative expenses (257.2) (32.1) (99.7)
--------- --------- ---------
$ 64.9 $ 364.1 $ 63.6
========= ========= =========
Assets:
Segments $14,982.1 $22,643.6
Corporate and other 1,126.5 (6,513.6)
--------- ---------
$16,108.6 $16,130.0
========= =========
Depreciation and amortization:
Segments $ 751.5 $ 908.9 $ 824.5
Corporate and other 14.5 (153.5) (153.5)
--------- --------- ---------
$ 766.0 $ 755.4 $ 671.0
========= ========= =========
</TABLE>
* * * * *
F-403
<PAGE> 620
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Column A Column B Column C
-------- -------- --------
Initial Cost to Partnership
---------------------------
Buildings and
Description Encumbrances Land Improvements Total
----------- ------------ ---- ------------ -----
<S> <C> <C> <C> <C>
Leawood Fountain Plaza Office
Complex (24% undivided
interest
Leawood, Kansas $ - $ 318,962 $ 1,991,417 $ 2,310,379
Tower Industrial Building,
Mundelein, Illinois - 193,744 1,042,076 1,235,820
NorthCreek Office Park,
Cincinnati, Ohio - 338,850 4,639,617 4,978,467
Northeast Commerce Center,
Cincinnati, Ohio - 199,361 2,784,317 2,983,678
Countryside Office Park,
NorthCreek Office Park and
Northeast Commerce Center 6,871,246 - - -
----------- ----------- ----------- -----------
6,871,246 1,050,917 10,457,427 11,508,344
Countryside Office Park,
Palatine, Illinois - 623,919 4,302,911 4,926,830
----------- ----------- ----------- -----------
Total $ 6,871,246 $ 1,674,836 $14,760,338 $16,435,174
=========== =========== =========== ===========
</TABLE>
F-404
<PAGE> 621
<TABLE>
<CAPTION>
Column D Column E
-------- --------
Gross Amount which
Costs Carried at Close of Period
Capitalized --------------------------------------------------------
Subsequent to Buildings and
Description Acquisition (1) Land Improvements Total
----------- -------------- ---- ------------ -----
<S> <C> <C> <C> <C>
Leawood Fountain Plaza Office
Complex (24% undivided
interest),
Leawood, Kansas $ (603,326) $ 318,962 $ 1,388,091 $ 1,707,053
Tower Industrial Building,
Mundelein, Illinois 195,588 193,744 1,237,664 1,431,408
NorthCreek Office Park,
Cincinnati, Ohio 3,713,830 1,370,100 7,322,197 8,692,297
Northeast Commerce Center,
Cincinnati, Ohio 1,801,533 736,051 4,049,160 4,785,211
Countryside Office Park,
NorthCreek Office Park and
Northeast Commerce Center
----------- ----------- ----------- -----------
5,107,625 2,618,857 13,997,112 16,615,969
Countryside Office Park,
Palatine, Illinois (938,645) 1,356,419 2,631,766 3,988,185(2)
----------- ----------- ----------- -----------
Total $ 4,168,980 $ 3,975,276 $16,628,878 $20,604,154
=========== =========== =========== ===========
</TABLE>
F-405
<PAGE> 622
<TABLE>
<CAPTION>
Column F Column G Column H Column I
-------- -------- -------- --------
Life on which
Depreciation
Accumulated Date of Date in Latest Income
Description Construction Acquired Statement is Computed
----------- ------------ -------- ---------------------
<S> <C> <C> <C> <C>
Leawood Fountain Plaza Office
Complex (24% undivided
interest),
Leawood, Kansas $ 938,094 1982-1983 2/20/1985 30 years
Tower Industrial Building,
Mundelein, Illinois 486,715 1974 3/20/1986 30 years
NorthCreek Office Park,
Cincinnati, Ohio 2,403,394 1984-1986 12/29/1986 30 years
Northeast Commerce Center,
Cincinnati, Ohio 1,334,130 1985 12/29/1986 30 years
----------
5,162,333
Countryside Office Park,
Palatine, Illinois 1,127,295(2) 1975 12/16/1986 30 years
----------
Total $6,289,628
==========
</TABLE>
(1) AMOUNTS SHOWN ARE NET OF ASSETS WRITTEN-OFF AND THE FOLLOWING WRITEDOWNS TO
REFLECT APPRAISED VALUES:
<TABLE>
<S> <C>
Leawood Fountain Plaza Office Complex $ 754,000
NorthCreek Office Park 484,000
Northeast Commerce Center 761,000
Countryside Office Park 3,256,000
</TABLE>
(2) Amount is shown net in the financial statements $2,860,890.
F-406
<PAGE> 623
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(A) Reconciliation of amounts in Column E:
Balance at beginning of period $ 20,130,482 $ 19,981,023 $ 19,569,732
Add - Cost of improvements 618,970 289,092 551,260
Less - Cost of disposals (145,298) (139,633) (139,969)
------------ ------------ ------------
Balance at end of period $ 20,604,154 $ 20,130,482 $ 19,981,023
============ ============ ============
(B) Reconciliation of amounts in Column F:
Balance at beginning period $ 5,757,725 $ 5,236,483 $ 4,771,634
Add - Provision during period 677,201 660,875 604,818
Less - Depreciation on disposals (145,298) (139,633) (139,969)
------------ ------------ ------------
Balance at end of period $ 6,289,628 $ 5,757,725 $ 5,236,483
============ ============ ============
(C) The aggregate cost of real estate owned for
federal income tax purposes $ 25,859,154 $ 25,385,482 $ 25,236,023
============ ============ ============
</TABLE>
F-407
<PAGE> 624
E. UNAUDITED FINANCIAL STATEMENTS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
----------- ----
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,354,006 $ 1,190,211
Accounts receivable 432,331 257,599
Prepaid expenses and deposits 45,855 24,430
Investment property, at cost:
Land 2,618,857 2,618,857
Buildings and improvements 14,039,176 13,997,112
------------ ------------
16,658,033 16,615,969
Less accumulated depreciation (5,392,177) (5,162,333)
------------ ------------
11,265,856 11,453,636
Investment property-held for sale 2,847,660 2,860,890
------------ ------------
14,113,516 14,314,526
Prepaid and deferred expenses - at
amortized cost 368,077 321,834
------------ ------------
$ 16,313,785 $ 16,108,600
============ ============
LIABILITIES AND PARTNERS' EQUITY:
Liabilities:
Accounts payable and accrued expenses $ 165,434 $ 174,137
Accrued real estate taxes 388,694 485,507
Refundable tenant deposits 269,174 250,231
Mortgage note payable 6,813,723 6,871,246
------------ ------------
7,637,025 7,781,121
Partners' equity 8,676,760 8,327,479
------------ ------------
$ 16,313,785 $ 16,108,600
============ ============
</TABLE>
F-408
<PAGE> 625
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Rental and other income $ 1,107,626 $ 929,911 $ 2,049,773 $ 1,785,526
Interest 1,063 0 2,447 0
----------- ----------- ----------- -----------
1,108,689 929,911 2,052,220 1,785,526
EXPENSES:
Interest expense 154,207 134,795 300,946 268,883
Depreciation and amortization 202,175 181,390 401,607 362,431
Real estate taxes 126,823 303,252 257,738 442,277
Property management fees paid to
American Spectrum Midwest 65,705 55,345 122,155 106,241
Reimbursement to American Spectrum Midwest
for partnership management
services and indirect expenses 10,000 10,000 20,000 20,000
Repairs and maintenance 54,276 89,543 100,799 150,051
Professional services 29,874 31,808 60,397 78,488
Utilities 38,887 32,427 87,603 72,767
Payroll 29,284 26,569 59,416 57,245
Cleaning 37,477 37,535 74,994 68,180
Insurance 14,296 19,678 30,423 37,449
Parking lot / landscaping expenses 28,252 27,953 41,234 40,333
Other operating expenses 49,566 56,725 145,627 178,364
----------- ----------- ----------- -----------
840,822 1,007,020 1,702,939 1,882,709
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 267,867 $ (77,109) $ 349,281 $ (97,183)
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 13.80 $ (3.97) $ 17.99 $ (5.01)
=========== =========== =========== ===========
PARTNERS' EQUITY:
Beginning of period $ 8,408,893 $ 8,242,469 $ 8,327,479 $ 8,262,543
Net income (loss) 267,867 (77,109) 349,281 (97,183)
----------- ----------- ----------- -----------
End of period $ 8,676,760 $ 8,165,360 $ 8,676,760 $ 8,165,360
=========== =========== =========== ===========
</TABLE>
F-409
<PAGE> 626
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 349,281 $ (97,184)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 401,607 362,431
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (174,732) 2,288
Increase in prepaid expenses and deposits (21,425) (28,225)
Increase in deferred assets (99,824) (21,521)
(Decrease) increase in accounts payable (8,703) 63,888
(Decrease) increase in accrued real
estate taxes (96,813) 62,001
Increase in refundable tenant deposits 18,943 20,620
----------- -----------
Total adjustments 19,053 461,482
----------- -----------
Net cash provided by operating
activities 368,334 364,299
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to investment property (147,016) (292,362)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on mortgage notes payable (57,523) (57,522)
----------- -----------
NET INCREASE IN CASH AND 163,795 14,415
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 1,190,211 1,249,605
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,354,006 $ 1,264,020
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during year for interest $ 300,946 $ 268,883
=========== ===========
</TABLE>
F-410
<PAGE> 627
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NOTE A:
Refer to the Registrant's financial statements for the year ended December 31,
1999, which are contained in the Registrant's Annual Report on Form 10-K, for a
description of the accounting policies which have been continued without change.
Also, refer to the footnotes to those statements for additional details of the
Registrant's financial condition. The details in those notes have not changed
except as a result of normal transactions in the interim periods.
NOTE B:
The financial statements include only those assets, liabilities, and results of
operations of the partners which relate to the business of Nooney Income Fund
Ltd. II, L.P. The statements do not include assets, liabilities, revenues or
expenses attributable to the partners' individual activities. No provision has
been made for federal and state income taxes since these taxes are the
responsibility of the individual partners. In the opinion of the general
partners, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
changes in financial position at June 30, 2000 and for all periods presented
have been made. The results of operations for the three and six month periods
ended June 30, 2000, are not necessarily indicative of the results which may be
expected for the entire year.
NOTE C:
The Registrant's properties are managed by American Spectrum Midwest (formerly
Nooney, Inc.), a wholly-owned subsidiary of CGS Real Estate Company. Nooney
Income Investments Two, Inc., a general partner, is a wholly-owned subsidiary of
S-P Properties, Inc. S-P Properties, Inc is a wholly-owned subsidiary of CGS
Real Estate Company.
F-411
<PAGE> 628
NOTE D:
The earnings per limited partnership unit for the three and six month periods
ended June 30, 2000 and 1999 was computed based on 19,221 units, the number of
units outstanding during the periods.
NOTE E:
CGS is continuing the process of developing a plan pursuant to which the
properties owned by the Registrant would be combined with the properties of
other real estate partnerships managed by CGS and its affiliates. These limited
partnerships own office properties, industrial properties, shopping centers, and
residential apartment properties. It is expected that the acquiror would in the
future qualify as a real estate investment trust. Limited partners would receive
shares of common stock in the acquiror which would be listed on a national
securities exchange or the NASDAQ national market system.
NOTE F:
The Registrant has no items of other comprehensive income, accordingly, net
income and other comprehensive income are the same.
NOTE G:
The partnership has five reportable operating segments: Leawood Fountain Plaza,
Tower Industrial, Countryside Executive Center, Northeast Commerce Center, and
NorthCreek Office Park. The Partnership's management evaluates performance of
each segment based on profit or loss from operations before allocation of
property write downs, general and administrative expenses, unusual and
extraordinary items, and interest.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Leawood Fountain Plaza (24%) $ 86,905 $ 84,674 $ 170,672 $ 168,985
Tower Industrial 54,970 50,450 105,754 100,900
Countryside Executive Center 463,640 277,023 801,837 537,603
Northeast Commerce Center 116,779 128,059 218,046 220,237
NorthCreek Office Park 372,786 382,209 739,616 741,875
----------- ----------- ----------- -----------
1,095,080 922,415 2,035,925 1,769,600
=========== =========== =========== ===========
Operating Profit:
Leawood Fountain Plaza (24%) $ 19,315 $ 12,226 $ 40,816 $ 28,097
Tower Industrial 22,514 22,676 43,591 46,398
Countryside Executive Center 192,476 (133,232) 256,547 (113,152)
Northeast Commerce Center (24,122) (36,354) (86,464) (150,445)
</TABLE>
F-412
<PAGE> 629
<TABLE>
<S> <C> <C> <C> <C>
NorthCreek Office Park 80,749 55,387 150,970 101,554
----------- ----------- ----------- -----------
290,932 (79,297) 405,460 (87,548)
=========== =========== =========== ===========
Capital Expenditures:
Leawood Fountain Plaza (24%) $ 32,474 $ 2,400 $ 33,362 $ 6,560
Tower Industrial 0 147,048 0 150,898
Countryside Executive Center 8,052 38,098 43,668 54,472
Northeast Commerce Center 17,977 41,865 17,977 47,725
NorthCreek Office Park 3,794 5,762 52,009 32,707
----------- ----------- ----------- -----------
62,297 235,173 147,016 292,362
=========== =========== =========== ===========
Depreciation and Amortization:
Leawood Fountain Plaza (24%) $ 15,426 $ 22,863 $ 30,200 $ 46,754
Tower Industrial 10,859 10,838 22,863 21,250
Countryside Executive Center 44,631 30,505 85,926 62,689
Northeast Commerce Center 53,842 65,422 106,496 128,161
NorthCreek Office Park 77,417 90,129 156,123 180,315
----------- ----------- ----------- -----------
202,175 219,757 401,607 439,169
=========== =========== =========== ===========
Assets:
June 30, 2000 December 31, 1999
------------- -----------------
Leawood Fountain Plaza (24%) $ 973,179 $ 946,803
Tower Industrial 999,019 985,935
Countryside Executive Center 3,302,308 3,126,218
Northeast Commerce Center 3,539,050 3,512,653
NorthCreek Office Park 6,429,058 6,410,529
----------- -----------
15,242,614 14,982,138
=========== ===========
</TABLE>
Reconciliation of segment data to the Partnership's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Segments $ 1,095,080 $ 922,415 $ 2,035,925 $ 1,769,600
Corporate and other 13,609 7,496 16,295 15,926
----------- ----------- ----------- -----------
1,108,689 929,911 2,052,220 1,785,526
=========== =========== =========== ===========
Net Income (Loss):
Segments $ 290,932 $ (79,297) $ 405,460 $ (87,548)
Corporate and other income 13,609 7,496 16,295 15,926
General and admin expenses (36,674) (5,308) (72,474) (25,561)
----------- ----------- ----------- -----------
267,867 (77,109) 349,281 (97,183)
=========== =========== =========== ===========
</TABLE>
F-413
<PAGE> 630
<TABLE>
<S> <C> <C> <C> <C>
Depreciation and Amortization
Segments $ 202,175 $ 219,757 $ 401,607 $ 439,169
Corporate and other 0 (38,367) 0 (76,738)
----------- ----------- ----------- -----------
202,175 181,390 401,607 362,431
=========== =========== =========== ===========
Assets:
June 30, 2000 December 31, 1999
------------- -----------------
Segments $15,242,614 $14,982,138
Corporate and other 1,071,171 1,126,462
----------- -----------
16,313,785 16,108,600
=========== ===========
</TABLE>
F-414
<PAGE> 631
NOONEY REAL PROPERTY INVESTORS - TWO L.P.
HISTORICAL FINANCIAL DATA
F-415
<PAGE> 632
Table of Contents
I. Nooney Real Property Investors - Two L.P.
A. Selected Historical Financial Data
B. Management's Discussion and Analysis of Financial Condition and
Results of Operations - November 30, 1999, 1998 and 1997.
C. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Quarters Ended May 31, 2000 and May 31,
1999.
D. Audited Financial Statements - November 30, 1999, 1998 and 1997
E. Unaudited Financial Statements - Six Months Ended May 31, 2000 and
May 31, 1999
F-416
<PAGE> 633
A. SELECTED HISTORICAL FINANCIAL DATA OF NOONEY REAL PROPERTY INVESTORS-TWO,
L.P.
The following table sets forth certain selected historical financial data of the
Partnership. The selected operating and financial position data as of and for
each of the five years ended November 30, 1999 have been derived from the
audited financial statements of the Partnership. The selected operating and
financial position data as of May 31, 2000 and for the six months ended May 31,
2000 and 1999 have been derived from the unaudited financial statements of the
Partnership. This information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto which follow.
(In thousands, except for per share data)
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
----------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement
income $ 2,331 $ 2,302 $ 2,424 $ 2,418 $ 2,150 $ 1,081 $ 1,287
Interest and other income 10 15 10 6 - - 50
------- ------- ------- ------- ------- ------- -------
Total revenues 2,341 2,317 2,434 2,424 2,150 1,081 1,337
======= ======= ======= ======= ======= ======= =======
EXPENSES:
Property operating 427 511 564 763 647 324 324
Management and advisory
fees 116 115 121 122 105 68 79
Real estate and other taxes 413 380 395 374 386 181 185
Depreciation and
amortization 493 518 523 518 491 244 269
Interest expense 838 776 743 706 679 336 459
------- ------- ------- ------- ------- ------- -------
Total expenses 2,287 2,300 2,346 2,483 2,308 1,153 1,316
======= ======= ======= ======= ======= ======= =======
</TABLE>
F-417
<PAGE> 634
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, SIX MONTHS ENDED MAY 31,
----------------------- ------------------------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Income (loss) $ 54 $ 17 $ 88 $ (59) $ (158) $ (72) $ 21
======= ======= ======= ======= ======= ======= =======
</TABLE>
F-418
<PAGE> 635
<TABLE>
<CAPTION>
(In thousands) NOVEMBER 30, MAY 31,
------------ -------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Weighted average limited partnership units
outstanding 12,000 12,000 12,000 12,000 12,000 12,000 12,000
Income (loss) per limited unit 4.49 1.40 7.29 (4.90) (13.04) (5.94) 1.72
Ratio of earnings to fixed charges (1) 1.06 1.02 1.12 - - - 1.43
Deficiency of earnings to cover fixed
charges (2) - - - 59 158 72 -
Total properties owned at end of period 4 4 4 4 4 4 4
Book value per limited partnership unit (19) (17) (10) (15) (28) (28) (33)
Per unit value assigned for the
consolidation 682
BALANCE SHEET DATA:
Cash and cash equivalents $ 628 $ 596 $ 449 $ 486 $ 2,572 $ 328 $ 1,930
Real estate held for investment, net 7,515 7,459 7,210 6,833 6,439 6,656 6,451
Accounts receivable, net 118 147 127 119 120 120 159
Other assets 179 152 120 137 296 139 997
Total assets, at book value 8,440 8,354 7,906 7,575 9,427 7,243 9,537
Total assets, at valued assigned for the
consolidation 18,404
</TABLE>
F-419
<PAGE> 636
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total liabilities 8,747 8,644 8,108 7,836 9,846 7,576 9,935
General partners deficit (83) (83) (82) (82) (84) (3) (4)
Limited partners deficit (224) (207) (120) (179) (335) (330) (394)
</TABLE>
<TABLE>
<CAPTION>
(In thousands) NOVEMBER 30, MAY 31,
------------ -------
1995 1996 1997 1998 1999 1999 2000
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net 25 (32) (147) 37 2,086 (158) (642)
Cash (used in) provided by operating
activities 493 693 460 544 (4) 100 (240)
</TABLE>
4) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of earnings before extraordinary items, income taxes and
fixed charges. Fixed charges consist of interest on indebtedness, the
amortization of debt issuance costs and that portion of operating rental
expense representing interest.
5) Deficiency to cover fixed charges is the amount of earnings that would be
required to achieve a ratio of earnings to fixed charges of 1.0.
F-420
<PAGE> 637
B. Management's Discussion and Analysis of Financial Condition and Results of
Operation - November 30, 1999, 1998 and 1997
Liquidity and Capital Resources
Cash reserves as of November 30, 1999, are $2,572,203, an increase of $2,086,047
from year ended November 30, 1998. The increase in cash can primarily be
attributed to the new financing obtained for three of the Registrant's
properties. The previous mortgage indebtedness was paid in full with the
proceeds of the new mortgage agreements. The utilization of the remaining
portion of the proceeds from the refinancing is being reviewed by the general
partners to provide for future anticipated needs of the Registrant. The
Registrant plans to maintain adequate cash reserves and to fund anticipated
capital expenditures in 2000. The anticipated capital expenditures by property
are:
<TABLE>
<CAPTION>
Other Capital Leasing Capital Total
------------- --------------- -----
<S> <C> <C> <C>
Park Plaza $ 82,149 $ 29,090 $111,239
Morenci 140,698 27,072 167,770
Maple Tree 370,800 -0- 370,800
Jackson Warehouse 15,000 244,608 259,608
-------- -------- --------
$608,647 $300,770 $909,417
======== ======== ========
</TABLE>
Other capital at Park Plaza, Morenci and Maple Tree will be funded by the cash
reserves for such improvements from the new loan agreements. Other capital at
Jackson Warehouse will be funded from operations. Leasing capital at all four of
the Registrant's properties will be funded from operations. Jackson Warehouse's
future funding for leasing capital is based upon anticipated higher occupancy
levels.
At all four of the Registrant's properties, leasing capital has been budgeted to
fund tenant alternations and lease commissions for new and renewal leases to be
signed during the year. At Morenci the Registrant has budgeted other capital for
upgrading the exterior lighting, asphalt overlay of the east section of the lot,
replacement of concrete sidewalks, ADA (American Disabilities Act) compliance,
and asphalt sealing. At Park Plaza the Registrant has budgeted other capital for
replacement of the porch canopies, roof repairs, exterior masonry and painting,
and parking lot sealing and striping. At Maple Tree Shopping Center other
capital has been budgeted for replacement of a section of the roof, overlaying
the rear and main drives of the center, ADA (American Disabilities Act)
compliance, and canopy renovation. At Jackson Warehouse other capital has been
budgeted for separation of utilities and building of a new entrance in the event
the vacant space needs to be further subdivided.
On November 30, 1999, the Registrant refinanced the debt on three of its
properties. A new note with a balance of $5,721,083 secured by Park Plaza I and
II, Morenci, and Maple Tree was obtained. In addition, the lender held back
$628,917 for specified capital improvements. This
F-421
<PAGE> 638
money will be drawn upon by the Registrant as needed. The refinancing will
result in a total mortgage for the above-mentioned properties of $6,350,000. The
note bears interest at a rate of 9.01% per annum and calls for monthly
installments of $57,348 including both interest and principal, through December
2004. The first mortgage debt on Jackson Warehouse has a balance due of
$3,665,974 and a maturity date of November 2000. The interest rate on the debt
is 9.31%. The Registrant intends to renew the Jackson note payable under similar
terms.
The future liquidity of the Registrant is dependent on its ability to fund
future capital expenditures and mortgage payments from operations and cash
reserves, maintain occupancy, and negotiate with lenders the refinancing of
mortgage debt as it matures.
Results of Operations
The results of operations for the Registrant's properties for the years ended
November 30, 1999, 1998, and 1997 are detailed in the schedule below. Expenses
of the Registrant are excluded.
<TABLE>
<CAPTION>
Jackson
Warehouse Maple Tree Park Plaza Morenci
--------- ---------- ---------- -------
1999
----
<S> <C> <C> <C> <C>
Revenues $ 486,226 $579,848 $518,807 $ 528,030
Expenses 817,433 499,735 304,485 503,551
----------- -------- -------- ---------
Net (Loss) Income $ (331,207) $ 80,113 $214,322 $ 24,479
=========== ======== ======== =========
1998
----
Revenues $ 835,944 $591,382 $484,736 $ 530,493
Expenses 1,130,028 469,852 286,508 455,275
----------- -------- -------- ---------
Net (Loss) Income $ (294,084) $121,530 $198,228 $ 75,218
=========== ======== ======== =========
1997
----
Revenues $ 867,895 $564,370 $484,872 $ 505,086
Expenses 861,781 465,257 330,272 522,937
----------- -------- -------- ---------
Net Income (Loss) $ 6,114 $ 99,113 $154,600 $ (17,851)
=========== ======== ======== =========
</TABLE>
1999 Property Comparisons
F-422
<PAGE> 639
At Jackson Warehouse, for the year ended 1999 revenues decreased compared to
1998 due to a decrease in base rental revenues of $181,920 as a result of the
consistent lower occupancy level than that reflected for the majority of 1998. A
decrease was also reflected in miscellaneous income ($161,522) due to
termination fees received only in 1998. Expenses decreased substantially
($312,595) due to decreases in repairs and maintenance-building ($37,000), real
estate tax ($19,917), management fees ($17,486), vacancy expenses ($186,475),
interest expense ($39,408), and amortization expense ($31,203). These decreases
were partially offset by increases in insurance ($3,837), payroll ($2,490),
legal fees ($5,500), and various other operating expenses ($7,067). The decrease
in repairs and maintenance-building can be attributed to preventive roof repairs
done in 1998, not necessary in 1999. Vacancy expense was higher in 1998 due to
the cost associated with the clean up and refurbishing of the significant space
vacated in 1998. Management fee expense is lower when compared to that of the
prior year due to related lower revenues. The decrease in interest expense can
be attributed to declining principal balances.
At Maple Tree, revenues decreased ($11,534) due to decreases in percentage rent
($9,358), common area maintenance reimbursement ($4,442), and real estate tax
revenues ($4,601). These decreases were partially offset by an increase in base
rental revenue ($7,314). Expenses at Maple Tree increased ($29,883) when
compared to year-end 1998. Increases were reflected in landscaping expense
($5,806), real estate tax ($10,892), and interest expense ($13,846). The
increase in real estate tax expense is due to higher annual taxes in 1999.
Interest penalties to pay off old mortgages prior to obtaining the new mortgage
resulted in the increased interest expense.
At Park Plaza I and II revenues increased $34,071 when compared to the prior
year end. Base rental revenues increased ($23,319), and miscellaneous revenues
increased in the amount of ($14,252). These increases were partially offset by
decreases in common area maintenance and real estate tax revenues. Expenses
increased $17,977 due to snow removal ($15,674), real estate tax expense
($14,383), and other operating expenses ($1,049). These increases were partially
offset by decreases in repairs and maintenance-electrical ($7,475), and vacancy
related expenses ($5,654). Real estate tax expense was lower in 1998 due to a
refund received and recorded in 1998.
At Morenci Professional Park revenues decreased $2,463 when comparing the year
ended 1999 to the year ended 1998. The decrease in revenues is primarily due to
a decrease in common area maintenance reimbursement revenues ($10,090),
partially offset by an increase in base rental revenue ($7,941). Expenses
increased $48,276 primarily due to increases reflected in plumbing repairs
($6,200), repairs and maintenance electrical service ($3,608), snow removal
($14,951), real estate tax expense ($13,593), and various other operating
expenses ($9,924). The increase in the real estate tax expense can be attributed
to higher annual taxes billed to the property in 1999.
The occupancy levels at November 30 are as follows:
<TABLE>
<CAPTION>
Occupancy rates at November 30
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Park Plaza 98% 95% 97%
Morenci 92% 94% 93%
Maple Tree 100% 100% 100%
Jackson Warehouse 61% 61% 100%
</TABLE>
F-423
<PAGE> 640
For the year ended November 30, 1999, Jackson Warehouse had two tenants who
leased 61% of the available space. One of the tenants occupied 40% of the space
on a lease which expires in July 2002. The other tenant occupied 21% of the
space on a lease which expires in November 2001. There was no leasing activity
in 1999. Effective December 1, 1999, the Registrant negotiated a lease amendment
through February 29, 2000 for 125,464 square feet (39%) with the tenant who had
previously occupied 21% of the available space. The tenant will be occupying
additional space starting in March 2000 (at which time the tenant will occupy
51% of the available space). The Registrant has signed a short-term lease with a
new tenant who will occupy 56,800 square feet (18%) from December 1, 1999,
through February 29, 2000. As of March 2000, when additional space will become
available due to the expiration of the short-term lease, the tenant whose lease
amendment terminates on February 29, 2000, will expand and occupy an additional
39,736 square feet. This will leave the property with a 9% vacancy.
Maple Tree remained 100% occupied during the fourth quarter of 1999. During the
quarter, two tenants signed new leases for 2,700 square feet, and two tenants
vacated a total of 2,700 square feet. During all of 1999, the Registrant signed
three new leases for 5,340 square feet, three tenants renewed their leases for
36,848 square feet, and three tenants vacated 5,340 square feet. The center has
two major tenants who occupy 18% and 42% of the available space. Their leases
have expiration dates of April 30, 2005 and July 31, 2004, respectively.
Occupancy at Park Plaza was 98% at the end of the fourth quarter of 1999. During
the fourth quarter, two tenants signed new leases for 12,600 square feet;and one
tenant renewed its lease for 3,600 square feet. During 1999 four tenants signed
new leases for 17,400 square feet; five tenants renewed their leases for 18,180
square feet; and two tenants vacated 10,640 square feet. At Park Plaza one
tenant occupies 10% of the total space, with a lease expiring August 2004.
Occupancy at Morenci Professional Park was 92% as of November 30, 1999. During
the fourth quarter, one tenant signed a new lease for 1,200 square feet; two
tenants renewed their leases for 3,600 square feet; and two tenants vacated
4,800 square feet. During all of 1999, nine tenants signed new leases for 12,000
square feet; four tenants renewed their leases for 12,000 square feet; and six
tenants vacated 14,400 square feet. No tenant occupies more than 10% of the
total space.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Registrant deems the Property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the Property, including disposal
value, if any, is less than its carrying amount. If the Property is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the Property exceeds its fair value. Fair value is based on quoted market
prices in active markets, if available. If quoted market prices are not
available, an estimate of fair value is based on the best information available,
including prices for similar properties or the results of valuation techniques
such as discounting estimated future cash flows. Considerable management
judgment is necessary to estimate fair value. Accordingly, actual results could
vary significantly from such estimates.
Year 2000 issues
Information Technology Systems
F-424
<PAGE> 641
The Registrant did not experience any information technology hardware or
software disruptions or failure as a result of the Year 2000. Subsequent to
December 31, 1999, the Registrant's "IT" systems have continued to operate, as
normally, at the management office and all four of the Registrant's properties.
NON-INFORMATION TECHNOLOGY SYSTEMS
All non-information systems at the Registrant's four properties did not
experience any disruptions or failures as a result of the Year 2000. These
systems included elevators, heating, ventilating, air conditioning (HVAC)
systems, and locks. These and other like systems continue to operate as normal
in the year 2000.
The Registrant did not separately track internal costs related to the Year 2000
issue. The changing of the century did not have a material impact on the
Registrant's financial condition or results of its operations.
MATERIAL THIRD PARTIES' SYSTEMS FAILURES
The Registrant did not experience any material impact related to third party
system failures for the Year 2000 issue at any of its four properties. Payments
from tenants did not appear to be delayed due to the Year 2000 conversion. The
Registrant remains confident that no third party material issues will arise in
the future.
1999 COMPARISONS
For the year ended November 30, 1999, consolidated revenues were $2,150,447
compared to $2,423,480 for the year ended November 30, 1998. The decrease in
revenues of $273,033 can primarily be attributed to the loss of revenues at
Jackson Warehouse due to lower occupancy level throughout the year when compared
to that of the prior year.
Consolidated expenses for the year ended November 30, 1999, were $2,280,827 as
compared to $2,482,905 for the year ended November 30, 1998. Consolidated
expenses decreased $202,078. The decrease is primarily attributable to decreases
in vacancy and other expenses at the Jackson Warehouse. In 1998, a significant
amount of expense was incurred to prepare the property for re-leasing after the
vacating of a former major tenant. During 1999 this expense was not necessary
since the space was rehabilitated in 1998. Net loss for the year ended November
30, 1999, was $158,010 compared to a net loss of $59,425 for the year ended
November 30, 1998. This decrease of $98,585 resulted in a net loss per
partnership unit of $13.04 compared to net loss per limited partnership unit of
$4.90 for the year ended November 30, 1998. Net cash used in operating
activities for the year ended November 30, 1999 was ($4,207). The Registrant was
able to fund capital expenditures of $59,978 and make payments on previously
existing notes payable of $395,283 during 1999.
1998 Comparisons
F-425
<PAGE> 642
For the year ended November 30, 1998, consolidated revenues were $2,423,480
compared to $2,434,123 for the year ended November 30, 1997. On a consolidated
basis, revenues were fairly steady, decreasing $10,643 or less than 1%.
Consolidated expenses for the year ended November 30,1998, were $2,482,905 as
compared to $2,345,759 for the year ended November 30, 1997. Consolidated
expenses increased 6% or $137,146. The increase is mainly attributable to an
increase in vacancy expense at the Jackson Warehouse. This expense was due to
the clean up of the interior of the space vacated by the large tenant during the
year and prepare this space and the exterior of the building for re-leasing. Net
income for the year ended November 30, 1998, was a net loss for the year of
$59,425 as compared to net income of $88,364 for the year ended November 30,
1997. This decrease resulted in a net loss per limited partnership unit of $4.90
compared to net income per limited partnership unit of $7.29 for the year ended
November 30, 1997. Cash flow provided by operating activities for the year ended
November 30, 1998 was $543,644. The Registrant was able to fund capital
expenditures of $110,145 and reduce loan balances by $396,241 during 1998.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operation in fiscal years 1997, 1998, and 1999, and are not expected to
materially affect the Registrant's operation in 2000.
Interest Rates
Interest rates on floating rate debt fluctuated throughout 1999. All debt of the
Registrant is now at a fixed rate, therefore, future increases in the prime
interest rate will not affect operations of the Registrant.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Registrant considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments. The Registrant
had no holdings of derivative financial or commodity instruments at November 30,
1999. A review of the Registrant's other financial instruments and risk
exposures at that date revealed that the Registrant had no exposure to interest
rate risk due to the payoff of the second mortgage debt. Interest rates are not
anticipated to affect the Registrant's financial position, results of operations
or cash flows.
F-426
<PAGE> 643
C. Management Discussion and Analysis of Financial Condition and Results of
Operations - Six Months Ended May 31, 2000 and May 31, 1999
It should be noted that this 10-Q contains forward-looking information (as
defined in the Private securities Litigation Reform Act of 1995) that involves
risk and uncertainty, including trends in the real estate investment market,
projected leasing and sales, and the future prospects for the Registrant. Actual
results could differ materially from those contemplated by such statements.
Liquidity and Capital Resources
Cash on hand as of May 31, 2000 is $1,929,831, a decrease of $642,372 from year
end November 30, 1999. The decrease in cash can primarily be attributed to the
payment of expenses related to the development of the real estate investment
trust as described in Note E of the notes to unaudited financial statements, and
the semi-annual and annual real estate tax payments at the Registrant's
properties. During the six month period ended May 31, 2000, capital additions
were made in the amount of $239,025 and payments were made on mortgage notes in
the amount of $162,763. The Registrant plans to maintain adequate cash reserves
and fund capital expenditures during the remainder of 2000. The capital
expenditures by property anticipated for the remainder of 2000 are as follows:
<TABLE>
<CAPTION>
Leasing Capital Other Capital Total
--------------- ------------- --------
<S> <C> <C> <C>
Park Plaza I & II $112,500 $ 5,125 $117,625
Morenci Professional Park 147,900 11,448 159,348
Maple Tree Shopping Center 163,000 10,700 173,700
Jackson Industrial -0- -0- -0-
-------- -------- --------
$423,400 $ 27,273 $450,673
======== ======== ========
</TABLE>
Other capital at Park Plaza I & II, Morenci Professional Park and Maple Tree
Shopping Center will partly be funded by the cash reserves for such improvements
from the new loan agreements. Leasing capital at all of the Registrant's
properties will be funded from operations.
At three of the Registrant's properties, leasing capital has been budgeted to
fund tenant alterations and lease commissions for new and renewal leases to be
signed during the year. At Morenci Professional Park, the Registrant has
budgeted other capital for upgrading the exterior lighting, asphalt overlay of
the east section of the lot, replacement of concrete sidewalks, ADA (American
Disabilities Act) compliance, and asphalt sealing. At Park Plaza I & II, the
Registrant has budgeted other capital for replacement of the porch canopies,
roof repairs, exterior masonry and painting, and parking lot sealing and
striping. At Maple Tree Shopping Center, other capital has been budgeted for
replacement of a section of the roof, overlaying the rear and main drives of the
center, ADA (American Disabilities Act) compliance, and canopy renovation.
On November 30, 1999, the Registrant refinanced the debt on three of its
properties. A new note with a balance of $5,721,083 secured by Park Plaza I and
II, Morenci Professional Park,
F-427
<PAGE> 644
and Maple Tree Shopping Center was obtained. In addition, the lender held back
$628,917 for specified capital improvements. This money will be drawn upon by
the Registrant as needed. The refinancing resulted in a total mortgage for the
above-mentioned properties of $6,350,000. The balance of this mortgage at May
31, 2000 was $5,635,424. The note bears interest at a rate of 9.01% per annum
and calls for monthly installments of $57,348 including both interest and
principal, through December 2004. The first mortgage debt on Jackson Industrial
has a balance due of $3,588,870 and a maturity date of November 2000. The
interest rate on the debt is 9.31%. The Registrant intends to renew the Jackson
Industrial note payable under similar terms.
The future liquidity of the Registrant is dependent on its ability to fund
future capital expenditures and mortgage payments from operations and cash
reserves, maintain occupancy, and negotiate with lenders the refinancing of the
mortgage debt as it matures.
Results of Property Operations
The results of operations of the Registrant's properties for the quarter ended
May 31, 2000 and 1999 are detailed in the schedule below. Revenues and expenses
of the Registrant are not presented:
<TABLE>
<CAPTION>
Jackson Maple Tree Park Plaza Morenci
Industrial Shopping Center I and II Prof. Park
---------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
2000
Revenues $ 181,633 $ 160,562 $ 140,493 $ 170,201
Expenses (210,243) (147,818) (108,971) (148,647)
--------- --------- --------- ---------
Net (Loss) Income $ (28,610) $ 12,744 $ 31,522 $ 21,554
========= ========= ========= =========
1999
Revenues $ 120,706 $ 149,796 $ 140,188 $ 135,645
Expenses (212,787) (118,261) (79,481) (131,433)
--------- --------- --------- ---------
Net (Loss) Income $ (92,081) $ 31,535 $ 60,707 $ 4,212
========= ========= ========= =========
</TABLE>
At Jackson Industrial, revenues increased $60,927 when comparing the quarter
ended May 31, 2000 to the quarter ended May 31, 1999 due to the current 100%
occupancy level at the property. Expenses remained consistent with only a $2,544
decrease when comparing the two three-month periods. No significant fluctuations
occurred in the expense categories during the comparison period.
F-428
<PAGE> 645
At Maple Tree Shopping Center revenues increased $10,766 when comparing the
quarter ending May 31, 2000 to the quarter ending May 31, 1999 primarily due to
an increase in percentage rent revenue ($8,991) and real estate tax revenue
($2,337). The percentage rent revenue increase can be attributed to annual tax
billings posted for two tenants at the shopping center during the second
quarter. These billings were done in a later period during 1999. Expenses
increased $29,557 when comparing the three month periods ended May 31, 2000 and
1999. This increase can primarily be attributed to increases in interest expense
($6,863), depreciation and amortization expense ($2,883), parking lot related
expenses ($14,175), and real estate tax expense ($5,250). The increased interest
expense can be attributed to the larger principal balance than that of prior
year. The parking lot expense increase is due to black-top patching and dumpster
repair at the property during the second quarter of 2000. The increased real
estate tax expense when comparing the two three month periods can be attributed
to a larger quarterly accrual based on an increase in the annual tax due for
2000.
At Park Plaza I and II, revenues remained consistent, with a $305 increase when
comparing the quarter ended May 31, 2000 to the quarter ended May 31, 1999.
Operating expenses at Park Plaza I and II increased $29,490 when comparing the
two quarters. This increase in expenses can primarily be attributable to an
increase in interest expense ($28,064), and depreciation and amortization
expense ($4,043), partially offset by a decrease in administrative payroll
($1,933). The increased interest expense can be attributed to the increased
principal balance.
At Morenci Professional Park, revenues increased $34,556 when comparing the
quarter ending May 31, 2000 to the quarter ending May 31, 1999. The increase in
revenues can primarily be attributed to increases in both common area
maintenance reimbursement revenue ($28,839) and real estate tax revenue
($5,503). The increase in common area maintenance revenue is due to a
significant increase in the reimbursable expenses when compared to that of prior
year. The increase in real estate tax revenue can primarily be attributed to an
increase in the pro-rata share of certain tenants that are responsible for the
taxes in accordance with their lease. Expenses increased $17,214 when comparing
the two quarters. The increase is primarily attributable to increases in
interest expense ($15,462), and vacancy related expenses ($6,138), partially
offset by a decrease in real estate tax expense ($4,546). The increase in
interest expense is due to the increased principal balance and the additional
costs incurred to update a vacant suite resulted in the increased vacancy
expense.
The occupancy levels at May 31 are as follows:
<TABLE>
<CAPTION>
Property 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
Park Plaza I & II 100% 92% 96%
Morenci Professional Park 92% 95% 93%
Maple Tree Shopping Center 100% 100% 100%
Jackson Industrial 100% 61% 39%
</TABLE>
Leasing activity for the quarter at Park Plaza I & II consisted of one new lease
being signed for 2,460 square feet, three tenants renewing their leases for
10,200 square feet, and one tenant vacating 2,460 square feet. The occupancy
level remained at 100% throughout the quarter.
F-429
<PAGE> 646
At Park Plaza I and II, one tenant occupies 10% of the available space, with a
lease expiring in August 2004.
The second quarter leasing activity at Morenci Professional Park consisted of
six new tenants leasing 9,600 square feet, five tenants renewing 13,200 square
feet, and three tenants vacating 7,200 square feet. The occupancy level
increased 2%, to 92% from that of first quarter 2000. There are no major tenants
occupying more than 10% of the space at this property.
At Maple Tree Shopping Center occupancy remained consistent at 100% during the
quarter. There was no leasing activity during the quarter. Two tenants occupy
18% and 42% of the available space with leases expiring in April 2005 and July
2004, respectively.
At Jackson Industrial, occupancy increased 4%, to 100% from that of first
quarter 2000. Leasing activity during the quarter consisted of one major tenant
on a short-term lease vacating 56,800 square feet and an existing major tenant
expanding into that space, resulting in the 100% occupancy level. The property
now has two major tenants occupying 61% and 39% of the available space, with
leases expiring in November 2001 and July 2002, respectively.
The Registrant reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of a property may not
be recoverable. The Registrant considers a history of operating losses or a
change in occupancy to be primary indicators of potential impairment. The
Registrant deems the property to be impaired if a forecast of undiscounted
future operating cash flows directly related to the property, including disposal
value, if any, is less than its carrying amount. If the property is determined
to be impaired, the loss is measured as the amount by which the carrying amount
of the property exceeds its fair value. Fair value is based on quoted market
prices in active markets, if available. If quoted market prices are not
available, an estimate of fair value is based on the best information available,
including prices for similar properties or the results of valuation techniques
such as discounting estimated future cash flows. Considerable management
judgement is necessary to estimate fair value. Accordingly, actual results could
vary significantly from such estimates.
2000 Comparison
Revenues for the quarter ended May 31, 2000 and 1999 are $677,473 and $545,383,
respectively. For the six month period ended May 31, 2000 and 1999 revenues are
$1,337,500 and $1,080,699 respectively. For the quarter ended, revenues
increased $132,090 when comparing the two periods and for the six month period,
revenues increased $256,801. This increase in consolidated revenue for both
comparison periods can be attributed primarily to increases in base rental
revenues, common area maintenance revenue, real estate tax revenue, and
percentage rent revenue, as previously mentioned in the property comparisons. An
increase in interest revenue of $25,044 for the three month period and $50,151
for the six month period also contributed to the consolidated increase in
revenues. This increase in interest revenue is attributable to the amount earned
on the additional principal funds obtained in November 1999 as mentioned
previously in the description of mortgage indebtedness.
For the quarters ended May 31, 2000 and 1999 consolidated expenses were $646,948
and $571,588 respectively. For the six month period ended May 31, 2000 and 1999,
consolidated expenses were $1,316,594 and $1,152,676 respectively. For the
quarter ended, consolidated
F-430
<PAGE> 647
expenses increased $75,360 primarily due to increases in interest expense
($47,416), depreciation and amortization expense ($9,208), management fees
($5,327), insurance ($4,310), parking lot/landscaping expenses ($6,942),
professional services ($2,704), vacancy related expenses ($3,782), and various
other operating expenses ($3,365). These increases were partially offset by
decreases in general and administrative expenses ($5,043) and payroll ($1,936).
The increase in interest expense is due to the increased principal balance at
three of the Registrant's properties, as previously mentioned in the property
comparisons. The increased management fee can be directly attributable to the
increased revenues. Also addressed in the property comparisons were the
increases in parking lot/landscaping and vacancy related expenses. The decrease
in general and administrative expenses is primarily due to a decrease in office
related expenses at all properties and at the partnership level. For the six
month period ended May 31, 2000, compared to the same period in 1999,
consolidated expenses increased $163,918 due to increases in interest expense
($123,194), depreciation and amortization ($24,977), real estate tax expense
($4,323), management fees ($11,771), insurance ($10,053), parking
lot/landscaping ($7,112), and payroll ($9,137). These increases were partially
offset by decreases in repairs and maintenance related expenses ($14,083),
general and administrative ($5,024), vacancy ($5,441), and other operating
expenses ($3,200). The increase in insurance expense is due to a rise in the
premium for property insurance at all of the Registrant's properties, as well as
an increase in the insurance carried at the partnership level. The decrease in
repairs and maintenance related expenses is primarily due to decreased
electrical repairs and general maintenance at the Registrant's properties. All
other expense fluctuations have either been previously addressed in the
consolidated three month comparison and/or the property comparisons.
1999 Comparison
Revenues for the quarter ended May 31, 1999 and 1998 are $545,383 and $879,083,
respectively. For the six month period ended May 31, 1999 and 1998 revenues are
$1,080,699 and $1,464,773, respectively. For the quarter ended, revenues
decreased $333,700 when comparing the two periods and for the six month period
revenues decreased $384,074. The decrease in revenue, for both periods, can
primarily be attributed to termination and early cancellation fees received at
Jackson Industrial during second quarter 1998 from a former major tenant, not
received in 1999. In addition there were also decreases in common area
maintenance income, bad debt recovery, and rental income. For the quarters ended
May 31, 1999 and 1998 consolidated expenses were $571,588 and $692, 370
respectively. For the six month period ended May 31, 1999 and 1998, consolidated
expenses were $1,152,676 and $1,257,605 respectively. For the quarter ended,
consolidated expenses decreased $120,782 primarily due to decreases in interest
expense ($4,435), depreciation/amortization expense ($37,013), real estate tax
expense ($5,136), management fees ($16,863), repairs and maintenance related
expenses ($29,033), other tax expense ($4,407), and vacancy related expenses
($73,397). These decreases were partially offset by increases in parking
lot/landscaping ($12,209), office expenses ($7,199), payroll ($9,677),
professional services ($15,089), and other operating expenses ($5,549). The
decrease in depreciation/amortization, management fees, vacancy, and repairs &
maintenance are all attributable to the former major tenant vacancy at Jackson
Industrial in 1998. The increase in parking lot/landscaping is due to exterior
maintenance at Maple Tree Shopping Center. Office expenses increased from that
of prior year due to computer hardware and software costs incurred in 1999. The
F-431
<PAGE> 648
increase in payroll is primarily due to additional staff at Park Plaza I & II.
For the six month period ended May 31, 1999 compared to the same period in 1998,
consolidated expenses decreased $104,929 due to decreases in interest expense
($5,793), depreciation/amortization ($44,776), real estate tax expense
($14,198), management fees ($20,940), repairs and maintenance related expenses
($18,350), other taxes ($7,058) and vacancy expenses ($74,306). These decreases
were partially offset by increases in parking lot/landscaping ($9,715), office
expenses ($7,237), payroll ($4,613), professional fees ($19,300), and other
operating expenses ($41,440). All increases and decreases have been explained
earlier in the three month period comparison, and the cause remains consistent
for the six month period, with the exception of the decrease in other tax which
can be attributed to lower income tax at the partnership level and the increase
in other operating expenses, which is primarily due to significant snow removal
costs during first quarter 1999.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operations in fiscal year 1999 and are not expected to materially affect the
Registrant's operations in 2000.
F-432
<PAGE> 649
D. AUDITED FINANCIAL STATEMENT - NOVEMBER 30, 1999, 1998 AND 1997
INDEPENDENT AUDITORS' REPORT
To the Partners of
Nooney Real Property Investors-Two, L.P.:
We have audited the accompanying balance sheets of Nooney Real Property
Investors-Two, L.P. (a limited partnership) as of November 30, 1999 and 1998,
and the related statements of operations, deficiency in assets and cash flows
for each of the three years in the period ended November 30, 1999. Our audits
also included the financial statement schedule immediately preceding the
financial statements. These financial statements and financial statement
schedule are the responsibility of the Partnership's general partners. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
Partnership's general partners, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nooney Real Property Investors-Two, L.P. as
of November 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended November 30, 1999 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 4, 2000
F-433
<PAGE> 650
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
BALANCE SHEETS - NOVEMBER 30, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 2,572,203 $ 486,156
ACCOUNTS RECEIVABLE - No allowance for doubtful
accounts considered necessary 120,110 119,039
PREPAID EXPENSES AND DEPOSITS 58,448 55,880
INVESTMENT PROPERTY:
Land 1,886,042 1,886,042
Buildings and improvements 14,187,855 14,137,031
------------ ------------
16,073,897 16,023,073
Less accumulated depreciation (9,634,858) (9,189,847)
------------ ------------
6,439,039 6,833,226
DEFERRED EXPENSES - At amortized cost 237,432 80,303
------------ ------------
TOTAL $ 9,427,232 $ 7,574,604
============ ============
LIABILITIES AND DEFICIENCY IN ASSETS
LIABILITIES:
Accounts payable and accrued expenses $ 359,278 $ 518,876
Refundable tenant deposits 100,090 80,086
Mortgage notes payable 9,387,057 7,236,825
------------ ------------
Total liabilities 9,846,425 7,835,787
DEFICIENCY IN ASSETS (419,193) (261,183)
------------ ------------
TOTAL $ 9,427,232 $ 7,574,604
============ ============
</TABLE>
See notes to financial statements.
F-434
<PAGE> 651
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental and other income $ 2,150,405 $ 2,417,980 $ 2,424,206
Interest 42 5,500 9,917
----------- ----------- -----------
Total revenues 2,150,447 2,423,480 2,434,123
----------- ----------- -----------
EXPENSES:
Interest 679,243 705,682 743,173
Depreciation and amortization 491,525 518,176 522,594
Real estate taxes 385,810 374,014 395,233
Repairs and maintenance 133,084 151,061 148,206
Property management fees - related party 105,322 122,128 121,111
Other operating expenses (includes
$30,000 in each year to related party) 513,473 611,844 415,442
----------- ----------- -----------
Total expenses 2,308,457 2,482,905 2,345,759
----------- ----------- -----------
NET INCOME (LOSS) $ (158,010) $ (59,425) $ 88,364
=========== =========== ===========
NET INCOME (LOSS) ALLOCATION:
General partners $ (1,580) $ (594) $ 884
Limited partners (156,430) (58,831) 87,480
LIMITED PARTNERSHIP DATA:
Net income (loss) per unit $ (13.04) $ (4.90) $ 7.29
=========== =========== ===========
Weighted average limited partnership
units outstanding 12,000 12,000 12,000
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-435
<PAGE> 652
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF DEFICIENCY IN ASSETS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Limited General
Partners Partners Total
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 1, 1996 $(207,512) $ (82,610) $(290,122)
Net income 87,480 884 88,364
--------- --------- ---------
BALANCE, NOVEMBER 30, 1997 (120,032) (81,726) (201,758)
Net loss (58,831) (594) (59,425)
--------- --------- ---------
BALANCE, NOVEMBER 30, 1998 (178,863) (82,320) (261,183)
Net loss (156,430) (1,580) (158,010)
--------- --------- ---------
BALANCE, NOVEMBER 30, 1999 $(335,293) $ (83,900) $(419,193)
========= ========= =========
</TABLE>
See notes to financial statements.
F-436
<PAGE> 653
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (158,010) $ (59,425) $ 88,364
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 454,165 487,214 489,734
Amortization of deferred expenses 37,360 30,962 32,860
Changes in accounts affecting operations:
Accounts receivable (1,071) 8,376 19,863
Prepaid expenses and deposits (2,568) (9,934) 283
Deferred expenses (194,489) (37,697) (1,204)
Accounts payable and accrued expenses (159,598) 124,260 (178,044)
Refundable tenant deposits 20,004 (112) 7,749
----------- ----------- -----------
Net cash (used in) provided by
operating activities (4,207) 543,644 459,605
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Net additions to investment property (59,978) (110,145) (240,913)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage notes payable (395,283) (396,241) (366,041)
Proceeds from mortgage notes payable 5,721,083
Repayment of mortgage notes payable (3,175,568)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 2,150,232 (396,241) (366,041)
----------- ----------- -----------
</TABLE>
F-437
<PAGE> 654
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 2,086,047 $ 37,258 $ (147,349)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 486,156 448,898 596,247
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 2,572,203 $ 486,156 $ 448,898
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during the year
for interest $ 683,312 $ 701,613 $ 743,173
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-438
<PAGE> 655
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
1. BUSINESS
Nooney Real Property Investors-Two, L.P. (the "Partnership") is a limited
partnership organized under the laws of the State of Missouri on September 26,
1979. The Partnership was organized to invest primarily in income-producing real
properties such as shopping centers, office buildings, other commercial
properties, apartment buildings, warehouses and light industrial properties. The
Partnership's portfolio is comprised of: a shopping center located in West St.
Louis County, Missouri; two office/warehouse complexes, a multi-tenant office
and a warehouse all located in Indianapolis, Indiana. These properties generated
27.4%, 25.0%, 24.6% and 23.0% of rental and other income, respectively, for the
year ended November 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements include only those assets, liabilities and results of
operations of the partners which relate to the business of the Partnership. The
statements do not include any assets, liabilities, revenues or expenses
attributable to the partners' individual activities. No provision has been made
for federal and state income taxes since these taxes are the personal
responsibility of the partners.
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 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.
Prior to October 31, 1997, the corporate general partner was a wholly owned
subsidiary of Nooney Company. One of the individual general partners was an
officer, director and shareholder of Nooney Company. The other individual
general partner's spouse's estate was a shareholder of Nooney Company. Nooney
Krombach Company, a wholly owned subsidiary of Nooney Company, managed the
Partnership's real estate for a management fee. Property management fees paid to
Nooney Krombach Company were $109,770 for the year ended November 30, 1997.
Additionally, the Partnership paid Nooney Krombach Company $27,500 in 1997 as
reimbursement for management services and indirect expenses in connection with
the management of the Partnership.
F-439
<PAGE> 656
On October 31, 1997, Nooney Company sold its wholly owned subsidiary, Nooney
Investors, Inc., the corporate general partner of the Partnership to S-P
Properties, Inc., a California corporation, which in turn is a wholly owned
subsidiary of CGS Real Estate Company, Inc., a Texas corporation.
Simultaneously, Gregory J. Nooney, Jr., an individual general partner and
PAN, Inc., a corporate general partner, sold their economic interests to S-P
Properties, Inc. and resigned as general partners subject to a ninety day
notification to the limited partners. CGS Real Estate also purchased the real
estate management business of Nooney Krombach Company and formed Nooney, Inc.
to perform the management of the Partnership.
In September 1999, Nooney, Inc. changed its name to American Spectrum
Midwest, Inc. and began doing business under the new name at that time.
Ownership remained unchanged. Property management fees paid to American
Spectrum Midwest, Inc. were $105,322, $122,128 and $11,341 for the years
ended November 30, 1999, 1998 and 1997, respectively. Additionally, the
Partnership paid American Spectrum Midwest, Inc. $30,000 in 1999 and 1998 and
$2,500 in 1997 as reimbursement for management services and indirect expenses
in connection with the management of the Partnership and $63,500 in 1999 for
loan refinancing fees related to the new mortgage notes discussed in Note 3.
The Partnership considers all highly liquid debt instruments with a maturity of
three months or less at date of purchase to be cash equivalents. Cash and cash
equivalents include $100,090 and $80,086 of restricted cash at November 30, 1999
and 1998, respectively. Restricted cash represents deposits paid by tenants.
Investment property is recorded at the lower of cost or fair market value.
Impairment is determined if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the property.
Depreciation and amortization is provided on a straight-line basis over the
estimated useful life of the depreciable asset (30 years for buildings) or, in
the case of tenant alterations, over the term of the lease.
Deferred expenses consist primarily of lease fees and financing costs and are
amortized over the terms of their respective leases or notes.
Lease agreements are accounted for as operating leases and rentals from such
leases are reported as revenues ratably over the terms of the leases. Certain
lease agreements provide for rent concessions. Rent concessions represent
revenue which is not yet due under the terms of the various agreements. Accrued
rent concessions included in accounts receivable were $20,732 and $23,127 at
November 30, 1999 and 1998, respectively.
Included in rental and other income are amounts received from tenants under
provisions of lease agreements which require the tenants to pay additional rent
equal to specified portions of certain expenses such as real estate taxes,
insurance, utilities and common area maintenance. The income is recorded in the
same period that the related expense is incurred.
F-440
<PAGE> 657
Pursuant to the terms of the Partnership Agreement, income and losses from
operations and cash distributions are allocated pro rata to the general and
limited partners based upon the relationship of original capital contributions.
F-441
<PAGE> 658
Limited partnership per unit computations are based on the weighted average
number of limited partnership units outstanding during the year.
3. MORTGAGE NOTES PAYABLE
Mortgage notes payable as of November 30, 1999 and 1998 and the related
collateral book values consist of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Maple Tree Shopping Center (Book value
of $980,607 at November 30, 1999)
9.01%, due in monthly installments of
$19,758, including interest, to
December 2004 $1,977,223 $ --
9.125%, due in monthly
installments of $17,911,
including interest to 2009. Paid
off on November 30, 1999 -- 1,454,324
Note payable to bank, principal due in
monthly installments of $1,208 plus
interest at bank's prime rate (8.5% at
November 30, 1999) plus 1-1/2%. Paid
off on November 30, 1999 -- 245,364
Park Plaza I & II Office/Warehouse
Complex (Book value of $817,431 at
November 30, 1999)
9.01%, due in monthly installments of $18,214,
including interest, to December 2004 1,833,710 --
9.5%, due in monthly installments of
$12,669, including interest, to 2003.
Paid off on November 30, 1999 -- 610,751
Morenci Professional Park (Book value of
$1,455,227 at November 30, 1999)
9.01% due in monthly installments of
$19,376, including interest, to
December 2004 1,910,150 --
</TABLE>
F-442
<PAGE> 659
<TABLE>
<S> <C> <C>
10.25%, due in monthly installments of
$15,682, including interest, to 2005.
Paid off on November 30, 1999 -- 929,636
</TABLE>
F-443
<PAGE> 660
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable to bank, principal due in
monthly installments of $1,111 plus
interest at bank's prime rate (8.5% at
November 30, 1999) plus 1-1/2%.
Paid off on November 30, 1999 $ -- $ 217,733
Jackson Industrial Park, Building A (Book
value of $3,185,774 at November 30, 1999)
9.31%, due in monthly installments of
$39,203, including interest, to November
2000, when remaining principal balance of
$3,542,902 is due 3,665,974 3,779,017
---------- ----------
Total $9,387,057 $7,236,825
========== ==========
</TABLE>
THE MAPLE TREE, PARK PLAZA AND MORENCI NOTES THAT WERE REPAID ON NOVEMBER 30,
1999 WERE PAID WITH THE PROCEEDS RECEIVED UPON REFINANCING THE PROPERTIES WITH A
NEW LENDER. PREPAYMENT PENALTIES RELATED TO THE PAID OFF MORTGAGE NOTES TOTALED
$27,630 AND WERE EXPENSED IN 1999.
MANAGEMENT INTENDS TO REFINANCE THE JACKSON NOTE PAYABLE UNDER SIMILAR TERMS BY
EXTENDING THE DUE DATE.
The mortgage notes are collateralized by deeds of trust and assignments of rents
on all investment properties. Principal payments required during the next five
years are as follows:
<TABLE>
<S> <C>
2000 $3,845,999
2001 196,932
2002 215,427
2003 235,659
2004 257,791
Thereafter 4,635,249
----------
Total $9,387,057
==========
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments, the estimated fair value
of mortgage notes payable with maturities greater than one year is determined
based on rates currently available to the Partnership for mortgage notes with
similar terms and remaining maturities. The estimated fair value of mortgage
notes payable with maturities of less than one year are valued at their carrying
amounts included in the balance sheet, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments.
F-444
<PAGE> 661
The carrying amount and estimated fair value of the Partnership's debt at
November 30, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Mortgage Notes Payable $9,387,057 $9,357,000 $7,236,825 $7,438,000
</TABLE>
Fair value estimates are made at a specific point in time, are subjective in
nature and involve uncertainties and matters of significant judgment. Settlement
of the Partnership's debt obligations at fair value may not be possible and may
not be a prudent management decision. The potential loss on extinguishment at
November 30, 1999 does not take into consideration expenses that would be
incurred to settle the debt obligations at fair value.
4. RENTAL REVENUES UNDER OPERATING LEASES
Minimum future rental revenues under noncancelable operating leases in effect as
of November 30, 1999 are as follows:
<TABLE>
<S> <C>
2000 $1,743,000
2001 1,285,000
2002 694,000
2003 351,000
2004 193,000
Remainder 196,000
----------
Total $4,462,000
==========
</TABLE>
In addition, certain lease agreements require tenant participation in certain
operating expenses and additional contingent rentals based upon percentages of
tenant sales in excess of minimum amounts. Tenant participation in expenses
included in revenues approximated $231,000 for the year ended November 30, 1999
($260,000 for the year ended November 30, 1998 and $259,000 for the year ended
November 30, 1997). Contingent rentals were not significant for the years ended
November 30, 1999, 1998 and 1997.
5. FEDERAL INCOME TAX STATUS
The general partners have received a ruling from the Internal Revenue Service
that Nooney Real Property Investors-Two, L.P. is considered a partnership for
income tax purposes.
F-445
<PAGE> 662
Selling commissions and offering expenses incurred in connection with the sale
of limited partnership units are not deductible for income tax purposes and
therefore increase the partners' bases. Investment property additions after
December 31, 1980 are depreciated for income tax purposes using rates which
differ from rates used for computing depreciation for financial statement
reporting. Rents received in advance are includable in taxable income in the
year received. Rent concessions, recognized ratably over lease terms for
financial statement purposes, are includable in taxable income in the year rents
are received. Insurance premiums are deductible for tax purposes in the year
paid. Losses in connection with the writedown of investment property are not
recognized for income tax purposes until the property is disposed.
The comparison of financial statement and income tax reporting is as follows:
<TABLE>
<CAPTION>
Financial Income
Statement Tax
----------- -----------
<S> <C> <C>
1999:
Net (loss) income $ (158,010) $ 72,833
Deficiency in assets (419,193) (1,181,414)
1998:
Net (loss) income $ (59,425) $ 139,813
Deficiency in assets (261,183) (1,254,247)
1997:
Net income $ 88,364 $ 386,375
Deficiency in assets (201,758) (1,394,060)
</TABLE>
6. MAJOR TENANTS
A substantial amount of the Partnership's revenue in 1999 was derived from one
major tenant whose rentals amounted to approximately $265,000 or $12%.
A substantial amount of the Partnership's revenue in 1998 was derived from two
major tenants whose rentals amounted to approximately $582,000 and $265,000 or
24% and 11%, respectively, of total revenues. Effective July 31, 1998, the
Partnership lost the major tenant accounting for 24% of total revenues.
Effective November 23, 1998, approximately one-third of the vacated space was
filled by a new tenant.
A substantial amount of the Partnership's revenue in 1997 was derived from two
major tenants whose rentals amounted to approximately $582,000 and $257,250 or
24% and 11%, respectively, of total revenues.
F-446
<PAGE> 663
7. BUSINESS SEGMENTS (IN THOUSANDS)
The Partnership has four reportable segments: Jackson "A" Industrial Park, Maple
Tree Shopping Center, Park Plaza Office Complex and Morenci Professional Park.
The Partnership's management evaluates performance of each segment based on
profit or loss from operations before allocation of property writedowns, general
and administrative expenses, unusual and extraordinary items, and interest. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 2).
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Jackson $ 486.2 $ 835.9 $ 867.9
Maple Tree 579.8 591.4 564.4
Park Plaza 518.8 484.7 484.9
Morenci 528.0 530.5 505.1
-------- -------- --------
$2,112.8 $2,442.5 $2,422.3
======== ======== ========
OPERATING PROFIT (LOSS):
Jackson $ (331.2) $ (294.1) $ 6.1
Maple Tree 80.1 121.5 99.1
Park Plaza 214.3 198.2 154.6
Morenci 24.5 75.2 (17.9)
-------- -------- --------
$ (12.3) $ 100.8 $ 241.9
======== ======== ========
CAPITAL EXPENDITURES:
Jackson $ 3.3 $ 2.7 $ 3.8
Maple Tree 14.8 45.3 54.2
Park Plaza 18.3 35.2 54.9
Morenci 23.6 26.9 128.0
-------- -------- --------
$ 60.0 $ 110.1 $ 240.9
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Jackson $ 222.4 $ 253.6 $ 238.7
Maple Tree 69.1 67.0 69.3
Park Plaza 66.7 66.7 75.9
Morenci 133.2 130.6 137.5
-------- -------- --------
$ 491.4 $ 517.9 $ 521.4
======== ======== ========
</TABLE>
F-447
<PAGE> 664
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Jackson $3,238.4 $3,474.2
Maple Tree 1,152.4 1,133.2
Park Plaza 900.3 885.2
Morenci 1,521.5 1,584.6
-------- --------
$6,812.6 $7,077.2
======== ========
</TABLE>
Reconciliation of segment data to the Partnership's consolidated data follow:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Segments $2,112.8 $2,442.5 $2,422.3
Corporate and other 37.6 (24.5) 1.9
-------- -------- --------
$2,150.4 $2,418.0 $2,424.2
======== ======== ========
NET INCOME (LOSS):
Segments operating profit (loss) $ (12.3) $ 100.8 $ 241.9
Other income (expense) 37.5 (19.1) 11.9
General and administrative expenses (183.2) (141.1) (165.4)
-------- -------- --------
$ (158.0) $ (59.4) 88.4
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Segments $ 491.4 $ 517.9 $ 521.4
Corporate and other 0.1 0.3 1.2
-------- -------- --------
$ 491.5 $ 518.2 $ 522.6
======== ======== ========
ASSETS:
Segments $6,812.6 $7,077.2
Corporate and other 2,614.6 497.4
-------- --------
$9,427.2 $7,574.6
======== ========
</TABLE>
* * * * *
F-448
<PAGE> 665
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------------------------------- ----------- ----------------------------------------------- -----------
Initial Cost to Partnership Costs Capitalized
----------------------------------------------- Subsequent
Buildings and to
Description Encumbrances Land Improvements Total Acquisition
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Maple Tree Shopping Center,
Ellisville, Missouri $ 1,977,223 $ 474,750 $2,709,303 $3,184,053 $ 490,845
Park Plaza I & II
Office/Warehouse
Complex,Indianapolis,
Indiana 1,833,710 182,335 2,228,828 2,411,163 225,198(1)
Morenci Professional Park,
Indianapolis, Indiana 1,910,150 320,418 2,689,506 3,009,924 87,304(2)
Jackson Industrial Park,
Building A, Indianapolis,
Indiana 3,665,974 908,539 5,181,390 6,089,929 575,481
----------- ----------- ---------- ---------- -----------
Total $ -- 9,387,507 $1,886,042 $ -- 12,809,027
$ -- 14,695,069 $1,378,828 -- --
=========== =========== ========== ========== ===========
</TABLE>
F-449
<PAGE> 666
<TABLE>
<CAPTION>
Column E
---------------------------------------------------------
Gross Amounts at Which
Carried at Close of Period
---------------------------------------------------------
Buildings and
Land Improvements Total
---------- ----------- -----------
<S> <C> <C> <C>
Maple Tree Shopping Center,
Ellisville, Missouri $ 474,750 $ 3,200,148 $ 3,674,898
Park Plaza I & II
Office/Warehouse Complex,
Indianapolis, Indiana 182,335 2,454,026 2,636,361
Morenci Professional Park,
Indianapolis, Indiana 320,418 2,776,810 3,097,228
Jackson Industrial Park,
Building A, Indianapolis,
Indiana 908,539 5,756,871 6,665,410
---------- ----------- -----------
Total $1,886,042 $14,187,855 $16,073,897
========== =========== ===========
</TABLE>
(1) Amount is net of a building writedown of $77,225, to reflect the minimum
recoverable value to the Partnership.
(2) Amount includes the disposal of Building G of Morenci Professional Park
for $482,387 and a building writedown of $139,281 to reflect the minimum
recoverable value to the Partnership.
F-450
<PAGE> 667
<TABLE>
<CAPTION>
Column F Column G Column H Column I
--------------- ------------- --------- ---------------------
Life on which
Depreciation
Accumulated Date of Date in Latest Income
Depreciation Construction Acquired Statement is Computed
------------ ------------ -------- ---------------------
<S> <C> <C> <C> <C>
Maple Tree Shopping Center,
Ellisville, Missouri $ 2,694,291 1974 10/03/79 30 yrs.
Park Plaza I & II
Office/Warehouse Complex,
Indianapolis, Indiana 1,818,930 1975, 1979 10/15/80 30 yrs.
Morenci Professional Park,
Indianapolis, Indiana $ 1,642,001 1975, 1979 03/27/81 30 yrs.
Jackson Industrial Park,
Building A, Indianapolis,
Indiana 3,479,636 1976, 1980 03/27/81 30 yrs.
---------------
Total $ 9,634,858
===============
</TABLE>
F-451
<PAGE> 668
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(A) Reconciliation of amounts in Column E:
Balance at beginning of period $ 16,023,073 $ 16,081,958 $ 15,851,109
Add - Cost of improvements 59,978 110,145 240,913
Less - Cost of disposals (9,154) (169,030) (10,064)
------------ ------------ ------------
Balance at end of period $ 16,073,897 $ 16,023,073 $ 16,081,958
============ ============ ============
(B) Reconciliation of amounts in Column F:
Balance at beginning of period $ 9,189,847 $ 8,871,663 $ 8,391,993
Add - Provision during the period 454,165 487,214 489,734
Less - Depreciation on disposals (9,154) (169,030) (10,064)
------------ ------------ ------------
Balance at end of period $ 9,634,858 $ 9,189,847 $ 8,871,663
============ ============ ============
(C) The aggregate cost of real estate
owned for federal income tax purposes $ 16,290,403 $ 16,239,579 $ 16,298,464
============ ============ ============
</TABLE>
F-452
<PAGE> 669
E. UNAUDITED FINANCIAL STATEMENTS - SIX MONTHS ENDED MAY 31, 2000 AND MAY 31,
1999
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
----------------------------------------
(A LIMITED PARTNERSHIP)
-----------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
May 31, November 30,
2000 1999
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,929,831 $ 2,572,203
Accounts receivable 159,324 120,110
Prepaid expenses and deposits 773,948 58,448
Investment property
Land 1,886,042 1,886,042
Buildings and improvements 14,424,466 14,187,855
------------ ------------
16,310,508 16,073,897
Less accumulated depreciation 9,859,123 9,634,858
------------ ------------
6,451,385 6,439,039
Deferred expenses-at amortized cost 222,390 237,432
------------ ------------
$ 9,536,878 $ 9,427,232
============ ============
LIABILITIES AND PARTNERS' DEFICIT:
Liabilities:
Accounts payable and accrued expenses $ 608,801 $ 359,278
Mortgage notes payable 9,224,294 9,387,057
Refundable tenant deposits 102,070 100,090
------------ ------------
9,935,165 9,846,425
Partners' deficit (398,287) (419,193)
------------ ------------
$ 9,536,878 $ 9,427,232
============ ============
</TABLE>
F-453
<PAGE> 670
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
----------------------------------------
(A LIMITED PARTNERSHIP)
-----------------------
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
----------------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ------------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Rental and other income $ 652,420 $ 545,374 $ 1,287,331 $ 1,080,681
Interest 25,053 9 50,169 18
----------- ----------- ----------- -----------
677,473 545,383 1,337,500 1,080,699
EXPENSES:
Interest 214,485 167,069 459,203 336,009
Depreciation and amortization 131,939 122,731 268,839 243,862
Real estate taxes 91,550 92,364 185,411 181,088
Property management fees paid to
American Spectrum Midwest 32,644 27,317 64,391 52,620
Reimbursement to American Spectrum Midwest
for partnership management
services and indirect expenses 7,500 7,500 15,000 15,000
Insurance 16,044 11,734 32,438 22,385
Parking lot/landscaping 35,844 28,902 42,985 35,873
Repairs & maintenance 11,675 11,482 18,259 32,342
General & administrative 10,502 15,545 20,622 25,646
Payroll 28,165 30,101 54,313 45,176
Professional services 24,639 21,935 47,510 46,425
Taxes - other 0 94 6,929 6,915
Vacancy expense 22,240 18,458 29,133 34,574
Other operating expenses 19,721 16,356 71,561 74,761
----------- ----------- ----------- -----------
646,948 571,588 1,316,594 1,152,676
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 30,525 $ (26,205) $ 20,906 $ (71,977)
=========== =========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 2.52 $ (2.16) $ 1.72 $ (5.94)
=========== =========== =========== ===========
PARTNERS' DEFICIT:
Beginning of period $ (428,812) (306,955) $ (419,193) $ (261,183)
Net income (loss) 30,525 (26,205) 20,906 (71,977)
----------- ----------- ----------- -----------
End of period $ (398,287) $ (333,160) $ (398,287) $ (333,160)
=========== =========== =========== ===========
</TABLE>
F-454
<PAGE> 671
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
----------------------------------------
(A LIMITED PARTNERSHIP)
-----------------------
STATEMENTS OF CASH FLOWS
------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
May 31, May 31,
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20,906 $ (71,977)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 268,839 243,862
Changes in assets and liabilities:
Increase in accounts receivable (39,214) (1,003)
Increase in prepaid expenses and
deposits (715,500) (53,635)
(Increase) decrease in deferred
expenses (27,118) 31,337
Increase (decrease) in accounts payable
and accrued expenses 249,523 (67,208)
Increase in refundable tenant deposits 1,980 19,185
----------- ---------
Total adjustments (261,490) 172,538
----------- ---------
Net cash from operating activities (240,584) 100,561
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property (239,025) (46,897)
----------- ---------
Net cash used in investing activities (239,025) (46,897)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage notes payable (162,763) (211,670)
----------- ---------
Net cash used in financing activities (162,763) (211,670)
----------- ---------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (642,372) (158,006)
----------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 2,572,203 486,156
----------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 1,929,831 $ 328,150
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during period for
interest $ 459,203 $ 336,009
=========== =========
</TABLE>
F-455
<PAGE> 672
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
----------------------------------------
(A LIMITED PARTNERSHIP)
-----------------------
NOTES TO UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
THREE AND SIX MONTHS ENDED MAY 31, 2000 AND 1999
------------------------------------------------
NOTE A:
Refer to the Registrant's financial statements for the year ended November 30,
1999, which are contained in the Registrant's Annual Report on Form 10-K, for a
description of the accounting policies which have been continued without change
except as noted below. Also, refer to the footnotes to those statements for
additional details of the Registrant's financial condition. The details in those
notes have not changed except as a result of normal transactions in the interim
or as noted below.
NOTE B:
The financial statements include only those assets, liabilities, and results of
operations of the partners which relate to the business of Nooney Real Property
Investors-Two, L.P. The statements do not include assets, liabilities, revenues
or expenses attributable to the partners' individual activities. No provision
has been made for federal and state income taxes since these taxes are the
responsibility of the partners. In the opinion of the general partners, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and changes in
financial position at May 31, 2000 and for all periods presented have been made.
The results of operations for the three-month and six-month period ended May 31,
2000 are not necessarily indicative of the results which may be expected for the
entire year.
NOTE C:
The Registrant's properties are managed by American Spectrum Midwest (formerly
Nooney, Inc.) , a wholly-owned subsidiary of CGS Real Estate Company, Inc.
("CGS"), an affiliate of the corporate general partner of the Registrant. Nooney
Investors, Inc., a general partner, is a wholly-owned subsidiary of S-P
Properties, Inc. S-P Properties, Inc is a wholly-owned subsidiary of CGS.
NOTE D:
(3) Amount is net of a building writedown of $77,225, to reflect the minimum
recoverable value to the Partnership.
(4) Amount includes the disposal of Building G of Morenci Professional Park for
$482,387 and a building writedown of $139,281 to reflect the minimum
recoverable value to the Partnership.
The income (loss) per limited partnership unit for the three and six months
ended May 31, 2000 and 1999 was computed based on 12,000 units, the number of
units outstanding during the periods.
F-456
<PAGE> 673
NOTE E:
CGS is continuing the process of developing a plan pursuant to which the
properties owned by the Registrant would be combined with the properties of
other real estate partnerships managed by CGS and its affiliates. These limited
partnerships own office properties, industrial properties, shopping centers, and
residential apartment properties. It is expected that the acquiror would in the
future qualify as a real estate investment trust. Limited partners would receive
shares of common stock in the acquiror which would be listed on a national
securities exchange or the NASDAQ national market system.
NOTE F:
The Registrant has no other comprehensive income items, accordingly,
comprehensive income and net income are the same for all periods presented.
NOTE G:
The Partnership has four reportable operating segments: Jackson Industrial,
Maple Tree Shopping Center, Park Plaza I & II, and Morenci Professional Park.
The Partnership's management evaluates performance of each segment based on
profit or loss from operations before allocation of property writedowns, general
and administrative expenses, unusual and extraordinary items, and interest.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
2000 1999 2000 1999
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Jackson Industrial $ 181,633 $ 120,706 $ 394,247 $ 244,798
Maple Tree Shopping Center 160,562 149,796 303,586 284,536
Park Plaza I & II 140,493 140,188 283,900 268,797
Morenci Professional Park 170,201 135,645 306,090 254,255
--------- ----------- ----------- -----------
652,889 546,335 1,287,823 1,052,386
========= =========== =========== ===========
Operating Profit (Loss):
Jackson Industrial (28,610) (92,081) (63,477) (190,769)
Maple Tree Shopping Center 12,744 31,535 18,688 50,077
Park Plaza I & II 31,522 60,707 63,775 109,385
Morenci Professional Park 21,554 4,212 13,821 (11,913)
--------- ----------- ----------- -----------
37,210 4,373 32,807 (43,220)
========= =========== =========== ===========
Capital Expenditures:
Jackson Industrial -0- 3,332 3,711 3,332
Maple Tree Shopping Center 215,800 17,995 215,800 17,852
Park Plaza I & II 7,948 9,845 7,948 11,250
Morenci Professional Park 11,567 9,315 11,566 14,463
--------- ----------- ----------- -----------
235,315 40,487 239,025 46,897
========= =========== =========== ===========
Depreciation and Amortization:
Jackson Industrial 55,888 55,672 115,951 111,040
Maple Tree Shopping Center 20,239 17,356 40,754 34,625
Park Plaza I & II 20,694 16,651 40,808 32,436
Morenci Professional Park 35,118 32,991 71,326 65,639
--------- ----------- ----------- -----------
131,939 122,670 268,839 243,740
========= =========== =========== ===========
</TABLE>
F-457
<PAGE> 674
Assets:
<TABLE>
<CAPTION>
May 31, 2000 November 30, 1999
------------ -----------------
<S> <C> <C>
Jackson Industrial $3,169,518 $3,238,441
Maple Tree Shopping Center 1,369,650 1,152,425
Park Plaza I & II 893,088 900,312
Morenci Professional Park 1,559,626 1,521,530
---------- ----------
6,991,882 6,812,708
========== ==========
</TABLE>
Reconciliation of segment data to the Partnerships's consolidated data follow:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 31, May 31,
2000 1999 2000 1999
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Segments $ 652,889 $ 546,335 $ 1,287,823 $ 1,052,386
Corporate and other 24,584 (952) 49,677 28,313
--------- ----------- ----------- -----------
677,473 545,383 1,337,500 1, 080,699
========= =========== =========== ===========
Operating Profit (Loss):
Segments $ 37,210 $ 4,373 $ 32,807 $ (43,220)
Corporate and other income (loss) 24,584 (952) 49,676 28,314
Less: General and admin expenses (31,269) (29,626) (61,577) (57,071)
--------- ----------- ----------- -----------
Net income (loss) 30,525 (26,205) 20,906 (71,977)
========= =========== =========== ===========
Depreciation and Amortization
Segments $ 131,939 $ 122,670 $ 268,839 $ 243,740
Corporate and other -0- 61 -0- 122
--------- ----------- ----------- -----------
131,939 122,731 268,839 243,862
</TABLE>
Assets:
<TABLE>
<CAPTION>
May 31, 2000 November 30, 1999
------------ -----------------
<S> <C> <C>
Segments $6,991,882 $6,812,708
Corporate and other 2,544,996 2,614,524
---------- ----------
9,536,878 9,427,232
========== ==========
</TABLE>
F-458
<PAGE> 675
Appendix A
Draft Portfolio Appraisal Report
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
Affiliates' Properties
1
<PAGE> 676
TABLE OF CONTENTS
Page
Letter of Transmittal .......................................................1
Identification of Subject Portfolios ........................................4
Property Ownership and History ..............................................4
Purpose of Appraisal ........................................................4
Function of Appraisal .......................................................4
Scope of Appraisal ..........................................................4
Date of Valuation ...........................................................6
Value Definition ............................................................6
Highest & Best Use ..........................................................7
Valuation Methodology .......................................................7
Site Inspections and Data Gathering ................................8
Lease & Rent Roll Review ..........................................9
Market Rental Rates ................................................9
Operational Projections ............................................9
Reversion .........................................................10
Selection of Discount Rates .......................................10
Land Valuation ....................................................11
Direct Capitalization .............................................11
Portfolio Valuation ...............................................11
Portfolio Value Conclusions ...............................................12
Portfolio Summaries ........................................................13
Assumptions and Limiting Conditions ........................................17
2
<PAGE> 677
3
<PAGE> 678
November __, 2000
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have engaged Robert A. Stanger & Co., Inc. ("Stanger") to estimate the
value of the real property portfolios (the "Portfolios") owned by Sierra Pacific
Development Fund, Sierra Pacific Development Fund II, Sierra Pacific Development
Fund III, Sierra Pacific Institutional Properties V, Sierra Pacific Pension
Investors '84, Nooney Income Fund Ltd., L.P., Nooney Income Fund Ltd, II, L.P.,
Nooney Real Property Investors - Two, L.P. (hereinafter the "Funds"), and a
portfolio of sixteen properties (the "Affiliates' Properties") owned by CGS
Realty, Inc. ("CGS") and entities affiliated with CGS (collectively, the
"Affiliated Entities"). Such appraisal reflects the estimated market value of
the leased fee interests or, where appropriate, fee simple interests in each of
the portfolios of real property owned by the Funds and the Affiliated Entities
as of March 31, 2000 (the "Portfolio Valuations").
This report is prepared in accordance with an agreement between Robert A.
Stanger & Co., Inc. and the Funds and CGS dated May 12, 2000. Pursuant to the
agreement, Stanger has been engaged to perform the appraisal on a limited scope
basis using a summary report format in conformity with the departure provisions
of the Uniform Standards of Professional Appraisal Practice of the Appraisal
Institute, relying solely upon the Income Approach to value (with the exception
of one land parcel which was valued utilizing the sales comparison approach as
described herein). As such, the report differs from a self-contained appraisal
report in that (i) the data is limited to the summary data and conclusions
presented, and (ii) the cost and market approaches were excluded and the
conclusions were based upon the income approach.
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<PAGE> 679
Our valuation has been based in part upon information supplied to us by
CGS, the Funds and the Affiliated Entities including but not limited to: rent
rolls; lease abstracts; schedules of current lease rates, income, expenses,
capital expenditures, cash flow and related financial information; property
descriptive information; physical condition of improvements, including any
deferred maintenance, status of ongoing or newly planned property additions,
reconfigurations, improvements and other factors affecting the condition of the
property improvements; recent prior appraisals; information relating to mortgage
encumbrances; and, where appropriate, property bids or proposed sales terms,
sales agreements and supporting documentation. We have also visited the offices
of CGS and the Funds in New York, N.Y. and have interviewed relevant management
personnel. We have relied upon such information and have assumed that the
information provided by CGS, the Funds and the Affiliated Entities is accurate
and complete. We have not attempted to independently verify such information.
We are advised by CGS, the Funds and the Affiliated Entities that the
purpose of the appraisal is to estimate the value of the leased fee interests
or, where appropriate, the fee simple interests in the Portfolios under market
conditions as of the appraisal date and that the Portfolio Valuations will be
used in connection with a proposed merger of CGS, the Funds and the Affiliated
Entities in exchange for shares of American Spectrum Realty, Inc., a newly
organized Maryland corporation (the "Company") and assumption of existing
indebtedness (the "Consolidation"). Stanger understands that the Portfolio
Valuations may be reviewed and utilized in connection with the Consolidation,
and Stanger agrees to the use of the Portfolio Valuations for this purpose
subject to the terms and conditions of the agreements related thereto.
For these purposes, this summary appraisal report was prepared stating our
opinion as to the market value of the Portfolios as of March 31, 2000. This
report may be summarized and referenced in the consent solicitation/proxy
statement for the Funds relating to the Consolidation, subject to prior review
by Stanger. However, the attached summary appraisal report should be reviewed in
its entirety and is subject to the assumptions and limiting conditions contained
herein. Background information and analysis upon which value conclusions are
based has been retained in our files.
Our review was undertaken solely for the purpose of providing an opinion
of value, and we make no representation as to the adequacy of such review for
any other purpose. Our opinion is expressed with respect to the total value of
each of the real estate portfolios in which the Funds and the Affiliated
Entities have an interest and not with respect to joint venture participations
or limited partners' allocations. Stanger has no present or contemplated future
interest in the properties, the Funds, the Affiliated Entities, CGS or the
proposed Company.
The appraisal is only an estimate of the aggregate market value of the
leased fee interests or, where appropriate, fee simple interests in each of the
Portfolios as of the date of valuation and should not be relied upon as being
the equivalent of the price that would necessarily be received in the event of a
sale or other disposition of the properties in the Portfolios. Changes in
corporate financing rates generally, changes in individual tenant
creditworthiness, changes in tenant motivation with respect to the exercise of
renewal or purchase options, or changes in real estate property markets may
result in higher or lower values of real property. The use of other valuation
methodologies might produce a higher or lower value.
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<PAGE> 680
Our opinion is subject to the assumptions and limiting conditions set
forth herein. We have used methods and assumptions deemed appropriate in our
professional judgment; however, future events may demonstrate that the
assumptions were incorrect or that other, different methods or assumptions may
have been more appropriate.
This abbreviated valuation report provides our value conclusion with
respect to the Portfolios, definitions of value, and discussions of the
valuation methodology employed, assumptions, and limiting conditions.
Sincerely,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
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<PAGE> 681
IDENTIFICATION OF SUBJECT PORTFOLIOS
The subjects of this appraisal are the real property portfolios (the
"Portfolios") in which Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd, II, L.P., Nooney Real Property
Investors - Two, L.P. (the "Funds") and CGS Realty Inc. ("CGS") and entities
affiliated with CGS (collectively, the "Affiliated Entities") own leased fee or
fee simple interests. The Portfolios are comprised of thirty-five properties,
including apartment, office, R&D, industrial/warehouse facilities, retail
properties and land. A listing of the properties in each Portfolio and the
percentage ownership interest of each Fund or Affiliated Entity in the
properties is provided in the "Portfolio Summaries" section of this report.
PROPERTY OWNERSHIP AND HISTORY
During the past three years, the properties have been owned continuously
by the Funds and the Affiliated Entities, with the exception of the following
eight properties which were purchased on the dates indicated: Parkade, October
1997; Nooney Rider Trail/Business Center, November 1997; Autumn Ridge, May 1999;
N.W. Corporate Center, August 1998; Beach & Lampson Pad D, October 1997;
Creekside Senior, November 1997; Villa Redondo, December 1998; and Van Buren
(land parcel), August 1997.
PURPOSE OF APPRAISAL
The purpose of this appraisal is to estimate the market value of the fee
simple or, where appropriate, leased fee interests in the real property
Portfolios under market conditions as of March 31, 2000.
FUNCTION OF APPRAISAL
The function of this appraisal is to provide a current estimate of market
value of the Portfolios for use solely by the Funds in connection with the
proposed merger of certain businesses of CGS, the Funds and the Affiliated
Entities in exchange for shares of a newly formed Maryland Corporation and the
assumption of existing indebtedness. No representation is made as to the
adequacy of this appraisal for any other purpose.
SCOPE OF APPRAISAL
The Portfolio Valuations have been prepared on a limited scope basis using
a summary report format in conformity with the departure provisions of the
Uniform Standards of Professional
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<PAGE> 682
Appraisal Practice of the Appraisal Institute, in accordance with an agreement
between Robert A. Stanger & Co., Inc. and the Funds and CGS, dated May 12, 2000.
Pursuant to the agreement, Stanger has relied solely upon the income approach to
value and did not employ the "cost" or "sales comparison" approaches with the
exception of one land parcel which was valued utilizing the sales comparison
approach (as described below).
In estimating the value of a property, appraisers typically consider three
approaches to value: the cost approach, the market data or sales comparison
approach, and the income approach. The value estimate by the cost approach
incorporates separate estimates of the value of the unimproved site under its
highest and best use and the value of the improvements less observed accrued
depreciation resulting from physical wear and tear and functional and/or
economic obsolescence. The market data or sales comparison approach involves a
comparative analysis of the subject property with other similar properties that
have sold recently or that are currently offered for sale in the market. The
income approach involves the estimation of a property's capacity to produce
income through an analysis of the rental stream, operating expenses, net income
and estimated residual value. Net income may then be processed into a value
through either direct capitalization or discounted cash flow ("DCF") analysis,
or a combination of these two methods. The Direct Capitalization method involves
the capitalization of estimated earnings from a property based on analysis of
income and expenses. The DCF method ascribes a present value to the future cash
flows associated with operating the property and the ultimate reversion value of
the property, based upon a discount rate commensurate with the risks inherent in
ownership of the property and with rates of return offered by alternative
investment opportunities.
Pursuant to the terms of our engagement, the Portfolio Valuations were
performed using the income approach and, in the case of one land parcel, the
sales comparison approach. Since a primary buyer group for properties of the
type appraised herein is investors, the income approach was deemed an
appropriate valuation methodology. Further, given the primary criteria used by
buyers of improved properties of the type appraised herein, the cost approach
was considered less reliable than the income approach. The sales comparison
approach was also considered less reliable than the income approach given the
primary criteria used by buyers of improved properties of the type appraised
herein and the relative lack of sufficient reliable data from recent
transactions involving properties directly comparable to the subject properties.
Consequently, given these factors, the income approach was considered a
reasonable approach to valuation for the improved properties in the subject
Portfolios.
Unless otherwise noted in this report, the Portfolios were valued
utilizing either the income capitalization and/or the discounted cash flow
method. Changes in corporate financing rates generally, in individual tenant
creditworthiness, changes in tenant motivation with respect to the exercise of
renewal or purchase options, or changes in real estate property markets may
result in higher or lower values of real property. The use of other valuation
methodologies might produce a higher or lower value. Our opinion is subject to
the assumptions and limiting conditions set forth herein.
-5-
<PAGE> 683
Departures - Uniform Standards of Professional Practice -- With respect to
limited appraisals, the departure provisions of the Uniform Standards of
Professional Appraisal Practice permit departures from the specific guidelines
of Standard 1. In this report the following departures were taken:
Standard Rule 1-4 (a) The cost and market approaches are excluded, and the
conclusions are based solely on the income approach (see Valuation Methodology).
DATE OF VALUATION
The date of valuation for the Portfolios is March 31, 2000.
VALUE DEFINITION
Market value, as defined by the Appraisal Institute, is the most probable
price as of a specified date, in cash, in terms equivalent to cash, or in other
precisely revealed terms, for which the specified property rights should sell
after reasonable exposure in a competitive market under all conditions requisite
to a fair sale, with the buyer and seller each acting prudently, knowledgeably
and for self-interest, and assuming that neither is under undue duress. As used
in this report, market value is based on a sale of the subject property rights
for cash.
Implicit in this definition is the consummation of a sale as of a
specified date and the passing of title from seller to buyer under conditions
whereby:
(a) buyer and seller are typically motivated;
(b) both parties are well informed or well advised, and each acts in a manner
he considers in his own best interest;
(c) a reasonable time is allowed for exposure in the open market;
(d) payment is made in terms of cash in U.S. dollars or financial arrangements
comparable thereto; and
(e) the price represents the normal consideration for the property sold
unaffected by special sales concessions granted by anyone associated with
the sale.
The property rights appraised in this report are leased fee interests and,
where appropriate, fee simple interests. Leased fee interest is defined as an
ownership interest held by a landlord with the right to use and occupancy
conveyed by lease to others, and usually consists of the right to receive rent
and the right to repossession at the termination of the lease. Fee simple
interest is defined as absolute ownership unencumbered by any other interest or
estate, subject only to the limitations of eminent domain, escheat, police
power, and taxation.
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<PAGE> 684
The appraisal includes the value of land, land improvements such as
paving, fencing, on-site sewer, water lines, and buildings as of March 31, 2000.
The appraisal does not include supplies, materials on hand, inventories,
furniture, equipment or other personal property, company records, or current or
intangible assets that may exist; it pertains only to items considered as real
estate.
HIGHEST AND BEST USE
Highest and best use is defined as:
The reasonable probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value. The four
criteria the highest and best use must meet are legal permissibility,
physical possibility, financial feasibility, and maximum profitability.
In conformity with the provisions of its engagement, Stanger evaluated
each site's highest and best use as currently improved. Based upon the review of
each of the sites, the highest and best use of each of the properties remains as
currently improved, unless otherwise noted herein.
VALUATION METHODOLOGY
Pursuant to the terms of this engagement, Stanger has estimated the
aggregate value of the leased fee or, where appropriate, fee simple interests in
each of the Portfolios based on the income approach to valuation (with the
exception of one land parcel valued utilizing the sales comparison approach).
Appraisers typically consider three approaches in valuing real property: the
cost approach, the income approach, and the sales comparison, or market data,
approach. The type and age of a property, the nature of the leases, market
conditions and the quantity and quality of data affect the applicability of each
approach in a specific appraisal situation.
The income approach is based on the assumption that the value of a
property or portfolio of properties can be represented by the present worth of
future cash flows. In these Portfolio Valuations, an income capitalization or
discounted cash flow ("DCF") analysis is used to determine the value of the
Portfolios. The indicated value by the income approach represents the amount an
investor might reasonably be expected to pay for the expectation of receiving
the net cash flow from each Portfolio's properties during an assumed holding
period (generally ten years) and the proceeds from the ultimate sale of each
Portfolio's properties.
Unless otherwise noted herein, in applying the DCF analysis, we utilized
pro forma statements of operations for each of the properties prepared in
accordance with the leases which currently encumber the properties. The
properties are assumed to be sold after the expiration of a ten-year holding
period. Where renewal terms deemed favorable to the tenants (i.e., where the
tenant has an option to renew at a rental rate materially below the projected
market rate rent at the time of the renewal option) existed, it is assumed that
such option would be exercised.
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<PAGE> 685
The reversion value of the properties which can be realized upon sale is
estimated based on the current economic rental rate and expenses deemed
reasonable for each property, escalated at a rate indicative of current
expectations in the marketplace for the property. The net operating income of
the properties at the year of sale is then capitalized at an appropriate rate
reflecting the age, anticipated functional and economic obsolescence,
competitive position of the properties, and any other lease factors deemed
significant to determine the reversion value of the properties. Net proceeds to
equity owners were determined by deducting estimated costs of sale. The
discounted present value of the cash flow stream from operations and net
proceeds from sale for each property were then summed to arrive at a total
estimated value.
In the case of apartment properties, net operating income was estimated,
and a direct capitalization method was utilized to estimate property value. In
the case of the one land parcel, the sales comparison approach, as described
herein, was utilized to estimate value.
Finally, the discounted present values, direct capitalization values and
the land value, as appropriate, were adjusted for any joint venture interests in
the properties based on information provided by the Funds and CGS. The resulting
adjusted values were summed to arrive at the final Portfolio Values.
The following describes more fully the steps involved in the valuation
methodology.
Site Inspections and Data Gathering
In conducting the Portfolio Valuations, representatives of Stanger
performed site inspections of the properties during July and August, 1999 in the
context of a prior evaluation of the Portfolios. In the course of these site
visits, the physical facilities of each property were inspected, current market
rental rates for competing properties were obtained, information on the local
market was gathered, and the local property manager was interviewed concerning
the property and market conditions. Information gathered during the site
inspection was supplemented by a review of published information concerning
economic, demographic and real estate trends in local, regional and/or national
markets, and by information updates provided by management and obtained through
telephonic interviews of local market information sources during May and June
2000.
In conducting the appraisals, Stanger also interviewed and relied upon the
Funds' and CGS management personnel to obtain information relating to the
condition of each property, including any deferred maintenance, capital budgets,
known environmental conditions, status of on-going or newly planned property
additions, reconfigurations, improvements, and other factors affecting the
physical condition of the property improvements.
Stanger also interviewed CGS's management and acquisitions personnel
regarding competitive conditions in property markets, trends affecting the
properties, certain lease and financing factors, and historical and anticipated
revenues and expenses. Stanger also reviewed historical operating statements for
each of the properties in the subject Portfolios.
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<PAGE> 686
In addition, Stanger reviewed the acquisition criteria and projection
parameters used by real estate investors. Such reviews included a search of real
estate data sources and publications concerning real estate buyer's criteria,
interviews with sources deemed appropriate in certain local markets (including
local appraisers and real estate brokers), and direct telephonic interviews with
major national investors, owners and managers of real property portfolios to
confirm acquisition criteria used.
Stanger also compiled data on actual transactions involving similar
properties, from which acquisition criteria and parameters were extracted.
Information on actual property transactions was obtained during the site
inspections and from direct telephonic interviews of local appraisers and real
estate brokers, major national investors, owners and managers of properties, and
from other publicly available sources. In addition, Stanger reviewed data
provided by the Funds and CGS concerning bids received for certain properties
and any recent actual acquisitions and sales involving CGS and affiliated
entities.
Lease & Rent Roll Review
Lease abstracts (for commercial properties) and/or rent rolls were
provided by CGS and the Funds and were relied upon in the preparation of
operational projections for each property (as discussed below). Stanger reviewed
such lease abstracts and rent rolls and interviewed the Funds and CGS management
personnel to ascertain any material renegotiated terms and modifications and the
status of various options and other factors. Provisions considered and
incorporated into the operational projections included current lease rate,
escalation factors, percentage rent provisions, and renewal options and terms.
Market Rental Rates
In the course of conducting the site inspections, representatives of
Stanger collected available data on rental rates at competing properties in each
local or regional market. Data collected at the time of the site inspection was
updated with published data and direct telephonic contacts with local brokers
and leasing agents.
Operational Projections
Based on the lease and market rent analysis, rental revenue projections
were developed for each property in each of the Portfolios based on the terms of
existing leases and for any vacant space based on analysis of market rents and
historical rents achieved at the property. Where lease terms included percentage
rent provisions, appropriate adjustments were made.
Lease renewals and turnovers were analyzed based on escalated current
market rental rates. The annual market rent escalation rates utilized were based
on local market conditions in the area of each property, inflation rates, the
projected holding period of the property and rental rate growth
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<PAGE> 687
parameters applied by investors in similar type properties. Where projected
market rental rates at the time of a renewal option materially exceeded
contractual lease renewal rate, the renewal option was assumed to be exercised.
Where appropriate, vacancy and collection losses were factored into the
analysis. A property management fee deemed appropriate for retaining a
professional real estate organization to manage the specific type of property
was included in the projections. Expenses relating solely to the administration
of the partnership (e.g. investor reporting, accounting, etc.) were excluded.
Expenses were analyzed based upon a review of actual expenses for 1998,
1999 and the three months ended March 31, 2000. Stanger also reviewed year 2000
budgeted expenses, published data on expenses for similar type properties, and
the properties' most recent tax bills and information.
Finally, where a capital expense reserve, deferred maintenance or
extraordinary capital expenditure was required for an individual property, the
cash flows and value were adjusted accordingly.
Reversion
In the course of performing the appraisals, Stanger reviewed available
sales transactions of similar investment properties as well as market data
relating to overall capitalization rates for similar properties in the general
location of the subject properties. As described above, acquisition criteria
used by buyers of similar properties were also reviewed. Based upon these
reviews and considering such factors as age, quality, anticipated functional and
economic obsolescence, competitive position of the property, the projected date
of sale, and buyers' acquisition criteria, appropriate terminal capitalization
rates were selected.
Based upon current market rate rents, estimated escalation factors, and
the estimated vacancy rate and other property operating expenses incurred by the
owner, net operating income during the twelve months following the lease
expiration was estimated. The resulting net operating income estimate was
capitalized to determine residual value. The residual value was discounted to
present value after deducting appropriate sales expenses. The discount rate
employed was based on current acquisition criteria and target rates of return
among commercial property investors (as described below).
The resulting discounted present values of operating cash flows and net
sale proceeds were then summed for each property to arrive at an estimated
discounted present value.
Selection of Discount Rates
To determine appropriate discount rates to apply for determining the
present value of future operating cash flow streams and reversion values, the
acquisition criteria and projection parameters and target rates of return in use
in the marketplace by real estate investors for various property types (e.g.
industrial/warehouse, retail, office, etc.) were reviewed (as described above).
Discount rates
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<PAGE> 688
deemed appropriate were applied to the cash flow streams of each property after
adjusting the rate for such factors as property age, quality, anticipated
functional and economic obsolescence, competitive position of the property, and
any unique property-related factors.
Land Valuation
In the case of the Van Buren property, a 16+ acre developable land parcel,
the sales comparison approach was utilized. Specifically, Stanger compiled data
on sales of land in the local market and, based on the relative size, location,
zoning, frontage, surface and other attributes, arrived at an indicated value
for the subject land parcel.
Direct Capitalization
In the case of the apartment properties, Stanger determined gross
potential rent for each property utilizing the number and type of apartment
units in each property and the estimated market rental rates deemed appropriate
for the property based on review of the rates charged at similar properties in
the local market and historical and current rental rates at the subject
property. Stanger also reviewed income from ancillary sources, and historical
and current occupancy rates at the subject and competing properties.
After assessing these factors, Stanger estimated each property's effective
gross income based upon unit mix and market rental rates and estimates of
ancillary income and occupancy. Expenses were estimated based on historical and
budgeted operating expenses, discussions with management, and certain industry
expense information. Estimated property operating expenses, including
replacement reserves, were then deducted from effective gross income to arrive
at each property's estimated net operating income.
Stanger then employed direct capitalization to estimate the value of each
apartment property by dividing net operating income by a capitalization rate
deemed appropriate based on reviews of parameters utilized by investors in
apartment properties and data on transactions involving apartment properties.
Portfolio Valuation
The direct capitalization values, land values and discounted present
values of the properties were adjusted for any joint venture interests in the
properties (based on information provided by the Funds and CGS) and the
resulting values were summed to arrive at a total estimated value for each
Portfolio.
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<PAGE> 689
PORTFOLIO VALUE CONCLUSIONS
Based upon the review as described above, and relying on the ownership
interests, as provided by the Funds' general partners, of each Fund in
properties held by joint ventures it is our opinion that the market value of the
fee simple interests or, where appropriate, leased fee interests in the
Portfolios as of March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Portfolio
Partnership Name Value Conclusion (1)
---------------- --------------------
<S> <C>
Sierra Pacific Development Fund $ 8,070,000
Sierra Pacific Development Fund II $ 20,773,274
Sierra Pacific Development Fund III $ 505,467
Sierra Pacific Institutional Properties V $ 4,188,043
Sierra Pacific Pension Investors '84 $ 23,543,216
Nooney Income Fund Ltd., L.P. $ 10,570,800
Nooney Income Fund Ltd. II, L.P. $ 22,079,200
Nooney Real Property Investors - Two, L.P. $ 15,590,000
Affiliates' Properties $177,390,000
------------
Total $282,710,000
============
</TABLE>
(1) Reflects each Fund's pro rata interest in properties owned by joint
ventures, which results in unrounded dollar amounts for each Fund.
-12-
<PAGE> 690
PORTFOLIO SUMMARIES
<TABLE>
<CAPTION>
Property Interest In
Property Name Address Type Property(1)
------------- ------- ---- -----------
<S> <C> <C> <C>
Sierra Pacific Development Fund
Sierra Creekside 100 Park Place Office 100.00%
San Ramon, CA
Sierra Pacific Development Fund II
Sierra San Felipe 5850 San Felipe Office 100.00%
Houston, TX
Sierra Southwest Point 9630 Clarewood Drive Office/ 100.00%
Houston, TX Warehouse
Sierra Westlakes 1560 Cable Ranch Road Office/ 100.00%
San Antonio, TX Warehouse
Sierra Sorrento I 9535 Waples Office/R&D 20.12%
San Diego, CA
Sierra Sorrento II 9960-10020 Hunnelcens Office/R&D 13.96%
San Diego, CA
Sierra Mira Mesa 9444 Waples Office 22.77%
San Diego, CA
Sierra Pacific Development Fund III
Sierra Sorrento 9535 Waples Office/R&D 11.65%
San Diego, CA
Sierra Pacific Institutional Properties V
Sierra Sorrento II 9960-10020 Hunnelcens Office/R&D 38.71%
San Diego, CA
</TABLE>
----------
(1) As provided by the Funds' general partners.
-13-
<PAGE> 691
PORTFOLIO SUMMARIES
<TABLE>
<CAPTION>
Sierra Pacific Pension Investors '84
<S> <C> <C> <C>
Sierra Sorrento I 9535 Waples Office/R&D 68.24%
San Diego, CA
Sierra Sorrento II 9960-10020 Hunnelcens Office/R&D 47.34%
San Diego, CA
Property Interest In
Property Name Address Type Property(1)
------------- ------- ---- -----------
Sierra Valencia 3280 Hemisphere Loop Office/ 100.00%
Tucson, AZ Warehouse
Sierra Mira Mesa 9444 Waples Office 77.23%
San Diego, CA
Nooney Income Fund Ltd., L.P.
Oak Grove Commons 1401-2818 Center Circle Office/ 100.00%
Downers Grove, IL Warehouse
Leawood Fountain Plaza 11111 Nall Avenue Office 76.00%
Leawood, KS
Nooney Income Fund Ltd. II, L.P.
Leawood Fountain Plaza 11111 Nall Avenue Office 24.00%
Leawood, KS
Tower Industrial Building 750 Tower Road Office/ 100.00%
Mundelein, IL Warehouse
Countryside Office Park 1210-80 W. Northwest Hwy. Office 100.00%
Palatine, IL
Northeast Commerce Center 420 Wards Corner Road Office/ 100.00%
Loveland, OH Warehouse
Northcreek Office Park 8220 Northcreek Drive Office 100.00%
Cincinnati, OH
</TABLE>
----------
(1) As provided by the Funds' general partners.
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<PAGE> 692
PORTFOLIO SUMMARIES
<TABLE>
<CAPTION>
Property Interest In
Property Name Address Type Property(1)
------------- ------- ---- -----------
<S> <C> <C> <C>
Nooney Real Property Investors - Two, L.P.
Maple Tree Shopping Center Clarkson Rd and Clayton Rd Shopping Center 100.00%
Ellisville, MO
Park Plaza I and II 5705 Park Plaza Court Office/ 100.00%
Indianapolis, IN Warehouse
Morenci Professional Park 6201 Coffman Road Office/ 100.00%
Indianapolis, IN Warehouse
Jackson Industrial A 8501 E. 33rd Street Bulk Warehouse 100.00%
Indianapolis, IN
Affiliates' Properties
Parkade Center 601 Business Loop 70 West Mixed Use Retail/Office 100.00%
Columbia, MO
Bristol Bay 2424 SE Bristol Street Office 100.00%
Newport Beach, CA
Beach & Lampson 8050-8060 Lampson Avenue Retail Pad 100.00%
Stanton, CA
Columbia North East 9221 Two Notch Road Shopping 100.00%
Columbia, SC Center
Marketplace 1001 Harden Street Shopping 100.00%
Columbia, SC Center
(w/office)
Phoenix Van Buren Land 34th Street & Washington Van Buren Land 100.00%
Phoenix, AZ
The Business Center 13701 Rider Trail North Office/ 100.00%
Earth City, MO Warehouse
The Lakes 205 Chaparral Creek Drive Garden Apartments 100.00%
Hazelwood, MO
</TABLE>
----------
(1) As provided by the Funds' general partners.
-15-
<PAGE> 693
PORTFOLIO SUMMARIES
<TABLE>
<CAPTION>
Property Interest In
Property Name Address Type Property(1)
------------- ------- ---- -----------
<S> <C> <C> <C>
Affiliates' Properties (continued)
Northwest Corporate Center II 5757 Phantom Drive Office 100.00%
Hazelwood, MO
Meadow Wood 1601-1635 Ximeno Way Garden Apartments 100.00%
Long Beach, CA
Spectrum Office Building 10201-10235 S. 51st Street Office 100.00%
Phoenix, AZ
Creekside Apartments 4291 Monroe Street Garden Apartments (Senior) 100.00%
Riverside, CA
Chrysler Building 7700 Irvine Center Drive Office 100.00%
Irvine, CA
Richardson Plaza 537 St. Andrews Road Shopping 100.00%
Columbia, SC Center
Sierra Technology Center 3100 Alvin Devane Office/ 100.00%
Austin, TX R&D
Villa Redondo 33400 Hathoway Avenue Garden Apartments 100.00%
Long Beach, CA
</TABLE>
----------
(1) As provided by the Funds' general partners.
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<PAGE> 694
ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal report is subject to the assumptions and limiting
conditions as set forth below.
1. No responsibility is assumed for matters of a legal nature affecting
the portfolio properties or the titles thereto. Titles to the properties are
assumed to be good and marketable and the properties are assumed free and clear
of all liens unless otherwise stated.
2. The Portfolio Valuations assume (a) responsible ownership and competent
management of the properties; (b) there are no hidden or unapparent conditions
of the properties' subsoil or structures that render the properties more or less
valuable (no responsibility is assumed for such conditions or for arranging for
engineering studies that may be required to discover them); (c) full compliance
with all applicable federal, state and local zoning, access and environmental
regulations and laws, unless noncompliance is stated, defined and considered in
the Portfolio Valuations; and (d) all required licenses, certificates of
occupancy and other governmental consents have been or can be obtained and
renewed for any use on which the value estimates contained in the Portfolio
Valuations are based.
3. The Appraiser shall not be required to give testimony or appear in
court because of having made the appraisal with reference to the portfolio in
question, unless arrangements have been previously made therefore.
4. The information contained in the Portfolio Valuations or upon which the
Portfolio Valuations are based has been provided by or gathered from sources
assumed to be reliable and accurate. Some of such information has been provided
by the owner of the properties. The Appraiser shall not be responsible for the
accuracy or completeness of such information, including the correctness of
estimates, opinions, dimensions, exhibits and other factual matters. The
Portfolio Valuations and the opinion of value stated therein are as of the date
stated in the Portfolio Valuations. Changes since that date in portfolios,
external and market factors can significantly affect property values.
5. Disclosure of the contents of the appraisal report is governed by the
Bylaws and Regulations of the professional appraisal organization with which the
Appraiser is affiliated.
6. Neither all, nor any part of the content of the report, or copy thereof
(including conclusions as to the portfolios' values, the identity of the
Appraiser, professional designations, reference to any professional appraisal
organizations, or the firm with which the Appraiser is connected) shall be used
for any purpose by anyone other than the client specified in the report,
including, but not limited to, any mortgagee or its successors and assignees,
mortgage insurers, consultants, professional appraisal organizations, any state
or federally approved financial institution, any department, agency or
instrumentality without the previous written consent of the Appraiser; nor shall
it be conveyed by anyone to the public through advertising, public relations,
news sales or other media, without the written consent and approval of the
Appraiser.
ASSUMPTIONS AND LIMITING CONDITIONS (continued)
7. On all appraisals subject to completion, repairs or alterations, the
appraisal report and value conclusions are contingent upon completion of the
improvements in a workmanlike manner.
8. The physical condition of the improvements considered by the Portfolio
Valuations are based on visual inspection by the Appraiser or other
representatives of Stanger and on representations by the owner. Stanger assumes
no responsibility for the soundness of structural members or for the condition
of mechanical equipment, plumbing or electrical components. The Appraiser has
made no survey of the properties.
-17-
<PAGE> 695
9. The projections of income and expenses and the valuation parameters
utilized are not predictions of the future. Rather, they are the Appraiser's
best estimate of current market thinking relating to future income and expenses.
The Appraiser makes no warranty or representations that these projections will
materialize. The real estate market is constantly fluctuating and changing. It
is not the Appraiser's task to predict or in any way warrant the conditions of a
future real estate market; the Appraiser can only reflect what the investment
community, as of the date of the appraisal, envisions for the future in terms of
rental rates, expenses, supply and demand. We have used methods and assumptions
deemed appropriate in our professional judgment; however, future events may
demonstrate that the assumptions were incorrect or that other different methods
or assumptions may have been more appropriate.
10. The Portfolio Valuations represent normal consideration for the
properties sold based on a cash purchase and unaffected by special terms,
services, fees, costs, or credits incurred in the transaction.
11. Unless otherwise stated in the report, the existence of hazardous
materials, which may or may not be present on the properties, was not disclosed
to the Appraiser by the owner. The Appraiser has no knowledge of the existence
of such materials on or in the properties. However, the Appraiser is not
qualified to detect such substances. The presence of substances such as
asbestos, ureaformaldehyde foam insulation, oil spills, or other potentially
hazardous materials may affect the values of the portfolios. The portfolio value
estimates are predicated on the assumption that there is no such material on or
in the portfolio properties that would cause a loss of value. No responsibility
is assumed for such conditions or for any expertise or engineering knowledge
required to discover them. The client is urged to retain an expert in this
field, if desired.
12. For purposes of this report, it is assumed that each property is free
of any negative impact with regard to the Environmental Cleanup Responsibility
Act (ECRA) or any other environmental problems or with respect to non-compliance
with the Americans with Disabilities Act (ADA). No investigation has been made
by the Appraiser with respect to any potential environmental or ADA problems.
Environmental and ADA compliance studies are not within the scope of this
report.
-18-
<PAGE> 696
ASSUMPTIONS AND LIMITING CONDITIONS (continued)
13. Pursuant to the Engagement Agreement, the Portfolio Valuations have
been prepared on a limited scope basis in conformity with the departure
provisions of the Uniform Standards of Professional Appraisal Practice and the
Standards of Professional Appraisal Practice of the Appraisal Institute, relying
on the income approach to value. Further, the engagement calls for delivery of a
summary appraisal report in which the content has been limited to that
information presented herein. As such, the summary appraisal report is not
designed to meet the requirements of Title XI of the Federal Financial
Institutions Reform, Recovery and Enforcement Act of 1989. Therefore, federally
regulated institutions should not rely on this report for financing purposes.
14. The Portfolio Valuations reported herein may not reflect the premium
or discount a potential buyer may assign to an assembled portfolio of properties
or to a group of properties in a particular local market which provides
opportunities for enhanced market presence and penetration. In addition, where
properties are owned jointly with other entities affiliated with the general
partner, minority interest discounts were not applied.
15. The appraisal is solely for the purpose of providing our opinion of
the values of the Portfolios, and we make no representation as to the adequacy
of such a review for any other purpose. The use of other valuation methodologies
might produce a higher or lower value.
16. The Appraiser relied upon the general partner of each Fund for the
determination of the ownership interests of each Fund in properties held in
joint ventures.
17. In addition to these general assumptions and limiting conditions, any
assumptions and conditions applicable to specific properties have been retained
in our files.
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<PAGE> 697
Appendix B
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
B-1
<PAGE> 698
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
B-2
<PAGE> 699
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
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<PAGE> 700
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
B-4
<PAGE> 701
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
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<PAGE> 702
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
B-6
<PAGE> 703
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
B-7
<PAGE> 704
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED ____________,2000
FOR SIERRA PACIFIC DEVELOPMENT FUND
This supplement is being furnished to you, as a limited partner of
Sierra Pacific Development Fund, which we refer to as the fund, to enable you to
evaluate the proposed consolidation of your fund into American Spectrum Realty,
Inc., a Maryland corporation. Terms such as we and us refer to American
Spectrum. This supplement is designed to summarize only the risks, effects,
fairness and other considerations of the consolidation that are unique to you
and the other limited partners of your fund. This supplement does not purport to
provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, S-P
Properties, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns an interest in one office property
located in California, American Spectrum will own a large
portfolio of properties of various types. These properties
include office/warehouse, apartment and shopping center
properties located primarily in the midwestern and western
United States, Texas and the Carolinas.
- Your fund's property is 100% occupied. American Spectrum's
properties are 87.55% occupied.
- Your fund only has a debt to total appraised value of real
estate assets of 50%. American Spectrum will have a ratio of
debt to total appraised value of real estate assets of 63%.
<PAGE> 705
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 391,648 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995
Your fund intended to liquidate its properties in 1986. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns only one property located in California. The property is
an office property. Some of the funds own more than one property,
different types of properties and properties located in other markets.
- Your fund's property has a ratio of debt to total appraised value of
real estate assets of 50%. The properties owned by all of the funds and
the CGS privately held entities have a ratio of debt to total appraised
value of real estate assets of 63%.
- Your fund's property is 100% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some
of the properties of the CGS privately held entities are properties
with low occupancy rates which were purchased because CGS believed they
were undervalued. These properties have greater risks than your
property.
- The average age of the property of your fund is 15 years. The average
age of the properties of American Spectrum is 20 years.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 9,432 units
or 32.13% of the outstanding units and intend to vote these units in favor of
the consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
S - 2
<PAGE> 706
Your fund's partnership agreement prohibits transfers of assets to
related parties. The amendment will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendment must be approved by
greater than 50% of the outstanding units. To vote "For" the consolidation, you
must also vote "For" the amendment.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will
have different consequences to you depending upon whether you elect to receive
shares or notes. If you elect to receive shares, the consolidation will be
reported on the basis that no gain is recognized. We cannot assure you that the
IRS will not challenge this treatment of the transaction. If the IRS asserts a
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Your gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. [Can we
give estimate, making assumptions] See "Tax Risks." Therefore, it is possible
for you to be allocated income which may result in a tax liability even though
you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K your fund for the year ended December 31, 1999 and the Form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
S - 3
<PAGE> 707
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 9,432 units or 32.13% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns one office located in California. After
the consolidation, you will hold common stock of American
Spectrum, an operating company, that will own and lease as
many as 35 properties and expects to make additional
investments. The properties include office, office warehouse,
apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Upon consummation of the consolidation, we will have greater
leverage than your fund. Your fund currently has a ratio of
debt to total appraisal value of real estate assets of 50%.
Upon completion of the consolidation, we will have a ratio of
debt to total appraisal value of real estate assets of 63%.
American Spectrum may also incur substantial indebtedness to
make future acquisitions of properties that it may be unable
to repay. We expect to increase the ratio of debt to total
assets to 70%.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
S - 4
<PAGE> 708
- The fund's properties are located in California. American Spectrum will
also own properties in the midwest and west and Texas. The California
real estate market is currently stronger than the market in these other
states.
- The average age of your fund's property is less than the average age of
American Spectrum's properties. As a result, American Spectrum's
properties may require more capital expenditures than your fund's
property.
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and
S - 5
<PAGE> 709
investing in real properties. As a result of the consolidation,
American Spectrum will be responsible for liabilities arising out of
the prior operations of these entities. These liabilities may include
unknown contingent liabilities and these liabilities may exceed those
shown on the balance sheets. As a result, we may expend cash to pay
these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
S - 6
<PAGE> 710
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain or loss to any limited partner who elects to receive shares.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations,
S - 7
<PAGE> 711
Proskauer Rose LLP's review of relevant documents and the assumption that
American Spectrum will operate in the manner described in this consent
solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
S - 8
<PAGE> 712
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's property for sale with brokers and commence the process
of liquidating the fund's property. The managing general partner believes that
it could take an extended time to complete the sale of the fund's property and
is likely to take in excess of one year. After completing the liquidation, the
fund would distribute the net proceeds, except for a portion which will be held
by the fund to cover potential liability for representations and warranties in
the sales contract and administrative expenses of winding up the fund.
S - 9
<PAGE> 713
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the ____________.
<TABLE>
<CAPTION>
Number of Exchange Value of Percentage of
American American Spectrum GAAP Book Value Total
Spectrum Shares Exchange Value of Shares per $1,000 June 30, 2000 per American
Allocated to American Spectrum Original Limited Average $1,000 Percentage of Total Spectrum
Fund (1) Shares(2) Partner Investment (2) Original Investment Exchange Value Shares Issued (3)
-------- --------- ---------------------- ------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
391,648 $5,874,720 $400.27 $84.42 5.32% 5.32%
</TABLE>
---------------------------
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sierra Creekside San Ramon, CA 8,070,000 Office 47,800 sq. ft. 1985
</TABLE>
S - 10
<PAGE> 714
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN THE FUNDS AND
THE CGS PRIVATELY HELD ENTITIES, AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $110,518,379 100.00% 7,367,890 100.00%
============== ============== ============== =============
</TABLE>
----------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership
S - 11
<PAGE> 715
units instead of American Spectrum shares. Each Operating Partnership
unit provides the same rights to distributions as one share of common
stock in American Spectrum and, subject to some limitations, is
exchangeable for American Spectrum shares on a one-for-one basis after
a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and liabilities of
the fund, the net proceeds on liquidation following a sale of all of the fund's
properties will be distributed as follows:
- first, to the partners in an amount equal to any loans or advances they
have made;
- second, to the limited partners in an amount equal to any capital
account balance;
- third, 1% to the general partners and 99% to the limited partners until
the limited partners receive cumulative distributions equal to 6% per
annum on the outstanding balance, from time to time, of their
unreturned capital; and
- fourth, 80% to the limited partners and 20% to the general partners.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S - 12
<PAGE> 716
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment per $1,000 Original Investment Original Investment Investment (1)
------------------------------ ------------------------------ ------------------- --------------
<S> <C> <C> <C>
$340.00-$370.00 $386.00 $ 84.42 $400.27
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
BENEFITS OF THE CONSOLIDATION
S - 13
<PAGE> 717
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
S - 14
<PAGE> 718
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
Pre-Closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1) ....................................................................................... $22,518
Appraisals and Valuation(2) ......................................................................... 4,286
Fairness Opinions(3) ................................................................................ 15,481
Solicitation Fees(4) ................................................................................ 3,589
</TABLE>
S - 15
<PAGE> 719
<TABLE>
<S> <C>
Printing and Mailing(5) ............................................................................. 8,973
Accounting Fees(6) .................................................................................. 60,183
Pre-formation Cost(7) ............................................................................... 22,518
Subtotal .................................................................................... $137,546
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(8) ........................................................... $ 11,259
Legal Closing Fees(9) ............................................................................... 6,687
Subtotal .................................................................................... $ 17,946
Total ............................................................................................... $155,491
</TABLE>
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of
S - 16
<PAGE> 720
June 30, 2000 to the total assets of all of the funds and the CGS
privately held entities, including the CGS Management Company, as of
June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$500.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------------------------------------------------------
<S> <C>
1995 0
1996 0
1997 0
1998 0
1999 0
Six months ended June 30, 2000 $ 0
======
</TABLE>
S - 17
<PAGE> 721
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following fees
from the fund:
- a partnership management fee equal to 9% of the cash available for
distribution;
- a property management fee equal to 6% of the gross revenues from real
properties of the fund;
- reimbursement for administrative services provided to the fund, such as
accounting, legal, data processing and similar services;
- reimbursement for construction supervision costs;
- reimbursement for initial leasing costs;
- reimbursement of out-of-pocket expenses; and
- a real estate commission on the sale of properties in an amount not to
exceed 50% of the lesser of (1) the requisition fees payable in
connection with the acquisition of the fund's properties, or (2) the
standard real estate commission, provided that the real estate
commission is subordinate to distributions to the limited partners of
their capital contributions plus 6% per annum on their adjusted capital
contribution.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S - 18
<PAGE> 722
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS (1)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
---------------------------------------------- June 30,
1997 1998 1999 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HISTORICAL:
Management Fees $ 33,559 $ 41,516 $ 39,654 $ 21,235
Administrative Fees 34,870 38,922 50,428 $ 20,398
Leasing Fees 19,097 42,738 2,875 --
Construction Supervision Fees 12,358 6,209 -- --
Broker Fees -- -- -- --
General Partner Distributions -- -- -- --
Limited Partner Distributions -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total historical $ 99,884 $129,385 $ 92,957 $ 41,633
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable in
respect of limited partnership interests $ 7,278 $ -- $ 15,549 $ --
Distributions on American Spectrum Shares issuable in
respect of the CGS Management Company 816 -- 1,743 --
Restricted Stock and Stock Options 29,754 29,754 29,754 14,877
Salary, Bonuses and Reimbursements 92,398 92,398 92,398 46,199
----------------------------------------------------------------------------------------------------------------------------------
Total pro forma as a "C" Corporation $130,244 $122,150 $139,441 $ 61,075
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable in
respect of limited partnership interests $ 7,278 $ -- $ 15,549 $ --
Distributions on American Spectrum Shares issuable in
respect of the CGS Management Company 816 -- 1,743 --
Restricted Stock and Stock Options 29,754 29,754 29,754 14,877
Salary, Bonuses and Reimbursements 92,396 92,396 92,396 46,198
----------------------------------------------------------------------------------------------------------------------------------
Total pro forma as a REI $130,244 $122,150 $139,441 $ 61,075
</TABLE>
------------------------------
(1) For a description of the calculation of these amounts, please refer to
the notes to the table entitled "Compensation, Reimbursements and
Distributions to the General Partners" in the Consent Solicitation.
S - 19
<PAGE> 723
PROPERTY OVERVIEW
Your fund owns one office property located in California. Information
regarding the property as of September 30, 2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
-------------------------------------------------------- PER
LEASED
YEAR SQ. FT. SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT % OF TOTAL FOOT OWNERSHIP
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Creekside Office CA OFFICE 1984 47,800 100.00% 47,800 $1,008,048 2.76% $21.09 94.92%(1)
</TABLE>
------------------------------
(1) During the years ended 1998 and 1999, Sierra Mira Mesa Partners
received net distributions of $92,700 and $47,000, respectively, from
Sierra Creekside Partners. Sierra Mira Mesa Partners' primary use of
these funds was to provide its joint venture partners with an
additional source of capital. As a result of the net distributions,
your fund's ownership interest in Sierra Creekside Partners increased
from 90.67% to 93.45% in 1999 and 94.92% in 2000 Creekside Office is
owned by Sierra Creekside Partners.
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENT TO THE PARTNERSHIP AGREEMENT
An amendment to the partnership agreement of the fund is necessary in
connection with the consummation of the consolidation. The amendment is attached
to this supplement as Appendix C.
S - 20
<PAGE> 724
The partnership agreement currently prohibits a sale of properties to
the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendment. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendment to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
FEDERAL INCOME TAX CONSIDERATIONS
S - 21
<PAGE> 725
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will affect
the character and amount of income reportable by you in the future. Because each
of the funds is a partnership for federal income tax purposes, it is not subject
to taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operating Partnership or a subsidiary of the
Operating Partnership. For federal income tax purposes, American Spectrum
intends to take the position that the merger of American Spectrum and your fund
will be treated as a transfer of assets of your fund to American Spectrum in
exchange for shares and a subsequent distribution in liquidation of such shares.
Consistent with such position for those limited partners who elect the notes
option, the transaction will be viewed as a sale of their interest in your fund
to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
S - 22
<PAGE> 726
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the fund
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain. Proskauer Rose LLP is not opining as to whether gain
will be recognized by your or any other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
S - 23
<PAGE> 727
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S - 24
<PAGE> 728
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW ............................................................................................. S-2
RISK FACTORS ......................................................................................... S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND ................................................. S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES ............................................................... S-11
FAIRNESS OF THE CONSOLIDATION ........................................................................ S-13
EXPENSES OF THE CONSOLIDATION ........................................................................ S-15
REQUIRED VOTE ........................................................................................ S-21
AMENDMENT TO THE PARTNERSHIP AGREEMENT ............................................................... S-21
VOTING PROCEDURES .................................................................................... S-22
FEDERAL INCOME TAX CONSIDERATIONS .................................................................... S-24
ADDITIONAL INFORMATION ............................................................................... S-26
</TABLE>
i
<PAGE> 729
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 730
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
A-2
<PAGE> 731
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
A-3
<PAGE> 732
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 733
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
A-5
<PAGE> 734
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
A-6
<PAGE> 735
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 736
APPENDIX B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Sierra Pacific
Development Fund (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties," and
individually, a "Party") hereto desire to merge the Merging Entity with and into
American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and California, with American Spectrum being the surviving
entity (the "Merger") as set forth in the registration statement of the Company
on Form S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
B - 1
<PAGE> 737
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common
stock, $.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in
Section 6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors `84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1
below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
B - 2
<PAGE> 738
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the
Recitals above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth
in the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first
paragraph of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of
the Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code (S) 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
B - 3
<PAGE> 739
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the California Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the California Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the California Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the California Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
B - 4
<PAGE> 740
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of
American Spectrum, as in effect immediately prior to the Effective Time, shall
be the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by-laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners
other than those Limited Partners who vote against the Merger and affirmatively
elect to receive notes (the "Note Option") will be allocated American Spectrum
Common Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or
combines American Spectrum Common Shares, or pays a stock dividend or other
stock distribution in American Spectrum Common Shares, or in rights or
securities exchangeable or convertible into or exercisable for American Spectrum
Common Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject
to the limitations described herein, those Limited Partners who, in connection
with the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined in accordance
with the final Prospectus/Consent Solicitation Statement. In the event that any
of the Limited Partners elect the Note Option, the number of American Spectrum
Common Shares allocated to the Merging Entity will be reduced in accordance with
the final Prospectus/Consent Solicitation Statement.
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<PAGE> 741
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and the
Merging Entity that the statements contained in this Article V are correct and
complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum
is a corporation duly organized, validly existing, and in good standing under
the laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
The Merging Entity represents and warrants to American Spectrum that the
statements contained in this Article VI are correct and complete as of the date
hereof.
B - 6
<PAGE> 742
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of California, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be entitled to possession of all documents,
books, records (including Tax records), agreements and financial data of any
sort relating to the Merging Entity but will provide the Limited Partners with
reasonable access to such documents, books and records upon request.
B - 7
<PAGE> 743
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations of
American Spectrum, the Limited Partners and the Merging Entity to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions, which conditions
may be waived upon the written consent of American Spectrum and the Merging
Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall
be no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective
Time, American Spectrum shall own property having an appraised value, as
determined by Stanger, of not less than $200,000,000.
(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
B - 8
<PAGE> 744
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the Share
Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to its Effective Time, before
or after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
B - 9
<PAGE> 745
11.3 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
B - 10
<PAGE> 746
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the
B - 11
<PAGE> 747
provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
---------
Name
Title
SIERRA PACIFIC DEVELOPMENT FUND
By:
---------
Name
Title
B - 12
<PAGE> 748
Appendix C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
SIERRA PACIFIC DEVELOPMENT FUND
Section 11.2 of the Partnership Agreement is amended to read as follows:
"11.2: The Partnership will not sell or lease any [Project] or [Project
Interest] to the General Partners or their affiliates; provided that the
foregoing shall not apply to the proposed merger, sale or other transfer
of properties in connection with the consolidation as described in the
Proxy/Consent Solicitation Statement of the Partnership dated []."
<PAGE> 749
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED ,2000
FOR SIERRA PACIFIC DEVELOPMENT FUND II
This supplement is being furnished to you, as a limited partner of
Sierra Pacific Development Fund II, which we refer to as the fund, to enable you
to evaluate the proposed consolidation of your fund into American Spectrum
Realty, Inc., a Maryland corporation. Terms such as we and us refer to American
Spectrum. This supplement is designed to summarize only the risks, effects,
fairness and other considerations of the consolidation that are unique to you
and the other limited partners of your fund. This supplement does not purport to
provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, S-P
Properties, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns interests in offices and office/warehouse
properties located in Texas and California, American Spectrum will own
a large portfolio of properties of various types. These properties
include office/warehouse, apartment and shopping center properties
located primarily in the midwestern and western United States, Texas
and the Carolinas.
- Your fund had $190,000 of cash flow during 1999. Some of the other
funds and the CGS privately held entities did not have cash flow.
- Your fund only has a ratio of debt to total appraisal value of real
estate assets of 31%. American Spectrum will have a ratio debt to total
appraisal value of real estate assets of 63%.
<PAGE> 750
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 839,334 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995.
Your fund intended to liquidate its properties by 1988. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns interests in five properties located in Texas and
California. The properties are office and office/warehouse properties.
Some of the funds own different types of properties, properties located
in other markets or only one property.
- Your fund's property has a ratio of debt to total appraised value of
real estate assets of 31%. The properties owned by all of the funds and
the CGS privately held entities have a ratio of debt to total appraised
value of real estate assets of 63%.
For appropriate funds:
Your fund made distributions in 1997 and had $190,000 of net cash flow
in 1999. Some of the funds did not make distributions or have net cash flow
which could have been available for distribution during this period. In
addition, a number of the CGS privately held entities did not make distributions
or have net cash flow which would have been available for distribution.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 6,870 units
or 7.75% of the outstanding units and intend to vote these units in favor of the
consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
S-2
<PAGE> 751
Your fund's partnership agreement prohibits transfers of assets to
related parties. The amendment will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendment must be approved by
greater than 50% of the outstanding units. To vote "For" the consolidation, you
must also vote "For" the amendment.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will
have different consequences to you depending upon whether you elect to receive
shares or notes. If you elect to receive shares, the consolidation will be
reported on the basis that no gain is recognized. We cannot assure you that the
IRS will not challenge this treatment of the transaction. If the IRS asserts a
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Your gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. [Can we
give estimate, making assumptions] See "Tax Risks." Therefore, it is possible
for you to be allocated income which may result in a tax liability even though
you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K your fund for the year ended December 31, 1999 and the form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
S-3
<PAGE> 752
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 6,870 units or 7.75% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns office and warehouse properties located
in Texas and California. After the consolidation, you will
hold common stock of American Spectrum, an operating company,
that will own and lease as many as 35 properties and expects
to make additional investments. The properties include office,
office warehouse, apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Upon consummation of the consolidation, we will have greater
leverage than your fund. Your fund currently has a ratio of
debt to total assets of 31%. Upon completion of the
consolidation, we will have a ratio of debt to total assets of
63%. American Spectrum may also incur substantial indebtedness
to make future acquisitions of properties that it may be
unable to repay. We expect to increase the ratio of debt to
total assets to 70%.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
S-4
<PAGE> 753
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
S-5
<PAGE> 754
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to 70% following the consummation of
consolidation.
S-6
<PAGE> 755
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain or loss to any limited partner who elects to receive shares.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
Consent Solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation
S-7
<PAGE> 756
it held before electing REIT status in an amount up to the amount of the
built-in gains at the time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's properties for sale with brokers and commence the
process of liquidating the fund's properties. The general partners believe that
it could take an extended time to complete the sale of all of the fund's
properties and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
S-8
<PAGE> 757
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the ______________.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
-------- --------- --- ------------------- -------------- ---
<S> <C> <C> <C> <C> <C>
839,334 $12,590,013 $581.17 $525.13 11.39% 11.39%
</TABLE>
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sierra Mira Mesa San Diego, CA 15,020,000 Office 89,560 sq. ft. 1987
San Felipe Houston, TX 6,500,000 Office 100,900 sq. ft. 1977
Sierra Sorrento II San Diego, CA 10,820,000 Office 88,423 sq. ft. 1986
</TABLE>
S-9
<PAGE> 758
<TABLE>
<S> <C> <C> <C> <C> <C>
Sierra Sorrento I San Diego, CA 4,340,000 Office/ 43,100 sq. ft. 1986
warehouse
Sierra Southwest Houston, TX 3,460,000 Office/ 100,868 sq. ft. 1972
Point warehouse
Sierra Westlakes San Antonio, TX 5,010,000 Office/ 95,370 sq. ft. 1985
warehouse
</TABLE>
S-10
<PAGE> 759
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES, AND THE CGS MANAGEMENT
COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $ 110,518,379 100.00% 7,367,890 100.00%
============== ====== ========= ======
</TABLE>
----------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership unit provides the same rights to distributions as one share
of common stock in American Spectrum and, subject
S-11
<PAGE> 760
to some limitations, is exchangeable for American Spectrum shares on a
one-for-one basis after a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, to the partners in an amount equal to any loans or advances they
have made;
- second, to the limited partners in an amount equal to any capital
account balance;
- third, 1% to the general partners and 99% to the limited partners until
the limited partners receive cumulative distributions equal to 6% per
annum on the outstanding balance, from time to time, of their
unreturned capital;
- fourth, to the general partners in an amount equal to 3% of the gross
sales price of properties sold by the fund, but not in excess of the
lesser of 6% of the compensation customarily paid to brokers or 6% of
the gross sales price for a property;
- fifth, 1% to the general partners and 99% to the limited partners until
the limited partners receive distributions equal to 100% of their
capital contributions, reduced by distributions from sales or
refinancing, plus 15% per annum on their adjusted capital contributions
minus prior distributions from all sources; and
- sixth, the balance pro rata to the partners in proportion to their
adjusted capital account balances.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-12
<PAGE> 761
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
------------------------------ -------------------------- ------------------- --------------
<S> <C> <C> <C>
$456.00-$536.00 $548.00 $ 525.13 $581.17
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
BENEFITS OF THE CONSOLIDATION
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
S-13
<PAGE> 762
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
S-14
<PAGE> 763
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
Pre-Closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1) ................................................. $ 57,963
Appraisals and Valuation(2) ................................... 15,257
Fairness Opinions(3) .......................................... 39,850
Solicitation Fees(4) .......................................... 7,687
Printing and Mailing(5) ....................................... 19,218
Accounting Fees(6) ............................................ 160,278
Pre-formation Cost(7) ......................................... 57,963
Subtotal ............................................. $358,217
</TABLE>
S-15
<PAGE> 764
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(8)...................... $ 28,982
Legal Closing Fees(9).......................................... 17,809
Subtotal.............................................. $ 46,790
Total.......................................................... $ 405,007
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds and the CGS privately held entities, including the CGS Management
Company, as of June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation
S-16
<PAGE> 765
of comments, as well as reimbursement of costs incurred by brokers and banks in
forwarding the consent solicitation to you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$500.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------- ------
<S> <C>
1995............................................... 9.23
1996............................................... 13.85
1997............................................... 2.31
1998............................................... 0
1999............................................... 0
Six months ended June 30, 2000..................... $ 0
======
</TABLE>
S-17
<PAGE> 766
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a profit sharing percentage fee equal to 10% of the cash available for
distribution;
- a property management fee equal to customary rates, but not to exceed
6% of gross receipts plus a one-time fee for initial lease-up of
development properties;
- reimbursement for administrative services provided to the fund, such as
accounting, legal, data processing and similar services;
- reimbursement for initial leasing costs;
- reimbursement of out-of-pocket expenses; and
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-18
<PAGE> 767
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS(1)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------
HISTORICAL: 1997 1998 1999 2000
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees $123,635 $ 151,894 $ 147,911 $ 82,433
Administrative Fees 263,773 $ 285,563 $ 329,462 $ 160,524
Leasing Fees 226,337 68,859 53,746 46,960
Construction Supervision Fees 53,429 17,152 8,460 --
Broker Fees -- -- -- --
General Partner Distributions 50,000 -- -- --
Limited Partner Distributions -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total historical $717,174 $ 523,468 $ 539,579 $ 289,917
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 2,955 80 14,375 --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 4,053 110 19,715 --
Restricted Stock and Stock Options 58,517 58,517 58,517 29,259
Salary, Bonuses and Reimbursements 181,716 181,716 181,716 90,858
-----------------------------------------------------------------------------------------------------------------------------------
Total Pro forma as "C" Corporation 247,240 240,422 274,323 120,117
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 2,955 80 14,375 --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 4,053 110 19,715 --
Restricted Stock and Stock Options 58,517 58,517 58,517 29,259
Salary, Bonuses and Reimbursements 181,716 181,716 181,716 90,858
-----------------------------------------------------------------------------------------------------------------------------------
Total Pro forma as REIT 247,240 240,422 274,323 120,117
</TABLE>
----------
(1) For a description of the calculation of these amounts, please refer to the
notes to the table entitled "Compensation, Reimbursement and Distributions to
the General Partners" in the Consent Solicitation.
S-19
<PAGE> 768
PROPERTY OVERVIEW
Your fund owns interests in office and office/warehouse properties
located in California. Information regarding the property as of September 30,
2000 is set forth below.
<TABLE>
<CAPTION>
PER LEASED
YEAR SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) FOOT OWNERSHIP
SQ. FT.
NUMBER % LEASED LEASED AMOUNT % OF TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sorrento 1 CA OFF/WARE 1986 43,100 100.00% 43,100 $ 295,152 0.81% $6.85 19%
Mira Mesa CA OFFICE 1986 89,560 97.04% 86,909 $1,967,480 5.39% $22.64 30.17%(1)
Sorrento II - Office CA OFFICE 1988 88,073 100.00% 88,073 $1,003,024 2.75% $11.39 13%
Southwest Point TX OFF/WARE 1972 100,868 90.70% 91,487 $ 537,841 1.47% $5.88 100%
Westlakes TX OFF/WARE 1985 95,370 74.75% 71,289 $ 644,788 1.77% $9.04 100%
San Felipe TX OFFICE 1977 100,900 99.02% 99,911 $1,221,754 3.35% $12.23 100%
</TABLE>
(1) During 1998 and 1999, Sierra Mira Mesa Partners made net contributions of
$203,000 and $326,184 to your fund, These net contributions were principally
used to assist funding of capital improvements and lease commission
expenditures. In 1998 and 1999, your fund incurred $526,000 and $446,000,
respectively, for such expenditures. As a result of these net contributions and
as a result of Sierra Mira Mesa Partners' contributions and distributions to
Sierra Pacific Pension Investors '84, your fund's ownership interest in Sierra
Mira Mesa Partners decreased from 33.74% in 1998 to 33.01% in 1999 and 30.17% in
2000.
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENT TO THE PARTNERSHIP AGREEMENT
S-20
<PAGE> 769
An amendment to the partnership agreement of the fund is necessary in
connection with the consummation of the consolidation. The amendment is attached
to this supplement as Appendix C.
The partnership agreement currently prohibits a sale of properties to
the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendment. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendment to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated ________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
FEDERAL INCOME TAX CONSIDERATIONS
S-21
<PAGE> 770
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will affect
the character and amount of income reportable by you in the future. Because each
of the funds is a partnership for federal income tax purposes, it is not subject
to taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operating Partnership or a subsidiary of the
Operating Partnership. For federal income tax purposes, American Spectrum
intends to take the position that the merger of American Spectrum and your fund
will be treated as a transfer of assets of your fund to American Spectrum in
exchange for shares and a subsequent distribution in liquidation of such shares.
Consistent with such position for those limited partners who elect the notes
option, the transaction will be viewed as a sale of their interest in your fund
to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
S-22
<PAGE> 771
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain. Proskauer Rose LLP is not opining as to whether gain
will be recognized by your or any other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses" means
your aggregate section 1231 losses for the five most recent prior years that you
have not previously recaptured. However, gain you recognize on the sale of
personal property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
S-23
<PAGE> 772
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-24
<PAGE> 773
APPENDIX A
A-1
<PAGE> 774
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 775
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
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<PAGE> 776
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
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<PAGE> 777
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 778
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
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<PAGE> 779
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
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EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 781
APPENDIX B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Sierra Pacific
Development Fund II (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties,"
and individually, a "Party") hereto desire to merge the Merging Entity with and
into American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and California, with American Spectrum being the surviving
entity (the "Merger") as set forth in the registration statement of the Company
on Form S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE> 782
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common
stock, $.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in
Section 6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1
below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
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<PAGE> 783
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the
Recitals above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth
in the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first
paragraph of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of
the Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code (S) 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
B-3
<PAGE> 784
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the California Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the California Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the California Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the California Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
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<PAGE> 785
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of
American Spectrum, as in effect immediately prior to the Effective Time, shall
be the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners other
than those Limited Partners who vote against the Merger and affirmatively elect
to receive notes (the "Note Option") will be allocated American Spectrum Common
Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or
combines American Spectrum Common Shares, or pays a stock dividend or other
stock distribution in American Spectrum Common Shares, or in rights or
securities exchangeable or convertible into or exercisable for American Spectrum
Common Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject
to the limitations described herein, those Limited Partners who, in connection
with the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined in accordance
with the final Prospectus/Consent Solicitation Statement. In the event that any
of the Limited Partners elect the Note Option, the number of American
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<PAGE> 786
Spectrum Common Shares allocated to the Merging Entity will be reduced in
accordance with the final Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and
the Merging Entity that the statements contained in this Article V are correct
and complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum
is a corporation duly organized, validly existing, and in good standing under
the laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
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The Merging Entity represents and warrants to American Spectrum that
the statements contained in this Article VI are correct and complete as of the
date hereof.
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of California, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be entitled to possession of all documents,
books, records (including Tax records), agreements and
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financial data of any sort relating to the Merging Entity but will provide the
Limited Partners with reasonable access to such documents, books and records
upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations
of American Spectrum, the Limited Partners and the Merging Entity to consummate
the transactions contemplated by this Agreement are subject to the fulfillment
at or prior to the Closing Date of each of the following conditions, which
conditions may be waived upon the written consent of American Spectrum and the
Merging Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall
be no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective
Time, American Spectrum shall own property having an appraised value, as
determined by Stanger, of not less than $200,000,000.
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(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the
Share Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to its Effective Time, before
or after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
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11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
11.3 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
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With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
B-11
<PAGE> 792
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
-----------------------------------
Name
Title
SIERRA PACIFIC DEVELOPMENT FUND II
By:
-----------------------------------
Name
Title
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<PAGE> 793
APPENDIX C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF SIERRA PACIFIC DEVELOPMENT FUND II
Section 11.2 of the Partnership Agreement is amended to read as follows:
"11.2 Sales and Leases to the General Partners. The Partnership shall
not sell or lease any property to the General Partners or their
Affiliates; provided that the foregoing shall not apply to the proposed
merger, sale or other transfer of properties in connection with the
consolidation as described in the Proxy/Consent Solicitation Statement
of the Partnership dated [ ]."
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<PAGE> 794
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW........................................................... S-2
ADDITIONAL INFORMATION............................................. S-3
RISK FACTORS....................................................... S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND............... S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES............................. S-12
FAIRNESS OF THE CONSOLIDATION...................................... S-14
EXPENSES OF THE CONSOLIDATION...................................... S-16
REQUIRED VOTE...................................................... S-21
AMENDMENT TO THE PARTNERSHIP AGREEMENT............................. S-22
VOTING PROCEDURES.................................................. S-22
</TABLE>
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<PAGE> 795
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
FOR SIERRA PACIFIC DEVELOPMENT FUND III
This supplement is being furnished to you, as a limited partner of
Sierra Pacific Development Fund III, which we refer to as the fund, to enable
you to evaluate the proposed consolidation of your fund into American Spectrum
Realty, Inc., a Maryland corporation. Terms such as we and us refer to American
Spectrum. This supplement is designed to summarize only the risks, effects,
fairness and other considerations of the consolidation that are unique to you
and the other limited partners of your fund. This supplement does not purport to
provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, S-P
Properties, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns an interest in one
office/warehouse property located in California, American
Spectrum will own a large portfolio of properties of various
types. These properties include office/warehouse, apartment
and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas.
- Your fund's property is 100% occupied. American Spectrum's
properties are 87.55% occupied.
- The transaction will be taxable to you. We estimate that you
will recognize a taxable gain of $37 for every $1,000 of your
original investment and that you may pay additional taxes if
the IRS challenges our position on the taxation of the
transaction.
<PAGE> 796
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 28,655 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995.
Your fund intended to liquidate its properties by 1989. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns an interest in only one property located in California.
The property is an office property. Some of the funds own more than one
property, different types of properties and properties located in other
markets.
- Your fund's property is 100% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some
of the properties of the CGS privately held entities are properties
with low occupancy rates which were purchased because CGS believed they
were undervalued. These properties have greater risks than your
property.
- None of the leases on your fund's property expire before 2003. 39.48%
of the leases on the properties of all of the funds and the CGS
privately held entities expire by 2002.
- The average age of the properties of your fund is 14 years. The average
age of the properties of American Spectrum is 20 years.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 1,785 units
or 4.89% of the outstanding units and intend to vote these units in favor of the
consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
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<PAGE> 797
Your fund's partnership agreement prohibits transfers of assets to
related parties. The amendment will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendment must be approved by
greater than 50% of the outstanding units. To vote "For" the consolidation, you
must also vote "For" the amendment.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation will have different consequences to you depending
upon whether you elect to receive shares or notes. If you elect to receive
shares, the consolidation will be reported on the basis that no gain is
recognized except for an amount equal to the amount by which the liabilities
assumed in the consolidation exceed the basis of the assets transferred. Your
share of the gain will be allocated to you. We estimate that an original limited
partner in the fund will recognize $37 of taxable gain for a $1000 original
investment. This gain may be offset by passive losses which a limited partner
may have.
We cannot assure you that the IRS will not challenge this treatment of
the transaction. If the IRS asserts a challenge, it may prevail. If the IRS
prevails your fund will recognize additional gain. If the IRS prevails your gain
will be equal to the amount by which the fair market value of the shares
received, increased by the liabilities assumed, exceeds the basis of the assets
transferred, and you will be allocated your share of the gain. See "Tax Risks."
Therefore, it is possible for you to be allocated income which may result in a
tax liability even though you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a C Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K your fund for the year ended December 31, 1999 and the form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
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<PAGE> 798
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 1,785 units or 4.89% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns an interest in one office/warehouse
located in California. After the consolidation, you will hold
common stock of American Spectrum, an operating company, that
will own and lease as many as 35 properties and expects to
make additional investments. The properties include office,
office warehouse, apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Your property is currently 100% occupied and none of the
leases expire before 2003. American Spectrum's occupancy rate
will be 85% upon completion of the consolidation and 39.48 %
of its leases will expire by 2002.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
- The fund's property is located in California. American Spectrum will
also own properties in the midwest and west and Texas. The California
real estate market is currently stronger than the market in these other
states.
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<PAGE> 799
- The average age of your fund's properties is less than the average age
of American Spectrum's properties. As a result, American Spectrum's
properties may require more capital expenditures than your fund's
properties.
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,167 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
S-5
<PAGE> 800
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency,
S-6
<PAGE> 801
and the notes may not be readily acceptable as loan collateral. Limited
partners electing to receive notes are likely to receive the full face
amount of their notes only if they hold the obligations to maturity,
which is eight years after the closing date of the consolidation.
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain by American Spectrum or loss to any limited partner who
elects to receive shares except in an amount equal to the liabilities assumed by
American Spectrum in excess of the basis of the assets contributed to American
Spectrum. We cannot assure you that the IRS will not challenge this treatment of
the transaction. If the IRS asserts a challenge, it may prevail. If the IRS
prevails your fund will recognize additional gain. The gain recognized by your
fund will equal the amount by which the fair market value of the shares
received, increased by the liabilities assumed, exceeds the basis of the assets
transferred, and your share of the gain will be allocated to you.
YOUR FUND HAS LIABILITIES IN EXCESS OF THE TAX BASIS OF CONTRIBUTED ASSETS.
LIMITED PARTNERS WILL RECOGNIZE ADDITIONAL GAIN FROM THE CONSOLIDATION.
Your fund has liabilities in excess of its tax basis in the assets
contributed to American Spectrum. Accordingly, it may realize gain upon the
transfer of its assets to American Spectrum in return for American Spectrum
shares or notes as part of the consolidation. As a partner of your fund, you
will bear a pro rata portion of your fund's income tax liability resulting from
any gain on the consolidation. The estimate of your tax liabilities is set forth
in "Overview--Tax Consequences of The Consolidation."
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an effective REIT election,
American Spectrum will be taxed as a C corporation.
S-7
<PAGE> 802
American Spectrum's qualification as a REIT depends on meeting the
requirements of the Code and Regulations applicable to REITs. American Spectrum
has not requested, and does not plan to request, a ruling from the Internal
Revenue Service that it qualifies as a REIT. It has received an opinion,
however, from its tax counsel, Proskauer Rose LLP, that it will meet the
requirements for qualification as a REIT. Proskauer Rose LLP's opinion is based
upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
consent solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum
S-8
<PAGE> 803
may not be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's property for sale with brokers and commence the process
of liquidating the fund's property. The general partners believe that it could
take an extended time to complete the sale of the fund's property and is likely
to take in excess of one year. After completing the liquidation, the fund would
distribute the net proceeds, except for a portion which will be held by the fund
to cover potential liability for representations and warranties in the sales
contract and administrative expenses of winding up the fund.
S-9
<PAGE> 804
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the ____________.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
<S> <C> <C> <C> <C> <C>
28,655 $ 429,832 $ 47.08 $(39.50) 0.39% 0.39%
</TABLE>
---------------------------
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sierra Sorrento I San Diego, CA 4,340,000 Office/ 43,100 sq. ft. 1986
warehouse
</TABLE>
S-10
<PAGE> 805
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES,
AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $110,518,379 100.00% 7,367,890 100.00%
============ ====== ========= ======
</TABLE>
----------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership
S-11
<PAGE> 806
unit provides the same rights to distributions as one share of common
stock in American Spectrum and, subject to some limitations, is
exchangeable for American Spectrum shares on a one-for-one basis after
a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, to the partners in an amount equal to any loans or advances they
have made;
- second, to the limited partners in an amount equal to any capital
account balance;
- third, 1% to the general partners and 99% to the limited partners until
the limited partners receive cumulative distributions equal to 6% per
annum on the outstanding balance, from time to time, of their
unreturned capital;
- fourth, to the general partners in an amount equal to 3% of the gross
sales price of properties sold by the fund, but not in excess of the
lesser of 6% of the compensation customarily paid to brokers or 6% of
the gross sales price for a property;
- fifth, 1% to the general partners and 99% to the limited partners until
the limited partners receive distributions equal to 100% of their
capital contributions, reduced by distributions from sales or
refinancing, plus 15% per annum on their adjusted capital contributions
minus prior distributions from all sources; and
- sixth, the balance pro rata to the partners in proportion to their
adjusted capital account balances.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-12
<PAGE> 807
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
------------------------------ -------------------------- ------------------- --------------
<S> <C> <C> <C>
$27.80-$30.08 $44.56 $(39.50) $47.08
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
BENEFITS OF THE CONSOLIDATION
S-13
<PAGE> 808
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
S-14
<PAGE> 809
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum.
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
<TABLE>
<S> <C>
Pre-Closing Transaction Costs
Legal Fees(1)........................................................ $ 1,410
Appraisals and Valuation(2).......................................... 514
Fairness Opinions(3)................................................. 970
Solicitation Fees(4)................................................. 1,922
</TABLE>
S-15
<PAGE> 810
<TABLE>
<S> <C>
Printing and Mailing(5).............................................. 4,806
Accounting Fees(6)................................................... 2,962
Pre-formation Cost(7)................................................ 1,410
Subtotal $13,995
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(8)............................ $ 705
Legal Closing Fees(9)................................................ 329
Subtotal.................................................... $ 1,034
Total................................................................ $15,029
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of
S-16
<PAGE> 811
June 30, 2000 to the total assets of all of the funds and the CGS
privately held entities, including the CGS Management Company, as of
June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$250.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
----------------------------------------------------------
<S> <C>
1995............................................ 0
1996............................................ 0
1997............................................ 0
1998............................................ 0
1999............................................ 0
Six months ended June 30, 2000.................. $ 0
======
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a profit sharing participation equal to 5% of the cash available for
distribution;
- a property management fee equal to 6% of the gross revenues from real
properties of the fund;
- reimbursement for administrative services provided to the fund, such as
accounting, legal, data processing and similar services;
- reimbursement for initial leasing costs;
- reimbursement of out-of-pocket expenses; and
S-17
<PAGE> 812
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-18
<PAGE> 813
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS (1)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
----------------------- June 30,
1997 1998 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
HISTORICAL:
Management Fees $ 40,248 $ -- $ -- $ --
Administrative Fees 75,530 -- -- --
Leasing Fees 76,984 -- -- --
Construction Supervision Fees 64,904 -- -- --
Broker Fees 61,000 -- -- --
General Partner Distributions -- -- -- --
Limited Partner Distributions -- -- -- --
----------------------------------------------------
Total historical $318,666 $ -- $ -- $ --
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests $ -- $ -- $ -- $ --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company -- -- -- --
Restricted Stock and Stock Options 1,451 1,451 1,451 726
Salary, Bonuses and Reimbursements 4,505 4,505 4,505 2,253
----------------------------------------------------
Total pro forma as a "C" Corporation $ 5,956 $ 5,956 $ 5,956 $ 2,978
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests $ -- $ -- $ -- $ --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company -- -- -- --
Restricted Stock and Stock Options 1,451 1,451 1,451 726
Salary, Bonuses and Reimbursements 4,505 4,505 4,505 2,253
----------------------------------------------------
Total pro forma as a REIT $ 5,956 $ 5,956 $ 5,956 $ 2,978
</TABLE>
------------------------------
(1) For a description of the calculation of these amounts, please refer to
the notes to the table entitled "Compensation, Reimbursements and
Distributions to the General Partners" in the consent solicitation.
S-19
<PAGE> 814
PROPERTY OVERVIEW
Your fund owns an interest in one office/warehouse property located in
California. Information regarding the property as of September 30, 2000 is set
forth below.
<TABLE>
<CAPTION>
YEAR PER LEASED PERCENTAGE
PROPERTY STATE TYPE BUILT RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) SQUARE FOOT OWNERSHIP
----------------- ----- ------ ----- -------------------------- ----------------------- ----------- ----------
SQ. FT. % OF
NUMBER % LEASED LEASED AMOUNT TOTAL
------ -------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Creekside Office CA OFFICE 1984 47,800 100.00% 47,800 $1,008,048 2.76% 21.09 66.64% (1)
</TABLE>
(1) Sierra Mira Mesa owns the Creekside office. During 1998, Sierra
Mira Mesa Partners received net distributions of $71,756 from Sierra Vista
Partners as a result of cash received by Sierra Vista Partners subsequent to
the sale of the Sierra Vista property in October 1997. Under the terms of the
Sierra Vista Partners joint venture agreement, Sierra Mira Mesa Partners
receives preferential cash distributions of available distributable funds from
the sale of the property to the extent of its capital contribution. In
accordance with the agreement, proceeds received from the sale in 1997 and the
subsequent funds received in 1998 were distributed to Sierra Mira Mesa
Partners. As a result of the net distributions, your fund's ownership interest
in Sierra Vista Partners increased from 65.49% in 1998 to 66.68% in 1999.
During 1999, Sierra Mira Mesa Partners made net contributions of $2,400
to Sierra Vista Partners. These net contributions were used to assist with
administrative expenses, as Sierra Vista Partners has no source of revenue. Your
fund's ownership interest in Sierra Vista Partners decreased from 66.68% in 1999
to 66.64% in 2000 as a result of the net contributions.
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
S-20
<PAGE> 815
AMENDMENT TO THE PARTNERSHIP AGREEMENT
An amendment to the partnership agreement of the fund is necessary in
connection with the consummation of the consolidation. The amendment is attached
to this supplement as Appendix C.
The partnership agreement currently prohibits a sale of properties to
the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendment. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendment to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents
S-21
<PAGE> 816
and instruments advisable or necessary to complete the consolidation. The power
of attorney is intended solely to ease the administrative burden of completing
the consolidation without requiring your signatures on multiple documents.
S-22
<PAGE> 817
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will
affect the character and amount of income reportable by you in the future.
Because each of the funds is a partnership for federal income tax purposes, it
is not subject to taxation. Currently, as the owner of units, you must take into
account your distributive share of all income, loss and separately stated
partnership items, regardless of the amount of any distributions of cash to you.
Your fund supplies that information to you annually on a Schedule K-1. In some
circumstances, you may offset your income with any losses you may have from
passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operations Partner or a subsidiary of the Operating
Partnership. For federal income tax purposes, American Spectrum intends to take
the position that the merger of American Spectrum and your fund will be
treated as a transfer of assets of your fund to American Spectrum in exchange
for shares and a subsequent distribution in liquidation of such shares.
Consistent with this position, for those limited partners who elect the notes
option, the transaction will be viewed as a sale of their interest in your fund
to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
S-23
<PAGE> 818
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of
stock possessing at least 80% of the total combined voting power of all classes
of stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum except
to the extent the liabilities American Spectrum assumed exceed the basis of the
assets contributed. Such gain will be equal to the amount by which the
liabilities assumed exceed the basis of the assets transferred, and your share
of the gain will be allocated to you. The estimated amount of your gain is set
forth on p. [___]. We cannot assure you that the IRS will not challenge this
treatment of the transaction. If the IRS asserts a challenge, it may prevail.
If the IRS prevails your fund will recognize additional gain. Such gain will
be equal to the amount by which the fair market value of the shares received,
increased by the liabilities assumed, exceeds the basis of the assets
transferred, and you will be allocated your share of the gain. Proskauer Rose
LLP is not opining as to whether gain will be recognized by your or any other
fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that have not
previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation,
S-24
<PAGE> 819
your share of all income, gain, loss, deduction and credit for your fund through
the date of the consolidation (including your gain, if any, resulting from the
consolidation described above).
If you receive American Spectrum Shares in the distribution your Fund
will recognize gain to the extent that the liabilities assumed by American
Spectrum exceed the bases of the assets your Fund contributed to American
Spectrum. See "Tax consequences to limited partners who receive shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-25
<PAGE> 820
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
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<PAGE> 821
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
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<PAGE> 822
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
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<PAGE> 823
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
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<PAGE> 824
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
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<PAGE> 825
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
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<PAGE> 826
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
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<PAGE> 827
Appendix B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Sierra Pacific
Development Fund III (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties," and
individually, a "Party") hereto desire to merge the Merging Entity with and into
American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and California, with American Spectrum being the surviving
entity (the "Merger") as set forth in the registration statement of the Company
on Form S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
B - 2
<PAGE> 828
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common stock,
$.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in Section
6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1 below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
B - 3
<PAGE> 829
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth in
the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first paragraph
of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of the
Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code (S) 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
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<PAGE> 830
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the California Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the California Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the California Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the California Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of _________________,
commencing at 9:00 a.m. local time on such date as within five (5) business
dates following the fulfillment or waiver of the conditions set forth in
Article IX (other than conditions which by their nature are intended to be
fulfilled at the Closing) or at such other place or time or on such other
date as the Managing General Partner of the Merging Entity and American
Spectrum may agree or as may be necessary to permit the fulfillment or waiver
of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
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<PAGE> 831
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of American
Spectrum, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation of the Surviving Corporation until thereafter amended
as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners other
than those Limited Partners who vote against the Merger and affirmatively elect
to receive notes (the "Note Option") will be allocated American Spectrum Common
Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or combines
American Spectrum Common Shares, or pays a stock dividend or other stock
distribution in American Spectrum Common Shares, or in rights or securities
exchangeable or convertible into or exercisable for American Spectrum Common
Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any action
by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject to
the limitations described herein, those Limited Partners who, in connection with
the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined
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<PAGE> 832
in accordance with the final Prospectus/Consent Solicitation Statement. In the
event that any of the Limited Partners elect the Note Option, the number of
American Spectrum Common Shares allocated to the Merging Entity will be reduced
in accordance with the final Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and the
Merging Entity that the statements contained in this Article V are correct and
complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum is
a corporation duly organized, validly existing, and in good standing under the
laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
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<PAGE> 833
The Merging Entity represents and warrants to American Spectrum that
the statements contained in this Article VI are correct and complete as of the
date hereof.
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of California, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be
B - 8
<PAGE> 834
entitled to possession of all documents, books, records (including Tax records),
agreements and financial data of any sort relating to the Merging Entity but
will provide the Limited Partners with reasonable access to such documents,
books and records upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations
of American Spectrum, the Limited Partners and the Merging Entity to consummate
the transactions contemplated by this Agreement are subject to the fulfillment
at or prior to the Closing Date of each of the following conditions, which
conditions may be waived upon the written consent of American Spectrum and the
Merging Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall
be no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective
Time, American Spectrum shall own property having an appraised value, as
determined by Stanger, of not less than $200,000,000.
B - 9
<PAGE> 835
(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the
Share Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to its Effective Time, before
or after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
B - 10
<PAGE> 836
11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
11.3 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
B - 11
<PAGE> 837
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact
B - 12
<PAGE> 838
that there exists another representation, warranty, or covenant relating to the
same subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
SIERRA PACIFIC DEVELOPMENT FUND III
By:
Name
Title
B - 13
<PAGE> 839
Appendix C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
SIERRA PACIFIC DEVELOPMENT FUND III
Section 11.2 of the Partnership Agreement is amended to read as follows:
"11.2 Sales and Leases to the General Partners. The Partnership shall not
sell or lease property to the General Partners or their affiliates;
provided that the foregoing shall not apply to the proposed merger, sale
or other transfer of properties in connection with the consolidation as
described in the Proxy/Consent Solicitation Statement of the Partnership
dated []."
<PAGE> 840
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW............................................................... S-2
RISK FACTORS........................................................... S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND................... S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES................................. S-11
FAIRNESS OF THE CONSOLIDATION.......................................... S-13
EXPENSES OF THE CONSOLIDATION.......................................... S-15
REQUIRED VOTE.......................................................... S-21
AMENDMENT TO THE PARTNERSHIP AGREEMENT................................. S-22
VOTING PROCEDURES...................................................... S-22
FEDERAL INCOME TAX CONSIDERATIONS...................................... S-24
ADDITIONAL INFORMATION................................................. S-26
</TABLE>
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<PAGE> 841
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
FOR SIERRA PACIFIC PENSION INVESTORS '84
This supplement is being furnished to you, as a limited partner of
Sierra Pacific Pension Investors '84, which we refer to as the fund, to enable
you to evaluate the proposed consolidation of your fund into American Spectrum
Realty, Inc., a Maryland corporation. Terms such as we and us refer to American
Spectrum. This supplement is designed to summarize only the risks, effects,
fairness and other considerations of the consolidation that are unique to you
and the other limited partners of your fund. This supplement does not purport to
provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, S-P
Properties, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns interests in office and
office/warehouse properties located in Arizona and California,
American Spectrum will own a large portfolio of properties of
various types. These properties include office/warehouse,
apartment and shopping center properties located primarily in
the midwestern and western United States, Texas and the
Carolinas.
- Your fund's property is 97.01% occupied. American Spectrum's
properties are 87.55% occupied.
- Your fund only has a ratio of debt to total appraised value of
real estate assets of 6%. American Spectrum will have a ratio
of debt to total appraised value of real estate assets of 63%.
<PAGE> 842
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 1,212,465 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995.
Your fund intended to liquidate its properties by 1989. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns interests in properties located in Arizona and
California. The properties are office and office/warehouse properties.
Some of the funds own different types of properties, properties located
in other markets or only one property.
- Your fund's property has a ratio of debt to total appraised value of
real estate assets of 6%. The properties owned by all of the funds and
the CGS privately held entities have a ratio of debt to total appraised
value of real estate assets of 63%.
- Your fund's property is 97.01% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some
of the properties of the CGS privately held entities are properties
with low occupancy rates which were purchased because CGS believed they
were undervalued. These properties have greater risks than your
property.
The average age of the properties of your fund is 14 years. The average
age of the properties of American Spectrum is 20 years.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates
S-2
<PAGE> 843
of the managing general partner own 18,138 units or 23.55% of the outstanding
units and intend to vote these units in favor of the consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Your fund's partnership agreement prohibits transfers of assets to
related parties. The amendment will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendment must be approved by
greater than 50% of the outstanding units. To vote "For" the consolidation, you
must also vote "For" the amendment.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will
have different consequences to you depending upon whether you elect to receive
shares or notes. If you elect to receive shares, the consolidation will be
reported on the basis that no gain is recognized. We cannot assure you that the
IRS will not challenge this treatment of the transaction. If the IRS asserts a
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Your gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. [Can we
give estimate, making assumptions] See "Tax Risks." Therefore, it is possible
for you to be allocated income which may result in a tax liability even though
you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K your fund for the year ended December 31, 1999 and the Form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
S-3
<PAGE> 844
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 18,138 units or 23.55% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns interests in office and office/warehouse
properties in Arizona and California. After the consolidation,
you will hold common stock of American Spectrum, an operating
company, that will own and lease as many as 35 properties and
expects to make additional investments. The properties include
office, office warehouse, apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Upon consummation of the consolidation, we will have greater
leverage than your fund. Your fund currently has a ratio of
debt to total assets of 6%. Upon completion of the
consolidation, we will have a ratio of debt to total assets of
63%. American Spectrum may also incur substantial indebtedness
to make future acquisitions of properties that it may be
unable to repay. We expect to increase the ratio of debt to
total assets to 70%.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the
S-4
<PAGE> 845
value of your investment only through the sale of your American
Spectrum shares, not from the liquidation proceeds from properties.
- The average age of your fund's properties is less than the average age
of American Spectrum's properties. As a result, American Spectrum's
properties may require more capital expenditures than your fund's
properties.
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
S-5
<PAGE> 846
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
S-6
<PAGE> 847
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain or loss to any limited partner who elects to receive shares.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
S-7
<PAGE> 848
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
consent solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
S-8
<PAGE> 849
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's properties for sale with brokers and commence the
process of liquidating the fund's properties. The general partners believe that
it could take an extended time to complete the sale of all of the fund's
properties and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
S-9
<PAGE> 850
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the ____________.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
-------- --------- --- ------------------- -------------- ---
<S> <C> <C> <C> <C> <C>
1,212,465 $18,186,978 $944.78 $494.12 16.46 16.46%
</TABLE>
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sierra Mira Mesa San Diego, CA 15,020,000 Office 89,560 sq. ft. 1987
Sierra Sorrento II San Diego, CA 10,820,000 Office 88,423 sq. ft. 1986
Sierra Sorrento I San Diego, CA 4,340,000 Office/warehouse 43,100 sq. ft. 1986
Sierra Valencia Tucson, AZ 3,860,000 Office/warehouse 82,520 sq. ft. 1987
</TABLE>
S-10
<PAGE> 851
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES
BETWEEN THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES,
AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF TOTAL AMERICAN
EXCHANGE SHARE SPECTRUM
EXCHANGE VALUE VALUE ALLOCATION (1) SHARES ISSUED
-------------- ----- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $110,518,379 100.00% 7,367,890 100.00%
============ ====== ========= ======
</TABLE>
S-11
<PAGE> 852
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership unit provides the same rights to distributions as one share
of common stock in American Spectrum and, subject to some limitations,
is exchangeable for American Spectrum shares on a one-for-one basis
after a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
will be allocated to the partners of the fund in accordance with the provisions
of the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, to the partners in an amount equal to any loans or advances they
have made;
- second, to the limited partners in an amount equal to any capital
account balance;
- third, 1% to the general partners and 99% to the limited partners until
the limited partners receive cumulative distributions equal to 6% per
annum on the outstanding balance, from time to time, of their
unreturned capital;
- fourth, to the general partners in an amount equal to 3% of the gross
sales price of properties sold by the fund, but not in excess of the
lesser of 6% of the compensation customarily paid to brokers or 6% of
the gross sales price for a property;
- fifth, 1% to the general partners and 99% to the limited partners until
the limited partners receive distributions equal to 100% of their
capital contributions, reduced by distributions from sales or
refinancing, plus 15% per annum on their adjusted capital contributions
minus prior distributions from all sources; and
- sixth, the balance pro rata to the partners in proportion to their
adjusted capital account balances.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-12
<PAGE> 853
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
------------------------------ -------------------------- ------------------- --------------
<S> <C> <C> <C>
$808.00-$900.00 $920.00 $ 494.12 $944.78
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
S-13
<PAGE> 854
BENEFITS OF THE CONSOLIDATION
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
S-14
<PAGE> 855
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The fund has paid consolidation expenses in excess of its pro rata
share of the consolidation expenses. The prepared consolidation expenses are
included as an asset on the fund's balance sheet. As a result, the fund will be
credited with the consolidation paid by it in determining its value and the
number of American Spectrum shares to be issued to its limited partners. If the
consolidation is not approved by the limited partners, the general partner or
its affiliates will repay the excess consolidation expenses paid by it.
S-15
<PAGE> 856
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
Pre-Closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)............................................................................... $65,692
Appraisals and Valuation(2)................................................................. 12,557
Fairness Opinions(3)........................................................................ 45,163
Solicitation Fees(4)........................................................................ 6,139
Printing and Mailing(5)..................................................................... 15,348
Accounting Fees(6).......................................................................... 162,362
Pre-formation Cost(7)....................................................................... 65,692
Subtotal........................................................................... $372,954
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(8)................................................... $32,846
Legal Closing Fees(9)....................................................................... 18,040
Subtotal........................................................................... $50,886
Total....................................................................................... $423,840
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
S-16
<PAGE> 857
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds and the CGS privately held entities, including the CGS Management
Company, as of June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$250.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------- ------
<S> <C>
1995............................................... $ 10.40
1996............................................... 10.40
1997............................................... 2.60
1998............................................... 0
1999............................................... 0
Six months ended June 30, 2000..................... $ 0
=========
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
S-17
<PAGE> 858
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a profit sharing percentage fee equal to 10% of the cash available for
distribution;
- a property management fee equal to customary rates, but not to exceed
6% of gross receipts plus a one-time fee for initial lease-up of
development properties;
- reimbursement for administrative services provided to the fund, such as
accounting, legal, data processing and similar services;
- reimbursement for initial leasing costs;
- reimbursement of out-of-pocket expenses; and
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-18
<PAGE> 859
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS (1)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------- --------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
HISTORICAL:
Management Fees .................................. $ 92,890 $ 96,911 $104,521 $ 55,406
Administrative Fees .............................. 137116 $150,128 $177,452 $ 78,676
Leasing Fees ..................................... 21,668 444 - -
Construction Supervision Fees .................... 18,312 929 21,872 -
Broker Fees ...................................... - - - -
General Partner Distributions .................... 50,000 - - -
Limited Partner Distributions .................... - - - -
--------- -------- -------- --------
Total historical ................................. $319,986 $248,412 $303,845 $134,082
--------- -------- -------- --------
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 2,774 -
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company .... - - 410 -
Restricted Stock and Stock Options ............... 96,671 96,671 96,671 48,336
Salary, Bonuses and Reimbursements ............... 300,199 300,199 300,199 150,100
--------- -------- -------- --------
Total Pro forma as "C" Corporation .......... 396,870 396,870 400,054 198,435
--------- -------- -------- --------
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 2,774 -
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company .... - - 410 -
Restricted Stock and Stock Options ............... 96,671 96,671 96,671 48,336
Salary, Bonuses and Reimbursements ............... 300,199 300,199 300,199 150,100
Total Pro forma as REIT ..................... 396,870 396,870 400,054 198,435
</TABLE>
(1) For description of the calculation of these amounts, please refer to the
notes to the table entitled "Compensation, Reimbursement and Distributions to
the General Partners" in the Consent Solicitation.
S-19
<PAGE> 860
PROPERTY OVERVIEW
Your fund owns interests in office and office/warehouse properties
located in California. Information regarding the property as of September 30,
2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) PER
------------------------------- ---------------------- LEASED
YEAR SQ. FT. SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT % OF TOTAL FOOT OWNERSHIP
-------- ----- ---- ----- ------ ------- ------ ------ ---------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Valencia AZ OFF/WARE 1987 82,520 96.97% 80,060 $ 588,960 1.61% 7.36 100%
Sorrento I CA OFF/WARE 1986 43,100 100.00% 43,100 $ 295,152 0.81% 6.85 62%
69.83%(1)
Mira Mesa CA OFFICE 1986 89,560 97.04% 86,909 $1,967,480 5.39% 22.64
Sorrento II -
Office CA OFFICE 1988 88,073 100.00% 88,073 $1,003,024 2.75% 11.39 42%
</TABLE>
During 1998, Sierra Mira Mesa Partners made net contributions of
$169,250 to your fund to provide assistance with operations of the Sierra
Valencia property and the funding of capital improvements and leasing
commissions amounts to $105,000. As a result of these net contributions and as a
result of Sierra Mira Mesa Partners' net contributions of $203,000 to Sierra
Pacific Development Fund II, your fund's ownership interest in Sierra Mira Mesa
Partners increased from 66.26% in 1998 to 66.99% in 1999.
In 1999, Sierra Mira Mesa Partners received net distributions of
241,284 from your fund. Sierra Mira Mesa Partners' primary use of these funds
was to provide its joint venture partners with an additional source of capital.
As a result of these net distributions and as a result of Sierra Mira Mesa
Partners' net contributions of $326,184 to Sierra Pacific Development Fund II,
your fund's ownership interest in Sierra Mira Mesa Partners increased from
66.99% in 1999 to 69.83% in 2000.
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
S-20
<PAGE> 861
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENT TO THE PARTNERSHIP AGREEMENT
An amendment to the partnership agreement of the fund is necessary in
connection with the consummation of the consolidation. The amendment is attached
to this supplement as Appendix C.
The partnership agreement currently prohibits a sale of properties to
the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendment. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendment to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will
S-21
<PAGE> 862
receive American Spectrum shares if your fund approves the consolidation. You
may withdraw or revoke your consent form at any time in writing before consents
from limited partners equal to more than 50% of the required vote are received
by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
S-22
<PAGE> 863
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will affect
the character and amount of income reportable by you in the future. Because each
of the funds is a partnership for federal income tax purposes, it is not subject
to taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operating Partnership or a subsidiary of the
Operating Partnership. For federal income tax purposes, American Spectrum
intends to take the position that the merger of American Spectrum and your fund
will be treated as a transfer of
S-23
<PAGE> 864
assets of your fund to American Spectrum in exchange for shares and a subsequent
distribution in liquidation of such shares. Consistent with such position for
those limited partners who elect the notes option, the transaction will be
viewed as a sale of their interest in your fund to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a
S-24
<PAGE> 865
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Such gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. Proskauer
Rose LLP is not opining as to whether gain will be recognized by your or any
other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the
S-25
<PAGE> 866
distribution in liquidation of shares by your fund to you, your basis in the
American Spectrum shares will equal the adjusted basis of your partnership
interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax- exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-26
<PAGE> 867
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW............................................................................ S-2
RISK FACTORS........................................................................ S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND................................ S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES.............................................. S-11
FAIRNESS OF THE CONSOLIDATION....................................................... S-13
EXPENSES OF THE CONSOLIDATION....................................................... S-15
REQUIRED VOTE....................................................................... S-21
AMENDMENT TO THE PARTNERSHIP AGREEMENT.............................................. S-22
VOTING PROCEDURES................................................................... S-22
FEDERAL INCOME TAX CONSIDERATIONS................................................... S-24
ADDITIONAL INFORMATION.............................................................. S-26
</TABLE>
i
<PAGE> 868
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
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dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
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<PAGE> 870
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
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<PAGE> 871
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
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<PAGE> 872
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
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<PAGE> 873
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
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EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
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<PAGE> 875
Appendix B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Sierra Pacific
Pension Investors '84 (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties,"
and individually, a "Party") hereto desire to merge the Merging Entity with and
into American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and California, with American Spectrum being the surviving
entity (the "Merger") as set forth in the registration statement of the Company
on Form S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
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<PAGE> 876
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common
stock, $.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in
Section 6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1
below.
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<PAGE> 877
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the
Recitals above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth
in the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first
paragraph of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of
the Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code
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<PAGE> 878
(S) 59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the California Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the California Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the California Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the California Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
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<PAGE> 879
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of _________________,
commencing at 9:00 a.m. local time on such date as within five (5) business
dates following the fulfillment or waiver of the conditions set forth in
Article IX (other than conditions which by their nature are intended to be
fulfilled at the Closing) or at such other place or time or on such other date
as the Managing General Partner of the Merging Entity and American Spectrum may
agree or as may be necessary to permit the fulfillment or waiver of the
conditions set forth in Article IX (the "Closing Date"), but in no event
later than __________.
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of
American Spectrum, as in effect immediately prior to the Effective Time, shall
be the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners other
than those Limited Partners who vote against the Merger and affirmatively elect
to receive notes (the "Note Option") will be allocated American Spectrum Common
Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or
combines American Spectrum Common Shares, or pays a stock dividend or other
stock distribution in American Spectrum Common Shares, or in rights or
securities exchangeable or convertible into or exercisable for American Spectrum
Common Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in
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<PAGE> 880
exchange for, or in connection with, their American Spectrum Common Shares (a
"Business Combination") or otherwise)), then the American Spectrum Common Shares
to be received by the Limited Partners of the Merging Entity will be
appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject
to the limitations described herein, those Limited Partners who, in connection
with the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined in accordance
with the final Prospectus/Consent Solicitation Statement. In the event that any
of the Limited Partners elect the Note Option, the number of American Spectrum
Common Shares allocated to the Merging Entity will be reduced in accordance with
the final Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and
the Merging Entity that the statements contained in this Article V are correct
and complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum
is a corporation duly organized, validly existing, and in good standing under
the laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
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5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
The Merging Entity represents and warrants to American Spectrum that
the statements contained in this Article VI are correct and complete as of the
date hereof.
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of California, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts
to take all action and to do all things necessary, proper or advisable in order
to consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
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<PAGE> 882
7.2 Notices and Consents. Each of the Parties shall give any notices
to, make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be entitled to possession of all documents,
books, records (including Tax records), agreements and financial data of any
sort relating to the Merging Entity but will provide the Limited Partners with
reasonable access to such documents, books and records upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations
of American Spectrum, the Limited Partners and the Merging Entity to consummate
the transactions contemplated by this Agreement are subject to the fulfillment
at or prior to the Closing Date of each of the following conditions, which
conditions may be waived upon the written consent of American Spectrum and the
Merging Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
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<PAGE> 883
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall
be no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective
Time, American Spectrum shall own property having an appraised value, as
determined by Stanger, of not less than $200,000,000.
(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the
Share Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated
and the Merger may be abandoned at any time prior to its Effective Time, before
or after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
B-9
<PAGE> 884
by this Agreement and such order, decree, ruling or other action shall have
become final and non-appealable; provided, in the case of a termination pursuant
to clause (a) or (b) above, that the terminating party shall not have breached
in any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
11.3 Succession and Assignment. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
B-10
<PAGE> 885
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation,
B-11
<PAGE> 886
or breach of warranty or covenant hereunder or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
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<PAGE> 887
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
By:
Name
Title
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<PAGE> 888
Appendix C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
SIERRA PACIFIC PENSION INVESTORS '84
Section 11.2 of the Partnership Agreement is amended to read as follows:
"11.2 Sales and Leases to the General Partners. The Partnership shall
not sell or lease property to the General Partners or their Affiliates;
provided that the foregoing shall not apply to the proposed merger,
sale or other transfer of properties in connection with the
consolidation as described in the Proxy/Consent Solicitation Statement
of the Partnership dated []."
<PAGE> 889
SUBJECT TO COMPLETION, DATED ____________, 2000
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED ______________, 2000
FOR SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
This supplement is being furnished to you, as a limited partner of
Sierra Pacific Institutional Properties V, which we refer to as the fund, to
enable you to evaluate the proposed consolidation of your fund into American
Spectrum Realty, Inc., a Maryland corporation. Terms such as we and us refer to
American Spectrum. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the consolidation that are unique
to you and the other limited partners of your fund. This supplement does not
purport to provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, S-P
Properties, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns an interest in one office property
located in California, American Spectrum will own a large portfolio of
properties of various types. These properties include office/warehouse,
apartment and shopping center properties located primarily in the midwestern and
western United States, Texas and the Carolinas.
- Your fund's property is 100% occupied. American Spectrum's
properties are 87.55% occupied.
- Your fund had $132,000 of cash flow during 1999. Some of the
other funds and the CGS privately held entities did not have cash flow.
- Your fund only has a ratio of debt to total appraisal value of
real estate assets of 1%. American Spectrum will have a debt to total appraisal
value of real estate assets of 63%.
<PAGE> 890
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 328,037 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995
Your fund intended to liquidate its properties by 1990. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns only one property located in California. The property is
an office property. Some of the funds own more than one property,
different types of properties and properties located in other markets.
- Your fund's property has a ratio of debt to total appraised value of
real estate assets of 1%. The properties owned by all of the funds and
the CGS privately held entities have a ratio of debt to total appraised
value of real estate assets of 63%.
- Your fund's property is 100% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some
of the properties of the CGS privately held entities are properties
with low occupancy rates which were purchased because CGS believed they
were undervalued. These properties have greater risks than your
property.
- 27.00% of the leases on your fund's property expire by 2002. 44.65% of
the leases on the properties of all of the funds and the CGS privately
held entities expire by 2002.
The average age of the properties of your fund is 14 years. The average
age of the properties of American Spectrum is 20 years.
For appropriate funds:
Your fund has not made distributions during the last five years and had
$132,000 of net cash flow in 1999. Some of the funds did not make distributions
or have net cash flow which could have been available for distribution during
this period. In addition, a number of the CGS privately held entities did not
make distributions or have net cash flow which would have been available for
distribution.
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<PAGE> 891
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 1,523 units
or 4.95% of the outstanding units and intend to vote these units in favor of the
consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Your fund's partnership agreement prohibits transfers of assets to
related parties. The amendment will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendment must be approved by
greater than 50% of the outstanding units. To vote "For" the consolidation, you
must also vote "For" the amendment.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will
have different consequences to you depending upon whether you elect to receive
shares or notes. If you elect to receive shares, the consolidation will be
reported on the basis that no gain is recognized. We cannot assure you that the
IRS will not challenge this treatment of the transaction. If the IRS asserts a
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Your gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. [Can we
give estimate, making assumptions] See "Tax Risks." Therefore, it is possible
for you to be allocated income which may result in a tax liability even though
you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K of your fund for the year ended December 31, 1999 and the Form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
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<PAGE> 892
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 1,523 units or 4.95% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns an interest in one office located in
California. After the consolidation, you will hold common
stock of American Spectrum, an operating company, that will
own and lease as many as 35 properties and expects to make
additional investments. The properties include office, office
warehouse, apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Upon consummation of the consolidation, we will have greater
leverage than your fund. Your fund currently has a ratio of
debt to total assets of 1%. Upon completion of the
consolidation, we will have a ratio of debt to total assets of
63%. American Spectrum may also incur substantial indebtedness
to make future acquisitions of properties that it may be
unable to repay. We expect to increase the ratio of debt to
total assets to 70%.
- Your property is currently 100% occupied and only 27.00% of
the leases expire in by 2002. American Spectrum's occupancy
rate will be 87.55% upon completion of the consolidation and
44.65% of its leases will expire in by 2002.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
The fund's property is located in California. American Spectrum will
also own properties in the midwest and west and Texas. The California real
estate market is currently stronger than the market in these other states.
The average age of your fund's properties is less than the average age
of American Spectrum's properties. As a result, American Spectrum's properties
may require more capital expenditures than your fund's properties.
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<PAGE> 893
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
S-5
<PAGE> 894
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
S-6
<PAGE> 895
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain or loss to any limited partner who elects to receive shares.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
consent solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in
S-7
<PAGE> 896
more detail under the heading "Federal Income Tax Considerations -- Taxation of
American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's property for sale with brokers and commence the process
of liquidating the fund's property. The general partners believe that it could
take
S-8
<PAGE> 897
an extended time to complete the sale of the fund's property and is likely to
take in excess of one year. After completing the liquidation, the fund would
distribute the net proceeds, except for a portion which will be held by the fund
to cover potential liability for representations and warranties in the sales
contract and administrative expenses of winding up the fund.
S-9
<PAGE> 898
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the
------------.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
---------------- --------------- ----------------- ------------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
328,037 $4,920,557 $639.51 $267.87 4.45% 4.45%
</TABLE>
---------------------------
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the , the actual values at
which the American Spectrum shares will trade on the may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Sierra Sorrento II San Diego, CA 10,820,000 Office 88,423 sq. ft. 1986
</TABLE>
S-10
<PAGE> 899
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES,
AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $ 110,518,379 100.00% 7,367,890 100.00%
============= ====== ========= ======
</TABLE>
------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership
S-11
<PAGE> 900
unit provides the same rights to distributions as one share of common
stock in American Spectrum and, subject to some limitations, is
exchangeable for American Spectrum shares on a one-for-one basis after
a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, to the partners in an amount equal to any loans or advances they
have made;
- second, to the limited partners in an amount equal to any capital
account balance;
- third, 1% to the general partners and 99% to the limited partners until
the limited partners receive cumulative distributions equal to 6% per
annum on the outstanding balance, from time to time, of their
unreturned capital;
- fourth, 1% to the general partners and 99% to the limited partners
until the limited partners receive distributions equal to 100% of their
capital contributions, reduced by distributions from sales or
refinancing, plus 12% per annum on their adjusted capital contributions
minus prior distributions from all sources; and
- fifth, the balance pro rata to the partners in proportion to their
adjusted capital account balances.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-12
<PAGE> 901
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
------------------------------ ------------------------------- ------------------------ -----------------
<S> <C> <C> <C>
$436.00-$516.00 $620.00 $267.87 $639.51
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the , the actual values at which
the American Spectrum shares will trade on the may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
BENEFITS OF THE CONSOLIDATION
S-13
<PAGE> 902
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
S-14
<PAGE> 903
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
<TABLE>
<CAPTION>
Pre-Closing Transaction Costs
<S> <C>
Legal Fees(1)............................................................................ $11,686
Appraisals and Valuation(2).............................................................. 1,671
Fairness Opinions(3)..................................................................... 8,034
Solicitation Fees(4)..................................................................... 3,288
</TABLE>
S-15
<PAGE> 904
<TABLE>
<S> <C>
Printing and Mailing(5).................................................................. 8,219
Accounting Fees(6)....................................................................... 24,451
Pre-formation Cost(7).................................................................... 11,686
Subtotal........................................................................ $69,035
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(8)................................................ $ 5,843
Legal Closing Fees(9).................................................................... 2,717
Subtotal........................................................................ $ 8,560
Total.................................................................................... $77,595
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of
S-16
<PAGE> 905
June 30, 2000 to the total assets of all of the funds and the CGS
privately held entities, including the CGS Management Company, as of
June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$250.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
--------------------------------------------------------------
<S> <C>
1995............................................... 0
1996............................................... 0
1997............................................... 0
1998............................................... 0
1999............................................... 0
Six months ended June 30, 2000..................... $ 0
=====
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
S-17
<PAGE> 906
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a profit sharing participation fee equal to 10% of the cash available
for distribution;
- a property management fee equal to 6% of the gross revenues from real
properties of the fund;
- reimbursement for administrative services provided to the fund, such as
accounting, legal, data processing and similar services;
- reimbursement of out-of-pocket expenses; and
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-18
<PAGE> 907
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
--------------------------------------- June 30,
HISTORICAL(1): 1997 1998 1999 2000
--------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Management Fees $ 59,515 $ 49,919 $ 69,072 $40,565
Administrative Fees 69720 77,844 $ 89,275 $40,795
Leasing Fees 16,293 74,504 -- --
Construction Supervision Fees 1,998 22,511 -- --
Broker Fees -- -- -- --
General Partner Distributions -- -- -- --
Limited Partner Distributions -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Total historical 147,526 224,778 158,347 81,360
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 347 -- 9,157 --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 466 -- 12,302 --
Restricted Stock and Stock Options 20,164 20,164 20,164 10,082
Salary, Bonuses and Reimbursements 62,618 62,618 62,618 31,309
----------------------------------------------------------------------------------------------------------------------
Total Pro Forma as a "C" Corporation 83,595 82,782 104,241 41,391
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 347 9,157 --
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 466 -- 12,302 --
Restricted Stock and Stock Options 20,164 20,164 20,164 10,082
Salary, Bonuses and Reimbursements 62,618 62,618 62,618 31,309
----------------------------------------------------------------------------------------------------------------------
Total Pro Forma as a REIT: $ 83,595 $ 82,782 $104,241 $41,391
</TABLE>
------------------------------
(1) For a description of the calculation of these amounts, please refer to
the notes to the table entitled "Compensation, Reimbursements and
Distributions to the General Partners" in the Consent Solicitation.
S-19
<PAGE> 908
PROPERTY OVERVIEW
Your fund owns one office property located in California. Information
regarding the property as of September 30, 2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) PER
---------------------------------- ---------------------- LEASED
YEAR SQ. FT. SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT % OF TOTAL FOOT OWNERSHIP
-------------------- ----- ----- ----- ------ -------- ------- ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sorrento II - Office CA OFFICE 1988 88,073 100.00% 88,073 $ 1,003,024 2.75% 11.9 56.08%(1)
</TABLE>
(1) During 1998, Sierra Mira Mesa Partners made net contributions of $143,043 to
Sorrento II Partners. These net contributions were principally used by Sorrento
II Partners to assist funding of leasing commissions and capital improvements
totaling $556,000 incurred during the year. Your fund's ownership interest in
Sorrento II Partners decreased from 66.45% in 1999 to 64.90% in 2000 as a result
of Sierra Mira Mesa's net contributions.
During 1999, Sierra Mira Mesa Partners made net contributions of
$967,420 to Sorrento II Partners. These net contributions were primarily used by
Sorrento II Partners to fund the ultimate purchase of the land parcels in which
the Sorrento II building is residing. In February 2000, Sorrento II Partners
concluded the purchase of the land parcels. Your fund's ownership interest in
Sorrento II Partners decreased from 64.90% in 1999 to 56.08% in 2000 as a result
of Sierra Mira Mesa's net contribution.
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENT TO THE PARTNERSHIP AGREEMENT
S-20
<PAGE> 909
An amendment to the partnership agreement of the fund is necessary in
connection with the consummation of the consolidation. The amendment is attached
to this supplement as Appendix C.
The partnership agreement currently prohibits a sale of properties to
the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendment. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendment to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration of
the solicitation period which is the time period during which limited partners
may vote "For" or "Against" the consolidation (the "Solicitation Period"). The
Solicitation Period will commence upon delivery of the solicitation materials to
you (on or about __________, 2000), and will continue until the later of (a)
__________, 2000 (a date not less than 60 calendar days from the initial
delivery of the solicitation materials), or (b) such later date as we may select
and as to which we give you notice. At our discretion, we may elect to extend
the Solicitation Period. We reserve the right to extend the Solicitation Period
even if a quorum has been obtained pursuant to your fund's partnership
agreement. Under no circumstances will the Solicitation Period be extended
beyond _________ __, 2000. Any consent form received by [___________], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
S-21
<PAGE> 910
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will affect
the character and amount of income reportable by you in the future. Because each
of the funds is a partnership for federal income tax purposes, it is not subject
to taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operating Partnership or a subsidiary of the
Operating Partnership. For federal income tax purposes, American Spectrum
intends to take the position that the merger of American Spectrum and your fund
will be treated as a transfer of assets of your fund to American Spectrum in
exchange for shares and a subsequent distribution in liquidation of such shares.
Consistent with such position for those limited
S-22
<PAGE> 911
partners who elect the notes option, the transaction will be viewed as a sale of
their interest in your fund to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the
non-recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
S-23
<PAGE> 912
Proskauer Rose LLP is not opining as to whether gain will be recognized by your
or any other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
S-24
<PAGE> 913
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax- exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-25
<PAGE> 914
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW.................................................................. S-2
RISK FACTORS.............................................................. S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND..................... S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES................................... S-11
FAIRNESS OF THE CONSOLIDATION............................................ S-13
EXPENSES OF THE CONSOLIDATION............................................ S-15
REQUIRED VOTE............................................................ S-21
AMENDMENT TO THE PARTNERSHIP AGREEMENT................................... S-22
VOTING PROCEDURES........................................................ S-22
FEDERAL INCOME TAX CONSIDERATIONS........................................ S-24
ADDITIONAL INFORMATION................................................... S-26
</TABLE>
i
<PAGE> 915
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 916
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
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<PAGE> 917
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
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<PAGE> 918
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
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<PAGE> 919
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
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<PAGE> 920
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
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<PAGE> 921
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
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<PAGE> 922
Appendix B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Sierra Pacific
Institutional Properties V (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties," and
individually, a "Party") hereto desire to merge the Merging Entity with and into
American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and California, with American Spectrum being the surviving
entity (the "Merger") as set forth in the registration statement of the Company
on Form S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
B-2
<PAGE> 923
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common stock,
$.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in Section
6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1 below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
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<PAGE> 924
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth in
the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first paragraph
of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of the
Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp occupation, premium,
windfall profits, environmental (including taxes under Code (S) 59A), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
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<PAGE> 925
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the California Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the California Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the California Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the California Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
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<PAGE> 926
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of American
Spectrum, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation of the Surviving Corporation until thereafter amended
as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners other
than those Limited Partners who vote against the Merger and affirmatively elect
to receive notes (the "Note Option") will be allocated American Spectrum Common
Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or combines
American Spectrum Common Shares, or pays a stock dividend or other stock
distribution in American Spectrum Common Shares, or in rights or securities
exchangeable or convertible into or exercisable for American Spectrum Common
Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any action
by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject to
the limitations described herein, those Limited Partners who, in connection with
the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined
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<PAGE> 927
in accordance with the final Prospectus/Consent Solicitation Statement. In the
event that any of the Limited Partners elect the Note Option, the number of
American Spectrum Common Shares allocated to the Merging Entity will be reduced
in accordance with the final Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and the
Merging Entity that the statements contained in this Article V are correct and
complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum is
a corporation duly organized, validly existing, and in good standing under the
laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
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<PAGE> 928
The Merging Entity represents and warrants to American Spectrum that the
statements contained in this Article VI are correct and complete as of the date
hereof.
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of California, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the Limited
Partners, the Merging Entity has full power and authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any notices to,
make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be
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<PAGE> 929
entitled to possession of all documents, books, records (including Tax records),
agreements and financial data of any sort relating to the Merging Entity but
will provide the Limited Partners with reasonable access to such documents,
books and records upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations of
American Spectrum, the Limited Partners and the Merging Entity to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions, which conditions
may be waived upon the written consent of American Spectrum and the Merging
Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be
no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective Time,
American Spectrum shall own property having an appraised value, as determined by
Stanger, of not less than $200,000,000.
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<PAGE> 930
(e) American Spectrum Common Shares shall have been approved for listing
on notice of issuance on a national securities exchange acceptable to American
Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the Share
Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to its Effective Time, before or
after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity. This
Agreement may be terminated and the Merger may be abandoned (a) by action of
American Spectrum in the event of a failure of a condition to the obligations of
American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
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<PAGE> 931
11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
11.3 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of American Spectrum and the Managing General Partner; provided, however, that
American Spectrum may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one or more of its
Affiliates to perform its obligations hereunder (in any or all of which cases
American Spectrum nonetheless shall remain responsible for the performance of
all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
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<PAGE> 932
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact
B-12
<PAGE> 933
that there exists another representation, warranty, or covenant contained herein
in any respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
By:
Name
Title
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<PAGE> 934
Appendix C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
Section 11.2 of the Partnership Agreement is amended to read as follows:
"11.2 Sales and Leases to the General Partner. The Partnership shall not
sell or lease property to the General Partner or its Affiliates; provided
that the foregoing shall not apply to the proposed merger, sale or other
transfer of properties in connection with the consolidation as described
in the Proxy/Consent Solicitation Statement of the Partnership dated []."
Notwithstanding the foregoing, the Partnership may enter into leases for
office space for no more and 1% (and renewals and/or expansions by an
existing affiliated tenant for no more than an additional 5%) of the
rentable space in any real property acquired by the Partnership to any
Affiliated of the General Partner in the normal course of such
Affiliate's business on terms and conditions and at rentals no less
favorable to the Partnership than those which would have been determined
by arms'-length negotiations with a nonaffiliated Person for comparable
space in the area where the property is located, which determination may
be made on the basis of, and take into account the terms, conditions and
rentals agreed to by any other tenants of the property. Notwithstanding
the foregoing, in the event such Affiliated of the General Partner
subleases any such space at a lease rate in excess of that paid by such
Affiliate to the Partnership, such Affiliated shall be required to pay
any such excess amounts as additional lease payments to the Partnership."
<PAGE> 935
SUBJECT TO COMPLETION, DATED ____________, 2000
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
FOR NOONEY INCOME FUND LTD., L.P.
This supplement is being furnished to you, as a limited partner of
Nooney Income Fund Ltd., L.P., to enable you to evaluate the proposed
consolidation of your fund into American Spectrum Realty, Inc., a Maryland
corporation. Terms such as we and us refer to American Spectrum. This supplement
is designed to summarize only the risks, effects, fairness and other
considerations of the consolidation that are unique to you and the other limited
partners of your fund. This supplement does not purport to provide an overall
summary of the consolidation. You should read the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other funds and assets being consolidated
with American Spectrum. We refer to this document as the consent solicitation.
Pursuant to the consent solicitation and this supplement, Nooney Income
Investments, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns one office and one
office/warehouse property located in Kansas and Illinois, respectively, American
Spectrum will own a large portfolio of properties of various types. These
properties include office/warehouse, apartment and shopping center properties
located primarily in the midwestern and western United States, Texas and the
Carolinas.
- Your fund's property is 91.91% occupied. American Spectrum's
properties are 87.55% occupied.
- Your fund had $433,000 of cash flow during 1999. Some of the
other funds and the CGS privately held entities did not have cash flow.
- Your fund only has a ratio of debt to total appraised value of
real estate assets of 11%. American Spectrum will have a debt to total appraised
value of real estate assets ratio of 63%.
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<PAGE> 936
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 683,383 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially similar
in nature and character. Generally, the funds own office or office/warehouse
properties. Each of the funds intended to liquidate its properties and
distribute the net proceeds during the period from 1984 to 1995. Your fund
intended to liquidate its properties by 1993. The funds all have similar
structures for paying compensation to the general partners and their affiliates
and for distribution of cash flow and liquidation proceeds. The managing general
partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns one property located in Kansas and one property located in
Illinois. Some of the funds own different types of properties, properties
located in other markets or only one property.
- Your fund's property has a ratio of debt to total appraised value of real
estate assets of 11%. The properties owned by all of the funds and the CGS
privately held entities have a ratio of debt to total appraised value of
real estate assets of 63%.
- Your fund's property is 91.91% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some of
the properties of the CGS privately held entities are properties with low
occupancy rates which were purchased because CGS believed they were
undervalued. These properties have greater risks than your property.
Your fund made distributions in 1998 and had $433,000 of net cash flow in
1999. Some of the funds did not make distributions or have net cash flow which
could have been available for distribution during this period. In addition, a
number of the CGS privately held entities did not make distributions or have net
cash flow which would have been available for distribution.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 2,064 units
or 13.60% of the outstanding units and intend to vote these units in favor of
the consolidation.
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<PAGE> 937
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Your fund's partnership agreement prohibits transfers of assets to related
parties. In addition, there are no provisions of the partnership agreement
addressing mergers with corporations, such as American Spectrum. The fund is a
Missouri limited partnership. Missouri law requires all partners to consent to a
merger with a corporation unless the partnership agreement provides for a
different vote. The amendments will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendments must be approved
by greater than 50% of the outstanding units. To vote "For" the consolidation,
you must also vote "For" the amendments.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will have
different consequences to you depending upon whether you elect to receive shares
or notes. If you elect to receive shares, the consolidation will be reported on
the basis that no gain is recognized. We cannot assure you that the IRS will not
challenge this treatment of the transaction. If the IRS asserts a challenge, it
may prevail. If the IRS prevails your fund will recognize gain. Your gain will
be equal to the amount by which the fair market value of the shares received,
increased by the liabilities assumed, exceeds the basis of the assets
transferred, and you will be allocated your share of the gain. [Can we give
estimate, making assumptions] See "Tax Risks." Therefore, it is possible for you
to be allocated income which may result in a tax liability even though you have
not received any cash.
If you elect to receive notes you will recognize gain. Your gain will be
equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited financial
statements for your fund, unaudited financial statements and Management's
Discussions and Analyses of Financial Conditions and Results of Operations are
set forth as an Appendix to the Consent Solicitation Statement and the Form 10-K
your fund for the year ended December 31, 1999 and the Form 10-Q for the quarter
ended June 30, 2000 are incorporated by reference. In addition, pro forma
financial information for American Spectrum is set forth on page F-__ of the
Consent Solicitation Statement.
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RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of your
fund who hold a majority in interest of the outstanding units vote in
favor of the consolidation. Such approval will bind all of the limited
partners in your fund, including you or any other limited partners who
voted against or abstained from voting with respect to the consolidation.
Affiliates of the managing general partner own different percentages of
each fund. Affiliates of the managing general partner own 2,064 units or
13.60% of the outstanding units in the fund and intend to vote these units
in favor of the consolidation.
- As a result of some differences between the fund and the other funds, the
consolidation may impact your fund differently from the other funds. By
participating in the consolidation, you will assume risks associated with
the assets of the other funds and the CGS privately held entities.
- There are differences in the types and geographic location of some of the
properties owned by the funds. Because the market for real estate may vary
from one region of the country to another, the change in geographic
diversity may expose you to different and greater risks than those you are
presently exposed. Moreover, because the properties owned by the funds and
the CGS privately held entities are not of uniform quality, combining
assets and liabilities of the funds in the consolidation may diminish the
overall asset quality underlying the interests of some of the limited
partners by comparison with their existing interests in the fund.
- Your investment currently consists of an interest in your fund. Your
fund owns one office located in Kansas, and one office/warehouse
located in Illinois. After the consolidation, you will hold common
stock of American Spectrum, an operating company, that will own and
lease as many as 35 properties and expects to make additional
investments. The properties include office, office warehouse, apartment
and shopping centers.
- Your fund intended to sell its properties and liquidate and distribute
the net proceeds to the partners. We intend to reinvest the proceeds
from property sales. The risks inherent in investing in an operating
company such as American Spectrum include the risk that American
Spectrum may invest in new properties that are not as profitable as
anticipated.
- Upon consummation of the consolidation, we will have greater leverage
than your fund. Your fund currently has a ratio of debt to total
appraised value of real estate assets of 11%. Upon completion of the
consolidation, we will have a ratio of debt to total appraised value of
real estate assets of 63%. American Spectrum may also incur substantial
indebtedness to make future acquisitions of properties that it may be
unable to repay. We expect to increase the ratio of debt to total
assets to 70%.
- It is possible that properties acquired in the consolidation may not be
as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally entitled
to receive distributions from any net proceeds of a sale or refinancing of
the fund's assets to an investment in an entity in which you may realize
the value of your investment only through the sale of your American
Spectrum shares, not from the liquidation proceeds from properties.
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
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<PAGE> 939
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in general.
Such fluctuations may depress the market price of American Spectrum shares
independent of the financial performance of American Spectrum. REIT stocks
have underperformed in the broader equity market in 1998 and 1999. The
market conditions for REIT stocks generally could affect the market price
of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share of
$15. The Exchange Value per share of $15 represents our estimate of the
net asset value per share of American Spectrum. However, the market may
value American Spectrum shares at less than their net asset value per
share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American Spectrum
shares is relatively low. As a result, American Spectrum shares may trade
at prices substantially less than their Exchange Value.
- American Spectrum will have a higher ratio of indebtedness to assets than
many REITs. This ratio is frequently referred to as the leverage ratio.
American Spectrum will have a ratio of total indebtedness of assets of
63%, assuming all funds participate in the consolidation. American
Spectrum intends to increase its leverage to 70%. American Spectrum will
also have a lower capitalization than many publicly traded REIT's. This
could adversely affect the market price for American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required to
qualify as a REIT. If we do not qualify as a REIT, we will be subject to a
corporate income tax, which could decrease cash available for
distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general partners
will receive an estimated aggregate of 2,628,655 American Spectrum shares
and limited partnership interests in the Operating Partnership. In
addition, American Spectrum and its subsidiaries will employ some of the
officers and employees of CGS and its privately held entities. As a result
of these benefits, the general partners of your fund have a conflict of
interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000, in
1998 of $4,832,000, in 1999 of $12,086,000 and in the six months ending
June 30, 2000 of $747,000. Additionally, we incurred losses on a pro forma
basis for 1999 and the first six months of 2000. We cannot assure you that
we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and the
CGS Management Company. These companies are engaged in the business of
serving as general partners of limited partnerships and investing in real
properties. As a result of the consolidation, American Spectrum will be
responsible for liabilities arising out of the prior operations of these
entities. These liabilities may include unknown contingent liabilities and
these liabilities may exceed those shown on the balance sheets. As a
result, we may expend cash to pay these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's- length negotiations. Accordingly,
the Exchange Value may not reflect the value that you could realize upon a
sale of your units or a liquidation of your fund's assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
consolidation.
S-5
<PAGE> 940
These terms and conditions include the consideration which you will
receive. The funds did not give limited partners the power to negotiate
the terms and conditions of the consolidation or to determine what
procedures to use to protect the rights and interests of the limited
partners. If each general partner had retained an independent
representative for their respective funds, it could have resulted in
different terms of the consolidation which may have benefitted the limited
partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have the
right to elect to receive notes as your portion of the consideration
received by your fund. The amount of notes that you receive is based upon
the estimated proceeds that you would receive in an orderly liquidation of
your fund in accordance with the terms of your fund's partnership
agreement. As a holder of notes, you are likely to receive the full face
amount of the notes only if you hold the notes to maturity. The notes will
mature approximately eight years after the consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you from
making a complete evaluation of the transaction. Most importantly, you
will not know which funds will approve the consolidation, and thus, which
properties American Spectrum will acquire. These factors will affect the
post-consolidation size and scope of American Spectrum. You also will not
know how many limited partners of the funds will elect to receive notes or
the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which, in
turn, controls American Spectrum. Because Stanger will not update its
fairness opinion, changes may occur from the date of the fairness opinion
that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the American
Spectrum shares. The opinion does not address the allocation of shares for
all possible combinations of participating funds. In addition, the opinion
does not address any other terms of the transaction, the trading value of
the shares, or alternatives to the transaction. Accordingly, there are
matters which are significant to limited partners' evaluation of the
consolidation which are not addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur costs
associated with defending or settling such litigation or paying any
judgment if it loses. As of the present time, no limited partner of the
funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal remedies
available to American Spectrum, to you and to other stockholders after the
consolidation against any officers or directors of American Spectrum may
be more limited.
- An active secondary market for the notes will not likely develop, making
it difficult for noteholders to sell their notes prior to maturity, or
subjecting them to the risk of selling the notes at substantial discounts
to facilitate their sale. Thus, a noteholder will likely not be able to
liquidate his investment in the event of an emergency, and the notes may
not be readily acceptable as loan collateral. Limited partners electing to
receive notes are likely to receive the full face amount of their notes
only if they hold the obligations to maturity, which is eight years after
the closing date of the consolidation.
- Upon consummation of the consolidation, American Spectrum will have more
indebtedness and leverage than the funds. American Spectrum currently has
a ratio of debt to total value of assets of 63% and intends to increase
their ratio to ___% following the consummation of consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future. You
also will
S-6
<PAGE> 941
not have the ability as a stockholder or noteholder of American Spectrum
to approve or disapprove of American Spectrum's investments. American
Spectrum may not buy properties on financially attractive terms. It may
not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in American
Spectrum, your investment will be subject to the risks of investing in
real property. In general, a downturn in the national or local economy,
changes in the zoning or tax laws or the availability of financing could
affect the performance and value of the properties. Also, because real
estate is relatively illiquid, American Spectrum may not be able to
respond promptly to adverse economic or other conditions by varying its
real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions with
affiliates, such as the consolidation with us, and the consolidation could
not close without amendments to the partnership agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will not
result in gain or loss to any limited partner who elects to receive shares. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
consent solicitation.
However, you should be aware that opinions of counsel are not binding on
the Internal Revenue Service or any court. Furthermore, the conclusions stated
in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain property
it held before electing REIT status. During the 10-year period following its
qualification as a REIT, American Spectrum will be subject to an entity level
tax on the income it recognizes upon the sale of assets including all the assets
transferred to it as part of the consolidation it held before electing REIT
status in an amount up to the amount of the built-in gains at the time American
Spectrum becomes a REIT.
S-7
<PAGE> 942
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes is
based on the tax laws that are currently in effect. We are unable to predict any
future changes in the tax laws that would adversely affect American Spectrum's
status as a REIT. In the event that there is a change in the tax laws that
prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's properties for sale with brokers and commence the
process of liquidating the fund's properties. The general partners believe that
it could take an extended time to complete the sale of all of the fund's
properties and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
S-8
<PAGE> 943
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the
------------.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
---------------- ----------------- ------------------ ------------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
683,383 $10,250,749 $675.28 $368.25 9.27% 9.27%
</TABLE>
----------------
(1) The American Spectrum shares issuable to limited partners of each fund as
set forth in this chart will not change if American Spectrum acquires
fewer than all of the funds in the consolidation. This number assumes that
none of the limited partners of the fund has elected the notes option. We
determined the number of shares issued to each fund or entity by dividing
the Exchange Value for the fund or entity by $15, which is our estimate of
the net asset value per share of the American Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by us.
The Exchange Value of each of the funds is our estimate of net asset value
of the fund's assets. The Exchange Value equals (i) the appraised value of
your fund's assets, as determined by Stranger; plus (ii) the book value of
non-real estate asset of your fund; minus (iii) mortgage and other
indebtedness of your fund and minus (iv) your fund's allocable share of
the consolidation expenses. Upon listing the American Spectrum shares on
the , the actual values at which the American Spectrum shares
will trade on the may be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned by
your fund, including its appraised value. The appraisal was prepared by Stanger
on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- ----------------- --------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Leawood Fountain Leawood, KS 6,580,000 Office 85,778 sq. ft. 1982-1983
Plaza
Oak Grove Commons Downers Grove, IL 5,570,000 Office/warehouse 137,678 sq. ft. 1972-1976
</TABLE>
S-9
<PAGE> 944
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and the
allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES, AND
THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $ 110,518,379 100.00% 7,367,890 100.00%
================== ====== ========= ======
</TABLE>
----------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating Partnership
units instead of American Spectrum shares. Each Operating Partnership unit
S-10
<PAGE> 945
provides the same rights to distributions as one share of common stock in
American Spectrum and, subject to some limitations, is exchangeable for
American Spectrum shares on a one-for-one basis after a twelve month
period.
After determining the Exchange Value for the fund, the Exchange Value to
be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, pro rata to the limited partners until they receive an amount equal
to their share of previously undistributed net income;
- second, to the limited partners in an amount equal to their share of their
adjusted capital contribution;
- third, to the general partners in an amount equal to any loans or advances
they have made;
- fourth, to the general partners in an amount equal to their share of
previously undistributed net income;
- fifth, to the general partners in an amount equal to their adjusted
capital contribution;
- sixth, pro rata to the limited partners in the amount equal to the excess
of 10% cumulative return, minus prior distributions to the limited
partners;
- seventh, pro rata to the general partners in an amount equal to the excess
of 10% cumulative return over prior distributions to the general partners;
and
- eighth, the balance 85% to all of the partners in proportion to their
capital contributions and 15% to the general partners.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-11
<PAGE> 946
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
------------------------------ ------------------------------- ------------------------ -------------------
<S> <C> <C> <C>
$520.00-$585.00 $661.00 $ 368.25 $675.28
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the , the actual values at which
the American Spectrum shares will trade on the may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
S-12
<PAGE> 947
BENEFITS OF THE CONSOLIDATION
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
S-13
<PAGE> 948
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
Pre-Closing Transaction Costs
<TABLE>
<CAPTION>
<S> <C>
Legal Fees(1)............................................................................... $ 29,495
Appraisals and Valuation(2)................................................................. 7,543
Fairness Opinions(3)........................................................................ 20,278
Solicitation Fees(4)........................................................................ 2,571
</TABLE>
S-14
<PAGE> 949
<TABLE>
<CAPTION>
<S> <C>
Printing and Mailing(5)..................................................................... 6,427
Accounting Fees(6).......................................................................... 70,447
Pre-formation Cost(7)....................................................................... 29,495
Subtotal........................................................................... $166,256
Closing Transaction Costs
Title, Transfer Tax and Recording Fees(8)................................................... $ 14,748
Legal Closing Fees(9)....................................................................... 7,827
Subtotal........................................................................... $ 22,575
Total....................................................................................... $188,831
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of
S-15
<PAGE> 950
June 30, 2000 to the total assets of all of the funds and the CGS
privately held entities, including the CGS Management Company, as of
June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$1,000.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------------------------------------------------
<S> <C>
1995............................................... 12.50
1996............................................... 18.75
1997............................................... 18.75
1998............................................... 25.00
1999............................................... 0
Six months ended June 30, 2000..................... $ 0
=======
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
S-16
<PAGE> 951
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a management fee equal to 9% of the net operating cash flow, subject to
a preferential distribution to limited partners of 7.5% per annum;
- a property management fee equal to 5% of the gross revenues from
residential properties and 6% of the gross revenues from industrial and
commercial properties;
- reimbursement of out-of-pocket expenses, including salaries of
employees directly engaged in full time leasing, servicing, operation
or maintenance of the properties; and
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-17
<PAGE> 952
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS(1)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
-------------------------------------- June 30,
1997 1998 1999 2000
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
HISTORICAL:
Management Fees $107,130 $111,606 $125,314 $62,967
Administrative Fees 25,000 25,000 25,000 12,500
Leasing Fees -- -- -- --
Construction Supervision Fees -- -- -- --
Broker Fees -- -- -- --
General Partner Distributions 31,665 42,193 -- --
Limited Partner Distributions -- -- -- --
Total historical $163,795 $178,799 $150,314 $75,467
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 3,311 -- 24,146 13,871
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 2,031 -- 14,810 8,508
Restricted Stock and Stock Options 50,952 50,952 50,952 25,476
Salary, Bonuses and Reimbursements 158,226 158,226 158,226 79,113
Total pro forma as a "C" Corporation 214,520 209,178 248,134 126,968
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 3,311 -- 24,146 13,871
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 2,031 -- 14,810 8,508
Restricted Stock and Stock Options 50,952 50,952 50,952 25,476
Salary, Bonuses and Reimbursements 158,226 158,226 158,226 79,113
Total pro forma as a REIT 214,520 209,178 248,134 126,968
</TABLE>
--------
(1) For description of the calculation of these amounts, please refer to the
notes to the table entitled "Compensation, Reimbursement and
Distributions to the General Partners" in the Consent Solicitation.
S-18
<PAGE> 953
PROPERTY OVERVIEW
Your fund owns one office property located in California. Information
regarding the property as of September 30, 2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------------- ----------------------- PER LEASED
YEAR SQ. FT. % OF SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT TOTAL FOOT OWNERSHIP
----------------- ----- ------- -------- -------- -------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oak Grove Commons IL OFF/WARE 1972-76 137,678 94.89% 130,637 $ 932,167 2.55% 7.14 100%
Leawood Fountain
Plaza KS OFFICE 1982 85,778 88.92% 76,272 $1,343,793 3.68% 17.62 100%
</TABLE>
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote of
limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of the
outstanding units do not vote "For" the consolidation, the consolidation may not
be consummated under the terms of the partnership agreement. In such event, your
managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Two amendments to the partnership agreement of the fund are necessary in
connection with the consummation of the consolidation. The amendments are
attached to this Supplement as Appendix C.
First, the partnership agreement currently prohibits a sale of properties
to the general partners or their affiliates. Accordingly, consent of the limited
partners is being sought for an amendment to the partnership agreement that
permits such a transfer in connection with the consolidation.
Second, the partnership agreement does not contain a provision addressing
mergers. Under Missouri law, a merger with a corporation, like American
Spectrum, requires the consent of all of the partners, unless the partnership
agreement otherwise provides. The proposed amendment permits the merger in
connection with the consolidation if the managing
S-19
<PAGE> 954
general partner and the limited partners holding a majority of the units
consent. The managing general partner believes that there will be reduced
transaction costs to the fund if the consolidation is consummated through a
merger rather than a sale of assets.
Accordingly, the managing general partner recommends that limited partners
vote to approve the amendments. The consent of limited partners holding the
majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendments to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration of
the solicitation period which is the time period during which limited partners
may vote "For" or "Against" the consolidation (the "Solicitation Period"). The
Solicitation Period will commence upon delivery of the solicitation materials to
you (on or about __________, 2000), and will continue until the later of (a)
__________, 2000 (a date not less than 60 calendar days from the initial
delivery of the solicitation materials), or (b) such later date as we may select
and as to which we give you notice. At our discretion, we may elect to extend
the Solicitation Period. We reserve the right to extend the Solicitation Period
even if a quorum has been obtained pursuant to your fund's partnership
agreement. Under no circumstances will the Solicitation Period be extended
beyond _________ __, 2000. Any consent form received by [ ], which was hired by
us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the last day of
the Solicitation Period will be effective provided that such consent has been
properly completed and signed. If you do not return a signed consent form by the
end of the Solicitation Period, it will have the same effect as having voted
"Against" the consolidation and you will receive American Spectrum shares if
your fund approves the consolidation. If you submit a properly signed consent
form but do not indicate how you wish to vote, you will be counted as having
voted "For" the consolidation and will receive American Spectrum shares if your
fund approves the consolidation. You may withdraw or revoke your consent form at
any time in writing before consents from limited partners equal to more than 50%
of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
S-20
<PAGE> 955
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive American
Spectrum shares unless you elect the notes option, in which case you will
receive notes.
If your fund consolidates with American Spectrum and you receive American
Spectrum shares, your ownership of American Spectrum shares will affect the
character and amount of income reportable by you in the future. Because each of
the funds is a partnership for federal income tax purposes, it is not subject to
taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American Spectrum. If
your fund is acquired by American Spectrum, your fund will merge with American
Spectrum, the Operating Partnership or a subsidiary of the Operating
Partnership. For federal income tax purposes, American Spectrum intends to take
the position that the merger of American Spectrum and your fund will be treated
as a transfer of assets of your fund to American Spectrum in exchange for shares
and a subsequent distribution in liquidation of such shares. Consistent with
such position for those limited partners who elect the notes option, the
transaction will be viewed as a sale of their interest in your fund to American
Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated among
such assets in accordance with their relative fair market values as described in
section 1060 of the Code. As a result, American Spectrum's basis in each
acquired property will differ from the fund's basis therein, and the properties
will be subject to different depreciable periods and methods as a result of the
consolidation. These factors could result in an overall change, following the
consolidation, in the depreciation deductions attributable to the properties
acquired from the funds.
S-21
<PAGE> 956
Tax Consequences to Limited Partners Who Receive Shares. The fund intends
to report the consolidation on the basis that it qualifies for non-recognition
treatment under Section 351 of the Code. In general, under Section 351(a) of the
Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more individuals or
entities in exchange for the stock of that corporation; and
- immediately after the exchange, such individuals or entities are in
control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the non-
recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain. Proskauer Rose LLP is not opining as to whether gain
will be recognized by your or any other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If you
elect to receive shares in the consolidation your fund should be deemed to have
sold its assets to American Spectrum for shares followed by a distribution in
liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation, your share of all income, gain, loss, deduction
and credit for your fund through the date of the consolidation (including your
gain, if any, resulting from the consolidation described above).
S-22
<PAGE> 957
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your sale
of your interests in your fund. However, you may be able to report income from
the Notes based upon the installment method. The installment method permits you
to pay tax as the principal amount is paid on your Notes. See "Tax Consequences
to Limited Partners Who Receive Notes." Your basis in the Notes received in the
distribution will be the same as your basis in your units, after adjustment for
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your fund, plus any gain recognized in the distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your fund
are held for investment and not for resale, the consolidation will not result in
the recognition of material unrelated business taxable income by you if you are
a tax-exempt investor that does not hold units either as a "dealer" or as
debt-financed property within the meaning of section 514, and you are not an
organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-23
<PAGE> 958
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW.............................................................. S-2
RISK FACTORS.......................................................... S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND.................. S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES................................ S-11
FAIRNESS OF THE CONSOLIDATION......................................... S-13
EXPENSES OF THE CONSOLIDATION......................................... S-15
REQUIRED VOTE......................................................... S-21
AMENDMENTS TO THE PARTNERSHIP AGREEMENT............................... S-21
VOTING PROCEDURES..................................................... S-22
FEDERAL INCOME TAX CONSIDERATIONS..................................... S-24
ADDITIONAL INFORMATION................................................ S-26
</TABLE>
i
<PAGE> 959
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 960
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
A-2
<PAGE> 961
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
A-3
<PAGE> 962
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 963
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
A-5
<PAGE> 964
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
A-6
<PAGE> 965
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 966
Appendix B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Nooney Income
Fund Ltd., L.P. (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties," and
individually, a "Party") hereto desire to merge the Merging Entity with and into
American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and Missouri, with American Spectrum being the surviving entity
(the "Merger") as set forth in the registration statement of the Company on Form
S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
B-2
<PAGE> 967
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 968
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
A-2
<PAGE> 969
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
A-3
<PAGE> 970
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 971
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
A-5
<PAGE> 972
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
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<PAGE> 973
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 974
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common stock,
$.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in Section
6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1 below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
B-3
<PAGE> 975
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth in
the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first paragraph
of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of the
Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp occupation, premium,
windfall profits, environmental (including taxes under Code (S) 59A), customs
duties, capital stock, franchise, profits, withholding, social security (or
similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
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ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the Missouri Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the Missouri Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the Missouri Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the Missouri Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
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ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of American
Spectrum, as in effect immediately prior to the Effective Time, shall be the
articles of incorporation of the Surviving Corporation until thereafter amended
as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect immediately
prior to the Effective Time, shall be the by-laws of the Surviving Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners other
than those Limited Partners who vote against the Merger and affirmatively elect
to receive notes (the "Note Option") will be allocated American Spectrum Common
Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or combines
American Spectrum Common Shares, or pays a stock dividend or other stock
distribution in American Spectrum Common Shares, or in rights or securities
exchangeable or convertible into or exercisable for American Spectrum Common
Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any action
by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and subject to
the limitations described herein, those Limited Partners who, in connection with
the Merger, affirmatively elect the Note Option shall receive notes (the
"Notes"). The principal amount of the Notes will be determined in accordance
with the final Prospectus/Consent Solicitation Statement. In the event that any
of the Limited Partners elect the Note Option, the number of American Spectrum
Common Shares
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allocated to the Merging Entity will be reduced in accordance with the final
Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an exchange
agent (the "Exchange Agent") to act as such in connection with the issuance of
certificates representing the American Spectrum Common Shares pursuant to this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and the
Merging Entity that the statements contained in this Article V are correct and
complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American Spectrum is
a corporation duly organized, validly existing, and in good standing under the
laws of Maryland, as set forth in the Preface. American Spectrum is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where failure to so
qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and no
stockholder of American Spectrum will have any preemptive right or similar
rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. The execution, delivery
and performance by American Spectrum of this Agreement has been duly and validly
authorized by the board of directors of American Spectrum. This Agreement
constitutes the valid and legally binding obligation of American Spectrum,
enforceable in accordance with its terms and conditions. American Spectrum is
not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
The Merging Entity represents and warrants to American Spectrum that the
statements contained in this Article VI are correct and complete as of the date
hereof.
6.1 Organization, Qualification and Corporate Power. The Merging Entity
is a limited partnership duly organized, validly existing, and in good standing
under the laws of Missouri, as set forth in the Preface. The Merging Entity is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the Limited
Partners, the Merging Entity has full power and authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any notices to,
make any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental agencies
in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be entitled to possession of all documents,
books, records (including Tax records), agreements and
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<PAGE> 980
financial data of any sort relating to the Merging Entity but will provide the
Limited Partners with reasonable access to such documents, books and records
upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective obligations of
American Spectrum, the Limited Partners and the Merging Entity to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions, which conditions
may be waived upon the written consent of American Spectrum and the Merging
Entity:
(a) Governmental Approvals. The Parties shall have received all other
authorizations, consents, and approvals of governments and governmental agencies
required in connection with the consummation of the transaction contemplated
hereby.
(b) No Injunction or Proceedings. There shall not be an unfavorable
injunction, judgment, order, decree, ruling, or charge would, in the reasonable
judgment of American Spectrum, prevent consummation of any of the transactions
contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be
no declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national calamity
directly or indirectly involving the United States, which war, hostility or
calamity (or any material acceleration or worsening thereof), in the reasonable
judgment of American Spectrum, would have a Material Adverse Effect on the
Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the Effective Time,
American Spectrum shall own property having an appraised value, as determined by
Stanger, of not less than $200,000,000.
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<PAGE> 981
(e) American Spectrum Common Shares shall have been approved for listing
on notice of issuance on a national securities exchange acceptable to American
Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The obligations of
the Merging Entity to consummate the transactions contemplated hereby and take
the actions to be performed by it in connection with the Closing are subject to
satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the Share
Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to its Effective Time, before or
after the approval of the Limited Partners of the Merging Entity or American
Spectrum, respectively, either by the mutual written consent of American
Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity. This
Agreement may be terminated and the Merger may be abandoned (a) by action of
American Spectrum in the event of a failure of a condition to the obligations of
American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of termination
of this Agreement and abandonment of the Merger pursuant to this Article X, no
Party hereto (or any of its directors, officers, Managing General Partners or
Limited Partners) shall have any liability or further obligation to any other
Party to this Agreement, except that nothing herein will relieve any Party from
liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
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<PAGE> 982
11.2 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
11.3 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of American Spectrum and the Managing General Partner; provided, however, that
American Spectrum may (i) assign any or all of its rights and interests
hereunder to one or more of its Affiliates and (ii) designate one or more of its
Affiliates to perform its obligations hereunder (in any or all of which cases
American Spectrum nonetheless shall remain responsible for the performance of
all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
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<PAGE> 983
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Maryland without giving effect to any
choice or conflict of law provision or rules (whether of the State of Maryland
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact
B-12
<PAGE> 984
that there exists another representation, warranty, or covenant relating to the
same subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that the
other Party would be damaged irreparably in the event any of the provisions of
this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
NOONEY INCOME FUND LTD., L.P.
By:
Name
Title
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<PAGE> 985
Appendix C
AMENDMENT TO AGREEMENT
OF LIMITED PARTNERSHIP
OF
NOONEY INCOME FUND LTD.
Section 5.2B of the Limited Partnership Agreement is amended to read as follows:
B. Without the Consent of the Limited Partners (subject to the provisions of
Section 10.11 hereof), the General Partners shall not have the authority:
(i) to sell or otherwise dispose of, at one time, all or substantially
all of the assets of the Partnership (except for the disposition of the
Partnership's final Property);
(ii) to dissolve the Partnership (except pursuant to Section 2.4 hereof).
The General Partner shall have the authority to cause the Partnership to merge
with any entity with the Consent of the Limited Partners (subject to the
provisions of Section 10.11 hereof).
For purposes of this Section 5.2B the term "substantially all" shall be
deemed to mean either (i) sixty-six and two-thirds percent (66 2/3%) or more in
number of the Properties then owned by the Partnership, or (ii) a Property or
Properties representing sixty-six and two-thirds percent (66 2/3%) or more of
the net book value of all of the Partnership's Properties as of the end of the
most recently completed calendar quarter.
Section 5.2D(ii) of the Partnership Agreement is amended to read as follows:
"(ii) Acquire or lease any properties from or sell or lease any
properties to the General Partners or their Affiliates; provided that the
foregoing shall not apply to the proposed merger, sale or other transfer
of properties in connection with the consolidation as described in the
Proxy/Consent Solicitation Statement of the Partnership dated []."
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<PAGE> 986
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
NOONEY INCOME FUND LTD. II, L.P.
This supplement is being furnished to you, as a limited partner of
Nooney Income Fund Ltd. II, L.P., which we refer to as the fund, to enable you
to evaluate the proposed consolidation of your fund into American Spectrum
Realty, Inc., a Maryland corporation. Terms such as we and us refer to American
Spectrum. This supplement is designed to summarize only the risks, effects,
fairness and other considerations of the consolidation that are unique to you
and the other limited partners of your fund. This supplement does not purport to
provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, Nooney Income
Investments Two, Inc., your managing general partner is asking you to approve
the consolidation of your fund into American Spectrum. In addition, your
managing general partner is asking you to approve amendments to the partnership
agreement to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns office and office/warehouse
properties located in Illinois and Ohio, American Spectrum
will own a large portfolio of properties of various types.
These properties include office/warehouse, apartment and
shopping center properties located primarily in the midwestern
and western United States, Texas and the Carolinas.
- Your fund had $2,086,000 of cash flow during 1999. Some of the
other funds and the CGS privately held entities did not have
cash flow.
- Your fund only has a ratio of debt to total appraised value of
real estate assets of 31%. American Spectrum will have a debt
to total appraised value of real estate assets of 63%.
<PAGE> 987
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 1,021,040 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995.
Your fund intended to liquidate its properties in by 1995. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns properties located in Illinois and Ohio. The properties
are office and office/warehouse properties. Some of the funds own
different types of properties, properties located in other markets or
only one property.
- Your fund's property has a ratio of debt to total appraised value of
real estate assets of 31%. The properties owned by all of the funds and
the CGS privately held entities have a ratio of debt to total appraised
value of real estate assets of 63%.
Your fund made distributions in 1998 and had $2,086,000 of net cash
flow in 1999. Some of the funds did not make distributions or have net cash flow
which could have been available for distribution during this period. In
addition, a number of the CGS privately held entities did not make distributions
or have net cash flow which would have been available for distribution.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 19,221
units or 5.21% of the outstanding units and intend to vote these units in favor
of the consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
S-2
<PAGE> 988
Your fund's partnership agreement prohibits transfers of assets to
related parties. In addition, there are no provisions of the partnership
agreement addressing mergers with corporations, such as American Spectrum. The
fund is a Missouri limited partnership. Missouri law requires all partners to
consent to a merger with a corporation unless the partnership agreement provides
for a different vote. The amendments will permit the fund to merge with American
Spectrum and participate in the consolidation. The amendments must be approved
by greater than 50% of the outstanding units. To vote "For" the consolidation,
you must also vote "For" the amendments.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation may be a partially taxable transaction and it will
have different consequences to you depending upon whether you elect to receive
shares or notes. If you elect to receive shares, the consolidation will be
reported on the basis that no gain is recognized. We cannot assure you that the
IRS will not challenge this treatment of the transaction. If the IRS asserts a
challenge, it may prevail. If the IRS prevails your fund will recognize gain.
Your gain will be equal to the amount by which the fair market value of the
shares received, increased by the liabilities assumed, exceeds the basis of the
assets transferred, and you will be allocated your share of the gain. [Can we
give estimate, making assumptions] See "Tax Risks." Therefore, it is possible
for you to be allocated income which may result in a tax liability even though
you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K of your fund for the year ended December 31, 1999 and the Form
10-Q for the quarter ended June 30, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
S-3
<PAGE> 989
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 19,221 units or 5.21% of the outstanding units in the fund and
intend to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns office and office/warehouse properties
located in Illinois and Ohio. After the consolidation, you
will hold common stock of American Spectrum, an operating
company, that will own and lease as many as 35 properties and
expects to make additional investments. The properties include
office, office warehouse, apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- Upon consummation of the consolidation, we will have greater
leverage than your fund. Your fund currently has a ratio of
debt to total assets of 31%. Upon completion of the
consolidation, we will have a ratio of debt to total assets of
63%. American Spectrum may also incur substantial indebtedness
to make future acquisitions of properties that it may be
unable to repay. We expect to increase the ratio of debt to
total assets to 70%.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
S-4
<PAGE> 990
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,093,127 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
S-5
<PAGE> 991
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
S-6
<PAGE> 992
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or note holder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain or loss to any limited partner who elects to receive shares.
We cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain.
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an Effective REIT election,
American Spectrum will be taxed as a Corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirement of the Code and Regulations as applicable to REITs. American
Spectrum has not requested, and does not plan to request, a ruling from the
Internal Revenue Service that it qualifies as a REIT. It has received an
opinion, however, from its tax counsel, Proskauer Rose LLP, that it will meet
the requirements for qualification as a REIT. Proskauer Rose LLP's opinion is
based upon representations made by American Spectrum regarding relevant factual
matters, existing Code provisions, applicable regulations issued under the Code,
reported administrative and judicial interpretations of the Code and
regulations, Proskauer Rose LLP's review of relevant documents and the
assumption that American Spectrum will operate in the manner described in this
consent solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in
S-7
<PAGE> 993
more detail under the heading "Federal Income Tax Considerations -- Taxation of
American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's property for sale with brokers and commence the process
of liquidating the fund's property. The managing general partner believes that
it
S-8
<PAGE> 994
could take an extended time to complete the sale of the fund's property and is
likely to take in excess of one year. After completing the liquidation, the fund
would distribute the net proceeds, except for a portion which will be held by
the fund to cover potential liability for representations and warranties in the
sales contract and administrative expenses of winding up the fund.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's properties for sale with brokers and commence the
process of liquidating the fund's properties. The general partners believe that
it could take an extended time to complete the sale of all of the fund's
properties and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
S-9
<PAGE> 995
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of
the value of the American Spectrum shares to be allocated to the fund based in
part on the appraisal by Stanger of the value of the property portfolio held by
your fund. In addition, your fund, the other funds and American Spectrum engaged
Stanger to provide your fund and the other funds with an opinion that the
allocation of the American Spectrum shares (i) between the funds and the CGS
privately held entities, including the CGS Management Company and (ii) among the
funds, is fair from a financial point of view to the limited partners of the
funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the _______________.
<TABLE>
<CAPTION>
Exchange Value of Percentage of
Number of American Spectrum Total
American Exchange Value of Shares per $ 1,000 GAAP Book Value American
Spectrum Shares American Original Limited June 30, 2000 per Spectrum
Allocated to Spectrum Partner Investment Average $1,000 Percentage of Total Shares Issued
Fund (1) Shares(2) (2) Original Investment Exchange Value (3)
<S> <C> <C> <C> <C> <C>
1,021,040 $ 15,315,594 $ 796.82 $ 451.42 13.86% 13.86%
</TABLE>
----------------------
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Appraised Property Property Year
Property Location Value Type Size Constructed
-------- -------- ----- ---- ---- -----------
<S> <C> <C> <C> <C> <C>
Countryside Palatine, IL 6,070,000 Office 91,975 sq. ft. 1972
Executive Ctr
NorthCreek Cincinnati, OH 8,420,000 Office 91,731 sq. ft. 1984-86
Office Park
Northeast Loveland, OH 4,550,000 Office/warehouse 100,000 sq. ft. 1985
Commerce Ctr
</TABLE>
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<PAGE> 996
<TABLE>
<S> <C> <C> <C> <C> <C>
Tower Industrial Bldg Mundelein, IL 1,460,000 Office/warehouse 42,120 sq ft 1983
</TABLE>
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
S-11
<PAGE> 997
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS PRIVATELY HELD ENTITIES, AND THE CGS MANAGEMENT
COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION(1) SHARES ISSUED
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
Totals $110,518,379 100.00% 7,367,890 100.00%
============== ============== ============= =============
</TABLE>
----------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership unit provides the same rights to distributions as one share
of common stock in American Spectrum and, subject to some limitations,
is exchangeable for American Spectrum shares on a one-for-one basis
after a twelve month period.
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, pro rata to the limited partners until they receive an amount
equal to their share of previously undistributed net income;
- second, to the limited partners in an amount equal to their share of
their adjusted capital contribution;
- third, to the general partners in an amount equal to any loans or
advances they have made;
- fourth, to the general partners in an amount equal to their share of
previously undistributed net income;
- fifth, to the general partners in an amount equal to their adjusted
capital contribution;
- sixth, pro rata to the limited partners in the amount equal to the
excess of an 11% cumulative return over prior distributions to the
limited partners;
- seventh, pro rata to the general partners in an amount equal to any
unpaid annual management fee; and
- eighth, the balance 85% to all of the partners in proportion to their
capital contributions and 15% to the general partners.
S-12
<PAGE> 998
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-13
<PAGE> 999
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value per 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment $1,000 Original Investment Original Investment Investment (1)
<S> <C> <C> <C>
$663.00-$758.00 $764.00 $451.42 $796.82
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
BENEFITS OF THE CONSOLIDATION
S-14
<PAGE> 1000
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
S-15
<PAGE> 1001
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
Pre-Closing Transaction Costs
<TABLE>
<S> <C>
Legal Fees(1)............................................. $ 61,607
Appraisals and Valuation(2)............................... 18,171
Fairness Opinions(3)...................................... 42,355
</TABLE>
S-16
<PAGE> 1002
<TABLE>
<S> <C>
Solicitation Fees(4)...................................... 2,824
Printing and Mailing(5)................................... 7,061
Accounting Fees(6)........................................ 137,030
Pre-formation Cost(7)..................................... 61,607
Subtotal...................................... $ 330,655
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(8)................. $ 30,804
Legal Closing Fees(9)..................................... 15,226
Subtotal...................................... $ 46,029
Total..................................................... $ 376,684
</TABLE>
* Estimated.
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $1,800,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
S-17
<PAGE> 1003
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds and the CGS privately held entities, including the CGS Management
Company, as of June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$1,000.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
------------------------------------------------- ---------
<S> <C>
1995............................................. 12.50
1996............................................. 12.50
1997............................................. 12.50
1998............................................. 18.75
1999............................................. 0
Six months ended June 30, 2000................... $0
=========
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a management fee equal to 9% of the net operating cash flow of the
fund, subject to a preferential distribution to limited partners of
7.5% per annum.
- a property management fee equal to 5% of the gross revenues from
residential properties and 6% of the gross revenues from industrial and
commercial properties;
- reimbursement of out-of-pocket expenses, including salaries of
employees directly engaged in full time leasing, servicing, operation
or maintenance of the properties; and
S-18
<PAGE> 1004
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 3% of the gross sales price of the property,
or (2) 50% of the standard real estate commission.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-19
<PAGE> 1005
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS (1)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
--------------------------------------- June 30,
1997 1998 1999 2000
<S> <C> <C> <C> <C>
HISTORICAL: --------- --------- --------- ----------------
Management Fees $ 201,992 $ 215,196 $ 216,862 $ 122,156
Administrative Fees 40,000 40,000 -- 20,000
Leasing Fees -- -- -- --
Construction Supervision Fees -- -- -- --
Broker Fees -- -- -- --
General Partner Distributions 14,704 22,046 -- --
Limited Partner Distributions -- -- -- --
------------------------------------------------------------------------------------------------------------------------
Total historical $ 256,696 $ 277,242 $ 256,862 $ 142,156
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests $ 6,119 $ -- $ -- $ 20,939
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 1,795 -- -- 6,141
Restricted Stock and Stock Options 76,443 76,443 76,443 38,222
Salary, Bonuses and Reimbursements 237,383 237,383 237,383 118,692
------------------------------------------------------------------------------------------------------------------------
Total pro forma as a "C" Corporation $ 321,739 $ 313,836 $ 313,826 $ 183,994
PRO FORMA AS A REIT:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests $ 6,119 $ -- $ -- $ 20,939
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company 1,795 -- -- 6,141
Restricted Stock and Stock Options 76,443 76,443 76,443 38,222
Salary, Bonuses and Reimbursements 237,383 237,383 237,383 118,692
------------------------------------------------------------------------------------------------------------------------
Total pro forma as a REIT $ 321,739 $ 313,826 $ 313,826 $ 183,994
</TABLE>
S-20
<PAGE> 1006
------------------------------
(1) For a description of the calculation of these amounts, please refer to
the notes to the table entitled "Compensation, Reimbursements and
Distributions to the General Partners" in the Consent Solicitation.
S-21
<PAGE> 1007
PROPERTY OVERVIEW
Your fund owns one office property located in California. Information
regarding the property as of September 30, 2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
---------------------------- ----------------------- PER LEASED
YEAR SQ. FT. SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT % OF TOTAL FOOT OWNERSHIP
------------------ ----- -------- ------- ------- -------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tower Industrial IL OFF/WARE 1974 42,120 100.00% 42,120 $ 168,480 0.46% $ 4.00 100%
Bldg
Northeast Commerce OH OFF/WARE 1985 100,000 65.36% 65,360 $ 391,351 1.07% $ 5.99 100%
Ctr.
Countryside IL OFFICE 1984 91,975 92.55% 85,126 $1,397,647 3.83% $16.42 100%
Executive Ctr.
NorthCreek Office OH OFFICE 1984-86 91,731 94.77% 86,933 $1,322,361 3.62% $15.21 100%
Park
</TABLE>
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Two amendments to the partnership agreement of the fund are necessary
in connection with the consummation of the consolidation. The amendments are
attached to this supplement as Appendix C.
First, the partnership agreement currently prohibits a sale of
properties to the general partners or their affiliates. Accordingly, consent of
the limited partners is being sought for an amendment to the partnership
agreement that permits such a transfer in connection with the consolidation.
S-22
<PAGE> 1008
Second, the partnership agreement does not contain a provision
addressing mergers. Under Missouri law, a merger with a corporation, like
American Spectrum, requires the consent of all of the partners, unless the
partnership agreement otherwise provides. The proposed amendment permits the
merger in connection with the consolidation if the managing general partner and
the limited partners holding a majority of the units consent. The managing
general partner believes that there will be reduced transaction costs to the
fund if the consolidation is consummated through a merger rather than a sale of
assets.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendments. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendments to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting against the
alternatives to the consolidation. If the consolidation is not approved [insert
plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents
S-23
<PAGE> 1009
and instruments advisable or necessary to complete the consolidation. The power
of attorney is intended solely to ease the administrative burden of completing
the consolidation without requiring your signatures on multiple documents.
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
MATERIAL TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund consolidates with American Spectrum you will receive
American Spectrum shares unless you elect the notes option, in which case you
will receive notes.
If your fund consolidates with American Spectrum and you receive
American Spectrum shares, your ownership of American Spectrum shares will affect
the character and amount of income reportable by you in the future. Because each
of the funds is a partnership for federal income tax purposes, it is not subject
to taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. In some circumstances, you
may offset your income with any losses you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund
consolidates with American Spectrum and you receive American Spectrum shares, as
a stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than the method of depreciation the funds
use. As a result, American Spectrum's tax depreciation from the acquired
properties may differ from the fund's tax depreciation. Accordingly, under
certain circumstances, even if American Spectrum were to make the same level of
distributions as your fund, a different portion of the distributions could
constitute taxable income to you. In addition, the character of this income to
you as a stockholder of American Spectrum does not depend on its character to
American Spectrum. The income will generally be ordinary dividend income to you
and will be classified as portfolio income under the passive loss rules, except
with respect to capital gains dividends, discussed below. Furthermore, if
American Spectrum incurs a taxable loss, the loss will not be passed through to
you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operating Partnership or a subsidiary of the
Operating Partnership. For federal income tax purposes, American Spectrum
intends to take the position that the merger of American Spectrum and your fund
will be treated as a transfer of assets of your fund to American Spectrum in
exchange for shares and a subsequent distribution in liquidation of such shares.
Consistent with such position for those limited partners who elect the notes
option, the transaction will be viewed as a sale of their interest in your fund
to American Spectrum.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable
S-24
<PAGE> 1010
periods and methods as a result of the consolidation. These factors could result
in an overall change, following the consolidation, in the depreciation
deductions attributable to the properties acquired from the funds.
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, a person recognizes no gain or loss if:
- property is transferred to a corporation by one or more
individuals or entities in exchange for the stock of that
corporation; and
- immediately after the exchange, such individuals or entities
are in control of American Spectrum.
For purposes of section 351(a), control means the ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and at least 80% of the total number of shares of all
other classes of stock of the corporation. American Spectrum has represented to
Proskauer Rose LLP that, following the consolidation, the partners of the funds
together with other qualified contributors, will own stock possessing at least
80% of the total combined voting power of all classes of American Spectrum stock
entitled to vote and at least 80% of the total number of shares of all other
classes of the stock of American Spectrum. In addition, pursuant to Section
351(e) of the Code and Treasury Regulations promulgated thereunder transfers to
investment companies, including a REIT, that directly or indirectly result in
diversification of the transferors' interest do not qualify for the non-
recognition treatment of Section 351 of the Code. American Spectrum and your
fund intend to take the position that Section 351(e) of the Code will not
prevent the consolidation from qualifying for non-recognition treatment under
Section 351 of the Code. American Spectrum and your fund intend to take the
position that given the length of time until the contemplated REIT election as
well as the uncertainty as to whether such election will be made, your fund
will not recognize gain upon the transfer of assets to American Spectrum. We
cannot assure you that the IRS will not challenge this treatment of the
transaction. If the IRS asserts a challenge, it may prevail. If the IRS prevails
your fund will recognize gain. Such gain will be equal to the amount by which
the fair market value of the shares received, increased by the liabilities
assumed, exceeds the basis of the assets transferred, and you will be allocated
your share of the gain. Proskauer Rose LLP is not opining as to whether gain
will be recognized by your or any other fund in the consolidation.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
Character of gain or loss. In general, gains or losses realized with
respect to transfers of non-dealer real estate in the consolidation are likely
to be treated as realized from the sale of a "section 1231 asset" (i.e., real
property and depreciable assets used in a trade or business and held for more
than one year). Your share of gains or losses from the sale of section 1231
assets of your fund would be combined with any other section 1231 gains and
losses that you recognize in that year. If the result is a net loss, such loss
is characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "nonrecaptured section 1231 losses."
For these purposes, the term "non-recaptured section 1231 losses" means your
aggregate section 1231 losses for the five most recent prior years that you have
not previously recaptured. However, gain you recognize on the sale of personal
property will be taxed as ordinary income to the extent of all prior
depreciation deductions your fund had taken prior to sale. In general, you may
only use up to $3,000 of capital losses in excess of capital gains to offset
ordinary income in any taxable year. Any excess loss is carried forward to
future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time. You must report, in your taxable year that includes
the date of the consolidation,
S-25
<PAGE> 1011
your share of all income, gain, loss, deduction and credit for your fund through
the date of the consolidation (including your gain, if any, resulting from the
consolidation described above).
If you receive American Spectrum shares in the distribution, your fund
should not recognize gain. See "Tax consequences to limited partners who receive
shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund to you, your basis in the American Spectrum shares will equal the
adjusted basis of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method. The installment method permits
you to pay tax as the principal amount is paid on your Notes. See "Tax
Consequences to Limited Partners Who Receive Notes." Your basis in the Notes
received in the distribution will be the same as your basis in your units, after
adjustment for your distributive share of income, gain, loss, deduction and
credit for the final taxable year of your fund, plus any gain recognized in the
distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt. However, this is not applicable to educational
organizations, qualified pension, profit-sharing and stock bonus plans and
certain closely held real property holding companies.
S-26
<PAGE> 1012
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW ............................................................ S-2
RISK FACTORS ........................................................ S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND ................ S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES .............................. S-11
FAIRNESS OF THE CONSOLIDATION ....................................... S-14
EXPENSES OF THE CONSOLIDATION ....................................... S-16
REQUIRED VOTE ....................................................... S-22
AMENDMENTS TO THE PARTNERSHIP AGREEMENT ............................. S-23
VOTING PROCEDURES ................................................... S-23
FEDERAL INCOME TAX CONSIDERATIONS ................................... S-25
ADDITIONAL INFORMATION .............................................. S-27
</TABLE>
i
<PAGE> 1013
APPENDIX A
A-1
<PAGE> 1014
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 1015
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
A-2
<PAGE> 1016
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
A-3
<PAGE> 1017
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 1018
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
A-5
<PAGE> 1019
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
A-6
<PAGE> 1020
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 1021
APPENDIX B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Nooney Income
Fund Ltd. II, L.P. (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties,"
and individually, a "Party") hereto desire to merge the Merging Entity with and
into American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and Missouri, with American Spectrum being the surviving entity
(the "Merger") as set forth in the registration statement of the Company on Form
S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
<PAGE> 1022
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common
stock, $.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in
Section 6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1
below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
B-2
<PAGE> 1023
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the
Recitals above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth
in the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first
paragraph of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of
the Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code (S) 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
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"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger.
Subject to the terms and conditions of this Agreement, the Maryland GCL
and the Missouri Revised Limited Partnership Act, at the Effective Time, the
Merging Entity and American Spectrum shall consummate the Merger in which (i)
the Merging Entity shall be merged with and into American Spectrum and the
separate existence of the Merging Entity shall cease to exist, (ii) American
Spectrum shall be the successor or surviving corporation in the Merger and shall
continue to be governed by the laws of Maryland and (iii) the properties, other
assets and liabilities of the Merging Entity will be deemed to have been
transferred to American Spectrum. The corporation surviving the Merger is
sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the Missouri Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time.
On the Closing Date, subject to the terms and conditions of this
Agreement, the Merging Entity and American Spectrum shall (i) cause to be
executed (A) a certificate of merger in the form required by the Maryland GCL
(the "American Spectrum Certificate of Merger") and (B) a certificate of merger
in the form required by the Missouri Revised Limited Partnership Act (the
"Merging Entity's Certificate of Merger"), and (ii) cause the American Spectrum
Certificate of Merger to be filed with the Maryland Department of Assessments
and Taxation as provided in the Maryland GCL and the Merging Entity's
Certificate of Merger to be filed with the Missouri Secretary of State. The
Merger shall become effective at (i) such time as the American Spectrum
Certificate of Merger has been duly filed with the Maryland Department of
Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
ARTICLE III
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NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of
American Spectrum, as in effect immediately prior to the Effective Time, shall
be the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein.
3.3 By-Laws. The by-laws of American Spectrum, as in effect
immediately prior to the Effective Time, shall be the by-laws of the Surviving
Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners
other than those Limited Partners who vote against the Merger and affirmatively
elect to receive notes (the "Note Option") will be allocated American Spectrum
Common Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or
combines American Spectrum Common Shares, or pays a stock dividend or other
stock distribution in American Spectrum Common Shares, or in rights or
securities exchangeable or convertible into or exercisable for American Spectrum
Common Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and
subject to the limitations described herein, those Limited Partners who, in
connection with the Merger,
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affirmatively elect the Note Option shall receive notes (the "Notes"). The
principal amount of the Notes will be determined in accordance with the final
Prospectus/Consent Solicitation Statement. In the event that any of the Limited
Partners elect the Note Option, the number of American Spectrum Common Shares
allocated to the Merging Entity will be reduced in accordance with the final
Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
4.4 Issuance of Shares. American Spectrum shall designate an
exchange agent (the "Exchange Agent") to act as such in connection with the
issuance of certificates representing the American Spectrum Common Shares
pursuant to this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and
the Merging Entity that the statements contained in this Article V are correct
and complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American
Spectrum is a corporation duly organized, validly existing, and in good standing
under the laws of Maryland, as set forth in the Preface. American Spectrum is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will,
when issued, be duly authorized, validly issued, fully paid and nonassessable,
and no stockholder of American Spectrum will have any preemptive right or
similar rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power
and authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. The execution,
delivery and performance by American Spectrum of this Agreement has been duly
and validly authorized by the board of directors of American Spectrum. This
Agreement constitutes the valid and legally binding obligation of American
Spectrum, enforceable in accordance with its terms and conditions. American
Spectrum is not required to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by this Agreement, except
in connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
The Merging Entity represents and warrants to American Spectrum that
the statements contained in this Article VI are correct and complete as of the
date hereof.
6.1 Organization, Qualification and Corporate Power. The Merging
Entity is a limited partnership duly organized, validly existing, and in good
standing under the laws of Missouri, as set forth in the Preface. The Merging
Entity is duly authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required, except where
failure to so qualify or obtain authorization would not have a Material Adverse
Effect on the Merging Entity.
6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best
efforts to take all action and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further
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<PAGE> 1028
action (including the execution and delivery of such further instruments and
documents) as any other Party reasonably may request, all at the sole cost and
expense of the requesting Party. The Merging Entity acknowledge and agree that
from and after the Closing, the Surviving Corporation will be entitled to
possession of all documents, books, records (including Tax records), agreements
and financial data of any sort relating to the Merging Entity but will provide
the Limited Partners with reasonable access to such documents, books and records
upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective
obligations of American Spectrum, the Limited Partners and the Merging Entity to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing Date of each of the following conditions,
which conditions may be waived upon the written consent of American Spectrum and
the Merging Entity:
(a) Governmental Approvals. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies required in connection with the consummation of the transaction
contemplated hereby.
(b) No Injunction or Proceedings. There shall not be an
unfavorable injunction, judgment, order, decree, ruling, or charge would, in the
reasonable judgment of American Spectrum, prevent consummation of any of the
transactions contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there
shall be no declaration of a banking moratorium by federal or state authorities
or any suspension of payments by banks in the United States (whether mandatory
or not) or of the extension of credit by lending institutions in the United
States, or commencement of war or other international, armed hostility or
national calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the reasonable judgment of American Spectrum, would have a Material Adverse
Effect on the Merging Entity.
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<PAGE> 1029
(d) Minimum Value of American Spectrum's Property. At the
Effective Time, American Spectrum shall own property having an appraised value,
as determined by Stanger, of not less than $200,000,000.
(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The
obligations of the Merging Entity to consummate the transactions contemplated
hereby and take the actions to be performed by it in connection with the Closing
are subject to satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the
Share Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to its Effective
Time, before or after the approval of the Limited Partners of the Merging Entity
or American Spectrum, respectively, either by the mutual written consent of
American Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no Party hereto (or any of its directors, officers, Managing General
Partners or Limited Partners) shall have any liability or further obligation to
any other Party to this Agreement, except that nothing herein will relieve any
Party from liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
B-9
<PAGE> 1030
11.1 No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
11.2 Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
11.3 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
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<PAGE> 1031
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Maryland without giving effect to
any choice or conflict of law provision or rules (whether of the State of
Maryland or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that
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there exists another representation, warranty, or covenant contained herein in
any respect, the fact that there exists another representation, warranty, or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the Party is in breach of the first representation,
warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that
the other Party would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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<PAGE> 1033
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
NOONEY INCOME FUND LTD. II, L.P.
By:
Name
Title
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<PAGE> 1034
APPENDIX C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
NOONEY INCOME FUND LTD. II, L.P.
Section 5.2B of the Limited Partnership Agreement is amended to read as follows:
B. Without the Consent of the Limited Partners (subject to the provisions
of Section 10.11 hereof), the General Partners shall not have the authority:
(i) to sell or otherwise dispose of, at one time, all or substantially
all of the assets of the Partnership (except for the disposition of the
Partnership's final Property);
(ii) to dissolve the Partnership (except pursuant to Section 2.4
hereof).
The General Partner shall have the authority to cause the Partnership to merge
with any entity with the Consent of the Limited Partners (subject to the
provisions of Section 10.11 hereof).
For purposes of this Section 5.2B the term "substantially all" shall be
deemed to mean either (i) sixty-six and two-thirds percent (66 2/3%) or more in
number of the Properties then owned by the Partnership, or (ii) a Property or
Properties representing sixty-six and two-thirds percent (66 2/3%) or more of
the net book value of all of the Partnership's Properties as of the end of the
most recently completed calendar quarter.
Section 5.2D(ii) of the Partnership Agreement is amended to read as follows:
"(ii) Acquire or lease any properties from or sell or lease any
properties to the General Partners or their Affiliates; provided that
the foregoing shall not apply to the proposed merger, sale or other
transfer of properties in connection with the consolidation as
described in the Proxy/Consent Solicitation Statement of the
Partnership dated []."
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<PAGE> 1035
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THEIR OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED ____________, 2000
AMERICAN SPECTRUM REALTY, INC.
PROSPECTUS SUPPLEMENT
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 2000
FOR NOONEY REAL PROPERTY INVESTORS TWO, L.P.
This supplement is being furnished to you, as a limited partner of
Nooney Real Property Investors Two, L.P., which we refer to as the fund, to
enable you to evaluate the proposed consolidation of your fund into American
Spectrum Realty, Inc., a Maryland corporation. Terms such as we and us refer to
American Spectrum. This supplement is designed to summarize only the risks,
effects, fairness and other considerations of the consolidation that are unique
to you and the other limited partners of your fund. This supplement does not
purport to provide an overall summary of the consolidation. You should read the
accompanying Prospectus/Consent Solicitation Statement, which includes detailed
discussions regarding American Spectrum and the other funds and assets being
consolidated with American Spectrum. We refer to this document as the consent
solicitation.
Pursuant to the consent solicitation and this supplement, Nooney
Investors, Inc., your managing general partner is asking you to approve the
consolidation of your fund into American Spectrum. In addition, your managing
general partner is asking you to approve amendments to the partnership agreement
to your fund. To approve the consolidation, you must vote "For" these
amendments.
The fund is one of eight limited partnerships, which we refer to
collectively as the funds, that we are seeking to consolidate into American
Spectrum as part of a series of transactions that we refer to as the
consolidation. Supplements have also been prepared for each of the other funds,
copies of which may be obtained without charge by each limited partner or his,
her or its representative upon written request to Mackenzie Partners, Inc., 156
Fifth Avenue, New York, NY 10010.
There are differences between the funds. Your fund may be subject to
increased risks as compared to the other funds as a result of these differences.
The following are risks applicable to your program as a result of these
differences. There are other risks which are generally applicable to your fund
and the other funds. You should review "Risk Factors" below, and in the consent
solicitation for an extensive summary of these risks.
- Unlike your fund which owns office/warehouse and shopping
center properties located in Indiana and Missouri, American
Spectrum will own a large portfolio of properties of various
types. These properties include office/warehouse, apartment
and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas.
- Your fund's property is 96.50% occupied. American Spectrum's
properties are 87.55% occupied.
- The transaction will be taxable to you. We estimate that you
will recognize a taxable gain of $35 for every $1,000 of your
original investment and that you may pay additional taxes if
the IRS challenges our position on the taxation of the
transaction.
<PAGE> 1036
OVERVIEW
THE CONSOLIDATION
Your fund will consolidate with us. We will also consolidate with the
other funds, the CGS privately held entities and the CGS Management Company. If
all of the funds approve the consolidation, we will own a portfolio of 35
properties in nine states. The properties will consist of 12 office properties,
12 office/warehouse properties, five apartment properties, five shopping centers
and one panel of development land. However, we do not know which funds will
approve the consolidation. Therefore, the exact makeup of our properties is
unknown. We and your managing general partner believe that the consolidation is
the best way for limited partners to achieve liquidity and maximize the value of
their investment in the fund. The American Spectrum shares will be listed for
trading on _____________. There is no active trading market for the limited
partnership units in the funds.
NUMBER OF AMERICAN SPECTRUM SHARES RECEIVED IF YOUR FUND IS CONSOLIDATED WITH
AMERICAN SPECTRUM
Your fund will be allocated an aggregate of 545,451 American Spectrum
shares if it is consolidated into American Spectrum in the consolidation. You
will receive your proportion of such shares in accordance with the terms of your
fund's partnership agreement. American Spectrum has assigned an Exchange Value
of $15 per share for each American Spectrum share. However, the Exchange Value
per share represents our estimate of the net asset value per share and American
Spectrum shares may trade at a price less than $15.
SIMILARITIES BETWEEN THE FUNDS
The investment objective and assets of the funds are substantially
similar in nature and character. Generally, the funds own office or
office/warehouse properties. Each of the funds intended to liquidate its
properties and distribute the net proceeds during the period from 1984 to 1995.
Your fund intended to liquidate its properties by 1989. The funds all have
similar structures for paying compensation to the general partners and their
affiliates and for distribution of cash flow and liquidation proceeds. The
managing general partner of each fund is an affiliate of CGS.
DIFFERENCES BETWEEN THE FUNDS
- Your fund owns properties located in Indiana and Missouri. The
properties are office/warehouse and shopping center properties. Some of
the funds own different types of properties, properties located in
other markets or only one property.
- Your fund's property is 96.50% occupied. The properties owned by all of
the funds and the CGS privately held entities are 87.55% occupied. Some
of the properties of the CGS privately held entities are properties
with low occupancy rates which were purchased because CGS believed they
were undervalued. These properties have greater risks than your
property.
VOTE REQUIRED TO APPROVE THE CONSOLIDATION
Pursuant to the terms of your fund's partnership agreement, the
consolidation of your fund with American Spectrum may not be consummated without
the approval of greater than 50% of the outstanding units. This approval by your
fund's limited partners will be binding on you even if you vote "Against" the
proposed transaction. Affiliates of the managing general partner own 648 units
or 5.40% of the outstanding units and intend to vote these units in favor of the
consolidation.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Your fund's partnership agreement prohibits transfers of assets to
related parties. In addition, there are no provisions of the partnership
agreement addressing mergers with corporations, such as American Spectrum. The
fund is a Missouri limited partnership. Missouri law requires all partners to
consent to a merger with a corporation unless the partnership agreement provides
for a different vote. The amendments will permit the fund to merge with American
S-2
<PAGE> 1037
Spectrum and participate in the consolidation. The amendments must be approved
by greater than 50% of the outstanding units. To vote "For" the consolidation,
you must also vote "For" the amendments.
TAX CONSEQUENCES OF THE CONSOLIDATION
The consolidation will have different consequences to you depending
upon whether you elect to receive shares or notes. If you elect to receive
shares, the consolidation will be reported on the basis that no gain is
recognized except for an amount equal to the amount by which the liabilities
assumed in the consolidation exceed the basis of the assets transferred. Your
share of the gain will be allocated to you. We estimate that an original limited
partner in the fund will recognize $37 of taxable gain for a $1000 original
investment. This gain may be offset by passive losses which a limited partner
may have.
We cannot assure you that the IRS will not challenge this treatment of
the transaction. If the IRS asserts a challenge, it may prevail. If the IRS
prevails your fund will recognize additional gain. If the IRS prevails your gain
will be equal to the amount by which the fair market value of the shares
received, increased by the liabilities assumed, exceeds the basis of the assets
transferred, and you will be allocated your share of the gain. See "Tax Risks."
Therefore, it is possible for you to be allocated income which may result in a
tax liability even though you have not received any cash.
If you elect to receive notes you will recognize gain. Your gain will
be equal to the amount by which the principal of the notes received exceeds the
bases of your interest in your fund (adjusted for your share of liabilities). If
you elect to receive notes you may be able to report your income on the basis of
the installment method which permits you to pay tax as the principal amount is
paid on your notes.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election, American Spectrum will be taxed as a C Corporation.
We urge you to consult with your tax advisor to evaluate the taxes that
will be incurred by you as a result of your participation in the consolidation.
ADDITIONAL INFORMATION
Selected historical financial information for your fund, audited
financial statements for your fund, unaudited financial statements and
Management's Discussions and Analyses of Financial Conditions and Results of
Operations are set forth as an Appendix to the Consent Solicitation Statement
and the Form 10-K of your fund for the year ended November 30, 1999 and the Form
10-Q for the quarter ended August 31, 2000 are incorporated by reference. In
addition, pro forma financial information for American Spectrum is set forth on
page F-__ of the Consent Solicitation Statement.
S-3
<PAGE> 1038
RISK FACTORS
The consolidation generally does not involve risks which are more
significant to your fund's limited partners than to limited partners in the
other funds. However, the transaction involves some risks and other adverse
factors which are applicable to all of the funds. Because all of the risks and
adverse factors described in the consent solicitation apply to the effects of
the transaction on your fund, as well as the other funds, you should carefully
review the risks summarized below and the section entitled "RISK FACTORS" in the
consent solicitation.
RISKS WHICH AFFECT YOUR FUND DIFFERENTLY
The following is a description of the risks which affect your fund
differently from the other funds:
- American Spectrum will acquire your fund if the limited partners of
your fund who hold a majority in interest of the outstanding units vote
in favor of the consolidation. Such approval will bind all of the
limited partners in your fund, including you or any other limited
partners who voted against or abstained from voting with respect to the
consolidation. Affiliates of the managing general partner own different
percentages of each fund. Affiliates of the managing general partner
own 648 units or 5.40% of the outstanding units in the fund and intend
to vote these units in favor of the consolidation.
- As a result of some differences between the fund and the other funds,
the consolidation may impact your fund differently from the other
funds. By participating in the consolidation, you will assume risks
associated with the assets of the other funds and the CGS privately
held entities.
- There are differences in the types and geographic location of some of
the properties owned by the funds. Because the market for real estate
may vary from one region of the country to another, the change in
geographic diversity may expose you to different and greater risks than
those you are presently exposed. Moreover, because the properties owned
by the funds and the CGS privately held entities are not of uniform
quality, combining assets and liabilities of the funds in the
consolidation may diminish the overall asset quality underlying the
interests of some of the limited partners by comparison with their
existing interests in the fund.
- Your investment currently consists of an interest in your
fund. Your fund owns office/warehouse and shopping center
properties located in Indiana and Missouri. After the
consolidation, you will hold common stock of American
Spectrum, an operating company, that will own and lease as
many as 35 properties and expects to make additional
investments. The properties include office, office warehouse,
apartment and shopping centers.
- Your fund intended to sell its properties and liquidate and
distribute the net proceeds to the partners. We intend to
reinvest the proceeds from property sales. The risks inherent
in investing in an operating company such as American Spectrum
include the risk that American Spectrum may invest in new
properties that are not as profitable as anticipated.
- It is possible that properties acquired in the consolidation
may not be as profitable as the properties your fund owns.
- Your investment will change from one in which you are generally
entitled to receive distributions from any net proceeds of a sale or
refinancing of the fund's assets to an investment in an entity in which
you may realize the value of your investment only through the sale of
your American Spectrum shares, not from the liquidation proceeds from
properties.
RISKS GENERALLY APPLICABLE TO ALL OF THE FUNDS
S-4
<PAGE> 1039
The following is a brief description of the potential disadvantages,
adverse consequences and risks of the consolidation that are applicable to all
of the funds. This description is qualified in its entirety by the more detailed
discussion in the section entitled "RISK FACTORS" contained in the consent
solicitation.
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may depress the market price of American
Spectrum shares independent of the financial performance of American
Spectrum. REIT stocks have underperformed in the broader equity market
in 1998 and 1999. The market conditions for REIT stocks generally could
affect the market price of the American Spectrum shares.
- There is currently no market for American Spectrum shares. American
Spectrum shares may trade at prices below the Exchange Value per share
of $15. The Exchange Value per share of $15 represents our estimate of
the net asset value per share of American Spectrum. However, the market
may value American Spectrum shares at less than their net asset value
per share.
- The investment of any limited partners of the funds who become
stockholders will change into freely tradable American Spectrum shares.
Consequently, some of these stockholders may choose to sell American
Spectrum shares upon listing at a time when demand for American
Spectrum shares is relatively low. As a result, American Spectrum
shares may trade at prices substantially less than their Exchange
Value.
- American Spectrum will have a higher ratio of indebtedness to assets
than many REITs. This ratio is frequently referred to as the leverage
ratio. American Spectrum will have a ratio of total indebtedness of
assets of 63%, assuming all funds participate in the consolidation.
American Spectrum intends to increase its leverage to 70%. American
Spectrum will also have a lower capitalization than many publicly
traded REIT's. This could adversely affect the market price for
American Spectrum shares.
- We do not intend to qualify as a REIT until 2002 and are not required
to qualify as a REIT. If we do not qualify as a REIT, we will be
subject to a corporate income tax, which could decrease cash available
for distribution.
- Some related parties will receive benefits that may exceed the benefits
that they would derive from ownership of their interests in the CGS
privately held entities and from their interests in the funds if the
consolidation were not consummated. Your managing general partner is a
subsidiary of CGS. CGS controls the general partners of the funds.
Assuming that all of the funds are included in the consolidation, the
general partners of the funds and their affiliates of the general
partners will receive an estimated aggregate of 2,628,655 American
Spectrum shares and limited partnership interests in the Operating
Partnership. In addition, American Spectrum and its subsidiaries will
employ some of the officers and employees of CGS and its privately held
entities. As a result of these benefits, the general partners of your
fund have a conflict of interest in connection with the consolidation.
- The CGS privately-held entities incurred losses in 1997 of $3,684,000,
in 1998 of $4,832,000, in 1999 of $12,086,000 and in the six months
ending June 30, 2000 of $747,000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first six months of 2000. We cannot
assure you that we will succeed and that we will become profitable.
- American Spectrum will merge with the CGS privately held entities and
the CGS Management Company. These companies are engaged in the business
of serving as general partners of limited partnerships and investing in
real properties. As a result of the consolidation, American Spectrum
will be responsible for liabilities arising out of the prior operations
of these entities. These liabilities may include unknown contingent
liabilities and these liabilities may exceed those shown on the balance
sheets. As a result, we may expend cash to pay these liabilities.
- American Spectrum established the terms of the consolidation, including
the Exchange Values, without any arm's-length negotiations.
Accordingly, the Exchange Value may not reflect the value that you
could realize upon a sale of your units or a liquidation of your fund's
assets.
S-5
<PAGE> 1040
- The managing general partner of your fund did not retain an independent
representative to act on your behalf, or on behalf of the other limited
partners in structuring and negotiating the terms and conditions of the
Consolidation. These terms and conditions include the consideration
which you will receive. The funds did not give limited partners the
power to negotiate the terms and conditions of the consolidation or to
determine what procedures to use to protect the rights and interests of
the limited partners. If each general partner had retained an
independent representative for their respective funds, it could have
resulted in different terms of the consolidation which may have
benefitted the limited partners.
- The limited partners do not have the right to elect to receive a cash
payment equal to the value of their interests in each fund if your fund
approves the consolidation and you voted "Against" it. You only have
the right to elect to receive notes as your portion of the
consideration received by your fund. The amount of notes that you
receive is based upon the estimated proceeds that you would receive in
an orderly liquidation of your fund in accordance with the terms of
your fund's partnership agreement. As a holder of notes, you are likely
to receive the full face amount of the notes only if you hold the notes
to maturity. The notes will mature approximately eight years after the
consolidation.
- At the time that you and the other limited partners vote on the
consolidation, there are several uncertainties that will preclude you
from making a complete evaluation of the transaction. Most importantly,
you will not know which funds will approve the consolidation, and thus,
which properties American Spectrum will acquire. These factors will
affect the post-consolidation size and scope of American Spectrum. You
also will not know how many limited partners of the funds will elect to
receive notes or the capital structure of American Spectrum.
- Stanger's opinion as to the fairness to the funds of the allocation of
American Spectrum shares, from a financial point of view, relies on
information prepared by the general partners of the funds and the CGS
Management Company. The general partners are controlled by CGS, which,
in turn, controls American Spectrum. Because Stanger will not update
its fairness opinion, changes may occur from the date of the fairness
opinion that might affect the conclusions expressed in such opinion.
- Stanger's fairness opinion addresses solely the allocation of the
American Spectrum shares. The opinion does not address the allocation
of shares for all possible combinations of participating funds. In
addition, the opinion does not address any other terms of the
transaction, the trading value of the shares, or alternatives to the
transaction. Accordingly, there are matters which are significant to
limited partners' evaluation of the consolidation which are not
addressed by the fairness opinion.
- There is a risk that third parties will assert claims against American
Spectrum that the general partners of the fund breached their fiduciary
duties to their limited partners or that the consolidation violates the
relevant partnership agreements and that they may commence litigation
against American Spectrum. As a result, American Spectrum may incur
costs associated with defending or settling such litigation or paying
any judgment if it loses. As of the present time, no limited partner of
the funds has initiated any lawsuit on such grounds.
- As an American Spectrum stockholder, you will have different rights and
remedies against American Spectrum, its officers and directors than you
have against the managing general partner of your fund. The legal
remedies available to American Spectrum, to you and to other
stockholders after the consolidation against any officers or directors
of American Spectrum may be more limited.
- An active secondary market for the notes will not likely develop,
making it difficult for noteholders to sell their notes prior to
maturity, or subjecting them to the risk of selling the notes at
substantial discounts to facilitate their sale. Thus, a noteholder will
likely not be able to liquidate his investment in the event of an
emergency, and the notes may not be readily acceptable as loan
collateral. Limited partners electing to receive notes are likely to
receive the full face amount of their notes only if they hold the
obligations to maturity, which is eight years after the closing date of
the consolidation.
S-6
<PAGE> 1041
- Upon consummation of the consolidation, American Spectrum will have
more indebtedness and leverage than the funds. American Spectrum
currently has a ratio of debt to total value of assets of 63% and
intends to increase their ratio to ___% following the consummation of
consolidation.
- Because American Spectrum has not identified new properties, it is not
possible to provide you with information to evaluate the merits of the
properties in which American Spectrum may invest in the near future.
You also will not have the ability as a stockholder or noteholder of
American Spectrum to approve or disapprove of American Spectrum's
investments. American Spectrum may not buy properties on financially
attractive terms. It may not make a profit on its investments.
- Like your investment in the funds, if you become a stockholder in
American Spectrum, your investment will be subject to the risks of
investing in real property. In general, a downturn in the national or
local economy, changes in the zoning or tax laws or the availability of
financing could affect the performance and value of the properties.
Also, because real estate is relatively illiquid, American Spectrum may
not be able to respond promptly to adverse economic or other conditions
by varying its real estate holdings.
- We intend to continue CGS's strategy of investing in properties that we
believe are under-valued. Our success will depend on future events that
increase the value of the properties. As a result, this strategy has
greater risks than investing in properties with proven cash flows.
- The partnership agreement of each of the funds prohibits transactions
with affiliates, such as the consolidation with us, and the
consolidation could not close without amendments to the partnership
agreement.
TAX RISKS
TRANSFER OF ASSETS TO AMERICAN SPECTRUM MAY FAIL TO QUALIFY AS A TRANSACTION
WHERE NO GAIN IS RECOGNIZED TO THE TRANSFEROR.
The fund intends to report the consolidation on the basis that it will
not result in gain by American Spectrum or loss to any limited partner who
elects to receive shares except in an amount equal to the liabilities assumed by
American Spectrum in excess of the basis of the assets contributed to American
Spectrum. We cannot assure you that the IRS will not challenge this treatment of
the transaction. If the IRS asserts a challenge, it may prevail. If the IRS
prevails your fund will recognize additional gain. The gain recognized by your
fund will equal the amount by which the fair market value of the shares
received, increased by the liabilities assumed, exceeds the basis of the assets
transferred, and your share of the gain will be allocated to you.
YOUR FUND HAS LIABILITIES IN EXCESS OF THE TAX BASIS OF CONTRIBUTED ASSETS.
LIMITED PARTNERS WILL RECOGNIZE ADDITIONAL GAIN FROM THE CONSOLIDATION.
Your fund has liabilities in excess of its tax basis in the assets
contributed to American Spectrum. Accordingly, it may realize gain upon the
transfer of its assets to American Spectrum in return for American Spectrum
shares or notes as part of the consolidation. As a partner of your fund, you
will bear a pro rata portion of your fund's income tax liability resulting from
any gain on the consolidation. The estimate of your tax liabilities is set forth
in "Overview--Tax Consequences of The Consolidation."
IF AMERICAN SPECTRUM FAILS TO ELECT REIT STATUS OR QUALIFY AS A REIT FOR TAX
PURPOSES, AMERICAN SPECTRUM WILL PAY FEDERAL INCOME TAXES AT CORPORATE RATES.
American Spectrum does not intend to qualify as a REIT until 2002.
Further, American Spectrum is not required to make a REIT election. If American
Spectrum fails to qualify as a REIT, or its Board of Directors determines not to
make a REIT election or for any time period before an effective REIT election,
American Spectrum will be taxed as a C corporation.
American Spectrum's qualification as a REIT depends on meeting the
requirements of the Code and Regulations applicable to REITs. American Spectrum
has not requested, and does not plan to request, a ruling from the Internal
Revenue Service that it qualifies as a REIT. It has received an opinion,
however, from its tax counsel,
S-7
<PAGE> 1042
Proskauer Rose LLP, that it will meet the requirements for qualification as a
REIT. Proskauer Rose LLP's opinion is based upon representations made by
American Spectrum regarding relevant factual matters, existing Code provisions,
applicable regulations issued under the Code, reported administrative and
judicial interpretations of the Code and regulations, Proskauer Rose LLP's
review of relevant documents and the assumption that American Spectrum will
operate in the manner described in this consent solicitation.
However, you should be aware that opinions of counsel are not binding
on the Internal Revenue Service or any court. Furthermore, the conclusions
stated in the opinion are conditioned on, and American Spectrum's continued
qualification as a REIT will depend on, American Spectrum's management meeting
various requirements discussed in more detail under the heading "Federal Income
Tax Considerations -- Taxation of American Spectrum" beginning on page ____.
A REIT is subject to an entity level tax on the sale of certain
property it held before electing REIT status. During the 10-year period
following its qualification as a REIT, American Spectrum will be subject to an
entity level tax on the income it recognizes upon the sale of assets including
all the assets transferred to it as part of the consolidation it held before
electing REIT status in an amount up to the amount of the built-in gains at the
time American Spectrum becomes a REIT.
If American Spectrum fails to qualify as a REIT, it would be subject to
federal income tax at regular corporate rates. In addition to these taxes,
American Spectrum may be subject to the federal alternative minimum tax and
various state income taxes. If American Spectrum qualifies as a REIT and its
status as a REIT is subsequently terminated or revoked, unless specific
statutory provisions entitle American Spectrum to relief, it could not elect to
be taxed as a REIT for four taxable years following the year during which it was
disqualified. Therefore, if American Spectrum loses its REIT status, the funds
available for distribution to you, as a stockholder, would be reduced
substantially for each of the years involved.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's amended and
restated articles of incorporation includes limitations on the ownership by any
single stockholder of any class of American Spectrum capital stock. The amended
and restated articles of incorporation also prohibit anyone from buying shares
if the purchase would cause American Spectrum to lose its REIT status. These
restrictions may discourage a change in control of American Spectrum, deter any
attractive tender offers for American Spectrum shares or limit the opportunity
for you or other stockholders to receive a premium for your American Spectrum
shares.
If American Spectrum cannot meet its REIT distribution requirements, it may have
to borrow funds or liquidate assets to maintain its REIT status.
For taxable years commencing after December 31, 2000, subject to
adjustments that are unique to REITs, a REIT generally must distribute 90% of
its taxable income. In the event that American Spectrum does not have sufficient
cash, this distribution requirement may limit American Spectrum's ability to
acquire additional properties. Also, for the purposes of determining taxable
income, the Code may require American Spectrum to include rent and other items
not yet received and exclude payments attributable to expenses that are
deductible in a different taxable year. As a result, American Spectrum could
have taxable income in excess of cash available for distribution. If this
occurred, American Spectrum may have to borrow funds or liquidate some of its
assets in order to make sufficient distributions and maintain its status as a
REIT or obtain approval from its stockholders in order to make a consent
dividend.
Changes in the tax law could adversely affect American Spectrum's REIT status.
American Spectrum's treatment as a REIT for federal income tax purposes
is based on the tax laws that are currently in effect. We are unable to predict
any future changes in the tax laws that would adversely affect American
Spectrum's status as a REIT. In the event that there is a change in the tax laws
that prevents American Spectrum from qualifying as a REIT or that requires REITs
generally to pay corporate level federal income taxes, American Spectrum may not
be able to make the same level of distributions to its stockholders. In
addition, such change may limit American Spectrum's ability to invest in
additional properties.
S-8
<PAGE> 1043
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's property for sale with brokers and commence the process
of liquidating the fund's property. The general partners believe that it could
take an extended time to complete the sale of the fund's property and is likely
to take in excess of one year. After completing the liquidation, the fund would
distribute the net proceeds, except for a portion which will be held by the fund
to cover potential liability for representations and warranties in the sales
contract and administrative expenses of winding up the fund.
EFFECT ON FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Upon completion of the transaction, the operations and existence of the
partnerships will cease. See "THE CONSOLIDATION" in the consent solicitation. If
the transaction is not completed, we contemplate liquidation of the
partnerships, which would result in an all-cash payment to you in the near
future.
If the consolidation is not approved, the general partners plan to
promptly list the fund's properties for sale with brokers and commence the
process of liquidating the fund's properties. The general partners believe that
it could take an extended time to complete the sale of all of the fund's
properties and is likely to take in excess of one year. After completing the
liquidation, the fund would distribute the net proceeds, except for a portion
which will be held by the fund to cover potential liability for representations
and warranties in the sales contract and administrative expenses of winding up
the fund.
S-9
<PAGE> 1044
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND
The proposed number of American Spectrum shares to be allocated to your
fund was determined by American Spectrum as set forth under "Allocation of
American Spectrum Shares" below.
The managing general partner of your fund determined the fairness of the value
of the American Spectrum shares to be allocated to the fund based in part on the
appraisal by Stanger of the value of the property portfolio held by your fund.
In addition, your fund, the other funds and American Spectrum engaged Stanger to
provide your fund and the other funds with an opinion that the allocation of the
American Spectrum shares (i) between the funds and the CGS privately held
entities, including the CGS Management Company and (ii) among the funds, is fair
from a financial point of view to the limited partners of the funds.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your fund in the consolidation. This data assumes that
none of the limited partners of your fund have elected to receive notes. You
should note that the American Spectrum shares may trade at prices below the
Exchange Value upon listing on the ____________.
<TABLE>
<CAPTION>
Number of Exchange Value of
American Exchange American Spectrum GAAP Book Value Percentage of
Spectrum Shares Value of Shares per $1,000 June 30, 2000 per Percentage of Total American
Allocated to American Spectrum Original Limited Average $1,000 Total Exchange Spectrum Shares
Fund (1) Shares(2) Partner Investment (2) Original Investment Value Issued (3)
-------- --------- ---------------------- ------------------- ----- ----------
<S> <C> <C> <C> <C> <C>
545,451 $ 8,181,768 $ 681.81 $ (33.19) 7.40% 7.40%
</TABLE>
---------------------------
(1) The American Spectrum shares issuable to limited partners of each fund
as set forth in this chart will not change if American Spectrum
acquires fewer than all of the funds in the consolidation. This number
assumes that none of the limited partners of the fund has elected the
notes option. We determined the number of shares issued to each fund or
entity by dividing the Exchange Value for the fund or entity by $15,
which is our estimate of the net asset value per share of the American
Spectrum shares.
(2) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of your fund's assets, as determined by Stranger; plus
(ii) the book value of non-real estate asset of your fund; minus (iii)
mortgage and other indebtedness of your fund and minus (iv) your fund's
allocable share of the consolidation expenses. Upon listing the
American Spectrum shares on the ____________, the actual values at
which the American Spectrum shares will trade on the ____________ may
be at prices below $15.
(3) Includes shares issuable on exchange of limited partnership interests
issued to the owners of the CGS privately held entities.
The fund has paid consolidation expenses in excess of its pro rata
share of the consolidation expenses. The prepaid consolidation expenses are
included as an asset on the fund's balance sheet. As a result, the fund will be
credited with the consolidation expenses paid by it in determining its value and
the number of American Spectrum shares to be issued to its limited partners. If
the consolidation is not approved by the limited partners, the general partner
or its affiliates will repay the excess consolidation expenses paid by it.
The following table provides information concerning the property owned
by your fund, including its appraised value. The appraisal was prepared by
Stanger on March 31, 2000.
<TABLE>
<CAPTION>
Property Property Location Appraised Value Property Type Property Size Year Constructed
-------- ----------------- --------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Maple Tree Shopping Ctr Elisville, MO 3,290,000 Shopping Center 72,148 sq. ft. 1974
Park Plaza I and II Indianapolis, IN 3,380,000 Office/warehouse 95,080 sq. ft. 1975 & 1979
Jackson Industrial A Indianapolis, IN 5,440,000 Office/warehouse 320,000 sq. ft. 1976 & 1980
Morenci Professional Park Indianapolis, IN 3,480,000 Office/warehouse 105,600 sq. ft. 1975 & 1979
</TABLE>
S-10
<PAGE> 1045
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum shares issued in the consolidation will be allocated as
follows:
American Spectrum shares will be allocated (1) between the funds as a
group and the CGS privately held entities and the CGS Management Company, and
(2) among the funds, based upon the estimated net asset value, computed as
described in the accompanying consent solicitation (the "Exchange Value") of
each of the funds, the CGS privately held entities and the CGS Management
Company. Your managing general partner believes that the Exchange Values of the
funds, the CGS privately held entities and the CGS Management Company represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the consolidation, as of June 30, 2000, and constitute a reasonable
basis for allocating the American Spectrum shares between the funds and the CGS
privately held entities, including the CGS Management Company, and among all the
funds.
The following summarizes the determination of the Exchange Value and
the allocation of American Spectrum shares to your fund and the other funds. We
first determined the Exchange Value of each of the funds, the CGS privately held
entities and the CGS Management Company. The Exchange Value of the funds and the
CGS privately held entities were determined based on appraisals of their real
properties prepared by Stranger. The appraised values were then adjusted for
other assets and liabilities of the entities and allocable expenses of the
consolidation. The Exchange Value for the CGS Management Company was determined
based on valuation methods we believe are reasonable. These valuation methods
are described in the consent solicitation. The sum of these values is the
Exchange Value of all of our assets. To allocate the shares, we arbitrarily
selected an Exchange Value per share of $15. We did not consult with any
independent third parties in selecting $15. We allocated to each fund a number
of American Spectrum shares equal to the Exchange Value of its assets divided by
$15. In accordance with each fund's partnership agreement, all of the American
Spectrum shares were allocated to the limited partners. Thus, each American
Spectrum share represents $15 of Exchange Value. Since the market may not value
the American Spectrum Shares as having a value equal to the Exchange Value, the
American Spectrum shares may trade at price of less than $15 per share.
For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares" on page __ of the consent solicitation.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN THE
FUNDS AND THE CGS PRIVATELY HELD ENTITIES, AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
PERCENTAGE OF SHARE SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION (1) SHARES ISSUED
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 5,874,720 5.32 391,648 5.32%
Sierra Pacific Development Fund II 12,590,013 11.39 839,334 11.39%
Sierra Pacific Development Fund III 429,832 0.40 28,655 0.40%
Sierra Pacific Institutional Properties V 4,920,557 4.45 328,037 4.45%
Sierra Pacific Pension Investors '84 18,186,978 16.46 1,212,465 16.46%
Nooney Income Fund Ltd., L.P. 10,250,749 9.27 683,383 9.27%
Nooney Income Fund Ltd. II, L.P. 15,315,594 13.86 1,021,040 13.86%
Nooney Real Property Investors-Two, L.P. 8,181,768 7.40 545,451 7.40%
CGS privately held entities 31,748,046 28.73 2,116,536 28.73%
CGS Management Company 3,020,122 2.73 201,341 2.73%
================================================================
Totals $110,518,379 100.00% 7,367,890 100.00%
</TABLE>
----------------------
(1) Some of the equity owners in the CGS privately held entities, including
affiliates of American Spectrum, will be allocated Operating
Partnership units instead of American Spectrum shares. Each Operating
Partnership unit provides the same rights to distributions as one share
of common stock in American Spectrum and, subject to some limitations,
is exchangeable for American Spectrum shares on a one-for-one basis
after a twelve month period.
S-11
<PAGE> 1046
After determining the Exchange Value for the fund, the Exchange Value
to be allocated to the partners of the fund in accordance with the provisions of
the partnership agreement allocable to distributions on liquidation.
Under the partnership agreement, after payment of all debts and
liabilities of the fund, the net proceeds on liquidation following a sale of all
of the fund's properties will be distributed as follows:
- first, pro rata to the limited partners until they receive an amount
equal to their share of previously undistributed net income;
- second, to the limited partners in an amount equal to their share of
their adjusted capital contribution;
- third, to the general partners in an amount equal to any loans or
advances they have made;
- fourth, to the general partners in an amount equal to their share of
previously undistributed net income;
- fifth, to the general partners in an amount equal to their adjusted
capital contribution;
- sixth, pro rata to the limited partners in the amount equal to the
excess of 7% per annum on the adjusted capital contribution, minus
prior distributions to the limited partners;
- seventh, pro rata to the general partners in an amount equal to the
excess of 7% per annum on their adjusted capital contribution over
prior distributions to the general partners; and
- eighth, the balance 75% to all of the partners in proportion to their
capital contributions and 25% to the general partners.
Under the terms of the Partnership Agreement, the general partners would not be
entitled to any of the American Spectrum shares issuable of the fund.
Accordingly, all of the American Spectrum shares issuable to the partners of the
fund is being allocated to the limited partners.
S-12
<PAGE> 1047
FAIRNESS OF THE CONSOLIDATION
GENERAL
Your managing general partner believes the consolidation to be fair to,
and in the best interests of, the fund and its limited partners. After careful
evaluation, your managing general partner has concluded that the consolidation
is the best way to maximize the value of your investment. Your managing general
partner recommends that you and the other limited partners approve the
consolidation of your fund and receive American Spectrum shares in the
consolidation.
Although your managing general partner believes the terms of the
consolidation are fair to you and the other limited partners, your managing
general partner has conflicts of interest with respect to the consolidation,
including, among others, its realization of substantial economic benefits upon
completion of the consolidation. For a further discussion of the conflicts of
interest and potential benefits of the consolidation to your managing general
partner see "Conflicts of Interest -- Substantial Benefits to Related Parties"
on page __ of the consent solicitation.
Also, your managing general partner wants you to note:
- The market prices for the American Spectrum shares may fluctuate with
changes in market and economic conditions, the financial condition of
American Spectrum and other factors that generally influence the market
prices of securities, including the market perception of REITs in
general. Such fluctuations may significantly affect liquidity and
market prices independent of the financial performance of American
Spectrum.
- American Spectrum established the terms of its offer, including the
Exchange Value, without any arm's-length negotiations. Accordingly, our
offer consideration may not reflect the value that you could realize
upon a sale of your units or a liquidation of your fund's assets.
- You do not have the right to elect to receive a cash payment equal to
the value of your interest in the fund if your fund approves the
consolidation and you have voted "Against" it. You only have the right
to elect to receive, as your portion of the consideration received by
your fund, notes. As a holder of notes, you are likely to receive the
full face amount of the notes only if you hold the notes to maturity.
The notes will mature approximately eight years after the
consolidation. You may receive payments earlier only if American
Spectrum chooses to repay the notes prior to the maturity date, or to
the extent that American Spectrum is required to prepay the notes in
accordance with their terms following property sales or refinancings.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
GAAP Book Value June 30, Exchange Value per
Estimated Going Concern Value Estimated Liquidation Value 2000 per Average $1,000 $1,000 Original
per $1,000 Original Investment per $1,000 Original Investment Original Investment Investment (1)
------------------------------ ------------------------------ ------------------- --------------
<S> <C> <C> <C>
$566.00 - $624.00 $638.00 $(33.19) $681.81
</TABLE>
(1) Values are based on the Exchange Value per share of $15 established by
us. The Exchange Value of each of the funds is our estimate of net
asset value of the fund's assets. The Exchange Value equals (i) the
appraised value of each fund's assets, as determined by Stanger; plus
(ii) the book value of non-real estate assets of each fund; minus (iii)
mortgage and other indebtedness of each fund; minus (iv) each fund's
allocable portion of the consolidation expenses. Upon listing the
American Spectrum shares on the _________, the actual values at which
the American Spectrum shares will trade on the _________ may be at
prices below $15.
We do not know of any factors that may materially affect (i) the value
of the consideration to be allocated to the fund, (ii) the value of the units
for purposes of comparing the expected benefits of the consolidation to the
potential alternatives considered by the managing general partner or (iii) the
analysis of the fairness of the consolidation.
S-13
<PAGE> 1048
BENEFITS OF THE CONSOLIDATION
WHY YOUR MANAGING GENERAL PARTNER BELIEVES THE CONSOLIDATION IS FAIR TO YOU
Your managing general partner believes that the terms of the
consolidation are fair, and that they will maximize the return on your
investment for the following principal reasons:
- Your managing general partner believes that the expected
benefits of the consolidation to you outweigh the risks and
potential detriments of the consolidation to you. These
benefits include the following:
- American Spectrum plans to make additional investments and
obtain additional financing. As a result, we believe that
there is greater potential for increases in the price of your
American Spectrum shares over time and increased distributions
to you as an American Spectrum stockholder.
- We believe the consolidation may provide you with increased
liquidity. Therefore, you may have the ability to find more
buyers for your American Spectrum shares and the price you
receive is more likely to be the market price.
- We expect to make regular cash distributions to our
shareholders. We believe that these distributions will
increase over time or as a result of future acquisitions.
- We will own a larger number of properties and have a broader
group of property types, tenants and geographic locations than
your fund. This increased diversification will reduce the
dependence of your investment upon the performance of a
particular company.
- The combination of the funds under the ownership of American
Spectrum will result in cost savings.
- Your managing general partner reviewed the estimated value of
the consideration to be received by you if your fund is
consolidated with American Spectrum, and compared it to the
consideration that you might have received under the
alternatives to the consolidation. Your managing general
partner considered the continuation of the funds without
change and the liquidation of the funds and the distributions
of the net proceeds to you. They concluded that over time the
likely value of American Spectrum shares would be higher than
the value of the consideration you would receive if they
selected one of the other alternatives.
- Your managing general partner considered that you may vote for
or against the consolidation, and, if you vote against it, you
may elect to receive either American Spectrum shares or notes
if your fund approves the consolidation.
- Your managing general partner considered the availability of
the notes option. The notes option gives limited partners
increased procedural fairness by providing an alternative to
limited partners. The notes provide greater security of
principal, a certainty as to maturity date, and regular
interest payments. In contrast, the American Spectrum shares
permit the holders of the American Spectrum shares to
participate in American Spectrum's potential growth and are a
more liquid investment.
- Your managing general partner have adopted the conclusions of
the fairness opinion and appraisals rendered by Stanger, which
are described in the consent solicitation.
You should note however that by voting "For" the transaction you would
be precluding the fund from entering into alternatives, including liquidation of
the fund. The alternatives have some potential benefits, including the
following:
- Liquidation provides liquidity to you as properties are sold.
You would receive the net liquidation proceeds received from
the sale of your fund's assets.
- The amount that you would receive would not be dependent on
the stock market's valuation of American Spectrum.
S-14
<PAGE> 1049
- You would avoid the risks of continued ownership of your fund
and ownership of American Spectrum.
Another alternative would be to continue your fund. Continuing your
fund without change would have the following benefits:
- Your fund would not be subject to the risks associated with
the ongoing operations of American Spectrum. Instead each fund
would remain a separate entity with its own assets and
liabilities.
- You would continue to be entitled to the safeguards of your
partnership agreement.
- Your fund's performance would not be affected by the
performance of the other funds and assets that American
Spectrum will acquire in the consolidation.
- Eventually, your fund would liquidate its holdings and
distribute the net proceeds in accordance with the terms of
your fund's partnership agreement.
- There would be no change in your voting rights or your fund's
operating policies.
- Your fund would not incur its share of the expenses of the
consolidation.
- For federal income tax purposes, income from your fund may,
under certain circumstances, be offset by passive activity
losses generated from your other investments; you lose the
ability to deduct passive losses from your investment in
American Spectrum
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you from the
consideration.
However, as discussed under "RECOMMENDATION AND FAIRNESS DETERMINATION"
in the consent solicitation, your managing general partner believes that the
disadvantages of the alternatives outweigh the benefits.
EXPENSES OF THE CONSOLIDATION
If your fund approves the consolidation, the portion of the
consolidation expenses attributable to your fund will be paid by your fund, as
detailed below. The number of American Spectrum shares paid to your fund would
reflect a reduction for your fund's expenses of the consolidation. Consolidation
expenses are expected to range from 2.5% to 3.5% of the estimated value of the
American Spectrum shares payable to each of the funds.
If the consolidation of your fund is not approved, we will bear a
percentage of all consolidation expenses equal to the total number of
abstentions and "Against" votes cast by the limited partners of your fund
divided by the total number of abstentions and votes cast by you and the other
limited partners of your fund. In such event, your fund will bear the remaining
consolidation expenses.
The following table sets forth the consolidation expenses for your
funds entities and the CGS Management Company:
The following table sets forth the estimated consolidation expenses of
consolidating with your fund:
<TABLE>
<CAPTION>
Pre-Closing Transaction Costs
<S> <C>
Legal Fees(1) ........................... $ 43,500
Appraisals and Valuation(2) ............. 17,143
Fairness Opinions(3) .................... 29,907
Solicitation Fees(4) .................... 1,979
Printing and Mailing(5) ................. 4,949
Accounting Fees(6) ...................... 106,349
Pre-formation Cost(7) ................... 43,500
Subtotal ................................ $247,327
</TABLE>
S-15
<PAGE> 1050
<TABLE>
<CAPTION>
Closing Transaction Costs
<S> <C>
Title, Transfer Tax and Recording Fees(8) $ 21,750
Legal Closing Fees(9) ................... 11,817
Subtotal ................................ $ 33,567
Total ................................... $280,894*
</TABLE>
----------------------
* Estimated
(1) Aggregate legal fees to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of the
appraised value of your fund's properties to the total appraised value
of the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
(2) Aggregate appraisal and valuation fees to be incurred in connection
with the consolidation were $150,000. Your fund's pro rata portion of
these fees was determined based on the number of properties in your
fund.
(3) The funds received a fairness opinion from Stanger and the funds
incurred a fee of $202,037. Your fund's pro rata portion of these fees
was determined based on the ratio of the appraised value of the real
estate of your fund to the total appraised value of the real estate
assets of the funds and the CGS privately held entities based on the
appraisal prepared by Stanger, and the value of the assets of CGS
Management Company.
(4) Aggregate solicitation fees to be incurred in connection with the
consolidation are estimated to be $30,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(5) Aggregate printing and mailing fees to be incurred connection with the
consolidation are estimated to be $75,000. Your fund's pro rata portion
of these fees was determined based on the number of limited partners in
your fund.
(6) Aggregate accounting fees to be incurred in connection with the
consolidation are estimated to be $1,800,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds, the CGS privately held entities, and the CGS Management Company,
as of June 30, 2000.
(7) Aggregate pre-formation costs to be incurred in connection with the
consolidation are estimated to be $800,000. Your fund's pro rata
portion of these costs was determined based on the ratio of the
appraised value of your fund's real estate assets to the total
appraised value of the real estate assets of the funds and the CGS
privately held entities, based on the appraisal prepared by Stanger,
and the value of the assets of CGS Management Company.
(8) Aggregate title, transfer tax and recording fees to be incurred in
connection with the consolidation are estimated to be $400,000. Your
fund's pro rata portion of these fees was determined based on the ratio
of the value of fund's appraised value to the total appraised value of
the real estate assets of the funds and the CGS privately held
entities, based on the appraisal prepared by Stanger, and the value of
the assets of CGS Management Company.
S-16
<PAGE> 1051
(9) Aggregate legal closing fees to be incurred in connection with the
consolidation are estimated to be $200,000. Your fund's pro rata
portion of these fees was determined based on the ratio of your fund's
total assets as of June 30, 2000 to the total assets of all of the
funds and the CGS privately held entities, including the CGS Management
Company, as of June 30, 2000.
The solicitation fees related to the consolidation will be allocated
among the funds and American Spectrum depending upon whether the consolidation
is consummated. For purposes of the consolidation, the term "Solicitation Fees"
includes costs such as telephone calls, broker-dealer facts sheets, legal and
other fees related to the solicitation of comments, as well as reimbursement of
costs incurred by brokers and banks in forwarding the consent solicitation to
you and the other limited partners.
If American Spectrum acquires all of the funds, all of the solicitation
fees will be payable by American Spectrum. If American Spectrum acquires less
than all of the funds, all of the solicitation fees will be payable by American
Spectrum or the funds that are acquired in proportion to their respective
Exchange Values. If none of the funds are acquired by American Spectrum, all of
the solicitation fees will be payable by us.
DISTRIBUTIONS
The following table sets forth the distributions paid per $1000
investment in the periods indicated below. The original cost per unit was
$1,000.00.
<TABLE>
<CAPTION>
Year Ended December 31 Amount
---------------------- ------
<S> <C>
1995............................................... 0
1996............................................... 0
1997............................................... 0
1998............................................... 0
1999............................................... 0
Six months ended June 30, 2000..................... $0
======
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and distributions made by your fund to the general partners
and their affiliates to the amounts that would have been paid if the
compensation and distribution structure which will be in effect after the
consolidation had been in effect during the years presented below.
Under the partnership agreements, the general partners of your fund and
their affiliates are entitled to receive distributions as general partners and
fees in connection with managing the affairs of your fund. The partnership
agreements also provide that the general partners are to be reimbursed for their
expenses for administrative services performed for each fund, such as legal,
accounting, transfer agent, data processing and duplicating services.
The general partners and their affiliates are entitled to the following
fees from the fund:
- a property management fee equal to 5% of the gross revenues from real
properties of the fund;
- an administrative management fee equal to $30,000 per annum;
- reimbursement of out-of-pocket expenses, including salaries of
employees directly engaged in full time leasing, servicing, operation
or maintenance of the properties.
S-17
<PAGE> 1052
- a real estate commission on the sale of properties in an amount not to
exceed the lesser of (1) 4% of the gross sales price of the property,
(2) 9% of the gross proceeds received by the fund from the offering of
units or (3) 50% of the standard real estate commission; and
- a financing fee comparable with fees or commissions paid to others
rendering similar services.
American Spectrum intends to operate as an internally-advised REIT. As
part of the consolidation, your fund will share in the overall cost of managing
the consolidated portfolio of properties owned by American Spectrum with the
other participating funds and the other shareholders and holders of Operating
Partnership units. Affiliates of the general partners will receive dividends on
shares of American Spectrum issued to them in exchange for their interests in
the CGS Management Company and salaries and other compensation as officers and
directors of American Spectrum. These dividend payments and compensation are in
lieu of the payments to the general partners discussed above.
During the years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 2000, the aggregate amounts accrued or actually paid by
your fund to the general partner are shown below under "Historical" and the
estimated amounts of compensation that would have been paid had the
consolidation been in effect for the years presented as a "C" corporation or as
a REIT are shown below under "Pro Forma as a "C" Corporation" and "Pro Forma as
a REIT," respectively:
S-18
<PAGE> 1053
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS (1)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended
------------------------------------ June 30,
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
HISTORICAL(1):
Management Fees $121,111 $122,128 $105,322 $ 64,391
Administrative Fees 30,000 30,000 30,000 15,000
Leasing Fees
Construction Supervision Fees
Broker Fees --
General Partner Distributions --
Limited Partner Distributions
-------- -------- -------- --------
Total historical $151,111 $152,128 $135,322 $ 79,391
PRO FORMA AS A "C" CORPORATION:
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 1,686 129,608
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company -- 1,107 85,112 --
Restricted Stock and Stock Options 39,173 39,173 39,173 19,587
Salary, Bonuses and Reimbursements 121,647 121,647 121,647 60,824
-------- -------- -------- --------
TOTAL PRO FORMA AS "C" CORPORATION 160,820 163,613 375,540 80,410
======== ======== ======== ========
Distributions on American Spectrum Shares issuable
in respect of limited partnership interests 1,686 129,608
Distributions on American Spectrum Shares issuable
in respect of the CGS Management Company(3) -- 1,107 85,112 --
Restricted Stock and Stock Options 39,173 39,173 39,173 19,587
Salary, Bonuses and Reimbursements 121,647 121,647 121,647 60,824
-------- -------- -------- --------
TOTAL PRO FORMA AS REIT 160,820 163,613 375,540 80,410
======== ======== ======== ========
</TABLE>
S-19
<PAGE> 1054
----------------------
(1) For a description of the calculation of these amounts, please refer
to the notes to the table entitled "Compensation, Reimbursement and
Distributions to the General Partners" in the Consent Solicitation.
S-20
<PAGE> 1055
PROPERTY OVERVIEW
Your fund owns one office property located in California. Information
regarding the property as of September 30, 2000 is set forth below.
<TABLE>
<CAPTION>
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) PER
--------------------------- --------------------- LEASED
YEAR SQ. FT. SQUARE PERCENTAGE
PROPERTY STATE TYPE BUILT NUMBER % LEASED LEASED AMOUNT % OF TOTAL FOOT OWNERSHIP
-------- ----- ---- ----- ------ -------- ------ ------ ---------- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jackson Industrial A IN OFF/WARE 1976-80 320,000 100.00% 320,000 $783,200 2.15% $2.45 100%
Morenci Professional IN OFF/WARE 1975-79 105,600 89.77% 94,800 $428,580 1.17% $4.52 100%
Park
Park Plaza I and II IN OFF/WARE 1975-79 95,080 96.21% 91,480 $539,700 1.48% $5.90 100%
Maple Tree Shopping MO RETAIL 1974 72,149 100.00% 72,149 $469,183 1.29% $6.50 100%
Ctr.
</TABLE>
REQUIRED VOTE
LIMITED PARTNER APPROVAL REQUIRED BY THE PARTNERSHIP AGREEMENT
Section 5.2 of your fund's partnership agreement provides that the vote
of limited partners representing greater than 50% of the outstanding units is
required to approve a sale or disposition, at one time, of "all or substantially
all" of the assets of the fund, which is defined by the partnership agreement to
be a transaction or series of transactions resulting in the transfer of either
(a) 66 2/3% or more of the net book value of your fund's properties as of the
end of the most recently completed calendar quarter, or (b) 66 2/3% or more in
number of the properties owned by the fund. Because the consolidation of your
fund may be deemed to be a sale of "all or substantially all" of the assets of
the fund within the meaning of the partnership agreement, it may not be
consummated without the approval of limited partners representing greater than
50% of the outstanding units.
CONSEQUENCE OF FAILURE TO APPROVE THE CONSOLIDATION
If the limited partners of your fund representing greater than 50% of
the outstanding units do not vote "For" the consolidation, the consolidation may
not be consummated under the terms of the partnership agreement. In such event,
your managing general partner plans to continue to operate your fund as a going
concern and to eventually dispose of your fund's properties if, in your managing
general partner's opinion, market conditions permit, as contemplated by the
terms of the partnership agreement.
SOLICITATION OF VOTE IN FAVOR OF THE CONSOLIDATION
Through the consent solicitation accompanying this supplement, we are
asking you, the limited partners of the fund, to vote on whether to approve the
consolidation. As discussed above, limited partners holding in excess of 50% of
the outstanding units in the fund must vote "For" the consolidation on the
enclosed consent form in order for the fund to be included in the consolidation.
For the reasons set forth in the accompanying consent solicitation, your
managing general partner believes that the terms of the consolidation provide
substantial benefits and are fair to you and recommends that you vote "For"
approval of the consolidation. Before deciding how to vote on the consolidation,
you should read this supplement, the consent solicitation and the accompanying
materials in their entirety.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
Two amendments to the partnership agreement of the fund are necessary
in connection with the consummation of the consolidation. The amendments are
attached to this supplement as Appendix C.
First, the partnership agreement currently prohibits a sale of
properties to the general partners or their affiliates. Accordingly, consent of
the limited partners is being sought for an amendment to the partnership
agreement that permits such a transfer in connection with the consolidation.
Second, the partnership agreement does not contain a provision
addressing mergers. Under Missouri law, a merger with a corporation, like
American Spectrum, requires the consent of all of the partners, unless the
partnership agreement otherwise provides. The proposed amendment permits the
merger in connection with the consolidation if
S-21
<PAGE> 1056
the managing general partner and the limited partners holding a majority of the
units consent. The managing general partner believes that there will be reduced
transaction costs to the fund if the consolidation is consummated through a
merger rather than a sale of assets.
Accordingly, the managing general partner recommends that limited
partners vote to approve the amendments. The consent of limited partners holding
the majority of the outstanding units is required to amend the partnership
agreement. In addition to voting for the consolidation, limited partners must
vote "For" the amendments to allow the consummation of the consolidation.
VOTING PROCEDURES
The consent solicitation, this supplement, the accompanying transmittal
letter, the power of attorney and the limited partner consent constitute the
solicitation materials being distributed to you and the other limited partners
to obtain your votes "For" or "Against" the consolidation of your fund by
American Spectrum. Please note that we refer, collectively, to the power of
attorney and limited partner consent as the consent form.
In order for your fund to be consolidated into American Spectrum, the
limited partners holding greater than 50% of the outstanding units of your fund
must approve the consolidation and the amendments to the partnership agreement.
Your fund will be consolidated into American Spectrum through a merger with
American Spectrum in the manner described in the consent solicitation. A copy of
the Agreement and Plan of Merger dated________, 2000, by and between American
Spectrum and your fund is attached hereto as Appendix B. We encourage you to
read it.
If you vote "For" the consolidation, you will be effectively voting
against the alternatives to the consolidation. If the consolidation is not
approved [insert plans for fund].
You should complete and return the consent form before the expiration
of the solicitation period which is the time period during which limited
partners may vote "For" or "Against" the consolidation (the "Solicitation
Period"). The Solicitation Period will commence upon delivery of the
solicitation materials to you (on or about __________, 2000), and will continue
until the later of (a) __________, 2000 (a date not less than 60 calendar days
from the initial delivery of the solicitation materials), or (b) such later date
as we may select and as to which we give you notice. At our discretion, we may
elect to extend the Solicitation Period. We reserve the right to extend the
Solicitation Period even if a quorum has been obtained pursuant to your fund's
partnership agreement. Under no circumstances will the Solicitation Period be
extended beyond _________ __, 2000. Any consent form received by [ ], which was
hired by us to tabulate your votes, prior to [ ] [p.m.] [Eastern] time on the
last day of the Solicitation Period will be effective provided that such consent
has been properly completed and signed. If you do not return a signed consent
form by the end of the Solicitation Period, it will have the same effect as
having voted "Against" the consolidation and you will receive American Spectrum
shares if your fund approves the consolidation. If you submit a properly signed
consent form but do not indicate how you wish to vote, you will be counted as
having voted "For" the consolidation and will receive American Spectrum shares
if your fund approves the consolidation. You may withdraw or revoke your consent
form at any time in writing before consents from limited partners equal to more
than 50% of the required vote are received by your fund.
A copy of the consent form, on blue paper, accompanies each of the
supplements that you received in the mail with the consent solicitation. The
consent form consists of two parts. Part A seeks your consent to American
Spectrum's consolidation with your fund and certain related matters. The exact
matters which a vote in favor of the consolidation will be deemed to approve are
described above under "Required Vote." If you return a signed consent form but
fail to indicate whether you are voting "For" or "Against" any matter, you will
be deemed to have voted "For" such matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints ____________ and _____________ as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the consolidation. The power of
attorney is intended solely to ease the administrative burden of completing the
consolidation without requiring your signatures on multiple documents.
S-22
<PAGE> 1057
FEDERAL INCOME TAX CONSIDERATIONS
Tax matters are very complicated, and the tax consequences of the
consolidation to you will depend on the facts of your own situation. We urge you
to consult your tax advisor for a full understanding of the tax consequences of
the consolidation to you.
CERTAIN TAX DIFFERENCES BETWEEN THE OWNERSHIP OF UNITS AND AMERICAN SPECTRUM
SHARES
If your fund is acquired by American Spectrum you will receive American
Spectrum shares unless you elect the notes option, in which case you will
receive notes.
If your fund is acquired by American Spectrum and you receive American
Spectrum shares, your ownership of American Spectrum shares will affect the
character and amount of income reportable by you in the future. Because each of
the funds is a partnership for federal income tax purposes, it is not subject to
taxation. Currently, as the owner of units, you must take into account your
distributive share of all income, loss and separately stated partnership items,
regardless of the amount of any distributions of cash to you. Your fund supplies
that information to you annually on a Schedule K-1. The character of the income
that you recognize depends upon the assets and activities of your fund and may,
in some circumstances, be treated as income which may be offset by any losses
you may have from passive activities.
In contrast to your treatment as a limited partner, if your fund is
acquired by American Spectrum and you receive American Spectrum shares, as a
stockholder of American Spectrum you will be taxed based on the amount of
distributions you receive from American Spectrum. Each year American Spectrum
will send you a Form 1099-DIV reporting the amount of taxable and nontaxable
distributions paid to you during the preceding year. The taxable portion of
these distributions depends on the amount of American Spectrum's earnings and
profits. Because the consolidation may be a partially taxable transaction,
American Spectrum's tax basis in the acquired properties may be higher than the
fund's tax basis had been in the same properties. At the same time, however,
American Spectrum may be required to utilize a slower method of depreciation
with respect to certain properties than that used by the fund. As a result,
American Spectrum's tax depreciation from the acquired properties may differ
from the fund's tax depreciation. Accordingly, under certain circumstances, even
if American Spectrum were to make the same level of distributions as your fund,
a different portion of the distributions could constitute taxable income to you.
In addition, the character of this income to you as a stockholder of American
Spectrum does not depend on its character to American Spectrum. The income will
generally be ordinary dividend income to you and will be classified as portfolio
income under the passive loss rules, except with respect to capital gains
dividends, discussed below. Furthermore, if American Spectrum incurs a taxable
loss, the loss will not be passed through to you.
TAX CONSEQUENCES OF THE CONSOLIDATION
Tax Consequences of Your Fund's Transfer of Assets to American
Spectrum. If your fund is acquired by American Spectrum, your fund will merge
with American Spectrum, the Operations Partner or a subsidiary of the Operating
Partnership. For federal income tax purposes, American Spectrum intends to take
the position that the merger of American Spectrum and your fund will be
treated as a transfer of assets of your fund to American Spectrum in exchange
for shares and a subsequent distribution in liquidation of such shares.
Consistent with this position, for those limited partners who elect the notes
option, the transaction will be viewed as a sale of their interest in your fund
to American Spectrum.
Tax Consequences to Limited Partners Who Receive Shares. The fund
intends to report the consolidation on the basis that it qualifies for
non-recognition treatment under Section 351 of the Code. In general, under
Section 351(a) of the Code, no gain or loss is recognized if: (i) property is
transferred to a corporation by one or more individuals or entities in exchange
for the stock of that corporation; and (ii) immediately after the exchange, such
individuals or entities are in control of American Spectrum. For purposes of
section 351(a), control is defined as the ownership of stock possessing at least
80% of the total combined voting power of all classes of stock entitled to vote
and at least 80% of the total number of shares of all other classes of stock of
the corporation. American Spectrum has represented to Proskauer Rose LLP that,
following the consolidation, the partners of the funds together with other
qualified contributors, will own stock possessing at least 80% of the total
combined voting power of all classes of American Spectrum stock entitled to vote
and at least 80% of the total number of shares of all other classes of the
corporation. In addition, Section 351(e) of the Code and Treasury Regulations
promulgated thereunder prevent transfers to investment companies, including a
REIT, that directly or indirectly result in diversification of the transferors'
interest
S-23
<PAGE> 1058
from qualifying under Section 351 of the Code. American Spectrum and your fund
intend to take the position that Section 351(e) of the Code will not prevent the
consolidation from qualifying for non-recognition treatment under Section 351 of
the Code. American Spectrum and your fund intend to take the position that given
the length of time until the contemplated REIT election as well as the
uncertainty as to whether such election will be made, your fund will not
recognize gain upon the transfer of assets to American Spectrum. We cannot
assure you that the IRS will not challenge this treatment of the transaction. If
the IRS asserts a challenge, it may prevail. If the IRS prevails your fund will
recognize additional gain. Such gain will be equal to the amount by which the
fair market value of the shares received, increased by the liabilities assumed,
exceeds the basis of the assets transferred, and you will be allocated your
share of the gain. Proskauer Rose LLP is not opining as to whether gain will
be recognized by your or any other fund in the consolidation.
In general, gains or losses realized with respect to transfers of
non-dealer real estate in the consolidation are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your fund would be
combined with any other section 1231 gains and losses that you recognize in that
year. If the result is a net loss, such loss is characterized as an ordinary
loss. If the result is a net gain, it is characterized as a capital gain, except
that the gain will be treated as ordinary income to the extent that you have
"nonrecaptured section 1231 losses." For these purposes, the term
"non-recaptured section 1231 losses" means your aggregate section 1231 losses
for the five most recent prior years that have not been previously recaptured.
However, gain recognized on the sale of personal property will be taxed as
ordinary income to the extent of all prior depreciation deductions taken by your
fund prior to sale. In general, you may only use up to $3,000 of capital losses
in excess of capital gains to offset ordinary income in any taxable year. Any
excess loss is carried forward to future years subject to the same limitations.
Tax Consequences to Limited Partners Who Receive Notes. If your fund is
acquired by American Spectrum and you elect the notes option, you will recognize
gain on the sale of your interests. Your gain will be equal to the amount by
which the principal of the notes received exceeds the basis of your interest in
your fund, adjusted for your share of liabilities. Note recipients may be able
to report income based on the installment method which permits the payment of
tax as the principal amount is paid on notes held. See "Tax Consequences of the
Liquidation and Termination of your Fund."
In general, gains or losses realized with respect to transfers of
non-dealer real estate in the consolidation are likely to be treated as realized
from the sale of a "section 1231 asset" (i.e., real property and depreciable
assets used in a trade or business and held for more than one year). Your share
of gains or losses from the sale of section 1231 assets of your fund would be
combined with any other section 1231 gains and losses that you recognize in that
year. If the result is a net loss, such loss is characterized as an ordinary
loss. If the result is a net gain, it is characterized as a capital gain, except
that the gain will be treated as ordinary income to the extent that you have
"nonrecaptured section 1231 losses." For these purposes, the term
"non-recaptured section 1231 losses" means your aggregate section 1231 losses
for the five most recent prior years that have not been previously recaptured.
However, gain recognized on the sale of personal property will be taxed as
ordinary income to the extent of all prior depreciation deductions taken by your
fund prior to sale. In general, you may only use up to $3,000 of capital losses
in excess of capital gains to offset ordinary income in any taxable year. Any
excess loss is carried forward to future years subject to the same limitations.
Tax Consequences of the Liquidation and Termination of Your Fund. If
you elect to receive shares in the consolidation your fund should be deemed to
have sold its assets to American Spectrum for shares followed by a distribution
in liquidation of the shares to limited partners including you. If you elect the
notes option the transaction should be deemed the sale of your interests in your
fund to American Spectrum for notes. In either case the taxable year of your
fund will end at such time, and you must report, in your taxable year that
includes the date of the consolidation, your share of all income, gain, loss,
deduction and credit for your fund through the date of the consolidation
(including your gain, if any, resulting from the consolidation described above).
If you receive American Spectrum shares in the distribution your fund
should not recognize gain. See "Tax Consequences to Limited Partners who Receive
Shares."
Immediately before the distribution of shares by your fund to you, the
basis of the shares in the hands of your fund will equal the basis of the assets
transferred to American Spectrum reduced by the debt assumed by American
Spectrum and increased by the gain recognized by your fund. Such gain, if any,
will be allocated to the Partners and will increase their basis in their
partnership interest. Following the distribution in liquidation of shares by
your fund
S-24
<PAGE> 1059
to you, your basis in the American Spectrum shares will equal the adjusted basis
of your partnership interest in your fund.
If you elect the notes option, you will have gain at the time of your
sale of your interests in your fund. However, you may be able to report income
from the Notes based upon the installment method which permits you to pay tax as
the principal amount is paid on your Notes. See "Tax Consequences to Limited
Partners Who Receive Notes." Your basis in the Notes received in the
distribution will be the same as your basis in your units, after adjustment for
your distributive share of income, gain, loss, deduction and credit for the
final taxable year of your fund, plus any gain recognized in the distribution.
Tax Consequences to Tax Exempt Investors. Because the assets of your
fund are held for investment and not for resale, the consolidation will not
result in the recognition of material unrelated business taxable income by you
if you are a tax-exempt investor that does not hold units either as a "dealer"
or as debt-financed property within the meaning of section 514, and you are not
an organization described in section 501(c)(7) (social clubs), section 501(c)(9)
(voluntary employees' beneficiary associations), section 501(c)(17)
(supplemental unemployment benefit trusts) or section 501(c)(20) (qualified
group legal services plans) of the Code. If you are included in one of the four
classes of exempt organizations noted in the previous sentence, you may
recognize and be taxed on gain or loss on the consolidation. In addition, the
consolidation may result in the recognition by tax-exempt partners (excluding
educational organizations, qualified pension, profit-sharing and stock bonus
plans and certain closely held real property holding companies) of material
unrelated business taxable income to the extent the properties owned by the
funds are encumbered by debt.
Tax Consequences of the Consolidation to American Spectrum. American
Spectrum should not recognize gain or loss as a result of the consolidation. The
basis of the properties received by American Spectrum from the funds that are
acquired by American Spectrum will equal such fund's basis in the assets on the
date of the consolidation increased by any gain recognized by the fund as a
result of the consolidation.
The aggregate basis of American Spectrum's assets will be allocated
among such assets in accordance with their relative fair market values as
described in section 1060 of the Code. As a result, American Spectrum's basis in
each acquired property will differ from the fund's basis therein, and the
properties will be subject to different depreciable periods and methods as a
result of the consolidation. These factors could result in an overall change,
following the consolidation, in the depreciation deductions attributable to the
properties acquired from the funds.
S-25
<PAGE> 1060
APPENDIX A
A-1
<PAGE> 1061
Appendix A
DRAFT FORM OF OPINION
Sierra Pacific Development Fund
Sierra Pacific Development Fund II
Sierra Pacific Development Fund III
Sierra Pacific Institutional Properties V
Sierra Pacific Pension Investors '84
Nooney Income Fund Ltd., L.P.
Nooney Income Fund Ltd. II, L.P.
Nooney Real Property Investors - Two, L.P.
2424 S.E. Bristol Street
Newport Beach, CA 92618
Gentlemen:
You have requested that Robert A. Stanger & Co., Inc. ("Stanger")
provide an opinion to Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institutional Properties V, Sierra Pacific Pension Investors '84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P., and Nooney Real Property
Investors-Two, L.P. (the "Funds") as to the fairness from a financial point of
view to the limited partners of the Funds (the "Limited Partners") of certain
allocations of shares (the "Shares") which would be effective following the
approval by the Funds of a proposed consolidation (the "Consolidation"). The
proposed Consolidation would involve the merger of the Funds, certain real
properties (the "Affiliates Properties") and other net assets owned by
affiliates of the Funds' General Partners (the "Affiliated Entities"), and the
portion of CGS Real Estate Company's management business which provides
property management to the Funds and the Affiliates' Properties (the "CGS
Management Company") into American Spectrum Realty, Inc., a newly organized
Maryland corporation (the "Company"), and the issuance of the Shares of the
Company to the participants in the Consolidation.
We have been advised by the General Partners and the Funds that (i)
6,936,035 or 3,841,062 Shares will be issued in the Consolidation assuming
Maximum or Minimum Participation as defined below, and that such Shares will be
allocated to the Funds as summarized on Exhibit I hereto, subject to certain
closing adjustments; and (ii) each Limited Partner may elect to receive Notes
(the "Notes") based on the estimated liquidation value of such Limited
Partner's Fund as determined by the Fund's General Partner.
We have been further advised that in lieu of receiving Shares in the
Consolidation, certain owners of the Affiliated Entities or the CGS Management
Company may choose to receive a portion of such Shares in the form of units
(the "Units") in an operating partnership which will be a subsidiary of the
Company. We have been advised that each Unit will receive dividends equal to
the
A-1
<PAGE> 1062
dividend paid on each Share and will be convertible to Shares on a one-for-one
basis after a restriction period of twelve months.
Stanger, founded in 1978, provides information, research, investment
banking and consulting services to clients throughout the United States,
including major New York Stock Exchange member firms and insurance companies
and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The investment banking
activities of Stanger include financial advisory services, asset and securities
valuations, industry and company research and analysis, litigation support and
expert witness services, and due diligence investigations in connection with
both publicly registered and privately placed securities transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, and reorganizations and for estate, tax, corporate and
other purposes. In particular, Stanger's valuation practice principally
involves real estate investment trusts, partnerships, partnership securities
and assets typically owned through partnerships including, but not limited to,
real estate, mortgages secured by real estate, oil and gas reserves, cable
television systems, and equipment leasing assets.
In arriving at the opinion set forth below, we have:
o performed appraisals of each Fund's portfolio and the Affiliates'
Properties' portfolio of real properties as of March 31, 2000;
o reviewed a draft of the Consent Solicitation Statement/Prospectus in
substantially the form which will be filed with the Securities &
Exchange Commission (the "SEC") and provided to Limited Partners by
the Funds and the Company;
o reviewed the financial statements of the Funds contained in Forms 10-K
filed with the SEC for the Funds' 1997, 1998 and 1999 fiscal years (or
for the fiscal years ended November 30, 1997, 1998 and 1999 for Nooney
Real Property Investors Two LP, which reports on a different fiscal
year) and Forms 10-Q filed with the SEC for the quarter ended June 30,
2000 (quarter ended May 31, 2000 for Nooney Real Property Investors
Two LP);
o reviewed operating and financial information (including property level
financial data) relating to the business, financial condition and
results of operations of the Funds, the Affiliates' Properties and the
CGS Management Company;
o reviewed the CGS predecessor's audited financial statements for the
fiscal year ended December 31, 1999, interim financial statements
prepared by management for the six-months ending June 30, 2000, and
pro forma financial statements and pro forma schedules prepared by
management;
A-2
<PAGE> 1063
o reviewed information regarding purchases and sales of properties by
the CGS Management Company, the Funds or any affiliated entities
during the prior year and other information available relating to
acquisition criteria for similar properties to those owned by the
Funds and the Affiliated Entities;
o conducted discussions with management of the Funds and the Affiliated
Entities regarding the conditions in property markets, conditions in
the market for sales or acquisitions of properties similar to those
owned by the Funds and the Affiliated Entities, current and projected
operations and performance, financial condition, and future prospects
of the properties, the Funds and the CGS Management Company;
o reviewed certain information relating to selected real estate
management companies and/or transactions involving such companies;
o reviewed the methodology utilized by the General Partners to determine
the allocation of Shares between the Funds, and the CGS Management
Company and the Affiliated Entities, and among the Funds, in
connection with the Consolidation; and
o conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
The General Partners of the Funds requested that Stanger opine as to
the fairness, from a financial point of view, of the allocation of the Shares
between the Funds on the one hand, and the Affiliated Entities and the CGS
Management Company on the other hand, and among the Funds assuming that all
Limited Partners elect to receive Shares, and that either all Funds, elect to
participate in the Consolidation (the "Maximum Participation Scenario") or the
minimum number of Funds, as defined below, participate in the Consolidation
(the "Minimum Participation Scenario"). The Minimum Participation Scenario
assumes the consolidation of Sierra Pacific Development Fund, Sierra Pacific
Development Fund II, Sierra Pacific Institutional Properties V and Nooney Real
Property Investors Two.
To evaluate the fairness, from a financial point of view, of the
allocation of Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds,
we observed that the exchange values (the "Exchange Values") assigned to the
Funds, the Affiliates' Properties, and the CGS Management Company were
determined by the General Partners based on (i) independent appraisals provided
by Stanger of the estimated value of each real estate portfolio as of March 31,
2000; (ii) valuations made by the General Partners of other assets and
liabilities of each Fund as of June 30, 2000 to be contributed in the
Consolidation; (iii) valuations made by the General Partners of the Affiliated
Entities' other assets and liabilities as of June 30, 2000 to be contributed in
the Consolidation; (iv) the estimated value of the CGS Management Company as of
June 30, 2000, including the valuation of any assets and liabilities to be
contributed by the CGS Management Company in the Consolidation as of June 30,
A-3
<PAGE> 1064
2000; and (v) adjustments made by the General Partners to the foregoing values
to reflect the estimated costs of the Consolidation to be allocated among the
Funds, the Affiliated Entities and the CGS Management Company. We also observed
that the General Partners intend to make such pre-consolidation cash
distributions to Limited Partners in each Fund as may be necessary to cause the
relative Exchange Values of the Funds, the Affiliated Entities and the CGS
Management Company, and among the Funds, as of the closing date to be
substantially equivalent to the relative estimated Exchange Values as shown in
the Consent Solicitation Statement/Prospectus.
Relying on these Exchange Values, we observed that the allocation of
Shares offered to each Fund, the Affiliated Entities and the CGS Management
Company reflects the net asset value contributed to the Company by each Fund,
the Affiliated Entities and the CGS Management Company after deducting
estimated real estate transfer taxes and a pro rata share of the costs
associated with the Consolidation.
In rendering this opinion, we relied, without independent
verification, on the accuracy and completeness of all financial and other
information contained in the Consent Solicitation Statement/Prospectus or that
was otherwise publicly available or furnished or otherwise communicated to us.
We have not made an independent evaluation or appraisal of the CGS Management
Company or of the non-real estate assets and liabilities of the Funds, the
Affiliated Entities, or the CGS Management Company. We relied upon the General
Partners' balance sheet value determinations for the Funds, the Affiliated
Entities and the CGS Management Company and the adjustments made by the General
Partners to the real estate portfolio appraisals to arrive at the Exchange
Values. We also relied upon the assurance of the Funds, the General Partners,
the Affiliated Entities, the CGS Management Company and the Company that the
calculations made to determine allocations between joint venture participants
and within each of the Funds between the General Partners and Limited Partners
are consistent with the provisions of the joint venture agreements and each
Fund's limited partnership agreement, that any financial projections, pro forma
statements, budgets, value estimates or adjustments provided to us were
reasonably prepared or adjusted on bases consistent with actual historical
experience and reflect the best currently available estimates and good faith
judgments, that no material changes have occurred in the Funds', the Affiliated
Entities' or the CGS Management Company's business, asset or liability values
subsequent to the valuation dates cited above, or in the real estate portfolio
values subsequent to March 31, 2000, which are not reflected in the Exchange
Values, and that the Funds, the General Partners, the CGS Management Company,
the Affiliated Entities, and the Company are not aware of any information or
facts regarding the Funds, the Affiliated Entities, the CGS Management Company
or the real estate portfolios that would cause the information supplied to us
to be incomplete or misleading.
We were not asked to and therefore did not: (i) select the method of
determining the allocation of Shares or Notes or establish the allocations;
(ii) make any recommendations to the Limited Partners, the General Partners or
the Funds with respect to whether to approve or reject the Consolidation or
whether to select the Shares or the Notes offered in the Consolidation; (iii)
perform an analysis or express any opinion with respect to any combination of
Fund participation other than
A-4
<PAGE> 1065
those noted above and whether or not any specified combination will result from
the Consolidation; (iv) express any opinion as to: (a) the impact of the
Consolidation with respect to combinations of participating Funds other than
those specifically identified herein; (b) the tax consequences of the
Consolidation for Limited Partners, the General Partners, the Funds, the
Affiliated Entities or the Company; (c) the potential impact of any
preferential return to holders of Notes on the cash flow received from, or the
market value of, Shares of the Company received by the Limited Partners; (d)
the potential capital structure of the Company or its impact on the financial
performance of the Shares or the Notes; (e) the potential impact on the
fairness of the allocations of any subsequently discovered environmental or
contingent liabilities; (f) the terms of employment agreements or other
compensation between the Company and its officers, including the officers of
the CGS Management Company; or (g) whether or not alternative methods of
determining the relative amounts of Shares and Notes to be issued would have
also provided fair results or results substantially similar to those of the
allocation methodology used.
Further, we have not expressed any opinion as to (a) the fairness of
any terms of the Consolidation (other than the fairness of the allocations for
the combinations of Funds as described above) or the amounts or allocations of
Consolidation costs, including estimated transfer taxes, or the amounts of
Consolidation costs borne by the Limited Partners at various levels of
participation in the Consolidation; (b) the relative value of the Shares and
Notes to be issued in the Consolidation; (c) the impact, if any, on the trading
price of the Shares resulting from the decision of Limited Partners to select
Notes or the Shares or liquidate such Shares in the market following
consummation of the Consolidation; (d) the prices at which the Shares or Notes
may trade following the Consolidation or the trading value of the Shares or
Notes to be received compared with the current fair market value of the Funds'
portfolios and other assets if liquidated; (e) the ownership percentage of the
Company held by certain individuals affiliated with CGS as a result of the
Consolidation and the potential impact of such ownership on the voting
decisions or value of the Company; (f) the ability of the Company to qualify as
a real estate investment trust; (g) alternatives to the Consolidation; and (h)
any other terms of the Consolidation other than the allocations described
above.
Based upon and subject to the foregoing, it is our opinion that the
allocation of the Shares between the Funds on the one hand, and the Affiliated
Entities and the CGS Management Company on the other hand, and among the Funds
pursuant to the Consolidation assuming the participation scenarios cited herein
is fair to the Limited Partners of the Funds from a financial point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Funds and the General Partners that our entire analysis must be
considered as a whole and that selecting portions of analyses and the factors
considered, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying this opinion. Our opinion
is based on business, economic, real estate market, and other conditions as
they existed and could be evaluated as of the date of our analysis and
addresses the Consolidation in the context of information available as of the
date of our analysis. Events occurring after that date could affect the value
of the assets of the Funds, the
A-5
<PAGE> 1066
Affiliates' Properties or the CGS Management Company or the assumptions used in
preparing the opinion.
Very truly yours,
Robert A. Stanger & Co., Inc.
Shrewsbury, New Jersey
__________, 2000
A-6
<PAGE> 1067
EXHIBIT I
ALLOCATION OF SHARES
SHARES(1)
---------
Sierra Pacific Development Fund 408,338
----------------------------------------------------------- ---------
Sierra Pacific Development Fund II 803,077
----------------------------------------------------------- ---------
Sierra Pacific Development Fund III 19,910
----------------------------------------------------------- ---------
Sierra Pacific Institutional Properties V 276,735
----------------------------------------------------------- ---------
Sierra Pacific Pension Investors '84 1,326,703
----------------------------------------------------------- ---------
Nooney Income Fund Ltd., L.P. 699,267
----------------------------------------------------------- ---------
Nooney Income Fund Ltd. II, L.P. 1,049,093
----------------------------------------------------------- ---------
Nooney Real Property Investors Two, L.P. 537,610
----------------------------------------------------------- ---------
Affiliated Entities 1,772,465
----------------------------------------------------------- ---------
CGS Management Company 42,837
----------------------------------------------------------- ---------
--------
1 Assumes all Limited Partners elect to receive Shares. Certain owners of the
Affiliates' Properties and the CGS Management Company may elect to receive
a portion of the Shares in the form of restricted Units in the Company's
subsidiary operating partnership.
A-7
<PAGE> 1068
APPENDIX B
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is entered into as
of this _____ day of ____ 2000, by and between American Spectrum Realty, Inc., a
Maryland corporation (the "Company" or "American Spectrum") and Nooney Real
Property Investors-Two, L.P. (the "Merging Entity").
RECITALS:
WHEREAS, the American Spectrum and the Merging Entity (the "Parties,"
and individually, a "Party") hereto desire to merge the Merging Entity with and
into American Spectrum, pursuant to the Maryland General Corporation Law (the
"Maryland GCL"), and Missouri, with American Spectrum being the surviving entity
(the "Merger") as set forth in the registration statement of the Company on Form
S-4, No. 33-_______ including all amendments thereto (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC")
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), of
which the Prospectus/Consent Solicitation Statement of the Company (the
"Prospectus/Consent Solicitation Statement") is a part; and
WHEREAS, American Spectrum and the Merging Entity have received a
fairness opinion (the "Fairness Opinion") from Robert A. Stanger & Co., Inc.
("Stanger"), an independent financial advisor that the allocation of the
American Spectrum Common Shares (i) between the Funds, as a group, and the CGS
Affiliates, including the CGS Management Company, and (ii) among the Funds, is
fair to the Limited Partners of the Merging Entity from a financial point of
view; and
WHEREAS, the Company's Articles of Incorporation and Bylaws permit, and
resolutions adopted by the Company's board of directors authorize, this
Agreement and the consummation of the Merger; and
WHEREAS, the Parties hereto anticipate that the Merger will further
certain of their business objectives.
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act of 1934, as amended.
"Affiliates' Properties" means properties held or controlled by
affiliates of CGS and which will be owned by American Spectrum immediately
following the consummation of the Merger.
<PAGE> 1069
"Agreement" means this Agreement, as amended from time to time.
"American Spectrum" has the meaning set forth in the preface above.
"American Spectrum Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"American Spectrum Common Shares" shall mean the shares of common
stock, $.01 par value, of American Spectrum.
"American Spectrum Preferred Shares" has the meaning set forth in
Section 6.2 below.
"Business Combination" has the meaning set forth in Section 4.1 below.
"CGS" means CGS Real Estate Company, Inc.
"CGS Affiliates" means CGS and its affiliates.
"CGS Management Company" means the portion of CGS's property management
business which manages the properties of the Funds and the Affiliated Entities.
"Closing" has the meaning set forth in Section 2.3 below.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Fairness Opinion" has the meaning set forth in the second paragraph of
the Recitals above.
"Funds" means Sierra Pacific Development Fund I, Sierra Pacific
Development Fund II, Sierra Pacific Development Fund III, Sierra Pacific
Institution Properties V, Sierra Pacific Pension Investors `84, Nooney Income
Fund Ltd., L.P., Nooney Income Fund Ltd. II, L.P. and Nooney Real Property
Investors-Two, L.P.
"Limited Partner" means a limited partner of the Merging Entity.
Limited Partnership Units has the meaning set forth in Section 2.1
below.
"Managing General Partner" means the managing general partner of the
Merging Entity.
"Maryland GCL" has the meaning set forth in the first paragraph of the
Recitals above.
"Material Adverse Effect" means, as to any Party, a material adverse
effect on the business, properties, operations or condition (financial or
otherwise) which is not related to any industry-wide change in the economy or
market or other conditions affecting all businesses in the industry of the Party
to which the term is applied.
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"Merger" has the meaning set forth in the first paragraph of the
Recitals above.
"Merging Entity" has the meaning set forth in the preface above.
"Merging Entity's Certificate of Merger" has the meaning set forth in
Section 2.2 below.
"Note Option" has the meaning set forth in paragraph 4.1 below.
"Notes" has the meaning set forth in paragraph 4.2 below.
"Party" or "Parties" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, a limited
liability company, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or other entity.
"Prospectus/Consent Solicitation Statement" has the meaning set forth
in the first paragraph of the Recitals above.
"Registration Statement" has the meaning set forth in the first
paragraph of the Recitals above.
"SEC" has the meaning set forth in the first paragraph of the Recitals
above.
"Securities Act" has the meaning set forth in the first paragraph of
the Recitals above.
"Share Consideration" has the meaning set forth in Section 4.1.
"Stanger" has the meaning set forth in the second paragraph of the
Recitals above.
"Surviving Corporation" has the meaning set forth in Section 2.1 below.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp occupation,
premium, windfall profits, environmental (including taxes under Code (S) 59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
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ARTICLE II
MERGER; EFFECTIVE TIME; CLOSING
2.1 Merger. Subject to the terms and conditions of this Agreement,
the Maryland GCL and the Missouri Revised Limited Partnership Act, at the
Effective Time, the Merging Entity and American Spectrum shall consummate the
Merger in which (i) the Merging Entity shall be merged with and into American
Spectrum and the separate existence of the Merging Entity shall cease to exist,
(ii) American Spectrum shall be the successor or surviving corporation in the
Merger and shall continue to be governed by the laws of Maryland and (iii) the
properties, other assets and liabilities of the Merging Entity will be deemed to
have been transferred to American Spectrum. The corporation surviving the Merger
is sometimes hereinafter referred to as the "Surviving Corporation." The Merger
shall have the effects set forth in the Maryland GCL and the Missouri Revised
Limited Partnership Act. Pursuant to the Merger, American Spectrum will issue
American Spectrum Common Shares or, in certain circumstances, as set forth in
Section 4.2 below, Notes in exchange for limited partnership units, of the
Merging Entity (the "Limited Partnership Units").
2.2 Effective Time. On the Closing Date, subject to the terms and
conditions of this Agreement, the Merging Entity and American Spectrum shall (i)
cause to be executed (A) a certificate of merger in the form required by the
Maryland GCL (the "American Spectrum Certificate of Merger") and (B) a
certificate of merger in the form required by the Missouri Revised Limited
Partnership Act (the "Merging Entity's Certificate of Merger"), and (ii) cause
the American Spectrum Certificate of Merger to be filed with the Maryland
Department of Assessments and Taxation as provided in the Maryland GCL and the
Merging Entity's Certificate of Merger to be filed with the Missouri Secretary
of State. The Merger shall become effective at (i) such time as the American
Spectrum Certificate of Merger has been duly filed with the Maryland Department
of Assessments and Taxation or (ii) such other time as is agreed upon by the
Merging Entity and American Spectrum and specified in the Merging Entity's
Certificate of Merger and the American Spectrum Certificate of Merger. Such time
is hereinafter referred to as the "Effective Time."
2.3 The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of
_____________________, commencing at 9:00 a.m. local time on such date as within
five (5) business dates following the fulfillment or waiver of the conditions
set forth in Article IX (other than conditions which by their nature are
intended to be fulfilled at the Closing) or at such other place or time or on
such other date as the Managing General Partner of the Merging Entity and
American Spectrum may agree or as may be necessary to permit the fulfillment or
waiver of the conditions set forth in Article IX (the "Closing Date"), but in no
event later than __________.
ARTICLE III
NAME; ARTICLES OF INCORPORATION; BY-LAWS; AND
DIRECTORS AND OFFICERS OF SURVIVING CORPORATION
3.1 Name. The Name of the surviving corporation shall be American
Spectrum Realty, Inc.
3.2 Articles of Incorporation. The articles of incorporation of
American Spectrum, as in effect immediately prior to the Effective Time, shall
be the articles of incorporation of the Surviving Corporation until thereafter
amended as provided therein.
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3.3 By-Laws. The by-laws of American Spectrum, as in effect
immediately prior to the Effective Time, shall be the by-laws of the Surviving
Corporation.
3.4 Directors and Officers. The directors and officers of American
Spectrum immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation from and after the Effective Time until
their successors have been duly elected, appointed or qualified or until their
earlier death, resignation or removal in accordance with the articles of
incorporation and by- laws of the Surviving Corporation.
ARTICLE IV
CONSIDERATION
4.1 Share Consideration. (a) At the Closing, the Limited Partners
other than those Limited Partners who vote against the Merger and affirmatively
elect to receive notes (the "Note Option") will be allocated American Spectrum
Common Shares (the "Share Consideration") in accordance with the final
Prospectus/Consent Solicitation Statement included in the Registration
Statement.
(b) Prior to the Effective Time, if American Spectrum splits or
combines American Spectrum Common Shares, or pays a stock dividend or other
stock distribution in American Spectrum Common Shares, or in rights or
securities exchangeable or convertible into or exercisable for American Spectrum
Common Shares, or otherwise changes the American Spectrum Common Shares into, or
exchanges the American Spectrum Common Shares for, any other securities (whether
pursuant to or as part of a merger, consolidation, acquisition of property or
stock, separation, reorganization, or liquidation of American Spectrum as a
result of which American Spectrum stockholders receive cash, stock, or other
property in exchange for, or in connection with, their American Spectrum Common
Shares (a "Business Combination") or otherwise)), then the American Spectrum
Common Shares to be received by the Limited Partners of the Merging Entity will
be appropriately adjusted to reflect such event.
(c) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, all of the American Spectrum Common Shares issued and
outstanding prior to the Effective Time shall remain issued and outstanding.
4.2 Note Consideration. Notwithstanding Section 4.1 above and
subject to the limitations described herein, those Limited Partners who, in
connection with the Merger, affirmatively elect the Note Option shall receive
notes (the "Notes"). The principal amount of the Notes will be determined in
accordance with the final Prospectus/Consent Solicitation Statement. In the
event that any of the Limited Partners elect the Note Option, the number of
American Spectrum Common Shares allocated to the Merging Entity will be reduced
in accordance with the final Prospectus/Consent Solicitation Statement.
4.3 Fractional American Spectrum Common Shares. No certificates
representing fractional American Spectrum Common Shares shall be issued. Each
Limited Partner who would otherwise be entitled to a fractional American
Spectrum Common Shares will receive one American Spectrum Common Share for each
fractional interest representing 50% or more of one American Spectrum Common
Share. No American Spectrum Common Shares will be issued for a fractional
interest representing less than 50% of an American Spectrum Common Share.
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4.4 Issuance of Shares. American Spectrum shall designate an
exchange agent (the "Exchange Agent") to act as such in connection with the
issuance of certificates representing the American Spectrum Common Shares
pursuant to this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AMERICAN SPECTRUM
American Spectrum represents and warrants to the Limited Partners and
the Merging Entity that the statements contained in this Article V are correct
and complete as of the date hereof:
5.1 Organization, Qualification and Corporate Power. American
Spectrum is a corporation duly organized, validly existing, and in good standing
under the laws of Maryland, as set forth in the Preface. American Spectrum is
duly authorized to conduct business and is in good standing under the laws of
each jurisdiction where such qualification is required, except where failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
American Spectrum.
5.2 Authorization for Common Stock. The Share Consideration will,
when issued, be duly authorized, validly issued, fully paid and nonassessable,
and no stockholder of American Spectrum will have any preemptive right or
similar rights of subscription or purchase in respect thereof.
5.3 Authorization of Transaction. American Spectrum has full power
and authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder. The execution,
delivery and performance by American Spectrum of this Agreement has been duly
and validly authorized by the board of directors of American Spectrum. This
Agreement constitutes the valid and legally binding obligation of American
Spectrum, enforceable in accordance with its terms and conditions. American
Spectrum is not required to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any government or governmental agency
in order to consummate the transactions contemplated by this Agreement, except
in connection with the federal securities laws, the Hart Scott Rodino Act, if
applicable, and any applicable "Blue Sky" or state securities laws.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES CONCERNING
THE MERGING ENTITY
The Merging Entity represents and warrants to American Spectrum that
the statements contained in this Article VI are correct and complete as of the
date hereof.
6.1 Organization, Qualification and Corporate Power. The Merging
Entity is a limited partnership duly organized, validly existing, and in good
standing under the laws of Missouri, as set forth in the Preface. The Merging
Entity is duly authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required, except where
failure to so qualify or obtain authorization would not have a Material Adverse
Effect on the Merging Entity.
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6.2 Authorization of Transaction. Subject to the approval of the
Limited Partners, the Merging Entity has full power and authority to execute and
deliver this Agreement and to perform its obligations hereunder. This Agreement
constitutes the valid and legally binding obligation of the Merging Entity,
enforceable in accordance with its terms and conditions. The Merging Entity is
not required to give any notice to, make any filing with, or obtain any
authorization, consent or approval of any governmental agency in order to
consummate the transactions contemplated by this Agreement, except in connection
with federal securities laws, the Hart Scott Rodino Act, if applicable, and any
applicable "Blue Sky" or state securities laws.
ARTICLE VII
PRE-CLOSING COVENANTS
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing:
7.1 General. Each of the Parties will use its reasonable best
efforts to take all action and to do all things necessary, proper or advisable
in order to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions set
forth in Article IX below).
7.2 Notices and Consents. Each of the Parties shall give any
notices to, make any filings with, and use its reasonable best efforts to obtain
any authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 9.1 below.
ARTICLE VIII
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following the
Closing:
8.1 General. In the event that at any time after the Closing any
further action is necessary or desirable to carry out the purposes of this
Agreement, each of the Parties will take such further action (including the
execution and delivery of such further instruments and documents) as any other
Party reasonably may request, all at the sole cost and expense of the requesting
Party. The Merging Entity acknowledge and agree that from and after the Closing,
the Surviving Corporation will be entitled to possession of all documents,
books, records (including Tax records), agreements and financial data of any
sort relating to the Merging Entity but will provide the Limited Partners with
reasonable access to such documents, books and records upon request.
8.2 Litigation Support. In the event and for so long as any Party
actively is contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand in connection with
(i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Merging Entity, the other Party will cooperate
with him and his counsel in the contest or defense, make available their
personnel, and provide such testimony and access to their books and records as
shall be necessary in connection with the contest or defense, all at the sole
cost and expense of the contesting or defending Party.
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8.3. Share Registration. American Spectrum shall use commercially
reasonable efforts to register the American Spectrum Common Shares within one
year of the consummation of the Merger.
ARTICLE IX
CONDITIONS TO OBLIGATION TO CLOSE
9.1 Conditions to Each Party's Obligation. The respective
obligations of American Spectrum, the Limited Partners and the Merging Entity to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing Date of each of the following conditions,
which conditions may be waived upon the written consent of American Spectrum and
the Merging Entity:
(a) Governmental Approvals. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies required in connection with the consummation of the transaction
contemplated hereby.
(b) No Injunction or Proceedings. There shall not be an
unfavorable injunction, judgment, order, decree, ruling, or charge would, in the
reasonable judgment of American Spectrum, prevent consummation of any of the
transactions contemplated by this Agreement.
(c) No Suspension of Trading, Etc. At the Effective Time, there
shall be no declaration of a banking moratorium by federal or state authorities
or any suspension of payments by banks in the United States (whether mandatory
or not) or of the extension of credit by lending institutions in the United
States, or commencement of war or other international, armed hostility or
national calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the reasonable judgment of American Spectrum, would have a Material Adverse
Effect on the Merging Entity.
(d) Minimum Value of American Spectrum's Property. At the
Effective Time, American Spectrum shall own property having an appraised value,
as determined by Stanger, of not less than $200,000,000.
(e) American Spectrum Common Shares shall have been approved for
listing on notice of issuance on a national securities exchange acceptable to
American Spectrum.
9.2 Conditions to Obligation of the Merging Entity. The
obligations of the Merging Entity to consummate the transactions contemplated
hereby and take the actions to be performed by it in connection with the Closing
are subject to satisfaction of the following conditions:
American Spectrum shall have delivered to the Limited Partners the
Share Consideration pursuant to Section 4.1.
ARTICLE X
TERMINATION
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<PAGE> 1076
10.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to its Effective
Time, before or after the approval of the Limited Partners of the Merging Entity
or American Spectrum, respectively, either by the mutual written consent of
American Spectrum and the Merging Entity or by the mutual action of the board of
directors of American Spectrum and the Managing General Partner of the Merging
Entity.
10.2 Termination by Either American Spectrum or the Merging Entity.
This Agreement may be terminated and the Merger may be abandoned (a) by action
of American Spectrum in the event of a failure of a condition to the obligations
of American Spectrum set forth in Section 9.1 of this Agreement; (b) by the
Managing General Partner or the vote of a majority in interest of the Limited
Partners of the Merging Entity in the event of a failure of a condition to the
obligations of the Merging Entity set forth in Section 9.1 or 9.2 of this
Agreement; or (c) if a United States or federal or state court of competent
jurisdiction or United States federal or state governmental agency shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling or other action shall have become
final and non-appealable; provided, in the case of a termination pursuant to
clause (a) or (b) above, that the terminating party shall not have breached in
any material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure referred to
in said clause.
10.3 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no Party hereto (or any of its directors, officers, Managing General
Partners or Limited Partners) shall have any liability or further obligation to
any other Party to this Agreement, except that nothing herein will relieve any
Party from liability for any breach of this Agreement.
ARTICLE XI
MISCELLANEOUS
11.1 No Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns.
11.2 Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement among the Parties and
supersedes any prior understandings, agreements, or representations by or among
the Parties, written or oral, to the extent they related in any way to the
subject matter hereof.
11.3 Succession and Assignment. This Agreement shall be binding
upon and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of American Spectrum and the Managing General Partner; provided,
however, that American Spectrum may (i) assign any or all of its rights and
interests hereunder to one or more of its Affiliates and (ii) designate one or
more of its Affiliates to perform its obligations hereunder (in any or all of
which cases American Spectrum nonetheless shall remain responsible for the
performance of all of its obligations hereunder).
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<PAGE> 1077
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
11.5 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.6 Notices. All notices, requests, demands, claim, or other
communication hereunder shall be deemed duly given, as of the date two business
days after mailing, if it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
If to the Merging Entity:
c/o William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
If to American Spectrum:
William J. Carden
Chief Executive Officer
American Spectrum Realty, Inc.
1800 East Deere Avenue
Santa Ana, California 92705
With copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attn: Peter M. Fass, Esq.
Telecopy: (212) 969-2900
Any Party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
11.7 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Maryland without giving effect to
any choice or conflict of law provision or
B-10
<PAGE> 1078
rules (whether of the State of Maryland or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Maryland.
11.8 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
American Spectrum and the Merging Entity. No waiver by any party of any default,
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
11.9 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
11.10 Expenses. Each of the Parties will its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, except to the extent set forth in the
Prospectus/Consent Solicitation Statement.
11.11 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warrant, and covenant contained herein in any respect,
the fact that there exists another representation, warranty, or covenant
contained herein in any respect, the fact that there exists another
representation, warranty, or covenant relating to the same subject matter
(regardless of the relative levels of specificity) which the Party has not
breached shall not detract from or mitigate the fact that the Party is in breach
of the first representation, warranty or covenant.
11.12 Specific Performance. Each of the Parties acknowledges that
the other Party would be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms or
otherwise are breached. Accordingly, each of the Parties agrees that the other
Party shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Agreement and to enforce specifically this Agreement and
the terms and provisions hereof in any action instituted in any court of the
United States or any state thereof having jurisdiction over the Parties and the
matter (subject to the provisions set forth in Section 11.13 below), in addition
to any other remedy to which they may be entitled, at law or in equity.
11.13 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in the State of California,
in any action or proceeding arising out of or relating to this Agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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<PAGE> 1079
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.
AMERICAN SPECTRUM REALTY, INC.
By:
Name
Title
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
By:
Name
Title
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<PAGE> 1080
APPENDIX C
AMENDMENT
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
NOONEY REAL PROPERTY INVESTORS TWO, L.P.
Section 5.2B of the Limited Partnership Agreement is amended to read as follows:
B. Without the Consent of the Limited Partners (subject to the provisions
of Section 10.11 hereof), the General Partners shall not have the authority:
(i) to sell or otherwise dispose of, at one time, all or substantially
all of the assets of the Partnership (except for the disposition of the
Partnership's final Property);
(ii) to dissolve the Partnership (except pursuant to Section 2.4
hereof).
The General Partner shall have the authority to cause the Partnership to merge
with any entity with the Consent of the Limited Partners (subject to the
provisions of Section 10.11 hereof).
For purposes of this Section 5.2B the term "substantially all" shall be
deemed to mean either (i) sixty-six and two-thirds percent (66 2/3%) or more in
number of the Properties then owned by the Partnership, or (ii) a Property or
Properties representing sixty-six and two-thirds percent (66 2/3%) or more of
the net book value of all of the Partnership's Properties as of the end of the
most recently completed calendar quarter.
Section 5.2D(ii) of the Partnership Agreement is amended to read as follows:
"(ii): Acquire or lease any properties from or sell or lease any
properties to the General Partners or their Affiliates; provided that
the foregoing shall not apply to the proposed merger, sale or other
transfer of properties in connection with the consolidation as
described in the Proxy/Consent Solicitation Statement of the
Partnership dated [ ]."
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<PAGE> 1081
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
OVERVIEW ........................................... S-2
RISK FACTORS ....................................... S-4
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND S-10
ALLOCATION OF AMERICAN SPECTRUM SHARES ............. S-11
FAIRNESS OF THE CONSOLIDATION ...................... S-14
EXPENSES OF THE CONSOLIDATION ...................... S-16
REQUIRED VOTE ...................................... S-22
AMENDMENTS TO THE PARTNERSHIP AGREEMENT ............ S-22
VOTING PROCEDURES .................................. S-23
FEDERAL INCOME TAX CONSIDERATIONS .................. S-25
ADDITIONAL INFORMATION ............................ S-27
</TABLE>
i
<PAGE> 1082
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification is provided for in Section 5.6 of the amended and restated
articles of incorporation of the Registrant and such provisions are incorporated
herein by reference.
Reference is hereby made to the caption "FIDUCIARY RESPONSIBILITY -- Directors
and Officers of the Company" in the consent solicitation, which is part of this
Registration Statement, for a more detailed description of indemnification and
insurance arrangements between the Registrant and its officers and directors.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS
(a) 1. Financial Statements
The financial statements indicated on page F-1 are filed as part of this
Report:
Index to Financial Statements and Selected Historical Financial Data
See individual Table of Contents included with each fund's historical financial
statement package
II - 1
<PAGE> 1083
(a) 2. Schedule
Report of Independent Public Accountants on Schedule.
Schedule III - Real Estate and Accumulated Depreciation
(b) Exhibits
Exhibit No. EXHIBIT
----------- -----------------------------------------------------------------
2.1 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund (2)
2.2 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund II (2)
2.3 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund III (2)
2.4 Form of Agreement and Plan of Merger of Sierra Pacific
Institutional Properties V (2)
2.5 Form of Agreement and Plan of Merger of Sierra Pacific Pension
Investors '84 (2)
2.6 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd.,
L.P. (2)
2.7 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd.
II, L.P. (2)
2.8 Form of Agreement and Plan of Merger of Nooney Real Property
Investors - Two, L.P. (2)
3.1 Form of Amended and Restated Articles of Incorporation of
American Spectrum Realty, Inc. (2)
3.2 Bylaws of American Spectrum Realty, Inc. (2)
4.1 Form of Stock Certificate (1)
5.1 Opinion of Maryland Counsel, Ballard, Sphahr, Andrews and
Ingersoll LLP (1)
8.1 Form of Opinion to be delivered Proskauer Rose LLP as to
Certain Tax Matters
10.1 2000 Stock Incentive Plan
10.2 Employment Agreement of William J. Carden
10.3 Employment Agreement of Harry A. Mizrahi
10.4 Employment Agreement of Thomas N. Thurber
10.5 Employment Agreement of Paul E. Perkins
10.6 Employment Agreement of Patricia A. Nooney
10.7 Agreement of Limited Partnership of American Spectrum Realty
Operating Partnership, L.P.
10.8 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and CGS Properties (Mkt./Col.), L.P. (2)
10.9 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Creekside/Riverside, L.L.C. (2)
II - 2
<PAGE> 1084
10.10 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and McDonnell Associates, L.L.C. (2)
10.11 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Pacific Spectrum, L.L.C. (2)
10.12 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Pasadena Autumn Ridge LP (2)
10.13 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Seventy Seven, L.L.C. (2)
10.14 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Villa Redondo LLC (2)
10.15 Agreement and Plan of Merger, dated August 8, 2000, between
American Spectrum and Third Coast LLC (2)
10.16 Contribution Agreement, dated August 8, 2000 between American
Spectrum and No.-So., Inc. (2)
10.17 Form of Restricted Stock Agreement
10.18 Form of Stock Option Agreement (Incentive Stock Options)
10.19 Form of Stock Option Agreement (Directors)
10.20 Form of Stock Option Agreement (Non-Qualified Options)
10.21 Form of Indenture Relating to Notes
10.22 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund
10.23 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund II
10.24 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund III
10.25 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Institutional Properties V
10.26 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Pension Investors '84
10.27 Amendment to the Amended Agreement of Limited Partnership of
Nooney Income Fund Ltd., L.P.
10.28 Amendment to the Amended Agreement of Limited Partnership of
Nooney Income Fund Ltd. II, L.P.
10.29 Amendment to the Amended Agreement of Limited Partnership of
Nooney Real Property Investors -Two, L.P.
12.1 Calculation of Ratio of Earnings to Fixed Charges of American
Spectrum Predecessor
12.2 Calculation of Ratio of Earnings to Fixed Charges of
Consolidated Funds - Maximum Participation
12.3 Calculation of Ratio of Earnings to Fixed Charges of Consolidated
Funds - Minimum Participation
12.4 Calculation of Ratio of Earnings to Fixed Charges of Affiliates
Combined
12.5 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund
12.6 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund II
12.7 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund III
12.8 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund V
12.9 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Pension Investors '84
12.10 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Income Fund
12.11 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Income Fund II
12.12 Calculation of Ratio of Earnings to Fixed Charges of Nooney Real
Property Investors - Two, L.P.
12.13 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Rider Trail, LLC
12.14 Calculation of Ratio of Earnings to Fixed Charges of Meadow Wood
Village Apts., Ltd., LP
12.15 Calculation of Ratio of Earnings to Fixed Charges of
Nooney-Hazelwood Associates, LP
23.1 Consent of Arthur Andersen, LLP
II - 3
<PAGE> 1085
23.2 Consent of Deloitte & Touche, LLP (Houston, Texas)
23.3 Consent of Deloitte & Touche, LLP (St. Louis, Missouri)
23.4 Consent of Wolfe, Nilges, Nahorski, P.C.
23.5 Consent of Proskauer Rose LLP (included in Exhibit 8.1)(1)
23.6 Consent of Ballard Spahr Andrews & Ingersoll P.C. (included in
Exhibit 5.1) (1)
27 Financial Data Schedule
99.1 Draft form of fairness opinion of Robert A. Stanger & Co., Inc.
99.2 Draft Independent Appraisal of Fair Market Value of the Funds'
Properties
99.3 Consolidation Consent Card, Election Form and Instructions for
Each of the Funds
99.4 Additional Solicitation Materials
99.5 Schedule III of American Spectrum Predecessor
99.6 Schedule III of Meadow Wood Village Apartments
99.7 Schedule III of Nooney Rider Trail
99.8 Schedule III of Nooney-Hazelwood Associates L.P. and Investee
(1) to be filed by amendment
(2) previously filed
II - 4
<PAGE> 1086
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Ana, State of California on the
10th day of November, 2000.
AMERICAN SPECTRUM REALTY, INC.
By: /s/ William J. Carden
---------------------------------
William J. Carden, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons in the
capacities indicated.
<TABLE>
<S> <C> <C>
NAME TITLE DATE
---------------------- ------------------------------------------ ------------
/s/ William J. Carden November 10, 2000
-------------------------
William J. Carden Chairman of the Board and Chief Executive
Officer (Principal Executive Officer)
-------------------------
Timothy R. Brown Director
/s/ William W. Geary, Jr. November 10, 2000
-------------------------
William W. Geary, Jr. Director
/s/ Lawrence E. Fiedler November 10, 2000
-------------------------
Lawrence E. Fiedler Director
/s/ Harry A. Mizrahi November 10, 2000
-------------------------
Harry A. Mizrahi Director and Chief Operating Officer
/s/ Thomas N. Thurber November 10, 2000
-------------------------
Thomas N. Thurber Chief Financial Officer (Principal
Financial and Accounting Officer)
</TABLE>
II - 5
<PAGE> 1087
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Pages
----------- ----------------------------------------------------------- ------------
<S> <C> <C>
2.1 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund (2)
2.2 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund II (2)
2.3 Form of Agreement and Plan of Merger of Sierra Pacific
Development Fund III (2)
2.4 Form of Agreement and Plan of Merger of Sierra Pacific
Institutional Properties V (2)
2.5 Form of Agreement and Plan of Merger of Sierra Pacific Pension
Investors '84 (2)
2.6 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd.,
L.P. (2)
2.7 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd.
II, L.P. (2)
2.8 Form of Agreement and Plan of Merger of Nooney Real Property
Investors - Two, L.P. (2)
3.1 Form of Amended and Restated Articles of Incorporation of
American Spectrum Realty, Inc. (2)
3.2 Bylaws of American Spectrum Realty, Inc. (2)
4.1 Form of Stock Certificate (1)
5.1 Opinion of Maryland Counsel, Ballard, Sphahr, Andrews and
Ingersoll LLP (1)
8.1 Form of Opinion to be delivered Proskauer Rose LLP as to
Certain Tax Matters
10.1 2000 Stock Incentive Plan
10.2 Employment Agreement of William J. Carden
10.3 Employment Agreement of Harry A. Mizrahi
10.4 Employment Agreement of Thomas N. Thurber
10.5 Employment Agreement of Paul E. Perkins
10.6 Employment Agreement of Patricia A. Nooney
10.7 Agreement of Limited Partnership of American Spectrum Realty
Operating Partnership, L.P.
10.8 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and CGS Properties (Mkt./Col.), L.P. (2)
10.9 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Creekside/Riverside, L.L.C. (2)
</TABLE>
<PAGE> 1088
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Pages
----------- ----------------------------------------------------------- ------------
<S> <C> <C>
10.10 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and McDonnell Associates, L.L.C. (2)
10.11 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Pacific Spectrum, L.L.C. (2)
10.12 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Pasadena Autumn Ridge LP (2)
10.13 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Seventy Seven, L.L.C. (2)
10.14 Agreement and Plan of Merger, dated August 8, 2000 between
American Spectrum and Villa Redondo LLC (2)
10.15 Agreement and Plan of Merger, dated August 8, 2000, between
American Spectrum and Third Coast LLC (2)
10.16 Contribution Agreement, dated August 8, 2000 between American
Spectrum and No.-So., Inc. (2)
10.17 Form of Restricted Stock Agreement
10.18 Form of Stock Option Agreement (Incentive Stock Options)
10.19 Form of Stock Option Agreement (Directors)
10.20 Form of Stock Option Agreement (Non-Qualified Options)
10.21 Form of Indenture Relating to Notes
10.22 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund
10.23 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund II
10.24 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Development Fund III
10.25 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Institutional Properties V
10.26 Amendment to the Amended Agreement of Limited Partnership of
Sierra Pacific Pension Investors '84
10.27 Amendment to the Amended Agreement of Limited Partnership of
Nooney Income Fund Ltd., L.P.
10.28 Amendment to the Amended Agreement of Limited Partnership of
Nooney Income Fund Ltd. II, L.P.
10.29 Amendment to the Amended Agreement of Limited Partnership of
Nooney Real Property Investors -Two, L.P.
12.1 Calculation of Ratio of Earnings to Fixed Charges of American
Spectrum Predecessor
12.2 Calculation of Ratio of Earnings to Fixed Charges of
Consolidated Funds - Maximum Participation
12.3 Calculation of Ratio of Earnings to Fixed Charges of Consolidated
Funds - Minimum Participation
12.4 Calculation of Ratio of Earnings to Fixed Charges of Affiliates
Combined
12.5 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund
12.6 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund II
</TABLE>
<PAGE> 1089
<TABLE>
<CAPTION>
Sequentially
Numbered
Exhibit No. Description Pages
----------- ----------------------------------------------------------- ------------
<S> <C> <C>
12.7 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund III
12.8 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Development Fund V
12.9 Calculation of Ratio of Earnings to Fixed Charges of Sierra
Pacific Pension Investors '84
12.10 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Income Fund
12.11 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Income Fund II
12.12 Calculation of Ratio of Earnings to Fixed Charges of Nooney Real
Property Investors - Two
12.13 Calculation of Ratio of Earnings to Fixed Charges of Nooney
Rider Trail, LLC
12.14 Calculation of Ratio of Earnings to Fixed Charges of Meadow Wood
Village Apts., Ltd., LP
12.15 Calculation of Ratio of Earnings to Fixed Charges of
Nooney-Hazelwood Associates, LP
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Deloitte & Touche, LLP (Houston, Texas)
23.3 Consent of Deloitte & Touche, LLP (St. Louis, Missouri)
23.4 Consent of Wolfe, Nilges, Nahorski, P.C.
23.5 Consent of Proskauer Rose LLP (included in Exhibit 8.1) (1)
23.6 Consent of Ballard Spahr Andrews & Ingersoll P.C. (included in
Exhibit 5.1) (1)
27 Financial Data Schedule
99.1 Draft form of fairness opinion of Robert A. Stanger & Co., Inc.
99.2 Draft Independent Appraisal of Fair Market Value of the Funds'
Properties
99.3 Consolidation Consent Card, Election Form and Instructions for
Each of the Funds
99.4 Additional Solicitation Materials
99.5 Schedule III of American Spectrum Predecessor
99.6 Schedule III of Meadow Wood Village Apartments
99.7 Schedule III of Nooney Rider Trail
99.8 Schedule III of Nooney-Hazelwood Associates L.P. and Investe
</TABLE>
(1) to be filed by amendment
(2) previously filed
