<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ___________ __, 2000
Registration No. 333-
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------------
AMERICAN SPECTRUM REALTY, INC.
(Exact name of Registrant as specified in its charter)
Maryland 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>
Proposed
Amount Maximum
Title of each Class of to be Aggregate Amount of Registration
Securities to be Registered Registered(1) Offering Price Fee
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, par value $.01 per share ... $ 5,050,014(2) $ 75,750,210 $ 19,998.06
Notes .................................... $55,259,175 $ 55,259,175 $ 0(3)
Total ........................... $60,309,189 $131,009,385 $ 19,998.06
==================================================================================================================
</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.
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
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 general partners of each of the eight limited partnerships listed above,
which we refer to as the Limited Partnerships or 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 (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 Affiliates. 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.
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 prospectus 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 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:
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.
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.
Rather than refer to its formal title repeatedly, we have chosen to refer to
this document as the Consent Solicitation. Through this Consent Solicitation and
the accompanying supplement, which we refer to as the Supplement, we, American
Spectrum Realty, Inc. (American Spectrum), are asking you, as the limited
partners of each of the Funds (the Limited Partners), to vote on whether to
approve the proposed consolidation into American Spectrum of each of the Funds
listed above, the CGS Affiliates and the portion of CGS Real Estate Company
Inc.'s (together with its affiliates, CGS Affiliates) property management
business which provides property management services to the Funds and CGS
Affiliates and certain properties owned by CGS Affiliates (collectively, the
Consolidation). In the Consolidation, American Spectrum will issue shares of
common stock or, in specified situations, notes (the Notes) in exchange for your
limited partnership units (the 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. As described herein, the general partners of the Funds (the General
Partners) 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:
- American Spectrum's common stock may trade at prices below the $15
exchange value that was assigned by American Spectrum to the common
stock for purposes of the Consolidation.
- Limited Partners may incur taxes in connection with the transaction.
- Following the Consolidation, certain of the officers and directors of
your General Partners will serve as directors of American Spectrum and,
as a result, may realize benefits that are likely to exceed the
benefits they would derive from the Funds if the Consolidation does not
occur. As a result, they have an interest in the completion of the
Consolidation which may conflict with the interests of the Limited
Partners of the Funds.
- In connection with the Consolidation, the General Partners and their
affiliates will receive shares of American Spectrum's common stock and
units of limited partnership interest in American Spectrum Operating
Partnership, L.P. (which we refer to as the Operating Partnership). As
a result, the General Partners have an
<PAGE> 4
interest in the completion of the Consolidation which may conflict with
yours as a Limited Partner of the Funds and with their own as General
Partners of the Funds.
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.
The date of this Consent Solicitation is __________ ____, 2000.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT
AMERICAN SPECTRUM REALTY, INC.'S
CONSOLIDATION OF THE FUNDS ....................................................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS? ................................................................... 6
SUMMARY ............................................................................................... 7
Purpose of this Consent Solicitation .................................................................. 7
Description of American Spectrum and the Funds ........................................................ 7
American Spectrum ..................................................................................... 7
The Properties ........................................................................................ 8
The Funds ............................................................................................. 9
Material Factors that Make the Offering Speculative or Risky .......................................... 9
Conflicts of Interest and Benefits to General Partners and their Affiliates ........................... 10
The Consolidation ..................................................................................... 11
Principal Components of the Consolidation ............................................................. 11
What You Will Receive if Your Fund Is Included in the Consolidation ................................... 12
American Spectrum Shares Allocated to Funds ........................................................... 13
Your General Partners' Reasons for Supporting the Consolidation ....................................... 14
Benefits of Participation in the Consolidation ........................................................ 14
Recommendation ........................................................................................ 15
Why Your General Partners Believe the Consolidation Is Fair to You .................................... 16
Appraisals ............................................................................................ 16
Fairness opinions ..................................................................................... 16
Allocation of American Spectrum Shares ................................................................ 17
Alternatives to the Consolidation that Your General Partners Considered ............................... 18
Voting ................................................................................................ 20
Voting Procedures ..................................................................................... 20
Amendments to Your Fund's Partnership Agreement ....................................................... 21
No Rights to Independent Appraisal .................................................................... 21
Comparison of Ownership of American Spectrum Shares and the Notes Option .............................. 21
American Spectrum Shares .............................................................................. 21
Notes ................................................................................................. 22
Consolidation Expenses ................................................................................ 23
Conditions to the Consolidation ....................................................................... 23
Your Right to Investor Lists and to Communicate with Other Limited Partners ........................... 23
Federal Income Tax Considerations ..................................................................... 24
The Consolidation may be a Partially Taxable Transaction for Limited Partners Subject to Federal Income
Taxation ......................................................................................... 24
Taxable Gain and Loss Estimates Per Average $1,000 Original Limited Partner Investment ................ 24
Qualification of American Spectrum as a REIT .......................................................... 25
Summary Historical and Pro Forma Data ................................................................. 26
RISK FACTORS .......................................................................................... 34
Risk Factors Related to American Spectrum and Risks Resulting from the Consolidation .................. 34
There are conflicts of interest inherent in the structure of the Consolidation, and related parties
will receive substantial benefits if it is consummated ........................................... 34
American Spectrum has a history of losses. We cannot assure you that we will become profitable in the
future ........................................................................................... 35
American Spectrum is Responsible for Liabilities of Entities included in Consolidation. This could
require American Spectrum to make additional payments and reduce our available cash .............. 35
There have been no arm's-length negotiations .......................................................... 35
</TABLE>
i
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<TABLE>
<S> <C>
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 .................................................... 35
Majority vote of the Limited Partners of a Fund binds all Limited Partners of that Fund ................. 35
Partners Have No Cash Appraisal Rights .................................................................. 36
At the time of the vote, there will be uncertainties as to the size of American Spectrum after the
Consolidation ...................................................................................... 36
There will be a fundamental change in the nature of your investment ..................................... 36
Interest rate fluctuations will impact the price of American Spectrum Shares ............................ 36
Stanger's fairness opinions relied on information that we provided ...................................... 37
There is the potential for litigation associated with the Consolidation. We may incur costs from
these litigations .................................................................................. 37
The potential liability of the officers and directors of American Spectrum is limited ................... 37
American Spectrum's ability to incur additional secured debt may reduce the value of the
Notes issued by former Limited Partners of the Funds ............................................... 37
Noteholders will not participate in American Spectrum profits ........................................... 37
The Notes are likely to be illiquid ..................................................................... 37
The Notes will not be subject to a sinking fund. As a result, we may not have funds to repay the Notes . 38
Noteholders have limited recourse. This could affect Noteholder recovery on the Notes .................. 38
American Spectrum may have to raise cash on unattractive terms to satisfy Note obligations
This could adversely affect our results of operations and our ability to satisfy the Notes ......... 38
Maryland law could restrict change in control. This could deter favorable transactions ................. 38
Distribution payments are subordinate to payments on debt. This could affect your receipt of dividends . 38
Real Estate/Business Risks .............................................................................. 38
American Spectrum's increased leverage increases our risk of default. This could adversely
affect our results of operations and our ability to make distributions ............................. 39
The results of future property purchases are uncertain .................................................. 39
American Spectrum may invest in joint ventures, which adds another layer of risk to its business ........ 39
American Spectrum's properties may not be profitable, may not result in distributions and/or
may depreciate ..................................................................................... 40
Upon expiration of current leases, American Spectrum may not enter into favorable leases ................ 40
Real property investments entail risk. These risks could adversely affect American Spectrum's
distributions ...................................................................................... 40
American Spectrum may incur unforeseen environmental liabilities ........................................ 40
American Spectrum faces intense competition in all of its markets ....................................... 41
Tax Risks ............................................................................................... 41
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 .......................................... 41
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 ................................. 42
To qualify as a REIT, American Spectrum must meet distribution requirements. If it fails to do so,
it will pay tax as a corporation ................................................................... 42
American Spectrum must meet limitations on share ownership to qualify as a REIT. These limitations
may deter parties from purchasing American Spectrum Shares ......................................... 42
Certain Funds Have Liabilities in Excess of the Tax Basis of Contributed Assets. Limited Partners
in these Funds will realize additional gain from the Consolidation ................................. 43
American Spectrum has acquired assets from Affiliates in exchange for Operating Partnership Units
The Affiliates will recognize gain upon the Operating Partnership's sale of these assets
This could delay the sale of these assets .......................................................... 43
American Spectrum will pay tax as a corporation prior to qualifying as a REIT. As a result,
American Spectrum will pay additional taxes ........................................................ 43
Future changes in tax law could adversely impact American Spectrum's qualification as a REIT ............ 43
BACKGROUND OF AND REASONS FOR THE CONSOLIDATION ......................................................... 44
Background of the Funds ................................................................................. 44
Investment Objectives of Funds .......................................................................... 45
</TABLE>
ii
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<TABLE>
<S> <C>
Consideration of Liquidation of the Funds and the Decision to Pursue the Consolidation 45
Your General Partners' Reasons for Proposing the Consolidation ....................... 48
Comparison of Alternatives ........................................................... 56
RECOMMENDATION AND FAIRNESS DETERMINATION ............................................ 61
General .............................................................................. 61
Material Factors Underlying Belief as to Fairness .................................... 62
Relative Weight Assigned to Material Factors ......................................... 65
Fairness to Limited Partners Receiving American Spectrum Shares ...................... 65
Fairness in View of Conflicts of Interest ............................................ 65
REPORTS, OPINIONS AND APPRAISALS ..................................................... 66
General .............................................................................. 66
Portfolio Appraisal .................................................................. 66
Fairness Opinion ..................................................................... 69
THE CONSOLIDATION .................................................................... 74
Conditions to Consolidation .......................................................... 74
Merger Agreements .................................................................... 74
Approval and Recommendation of the General Partners .................................. 74
Vote Required for Approval of the Consolidation ...................................... 75
Consideration ........................................................................ 75
Estimated Exchange Value of American Spectrum Shares Issuable to Funds ............... 75
No Fractional American Spectrum Shares ............................................... 76
Effect of the Consolidation on Limited Partners Who Vote Against the Consolidation ... 76
Effect of Consolidation on Funds Not Acquired ........................................ 77
Consolidation Expenses ............................................................... 77
Accounting Treatment ................................................................. 77
CONFLICTS OF INTEREST ................................................................ 78
Affiliated General Partners .......................................................... 78
Substantial Benefits to General Partners and their Affiliates ........................ 78
COMPARISON OF OWNERSHIP OF UNITS, NOTES AND AMERICAN SPECTRUM SHARES ................. 79
Form of Organization and Purpose ..................................................... 79
Length and Type of Investment ........................................................ 79
Business and Property Diversification ................................................ 80
Borrowing Policies ................................................................... 80
Other Investment Restrictions ........................................................ 81
Management Control ................................................................... 82
Fiduciary Duties ..................................................................... 83
Management's Liability and Indemnification ........................................... 84
Anti-takeover Provisions ............................................................. 85
Sale ................................................................................. 85
Merger ............................................................................... 86
Dissolution .......................................................................... 86
Amendments ........................................................................... 87
Compensation and Fees ................................................................ 87
Management Fees ...................................................................... 88
Real Estate Disposition Fee .......................................................... 88
Distributions of Net Sales Proceeds (Not in Liquidation) ............................. 89
Reimbursement of Expenses ............................................................ 89
Review of Investor Lists ............................................................. 89
Nature of Investment ................................................................. 90
Additional Equity/Potential Dilution ................................................. 91
Liability of Investors ............................................................... 92
Voting Rights ........................................................................ 92
</TABLE>
iii
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<TABLE>
<S> <C>
Liquidity ................................................. 93
Expected Distributions and Payments ....................... 94
Taxation of Taxable Investors ............................. 95
Taxation of Tax-Exempt Investors .......................... 96
VOTING PROCEDURES ......................................... 97
Distribution of Solicitation Materials .................... 97
Required Vote and Other Conditions ........................ 97
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AMERICAN SPECTRUM ....... 112
AMERICAN SPECTRUM'S BUSINESS .............................. 125
General ................................................... 125
Background and Strategy ................................... 125
Subsidiaries .............................................. 127
Credit Facility ........................................... 127
Acquisition and Investment Policies ....................... 127
Financing Policies ........................................ 128
Other Policies ............................................ 129
The Properties ............................................ 130
MORTGAGE DEBT ............................................. 140
Environmental Matters ..................................... 141
Insurance ................................................. 141
Competition ............................................... 141
Employees ................................................. 141
Legal Proceedings ......................................... 141
BUSINESS OF THE FUNDS ..................................... 142
General ................................................... 142
Management Services ....................................... 142
Description of Properties ................................. 142
Description of Leases ..................................... 143
Financing ................................................. 144
Sale of Properties ........................................ 144
Competition ............................................... 144
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES ............... 144
AMERICAN SPECTRUM ......................................... 145
Investment Policies ....................................... 145
Financing Policies ........................................ 145
Miscellaneous Policies .................................... 146
Working Capital Reserves .................................. 146
THE FUNDS ................................................. 146
Investment Policies ....................................... 146
Financing ................................................. 146
MANAGEMENT ................................................ 147
Directors and Executive Officers .......................... 147
Board of Directors ........................................ 148
Employment Agreements ..................................... 149
Option and Restricted Share Plans ......................... 150
Incentive Compensation .................................... 150
PRINCIPAL STOCKHOLDERS OF AMERICAN SPECTRUM ............... 151
RELATED PARTY TRANSACTIONS ................................ 152
Transactions Relating to the Consolidation ................ 152
Exchange Rights ........................................... 152
</TABLE>
iv
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<TABLE>
<S> <C>
Registration Rights Agreement ..................................................... 152
Third Party Management Services ................................................... 152
Other transactions ................................................................ 152
FIDUCIARY RESPONSIBILITY .......................................................... 153
Directors and Officers of American Spectrum ....................................... 153
General Partners of the Funds ..................................................... 153
DESCRIPTION OF CAPITAL STOCK ...................................................... 155
Preferred Stock ................................................................... 155
Ownership Limits and Restrictions on Transfer ..................................... 155
Registrar and Transfer Agent ...................................................... 157
DESCRIPTION OF THE NOTES .......................................................... 158
General ........................................................................... 158
Principal and Interest ............................................................ 159
Redemption ........................................................................ 159
Proceeds from Refinancings of Properties Formerly Owned by the Funds .............. 160
Limitation on Incurrence of Indebtedness .......................................... 160
Merger, Consolidation or Sale ..................................................... 161
Events of Default, Notice and Waiver .............................................. 161
Modification of the Indenture ..................................................... 162
Satisfaction and Discharge ........................................................ 163
No Conversion Rights .............................................................. 163
Governing Law ..................................................................... 163
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS ...................................................... 164
FEDERAL INCOME TAX CONSIDERATIONS ................................................. 166
Certain Tax Differences between the Ownership of Units and American Spectrum Shares 166
Tax Consequences of the Consolidation ............................................. 167
Treatment of Noteholders .......................................................... 168
Taxation of American Spectrum ..................................................... 170
Taxation of Stockholders .......................................................... 175
State and Local Taxes ............................................................. 178
EXPERTS ........................................................................... 178
LEGAL MATTERS ..................................................................... 179
WHERE YOU CAN FIND MORE INFORMATION ............................................... 179
INDEX TO FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
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 American Spectrum, as part of the
Consolidation. In addition, as part of the Consolidation, American
Spectrum will own or acquire by merger properties held by CGS and
affiliates of CGS (together with CGS, the CGS Affiliates). American
Spectrum will also own the portion of CGS's property management
business which manages properties of the Funds and CGS Affiliates (the
CGS Management Company). We refer to the properties that are currently
owned by CGS Affiliates as the "Affiliates' Properties."
Q: Who is soliciting my approval of the proposed Consolidation?
A: The General Partners of your Fund are soliciting your approval for
the Consolidation.
Q: Do the General Partners of my Fund recommend that I vote in favor of
the proposed Consolidation?
A: Yes. The General Partners of the Funds have unanimously recommended
that you vote "For" the proposed Consolidation. They believe that the
Consolidation is the best means to maximize the value of your
investment in your Fund. They believe that the Consolidation is better
than liquidating your Fund's portfolio or continuing the investment
unchanged. However, you should note that the General Partners of the
Funds are affiliates of CGS and American Spectrum.
Q: What is American Spectrum Realty, Inc.?
A: We are a full-service real estate corporation. We currently engage
in the business of investing in and managing real estate. Through the
Consolidation, we intend to combine the properties of the Funds and the
CGS Affiliates. We intend to qualify as a real estate investment trust
and elect to be treated as a real estate investment trust (a REIT)
beginning in 2002. Our primary business, like the Funds, is the
ownership of office, office/warehouse, apartment and shopping center
properties. In addition, we plan to expand our business by acquiring
additional properties. In the future, we plan to focus primarily on
office, office warehouse and apartment properties located in the
midwestern and western United States. If American Spectrum consolidates
with all of the Funds, the CGS Management Company and the CGS
Affiliates, American Spectrum expects to have total real estate assets
with an aggregate appraised value of approximately $283,000,000 at the
time the Consolidation is consummated. This includes approximately
$177,000,000 of real estate assets that will be contributed by the CGS
Affiliates.
Q: What is a REIT?
A: In general, a REIT is a company that owns or provides financing for
real estate, offers the benefits of a diversified portfolio under
professional management 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" (tax imposed at both the corporate and
stockholder levels) that generally results from investments in a
corporation. We intend to qualify as a REIT beginning in 2002.
1
<PAGE> 11
Q: What will I receive if I vote in favor of the Consolidation and it is
approved by my Fund?
A: In the event that 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 be entitled to receive shares of American
Spectrum common stock (or American Spectrum Shares) in exchange for the
Units of Limited Partnership interest that you own in your Fund. The
American Spectrum Shares will be listed for trading on the ___________,
which we refer to as the ___________, concurrently with the
consummation of the Consolidation.
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. 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.
Q: What benefits will I receive from becoming an American Spectrum
stockholder?
A: We believe that the American Spectrum Shares you receive in the
Consolidation will provide you with increased growth potential.
American Spectrum is a growth-oriented operating company of unlimited
duration. American Spectrum is self-administered and internally
managed. Your present Fund is a finite-life, closed-end limited
partnership. American Spectrum (assuming the acquisition of all of the
Funds) will own an interest in 35 properties consisting primarily of
office, office/warehouse, apartment and shopping center properties (the
Properties). An investment in American Spectrum will provide you with
lower risk than does your Fund investment through diversification
geographically. We intend to continue our strategy of opportunistic
investing by seeking under-valued assets and value-enhancing situations
in a range of property types and geographical locations. We believe
that American Spectrum will have greater access to the public debt and
equity markets than your Fund. Finally, since the American Spectrum
Shares will be listed for trading on the _________, your Units, for
which there is presently no established trading market, will be
converted into liquid, freely-tradable securities.
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" and in the Supplement accompanying this Consent
Solicitation. You will receive your proportion of such shares in
accordance with the terms of your Fund's limited partnership agreement.
Q: How did American Spectrum determine the number of American Spectrum
Shares to be allocated to each Fund?
A: American Spectrum evaluated several factors, including its
determination of the relative net asset value of each Fund. This value
was based, in large part, on appraisals prepared by Robert A Stanger &
Co., Inc.("Stanger"), an independent financial advisor.
Q: What is the value of an American Spectrum Share?
A: We do not know the fair value of an American Spectrum Share.
American Spectrum has assigned a value of $15 per share. This is an
arbitrary amount chosen for the sole purpose of allocating American
Spectrum Shares. We determined the number of American Shares allocated
to each Fund by dividing the aggregate value used to allocate American
Spectrum shares, which we call the Exchange Value, for each Fund by
$15. We determined the Exchange Value based in part on appraisals by
Robert A. Stanger & Co.,an independent financial advisor ("Stanger").
After careful consideration, American Spectrum concluded that the
Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including
the CGS
2
<PAGE> 12
Management Company. Since the American Spectrum Shares are not listed
on the _________ at this time, we are not certain of the value at which
an American Spectrum Share may trade. Once listed, it is possible that
the American Spectrum Shares will trade at prices below $15 per share.
Q: Did you receive a fairness opinion in connection with the consolidation
of my Fund with American Spectrum?
A: Yes. Stanger, an independent financial advisor, rendered an opinion
that the allocation of the American Spectrum 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
your Fund from a financial point of view.
Q: Did you receive an appraisal in connection with the consolidation of my
Fund with American Spectrum?
A: Yes. To assist in the determination of the number of American
Spectrum Shares to be issued to each Fund and in your General Partners'
evaluation of our offer, the General Partners and CGS engaged Stanger
to appraise the portfolio of properties owned by your Fund and the CGS
Affiliates.
Q: Will I receive future distributions with respect to the American
Spectrum Shares I receive in the Consolidation?
A: Yes. American Spectrum expects to make quarterly distributions to
its stockholders. American Spectrum intends to elect to qualify as a
REIT beginning in 2002. If American Spectrum makes the REIT election,
it must always distribute at least 90% of its taxable income to its
stockholders on an annual basis in order to maintain its status as a
REIT. American Spectrum is not required to make the REIT election.
American Spectrum intends to make quarterly distributions whether or
not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares.
American Spectrum Shares will be listed for trading on the _______.
Going forward, we believe that, unlike your Fund, American Spectrum's
assets, will grow, resulting in an increase of its earnings and its
funds from operations. As a result, the price of American Spectrum
Shares on the _________ may increase due to such growth. However, we
cannot assure you that any growth will be achieved.
Q: In the event that my Fund is consolidated 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 acquired by American Spectrum, you may
elect to receive notes due ________ ___, _____. The value of the Notes
will be based on the liquidation value of your Fund. The liquidation
value will be lower than the aggregate exchange value of the American
Spectrum Shares offered to your Fund in the Consolidation. The Notes
will bear interest at a fixed rate equal to ______%. The interest rate
was determined based on 120% of the applicable federal rate on ________
___, 2000.
Q: What do I have to do to receive Notes?
A: 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. You will receive American Spectrum
Shares if your Fund elects to be acquired in the Consolidation and you
vote "For" the Consolidation, or you vote "Against" the Consolidation
and do not elect to receive Notes (the Notes Option) on your consent
form. The Notes will not be listed on any exchange or automated
quotation system, and a market for the Notes will not likely develop.
3
<PAGE> 13
Q: How long has American Spectrum been an operating company and how large
is it?
A: We are an entity formed in Texas. In ________, 2000, we merged with
a newly-organized Maryland corporation and changed our name to American
Spectrum Realty, Inc. We plan to acquire and continue the business of
CGS Real Estate Company, Inc., its affiliated companies and the Funds.
CGS's predecessors were the sponsors of the Funds. The size of American
Spectrum will depend on the number of Funds we are able to acquire.
Q: Who manages American Spectrum?
A: American Spectrum is managed by its Board of Directors, consisting
of five members, the majority of which are independent. Independent
directors are neither employed by American Spectrum, nor have a
substantial financial interest in American Spectrum. William J. Carden
is the Chairman of the Board of American Spectrum.
Q: Is American Spectrum's Consolidation of my Fund dependent on its
Consolidation with the other Funds?
A: It is our goal to achieve a minimum participation level of
approximately $200 million of appraised real estate value. The
Affiliates' Properties to be contributed to American Spectrum by CGS
Affiliates have a total appraised value of approximately $177 million.
Therefore, consummation of the consolidation of the various Funds is
conditioned upon the approval of the Limited Partners of Funds with a
combined appraised real estate value of at least $23 million. Unless
the appraised value of the properties acquired (including the
Affiliates' Properties) is at least $200 million, none of the Funds
will be merged into American Spectrum pursuant to the Consolidation.
The real properties owned by the Funds have an aggregate appraised
value of approximately $105 million.
Q: What benefits will the General Partners of my Fund and its affiliates
receive as a result of the Consolidation?
A: Affiliates of your General Partner will receive substantial
interests in American Spectrum in exchange for their interests in the
CGS Affiliates, including the contribution of the Affiliates'
Properties and the CGS Management Company.
Q: What are the tax consequences of the Consolidation for me?
A: 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
except to the extent the liabilities of your Fund assumed by American
Spectrum exceed the bases of the assets that your Fund contributed to
American Spectrum. If the liabilities of your Fund assumed by American
Spectrum exceed the bases of the assets contributed, your Fund will
recognize gain equal to the amount by which the liabilities assumed
exceed the bases of the assets transferred, and you will be allocated
your share of the gain. 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. 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.
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.
To review the tax consequences to the Limited Partners of the Funds in
greater detail, see pages ___ through ___ of this Consent Solicitation
and the Supplement.
4
<PAGE> 14
Q: Who can vote on the Consolidation? What vote is required to approve the
Consolidation?
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.
For a Fund to be acquired by American Spectrum, 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: Am I entitled to an independent appraisal of my Units at my request?
A: No. However, an appraisal of the portfolio of properties owned by
your Fund has been prepared by Stanger. See the Supplement for details.
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
acquisition of your Fund. 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.
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.
5
<PAGE> 15
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): ________________
6
<PAGE> 16
SUMMARY
This Summary highlights selected information from this Consent
Solicitation, and may not contain all of the information regarding the
Consolidation that is important to you. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" refer to American
Spectrum Realty, Inc., a Maryland corporation and its subsidiaries, including
American Spectrum Operating Partnership, L.P., a limited partnership through
which we conduct our business and which we call the Operating Partnership. 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 Supplement pertaining to your Fund accompanying
this Consent Solicitation and the other documents to which we have referred you.
See "Where You Can Find More Information" on page ____.
American Spectrum has set the exchange value at $15 per share (the
Exchange Value) for purposes of allocating the American Spectrum Share to the
Funds and CGS Affiliates. However, the Exchange Value may not represent the fair
market value of the American Spectrum Shares or the price at which it will trade
on the __________.
PURPOSE OF THIS CONSENT SOLICITATION
This Consent Solicitation describes our proposed consolidation of up to
eight limited partnerships into American Spectrum, which we refer to as the
Funds. Through this Consent Solicitation, we are asking you to approve the
consolidation of your Fund with American Spectrum. Your Fund will consolidate
with American Spectrum if Limited Partners holding greater than 50% of the
outstanding Units of Limited Partnership interest vote to approve the
Consolidation, if the appraised value of the properties acquired (including the
properties owned or controlled by the CGS Affiliates) is at least $200 million
and the other conditions to the Consolidation are met.
DESCRIPTION OF AMERICAN SPECTRUM AND THE FUNDS
AMERICAN SPECTRUM
American Spectrum is a newly organized Maryland corporation. CGS Real
Estate Company, Inc. was merged into American Spectrum in _________, 2000. We
were formed to continue to expand the real estate business conducted by CGS and
its affiliates. We will operate as a fully integrated, self-administered and
internally managed real estate company. Upon completion of the Consolidation, we
expect to own and operate a diversified portfolio of 35 properties located in
nine states. 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. In the future, 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.
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):_______________________
American Spectrum's business objectives are to:
- maximize cash flow available for distribution and the capital
appreciation of our property portfolio through the acquisition
and redevelopment of additional properties, professional
management and, when appropriate, disposition of our
properties;
- hold properties for long-term investment.
7
<PAGE> 17
American Spectrum's acquisition and operating strategies are to:
- achieve and maintain a property portfolio which is diversified
both geographically and by property type. We intend to focus
primarily on acquisitions of office, office/warehouse and
apartment properties in the midwestern and western United
States;
- continue our strategy of opportunistic investing by seeking
under-valued assets and value-enhancing situations in a broad
range of property types and geographical locations;
- achieve and maintain high occupancy and increase rental rates
through (i) efficient and effective leasing strategies; (ii)
reducing turnover rates; and (iii) providing quality
maintenance and services to maximize tenant satisfaction and
retention;
- manage operating expenses and achieve reductions through
operating efficiencies and economies of scale;
- attract and retain high quality tenants;
- emphasize regular programs of repairs and capital improvements
to enhance the Properties' competitive advantages in their
respective markets; and
- take advantage of what we believe to be a favorable
acquisition climate for buyers with access to capital.
American Spectrum intends to qualify as a REIT beginning in 2002. We
believe that our real estate expertise will allow us to reposition and, when
necessary, renovate properties, making them competitive in their local markets.
THE PROPERTIES
Upon completion of the Consolidation, American Spectrum expects to own
and operate a diversified portfolio of 35 properties in nine states. All of the
Properties have been previously managed by CGS and its affiliates.
The following table indicates the distribution by type and the
geographical distribution of the Properties:
<TABLE>
<CAPTION>
PERCENT OF
TOTAL-PROPERTY
ACQUISITION
TYPE OF PROPERTY NUMBER OF PROPERTIES COST (1)
--------------------------------- -------------------- --------------
<S> <C> <C>
Office buildings 12 46.30%
Office/warehouse buildings 12 22.61%
Apartment properties 5 21.70%
Shopping centers 5 8.86%
Land Held for Development 1 0.52%
-------------------- --------------
TOTAL 35 100.0%
==================== ==============
</TABLE>
8
<PAGE> 18
<TABLE>
<CAPTION>
PERCENT OF TOTAL
PROPERTY ACQUISITION
GEOGRAPHIC DISTRIBUTION NUMBER OF PROPERTIES COST
------------------------------- -------------------- --------------------
<S> <C> <C>
West: 13 43.32%
Midwest: 14 38.93%
South: 5 11.03%
East: 3 6.73%
-------------------- --------------------
TOTAL 35 100.0%
==================== ====================
</TABLE>
(1) Based on historical acquisition cost of the Funds and the CGS
Affiliates.
THE FUNDS
The Funds are finite-life limited partnerships that CGS's predecessors
formed from 1979 to 1985 to invest in office, office/warehouse and apartment
properties. As of December 31, 1999, the Funds owned, in the aggregate, 18
office, office/warehouse and shopping center properties located in eight states.
For the fiscal year ended December 31, 1999, the Funds' properties generated
aggregate gross revenues of approximately $13,732,305. In addition, the
Affiliates' Properties generated aggregate gross revenues of approximately
$19,831,394. The Funds' properties are managed by subsidiaries of CGS. The Funds
consist of the following eight Limited Partnerships:
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.
MATERIAL FACTORS THAT MAKE THE OFFERING SPECULATIVE OR RISKY
There are certain risks involved in the Consolidation, which are more
fully discussed beginning on page __ in "Risk Factors," that you should consider
in determining whether to vote in favor of the Consolidation. The following list
summarizes the risks of the Consolidation that we believe to be most material to
you:
- Because there has not been a public market for the Units in
your Fund, upon their exchange for American Spectrum Shares,
the trading price of the American Spectrum Shares may
fluctuate significantly. Once listed on the _________, the
American Spectrum Shares may trade below the Exchange Value.
- 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.
- The consolidation of your Fund into American Spectrum involves
a fundamental change in the nature of your investment. If the
Consolidation is approved, you will no longer hold an interest
in a Fund that has a fixed portfolio of properties. Instead,
you will be a stockholder in an operating company that will
own interests in 35 properties (assuming American Spectrum
acquires all of the Funds). The Funds are required to
distribute the proceeds of any property sales. It is our
intention to reinvest the proceeds of any future sales of our
properties. In addition, we plan to raise additional funds
through equity or debt financings to make future acquisitions
of properties, although there can be no assurance that any
9
<PAGE> 19
such acquisitions will ultimately be consummated. In addition,
we may invest in types of properties different from those in
which your Fund invests.
- We intend to continue our strategy of opportunistic investing
by seeking under-valued assets and value-enhancing strategies
in a broad range of property types and geographic locations.
While we believe that this strategy can result in higher
returns, it also involves increased risks.
- Upon consummation of the Consolidation, we will have more
indebtedness and greater leverage than the Funds. In addition,
as part of our acquisition strategy, we anticipate that we
will incur indebtedness to acquire properties. This use of
debt will subject American Spectrum to risk of default, which
could in turn affect American Spectrum's funds from
operations. American Spectrum does, however, have a policy of
maintaining a ratio of total indebtedness to total assets of
not more than 70% (based on appraised value).
- Each Fund intends to report the Consolidation on the basis
that no gain is recognized except to the extent liabilities
assumed by American Spectrum exceed the bases of the assets
contributed to American Spectrum. If the liabilities of your
Fund assumed by American Spectrum exceed the bases of the
assets contributed, your Fund will recognize gain equal to the
amount by which the liabilities assumed exceed the bases of
the assets transferred, and you will be allocated your share
of the gain. 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. See "Tax Risks" and "The Tax
Consequences of the Consolidation."
- 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.
- 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 (assuming all of the Funds are
acquired), the General Partners of the Funds will receive certain benefits and
may also have conflicts of interest as a result of the Consolidation. These
conflicts and benefits include:
- As a result of the terms of the Partnership Agreements, the
Funds' General Partners will not receive any American Spectrum
Shares on account of the general partnership interest in the
Funds. Affiliates of the Funds' General Partners are expected
to receive approximately 2,628,655 American Spectrum shares
and units in the Operating Partnership on account of the CGS
Affiliates and their interests as limited partners in the
Funds.
- Following the Consolidation, certain of the officers and
directors of your General Partners will serve as officers and
directors of American Spectrum, with William J. Carden serving
as Chief Executive Officer, Harry A. Mizrahi serving as Chief
Operating Officer, Thomas N. Thurber serving as Chief
Financial Officer and Paul E. Perkins and Patricia A. Nooney
serving as Senior Vice Presidents. As American Spectrum
officers and directors, they will be entitled to receive stock
options under any stock option plan adopted by American
Spectrum. The benefits that may be realized by them are likely
to exceed the benefits that they would derive from the Funds
if the Consolidation does not occur.
- The CGS Affiliates are obligated to make payments to the
Funds. In addition, the CGS Affiliates have indebtedness other
than mortgage indebtedness. William J. Carden and John
Galardi, principal shareholders of American Spectrum,
guaranteed a substantial portion of these obligations. If the
Consolidation is consummated, these obligations will become
obligations of American Spectrum.
10
<PAGE> 20
- Messrs. Carden and Galardi have guaranteed indebtedness of the
CGS Affiliates. The Consolidation reduces the likelihood that
Messrs. Carden and Galardi will make payments on the
guarantees.
- The CGS Affiliates 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.
THE CONSOLIDATION
PRINCIPAL COMPONENTS OF THE CONSOLIDATION
The Consolidation will consist of the following principal components:
- 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.
- CGS Affiliates will consolidate into American Spectrum. As
part of the Consolidation, simultaneously with the closing of
the merger with the Funds, we will merge with 13 partnerships,
corporations, and limited liability companies in which William
J. Carden, John Galardi and members of their families hold
more than 50% of the equity. In addition, we will merge with
11 other limited partnerships in which affiliates of CGS are
the general partners. 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 (subject to certain limitations described under
"AMERICAN SPECTRUM -- Miscellaneous Policies -- Restrictions
on Related Party Transactions") into shares of American
Spectrum on a one-for-one basis after 12 months. We have
agreed to file a registration statement to register the resale
of these American Spectrum Shares.
- 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 (collectively, the Third
Party Management Company) and providing property management,
brokerage and leasing services to the Funds and the
Affiliates' Properties (which we refer to as the CGS
Management Company). While investigating the Consolidation, we
determined that the third party management business 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 Affiliates' Properties. We will continue to own
the CGS Management Company. In connection with the
Consolidation, the Third Party Management Company 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. The CGS Management Company
will enter into an agreement under which the Third Party
Management Company will provide office space and equipment to
the CGS Management Company for a payment based upon the out of
pocket expenses of the Third Party Management Company.
11
<PAGE> 21
- 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.
- The following chart reflects the organizational structure of
and the relationship among Messrs. Carden and Galardi, the
Funds, the CGS Affiliates and the management company
subsidiaries of CGS before the Consolidation:
[CHART SHOWING THE OWNERSHIP OF THE
CGS AFFILIATES AND THE FUND BEFORE THE
CONSOLIDATION]
- 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 Affiliates have merged into American Spectrum and
their assets have been contributed to the Operating Partnership.
The CGS Management Company is owned by American Spectrum.
[CHART SHOWING THE OWNERSHIP STRUCTURE
OF AMERICAN SPECTRUM AFTER THE
CONSOLIDATION]
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 ultimately consummated, you will receive American Spectrum Shares as
consideration for your Units, unless you vote against the acquisition of your
Fund by American Spectrum and elect to receive Notes, as described below.
- American Spectrum Shares. Upon the consummation of the
Consolidation, you will receive American Spectrum Shares for
your Units unless you vote "Against" the Consolidation and
specifically elect to receive Notes. You should bear in mind
that if you vote against the Consolidation and do not
specifically choose to receive Notes, you will receive
American Spectrum Shares if your Fund approves the
Consolidation.
The number of American Spectrum Shares that you will receive
for your Units will be determined in accordance with the
provisions of your Fund's partnership agreement that specify
how consideration is distributed upon a liquidation of your
Fund. The next section of this Summary contains a chart that
lists the number and estimated value of American Spectrum
Shares. The estimated value is based on the Exchange Value of
the American Spectrum Shares issued to the Limited Partners in
each Fund. As we have previously noted, the Exchange Value has
been assigned by American Spectrum to the American Spectrum
Shares. Upon listing on the _________, the American Spectrum
Shares may trade at prices below the Exchange Value. We have
included in the chart the estimated value of American Spectrum
Shares per average $1,000 original investment in each Fund. We
have included these amounts to show the relationship of the
American Spectrum Shares that will be paid to your Fund and
12
<PAGE> 22
your investment in the Funds and these amounts should not be
treated as the value of the American Spectrum Shares you will
receive.
- Notes. If your Fund approves the Consolidation and 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 payment received by you and other
Limited Partners who elect the Notes Option will be the
estimated amount that the Limited Partners would receive upon
an orderly liquidation of the Fund's properties pursuant to
the partnership agreement governing your Fund, based in part
upon an independent appraisal prepared by Stanger. This amount
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. For a discussion of the terms and
conditions of the Notes, see "Description of the Notes,"
page __.
AMERICAN SPECTRUM SHARES ALLOCATED TO FUNDS
The following table sets forth for each Fund: (i) the number of
American Spectrum Shares to be allocated to that Fund; (ii) the estimated value
of American Spectrum Shares to be allocated to that Fund based on the Exchange
Value; and (iii) the estimated value of American Spectrum Shares, based on the
Exchange Value, you will receive for each $1,000 of your original investment:
<TABLE>
<CAPTION>
EXCHANGE VALUE OF
NUMBER OF AMERICAN SPECTRUM
AMERICAN SPECTRUM SHARES PER AVERAGE
SHARES EXCHANGE VALUE $1,000 ORIGINAL
ALLOCATED TO OF AMERICAN SPECTRUM LIMITED PARTNER
FUND FUND(1) SHARES INVESTMENT(2)
----------------------------------------- ----------------- -------------------- ------------------
<S> <C> <C> <C>
Sierra Pacific Development Fund 391,648 $ 5,874,720 $ 400.27
Sierra Pacific Development Fund II 839,334 12,590,013 581.17
Sierra Pacific Development Fund III 28,655 429,832 47.08
Sierra Pacific Institutional Properties V 328,037 4,920,557 639.51
Sierra Pacific Pension Investors '84 1,212,465 18,186,978 944.78
Nooney Income Fund Ltd., L.P. 683,383 10,250,749 675.28
Nooney Income Fund Ltd. II, L.P. 1,021,040 15,315,594 796.82
Nooney Real Property Investors-Two, L.P. 545,451 8,181,768 681.81
</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.
(2) 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 at prices below the Exchange Value.
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 purchase prices with
a round number. In order to determine the approximate value, based on the
Exchange 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
13
<PAGE> 23
"Estimated 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 $400.27 by 5 (equal to $5,000 divided by
$1,000), which would result in your receiving an estimated value of $2,001.35 in
American Spectrum Shares in the Consolidation.
Why the American Spectrum Shares may trade at prices below the Exchange
Value. There has been no public trading market for the Units and, upon their
exchange for American Spectrum Shares, the American Spectrum Shares may trade,
when listed on the _________, below the Exchange Value. The principal reasons
for this are as follows:
- 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 the broader equity market in
1998 and 1999. The overall market for REIT common stock in the
future could affect market prices for American Spectrum
Shares.
- Upon the exchange of the Units for the American Spectrum
Shares and the listing of the American Spectrum Shares on the
_________, the Fund investors who receive American Spectrum
Shares in the Consolidation will for the first time be able to
sell their interests in a relatively liquid market. As a
consequence, the supply of American Spectrum Shares offered
for sale may exceed the demand for American Spectrum Shares,
thereby depressing the trading price of an American Spectrum
Share.
- American Spectrum will be more leveraged than many REIT's.
This higher leverage could adversely affect the market price
for American Spectrum Shares.
- American Spectrum will have a lower capitalization than many
publicly traded REIT's. This could adversely affect the market
price for American Spectrum Shares.
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 Operating Partnership Units in
exchange for their limited partnership interests in the Funds acquired by
American Spectrum and the other property interests contributed by them to
American Spectrum.
YOUR GENERAL PARTNERS' REASONS FOR SUPPORTING THE CONSOLIDATION
Your General Partners recommend that you approve the Consolidation
because 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
acquisition of the Funds' properties by American Spectrum in 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 the following
benefits:
- Growth Potential. We believe that there is greater potential
for increased distributions to you as an American Spectrum
stockholder and for appreciation in the price of your American
Spectrum Shares than there would be for you as a Limited
Partner of your Fund. This growth potential results primarily
from our strategy to make future acquisitions of additional
properties and engage in advantageous
14
<PAGE> 24
financing activities. We believe that substantial
opportunities currently exist to acquire additional properties
at attractive prices. Your Fund does not incur borrowings in
the ordinary course of business. In addition, due to their
relatively small size, it is difficult for any of the Funds to
incur debt on favorable terms or raise capital through the
issuance of additional equity.
- Risk Diversification. The combination of the Properties owned
by the Funds and the properties being contributed by CGS and
its affiliates with potential future property acquisitions
made by American Spectrum will diversify your investment over
a larger number of properties and a broader group of property
types, tenants and geographic locations. Your investment will
also change from being an interest in a static, finite-life
entity to an investment in a growing operating company. 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.
- 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 the Funds. 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 save compliance costs with respect to
SEC reporting. 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 to you each January.
- Liquidity. We believe the Consolidation may provide you with
liquidity for two reasons. First, the market for the Units
that you own is very limited. The Units are not listed on an
exchange and, therefore, a potential buyer has 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 are able to
locate a willing buyer. As a stockholder of American Spectrum,
you will own American Spectrum Shares which will be listed on
the _________, and therefore publicly valued. Additionally,
there will be no restrictions on your ability to sell the
American Spectrum Shares you own. Second, as a holder of Units
that are non-tradable, the pool of potential buyers for your
Units is limited. To the extent that there is a willing buyer,
the buyer would likely acquire your Units at a substantial
discount. 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 acquires 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.
- Greater Access to Capital. American Spectrum 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 necessary for funding its operations and
making acquisitions on more attractive terms than would be
available to any of the Funds individually.
- Greater Reduction of Conflicts of Interest. American Spectrum
will be operated as an internally-advised real estate company
with management employed by American Spectrum. This structure
eliminates fees paid to outside advisors, reduces conflicts of
interest and creates an alignment of the interests of the
stockholders and management.
RECOMMENDATION
The General Partners of your Fund believe that the terms of the
Consolidation provide substantial benefits and are fair to you, and recommend
that you vote "For" approval of the Consolidation.
15
<PAGE> 25
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:
- 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 ___.
- 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 (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.
- 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.
- Your General Partners considered the fairness opinion and
appraisals rendered by Stanger, which are described below.
APPRAISALS
Stanger has provided an appraisal of each Fund's portfolio of real
estate and the Affiliates' Properties. The appraisals were prepared on a limited
scope basis, utilizing the income approach to value, and in the case of
developable land, the sales comparison approach. The appraisals included
individual inspections of each Property. In performing the appraisals, Stanger
conducted such investigations and inquiries as it deemed appropriate in
establishing its estimates of value and made such assumptions and identified
such qualifications and limitations as it deemed necessary in its findings. The
portfolio appraisal represents Stanger's opinion of the estimated value of the
portfolios of Properties owned by the Funds and the Affiliates' Properties as of
March 31, 2000. They do not necessarily reflect the sales prices of the
portfolios that would be realized in actual sales. These prices could be higher
or lower than the appraised value of the portfolios. Your General Partners
utilized the appraisals in determining the Exchange Values. There is no separate
appraisal of the CGS Management Company's business or assets. See "Reports,
Opinions and Appraisals."
FAIRNESS OPINIONS
Stanger was 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 between the Funds and the CGS Affiliates, including the CGS
Management Company, and among the Funds. Because the approval of any particular
Fund is not a condition of the Consolidation, we obtained from Stanger a
fairness opinion that did not assume any particular Fund is included in the
Consolidation. 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.
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 in
connection with the Consolidation between the Funds and the CGS Affiliates,
including the CGS Management Company, and among the Funds, is fair to the
limited partners of the Funds from a financial point of view.
16
<PAGE> 26
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated
as follows:
American Spectrum Shares will be allocated between the Funds and the
CGS Affiliates, including the CGS Management Company, and among the Funds, based
upon the estimated net asset value, computed as described below (the "Exchange
Value") of each of the Funds, and the CGS Affiliates, including the CGS
Management Company, relative to the aggregate estimated Exchange Value of all of
the Funds and the CGS Affiliates, including the CGS Management Company. The
General Partners believe that the Exchange Values of the Funds and the CGS
Affiliates, including the CGS Management Company, represent fair estimates of
the value of their assets, net of liabilities and allocable expenses of the
Consolidation, as of March 31, 2000, and constitute a reasonable basis for
allocating the American Spectrum Shares between the Funds and the CGS
Affiliates, including the CGS Management Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum
Shares. For a detailed explanation of the manner in which the allocations are
made, see "Allocation of Shares."
17
<PAGE> 27
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL
AMERICAN
PERCENTAGE SPECTRUM
OF TOTAL SHARE SHARES
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION ISSUED(1)
-------------- -------------- ---------- ---------
<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 0.39% 28,655 0.39%
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 Affiliates(2) 31,748,046 28.73% 2,116,536 28.73%
CGS Management Company 3,020,122 2.73% 201,341 2.73%
7,501,707
========
Totals $110,518,379 100.00% 7,367,890 100.00%
============ ====== ========= ======
</TABLE>
(1) Includes OP Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
Under the terms of the Partnership Agreement, the General Partners
would not be entitled to any of the American Spectrum Shares issuable to each of
the Funds. Accordingly, all of the American Spectrum Shares issuable to the
partners of each of the Funds is being allocated to the Limited Partners.
ALTERNATIVES TO THE CONSOLIDATION THAT YOUR GENERAL PARTNERS CONSIDERED
In determining whether to accept 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 effects, some of which you might
perceive as benefits:
- Your Fund would not be subject to the risks associated with
the ongoing operations of American Spectrum and its investment
strategy of opportunistic investing, and instead would remain
a separate entity with its own assets and liabilities. Your
Fund would pursue its original investment objectives
consistent with the guidelines, restrictions and safeguards
contained in its partnership agreement;
- Your Fund's performance would not be affected by the
performance of American Spectrum and the other Funds and
assets that American Spectrum intends to acquire in the
Consolidation;
18
<PAGE> 28
- 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;
- There would be no change in the nature of your voting rights
and no change in your Fund's operating policies;
- Your Fund would not incur its share of the expenses of the
Consolidation, ranging from approximately $13,294 to $562,484,
depending on the size of the Fund (for a breakdown of the
expenses with respect to your Fund, see the Supplement
accompanying this Consent Solicitation);
- Income from your Fund may, under certain circumstances, be
offset by passive activity losses generated from your other
investments, whereas you will not have the ability to offset
income from your investment in American Spectrum with such
losses; and
- You would not be subject to any immediate federal income
taxation that would otherwise be incurred by you as a
consequence of the Consolidation because the Consolidation may
be taxable.
We believe that maintaining the Funds as separate entities would have
the following disadvantages:
- Since the majority of the Funds' administrative expenses are
fixed, as the Properties are sold and revenues from the
portfolio decrease, we do not expect the Funds to make
distributions out of operating cash flow;
- Since the Funds are not authorized to make additional
investments, the Funds are unable to benefit from investing in
potential growth opportunities;
- 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. American
Spectrum Shares will have a public trading market;
- Your Fund's portfolio of properties would be less diversified.
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
- Your Fund would continue to be managed externally. 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 Limited Partners (as well as to our affiliates in their capacities as
General Partners) in accordance with the distribution provisions of its
partnership agreement. The primary advantage of this alternative would be to
provide liquidity to you as Properties are sold, based upon the net liquidation
proceeds received from the sale of your Fund's assets.
Your General Partners do not believe that liquidation would be as
beneficial to you as the Consolidation for the following reasons:
- Your General Partners believe that liquidation of the
Properties could result in various adverse consequences. For
example, your General Partners believe that an aggressive
liquidation of individual Properties could result in
significant discounts from appraised values, while a gradual
disposition strategy likely would involve higher
administrative costs and greater uncertainty, either of which
would reduce the portion of net sales proceeds available for
distribution to you;
19
<PAGE> 29
- You would lose the opportunity to participate in any increases
in value resulting from appreciations in asset value and
strategic acquisitions;
- Your General Partners believe that, over time, the value of
the American Spectrum Shares will exceed the liquidation value
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 derive these estimated values are explained
therein.
The following table summarizes the results of the General Partners'
comparative analysis of alternatives:
COMPARISON OF ALTERNATIVES
(Per $1,000 Investment)
<TABLE>
<CAPTION>
Range of Secondary
Estimated Market Prices
Estimated Going- Liquidation (15 Months Ending Exchange
Concern Value Value March 31, 2000)(1) Value(2)
------------------- ----------- ------------------- --------
<S> <C> <C> <C> <C>
Sierra Pacific
Development Fund $340.00 - $370.00 $386.00 $100.00 - $230.00 $400.27
Sierra Pacific
Development Fund II 456.00 - 536.00 548.00 400.00 - 528.00 581.17
Sierra Pacific
Development Fund III 27.80 - 30.08 44.56 None* 47.08
Sierra Pacific
Institutional Properties V 436.00 - 516.00 620.00 100.00 - 240.00 639.51
Sierra Pacific
Pension Investors '84 808.00 - 900.00 920.00 275.00 - 600.00 944.78
Nooney Income
Fund Ltd., L.P. 520.00 - 585.00 661.00 210.00 - 344.70 675.28
Nooney Income
Fund Ltd. II, L.P. 663.00 - 758.00 764.00 200.00 - 471.00 796.82
Nooney Real Property
Investors-Two, L.P. 566.00 - 624.00 638.00 194.00 - 390.10 681.81
</TABLE>
-------------------------
(1) Does not include purchases by affiliates. The purchases are described
under "Background of and Reasons for the Consolidation -- Consideration
of Liquidation of the Funds and the Decision to Pursue the
Consolidation."
(2) 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.
* No reported sales.
VOTING
VOTING PROCEDURES
Please mark the enclosed consent form to vote "For" or "Against"
approval of the Consolidation. If you have invested in more than one Fund, you
will receive one copy of this Consent Solicitation, the Supplement and a consent
form for each Fund in which you hold Units. Because each Fund will vote
separately on whether or not to approve the Consolidation, you must complete one
consent form for each Fund in which you are an investor.
20
<PAGE> 30
If you vote "Against" the Consolidation and your Fund approves the
Consolidation and is consolidated 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, you must vote "Against" the
Consolidation and elect the Notes Option on the consent form or you will receive
American Spectrum Shares.
Your consent form must be received by [ ] by 5:00 p.m. Eastern time on
_____________ ___, 2000 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 Fund's partnership agreement. If you do not submit a
consent form, you will also be counted as having voted "Against" the
Consolidation and 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
before consents from Limited Partners equal to more than 50% of the required
vote are received by your Fund in the manner described later in this Consent
Solicitation.
Affiliates of CGS own interests as limited partners 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 certain 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. For a
discussion of the amendments, if applicable to your Fund, 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.
COMPARISON OF OWNERSHIP OF AMERICAN SPECTRUM SHARES AND THE NOTES OPTION
Your rights and obligations as an investor in a Fund currently are
governed by your Fund's partnership agreement. If your Fund is acquired by
American Spectrum, you will become either an American Spectrum stockholder (if
you receive American Spectrum Shares in the Consolidation) or a noteholder of
American Spectrum (if you vote "Against" the Consolidation and elect the Notes
Option). In order to assist you in deciding whether to approve the Consolidation
and whether to elect to receive American Spectrum Shares or Notes if your Fund
approves the Consolidation, we have summarized below some of the advantages and
disadvantages of American Spectrum Shares versus Notes.
AMERICAN SPECTRUM SHARES
Advantages of American Spectrum Shares include:
- The market for American Spectrum Shares, which will be traded
on the _________, likely will be more active than the market
for Notes. This means you may have the opportunity to
liquidate, at your convenience, all or any portion of the
American Spectrum Shares that you hold. The Notes will not be
listed on any exchange.
- You will be a stockholder in an operating company that is in a
position to take advantage of external growth opportunities.
We can raise additional funds through equity or debt financing
and can reinvest net sales or refinancing proceeds in new
investments.
21
<PAGE> 31
- As a stockholder, you will be entitled to participate in the
dividends and distributions made by American Spectrum with
respect to the American Spectrum Shares based on your
percentage ownership interest of the outstanding American
Spectrum Shares.
- Although the initial distributions on the American Spectrum
Shares are expected to be lower than the initial interest
payments expected to be made on the Notes, it is anticipated
that, over time, these distributions will exceed the interest
payments made on the Notes due to American Spectrum's
anticipated growth and the expected increase in its cash flow
resulting therefrom.
- Unlike a Noteholder, you will be entitled to vote on matters
presented at meetings of stockholders and you will have the
right to access American Spectrum's books and records to the
extent provided by Maryland law.
Disadvantages of American Spectrum Shares include:
- Your right to receive distributions as a stockholder is
subordinated to the principal and interest payments payable
with respect to all debt obligations of American Spectrum or
the Operating Partnership. This means that prior to making any
distribution to you, American Spectrum must pay the principal
and interest owed with respect to the Notes and its other debt
obligations. Thus, to the extent that American Spectrum does
not have sufficient cash to make a distribution after it makes
the required principal and interest payments on the Notes and
payments on other debt obligations, you will not receive a
distribution. It is possible that we may be forced to incur
indebtedness in order to make distributions necessary to
maintain REIT status.
- Your percentage ownership interest in American Spectrum may be
diluted at any time through the issuance of additional
securities, including securities that have priority as to
distributions from cash flow generated from American
Spectrum's operations and liquidation proceeds derived from
the sale of American Spectrum's assets.
NOTES
Advantages of Notes include:
- Notes are senior, unsecured indebtedness and represent fixed
obligations of American Spectrum. Payments to you as a
Noteholder will be superior to the rights of stockholders to
receive dividend distributions.
- Payments of principal and interest on the Notes are not solely
dependent upon the profits derived from American Spectrum's
operations.
- The Notes provide that, following the consummation of the
Consolidation, if American Spectrum sells or refinances any
property acquired from a Fund, American Spectrum must redeem
Notes held by the former Limited Partners of such Fund in an
aggregate amount equal to 80% of the net cash proceeds of the
sale or refinancing.
Disadvantages of Notes include:
- American Spectrum may redeem the Notes at any time, in whole
or in part, at the face value of the Notes with no prepayment
penalty or premium.
- Unlike the American Spectrum Shares which will be listed for
trading on the _________, there likely will be no public
market for your Notes.
22
<PAGE> 32
- Unlike a stockholder, you will have no right to participate in
the future profits derived from American Spectrum's assets or
from the sale or refinancing of American Spectrum's properties
(other than the mandatory redemption upon the sale or
refinancing of your Fund's properties, as described in
"DESCRIPTION OF THE NOTES - Redemption"), you will not be
entitled to vote with regard to matters presented to
stockholders and you will not be entitled to access American
Spectrum's books and records.
- While Noteholders will have priority over holders of American
Spectrum Shares, our ability to repay the Notes is dependent
upon our performance. Thus, while Noteholders bear a portion
of the risk of our poor performance, Noteholders will not
participate in any increases in distributions from the
American Spectrum Shares or increases in market value in the
American Spectrum Shares if we are successful.
CONSOLIDATION EXPENSES
American Spectrum and each Fund will bear their own expenses incurred
in connection with the Consolidation. If your Fund approves the Consolidation
and your Fund is acquired by American Spectrum, the number of American Spectrum
Shares you receive will reflect a reduction for your Fund's expenses of the
Consolidation. 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 in order for the
Consolidation to be consummated:
- The American Spectrum Shares must be approved for listing on
the _________ prior to or concurrently with the consummation
of the Consolidation.
- The Funds' real properties have an aggregate appraised value
of $105,320,000. We condition the consummation of the
Consolidation upon the acquisition of real properties having
an appraised value of at least $200 million, including real
properties owned by CGS Affiliates. At March 31, 2000, the
appraised value of the real properties owned by CGS Affiliates
(i.e., the Affiliates' Properties) was $177,390,000. If real
properties with an aggregate value of at least $200 million
are not acquired in the proposed acquisitions, we will not
acquire any of the Funds in the Consolidation.
YOUR RIGHT TO INVESTOR LISTS AND TO COMMUNICATE WITH OTHER LIMITED PARTNERS
We are required under applicable federal securities laws, upon receipt
of a written request from you, to provide you with the following information:
(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.
23
<PAGE> 33
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 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 to the extent that the liabilities
of your Fund assumed by American Spectrum exceed the bases of the assets your
Fund contributed to American Spectrum. If the liability of your Fund assumed by
American Spectrum exceed the bases of the assets contributed, your Fund will
recognize gain equal to the amount by which the liabilities assumed exceed the
bases of the assets transferred, and you will be allocated your share of the
gain. 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 you will be allocated
your share of the gain. 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
FUND LIMITED PARTNER 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.
24
<PAGE> 34
(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".
(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.
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). Accordingly, if your Fund is acquired by American Spectrum, you will
cease to be a partner in a partnership and will become a stockholder of a C
Corporation, which intends to qualify as a REIT. 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.
A REIT is a company that combines the capital of many investors to
acquire or provide financing for real estate, offers benefits of a diversified
portfolio under professional management and, for taxable years beginning after
December 31, 2000, 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" (tax imposed at both the corporate and stockholder levels) that
generally results from investments in a corporation. American Spectrum is not
required to elect REIT status.
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.
25
<PAGE> 35
SUMMARY HISTORICAL AND PRO FORMA DATA
The following presents summary information for the following:
(i) American Spectrum Predecessor - historical data
(ii) Funds - pro forma data to reflect the combination of the historical
amounts of the individual funds under both minimum and maximum
scenarios
(iii) Other affiliates - 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
26
<PAGE> 36
SUMMARY HISTORICAL DATA FOR AMERICAN SPECTRUM PREDECESSOR
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) $ (4,832) $ (12,086)
========== ========== ========== ========== ==========
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------
($ amounts, except per share data, in 000's) 1999 2000
---------- ----------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 5,055 $ 4,937
Interest and other 424 267
---------- ----------
Total 5,479 5,204
========== ==========
Expenses:
Property operating and management 3,800 3,384
Depreciation and amortization 914 942
Impairment charges -- --
Interest 2,221 2,840
Gain on sale of property -- (1,193)
Equity in losses (earnings) of
non combined partnerships (12) (22)
---------- ----------
Total 6,923 5,951
========== ==========
Loss before extraordinary items (1,444) (747)
Extraordinary item - extinguishment
of debt -- --
---------- ----------
Net loss $ (1,444) $ (747)
========== ==========
</TABLE>
27
<PAGE> 37
<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 loss per share (1) $ (1.27) $ (1.64) $ (2.37) $ (3.10) $ (7.76)
Pro forma number of shares (1) 1,557 1,557 1,557 1,557 1,557
OTHER DATA:
Funds from operations (FFO) (2) (469) (1,047) (2,262) (3,200) (9,696)
Pro forma FFO per share (0.30) (0.67) (1.45) (2.06) (6.23)
Cash flows provided by (used in):
Operating activities $ (939) $ (2,269) $ (4,916)
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
Debt 60,982 89,803 115,601 120,094 133,411
Equity (5,148) (5,032) (8,396) (15,266) (24,976)
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------
($ amounts, except per share data, in 000's) 1999 2000
---------- ----------
<S> <C> <C>
Pro forma loss per share (1) $ (0.93) $ (0.48)
Pro forma number of shares (1) 1,557 1,557
OTHER DATA:
Funds from operations (FFO) (2) (903) (998)
Pro forma FFO per share (0.58) (0.64)
Cash flows provided by (used in):
Operating activities $ (11,615) $ 2,076
Number of properties at end of period 16 15
BALANCE SHEET DATA:
Real estate held for investment, net $ 89,735 $ 91,506
Total assets 104,395 110,473
Debt 118,651 135,664
Equity (14,256) (25,191)
</TABLE>
(1) 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.
(2) The Company considers funds from operations one measure of REIT
performance. Funds from operations ("FFO") is defined as net income
(loss) computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt
restructuring, other extraordinary items and sales of property, plus
depreciation and amortization of real property (non-real estate related
depreciation is insignificant). FFO should not be considered as an
alternative for net income as an indication of the Company's
performance or to cash flows as a measure of liquidity. FFO presented
herein is not necessarily comparable to funds from operations presented
by other real estate companies due to the fact that not all real estate
companies use the same definition. However, the Company's funds from
operations is comparable to the funds from operations of real estate
companies that use the 1999 definition of the National Association of
Real Estate Investment Trusts ("NAREIT").
28
<PAGE> 38
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 any effects of the consolidation. Such additional disclosures
are presented in Summary Pro Forma Data for American Spectrum.
MAXIMUM PARTICIPATION
<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 $ 11,601 $ 14,119 $ 14,080 $ 14,371 $ 15,178
Interest and other 872 773 758 919 904
---------- ---------- ---------- ---------- ----------
Total 12,473 14,892 14,838 15,290 16,082
========== ========== ========== ========== ==========
Expenses:
Property operating and management 7,154 8,495 8,486 8,282 10,156
Depreciation and amortization 4,149 4,781 4,806 4,268 4,144
Interest 2,209 2,965 2,930 2,579 2,503
Loss (gain) on sale of property (151) -- 967 -- (83)
---------- ---------- ---------- ---------- ----------
Total 13,361 16,241 17,189 15,129 16,720
========== ========== ========== ========== ==========
Income (loss) before extraordinary
items (888) (1,349) (2,351) 161 (638)
Extraordinary item - gain or (loss) on
extinguishment of debt -- 1,200 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (888) $ (149) $ (2,351) $ 161 $ (638)
========== ========== ========== ========== ==========
OTHER DATA:
Cash flows provided by (used in):
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
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------
($ amounts, except per share data, in 000's) 1999 2000
---------- ----------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 3,647 $ 3,971
Interest and other 194 308
---------- ----------
Total 3,841 4,279
========== ==========
Expenses:
Property operating and management 2,179 2,256
Depreciation and amortization 1,025 1,024
Interest 614 759
Loss (gain) on sale of property -- --
---------- ----------
Total 3,818 4,039
========== ==========
Income (loss) before extraordinary
items 23 240
Extraordinary item - gain or (loss) on
extinguishment of debt -- (46)
---------- ----------
Net income (loss) $ 23 $ 194
========== ==========
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ 571 $ (125)
Number of properties at end of period 18 18
BALANCE SHEET DATA:
Real estate held for investment, net $ 54,311
Total assets 77,518
Debt 38,258
Equity 39,260
</TABLE>
29
<PAGE> 39
MINIMUM PARTICIPATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 5,605 $ 5,807 $ 5,802 $ 5,531 $ 5,699
Interest and other 356 365 350 475 460
---------- ---------- ---------- ---------- ----------
Total 5,961 6,172 6,152 6,006 6,159
========== ========== ========== ========== ==========
Expenses:
Property operating and management 3,567 3,687 3,811 3,583 4,822
Depreciation and amortization 1,904 2,144 2,221 1,867 1,802
Interest 1,611 1,505 1,478 1,145 1,116
Loss on sales of properties -- -- 967 -- --
---------- ---------- ---------- ---------- ----------
Total 7,082 7,336 8,477 6,595 7,740
========== ========== ========== ========== ==========
Income (loss) before equity in earnings
(losses) of non-consolidated
partnership and minority interest (1,121) (1,164) (2,325) (589) (1,581)
Equity in earnings (losses) of
non-consolidated partnerships (572) 575 (276) 1 152
225 285 840 109 30
Minority interest
---------- ---------- ---------- ---------- ----------
Net loss $ (1,468) $ (304) $ (1,761) $ (479) $ (1,399)
========== ========== ========== ========== ==========
OTHER DATA:
Cash flows provided by (used in):
Operating activities (758) 1090 (1,368) 1,021 (412)
Number of properties at end of period 9 9 8 8 8
BALANCE SHEET DATA:
Real estate held for investment, net $ 30,448 $ 30,485 $ 24,052 $ 23,303 $ 22,582
Total assets 41,306 41,642 34,617 34,066 36,509
Debt 18,922 19,544 15,437 15,419 18,321
Equity 22,384 22,098 19,180 18,647 18,188
<CAPTION>
QUARTER ENDED MARCH 31,
--------------------------
1999 2000
---------- ----------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 1,431 $ 1,589
Interest and other 103 150
---------- ----------
Total 1,534 1,739
========== ==========
Expenses:
Property operating and management 818 967
Depreciation and amortization 443 470
Interest 277 357
Loss on sales of properties -- --
---------- ----------
Total 1,538 1,794
========== ==========
Income (loss) before equity in earnings
(losses) of non-consolidated
partnership and minority interest (4) (55)
Equity in earnings (losses) of
non-consolidated partnerships 29 48
Minority interest 23 (51)
---------- ----------
Net loss $ 48 $ (58)
========== ==========
OTHER DATA:
Cash flows provided by (used in):
Operating activities 84 (436)
Number of properties at end of period 8 8
BALANCE SHEET DATA:
Real estate held for investment, net $ 22,568
Total assets 34,540
Debt -- 17,493
Equity 17,047
</TABLE>
30
<PAGE> 40
SUMMARY PRO FORMA DATA FOR THE OTHER AFFILIATES
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 any effects of the consolidation. Such additional disclosures
are presented in Summary Pro Forma Data for American Spectrum.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------------- -----------------------
($ 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 $ 1,255 $ 1,348
Interest and other 97 29 40 9 12
-------- -------- -------- -------- --------
Total 5,006 5,107 5,196 1,264 1,360
======== ======== ======== ======== ========
Expenses:
Property operating and management . 2,449 2,334 2,405 594 614
791 856 891 212 216
Depreciation and amortization
Interest 2,076 2,031 1,942 473 501
-------- -------- -------- -------- --------
Total 5,316 5,221 5,238 1,279 1,331
======== ======== ======== ======== ========
Net income (loss) $ (310) $ (114) $ (42) $ (15) $ 29
======== ======== ======== ======== ========
OTHER DATA:
Cash flows provided by (used in):
Operating activities $ 1,064 $ 739 $ 639 $ 198 $ 186
Number of properties at end of period 3 3 3 3 3
BALANCE SHEET DATA:
Real estate held for investment, net $ 9,292 $ 16,310 $ 16,122
Total assets 10,296 19,225 19,198
Debt 16,031 29,459 29,452
Equity (5,735) (10,234) (10,254)
</TABLE>
31
<PAGE> 41
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)
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
31-DEC-99 31-MAR-00 31-DEC-99 31-MAR-00
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental and reimbursement income $ 25,194 $ 6,806 $ 35,180 $ 9,283
Interest and other 1,867 400 1,661 393
---------- ------------ ---------- ------------
Total 27,061 7,206 36,841 9,676
========== ============ ========== ============
Expenses:
Property operating and management 15,759 3,544 20,444 4,504
Depreciation and amortization 5,867 1,659 10,001 2,661
Impairment charges 3,440 -- 3,440 --
Interest 12,715 3,644 14,101 4,046
Other (7) 5 -- --
Gain on sale of property -- (1,193) (83) (1,193)
---------- ------------ ---------- ------------
Total 37,774 7,659 47,903 10,018
========== ============ ========== ============
Loss before extraordinary items (10,714) (453) (11,062) (342)
Extraordinary item - extinguishment
of debt (214) -- (214) (46)
---------- ------------ ---------- ------------
Net loss $ (10,928) $ (453) $ (11,276) $ (388)
========== ============ ========== ============
</TABLE>
32
<PAGE> 42
<TABLE>
<CAPTION>
(Minimum Scenario) (Maximum Scenario)
($ amounts, except per share data, in 000's)
THREE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
31-DEC-99 31-MAR-00 31-DEC-99 31-MAR-00
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Pro forma loss per share (1) $ (2.69) $ (0.11) $ (1.63) $ (0.08)
Number of shares outstanding 4,060 4,060 7,368 7,368
OTHER DATA:
Funds from operations (FFO) (2) (5,961) (308) (2,227) 926
Pro forma FFO per share (1.47) (0.08) (0.30) 0.13
Cash flows provided by (used in):
Operating activities $ (412) $ (981) $ 2,089 $ 1,116
Investing activities (464) (8,051) (11,873) (6,460)
Financing activities (3,285) (7,480) 7,826 (5,667)
Number of properties at end of period 28 26 39 37
BALANCE SHEET DATA:
Real estate held for investment, net $ 160,362 $ 223,997
Total assets 181,705 243,322
Debt 171,812 188,665
Equity 9,893 54,657
</TABLE>
(1) 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.
(2) The Company considers funds from operations one measure of REIT
performance. Funds from operations ("FFO") is defined as net income
(loss) computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt
restructuring, other extraordinary items and sales of property, plus
depreciation and amortization (non-real estate related depreciation is
insignificant). FFO should not be considered as an alternative for net
income as an indication of the Company's performance or to cash flows
as a measure of liquidity. FFO presented herein is not necessarily
comparable to funds from operations presented by other real estate
companies due to the fact that not all real estate companies use the
same definition. However, the Company's funds from operations is
comparable to the funds from operations of real estate companies that
use the 1999 definition of the National Association of Real Estate
Investment Trusts ("NAREIT").
33
<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.
There is currently no market for the American Spectrum Shares. It is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share net asset value of the assets of American
Spectrum. 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. The market price of the American Spectrum Shares may be volatile
after the Consolidation, and the American Spectrum Shares could trade at prices
substantially less than the Exchange Value. This could result from increased
selling activity following issuance of the American Spectrum Shares, the
interest level of investors in purchasing the American Spectrum Shares after the
Consolidation and the amount of distributions to be paid by 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 will have more indebtedness and will have a lower
capitalization, than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets
than many REIT's. This ratio is frequently referred to as leverage. 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.
There are conflicts of interest inherent in the structure of the Consolidation,
and related parties will receive substantial benefits if it is consummated.
Your 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 Units in the Operating Partnership (Operating Partnership
Units). If the Consolidation is consummated, affiliates of the General Partners
of the Funds will receive substantial interests in American Spectrum in exchange
for their interests in the CGS Affiliates and the CGS Management Company. These
benefits may exceed the benefits that they would derive from ownership of their
interests in the CGS Affiliates and from their interests in the Funds if the
Consolidation were not consummated. In addition, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates with William J. Carden serving as the Chief Executive Officer, Harry
A. Mizrahi serving as Chief Operating Officer, Thomas N. Thurber serving as
Chief Financial Officer and Paul E. Perkins and Patricia A. Nooney serving as
Senior Vice Presidents.
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American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999 and
the three months ending March 31, 2000. Additionally, we incurred losses on a
pro forma basis for 1999 and the first three months of 2000. We believe that
American Spectrum Predecessor's historical losses resulted primarily from our
investing in turnaround properties. We expected that we would initially spend
more on these properties than the rental income. We expect that the rent from
these properties will increase and that the properties would increase in value.
However, 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. In addition, although American Spectrum had pro forma losses
during 1999 and the first three months of 2000, it had positive pro forma cash
flow from operations during the first three months of 2000, assuming all Funds
participate in the Consolidation. A significant portion of the pro forma losses
resulted from non-cash expenses, such as depreciation.
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These
companies are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. As a result, American Spectrum is 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 your behalf, or on behalf of the other Limited
Partners, in structuring and negotiating the terms and conditions, including the
consideration which you will receive, of the Consolidation. If the Funds had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of the
Consolidation. 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. 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, and such 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 their respective 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. Such approval 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. Affiliates of CGS own interests
as limited partners in five of the Funds. These interests range from 4.91% to
32.13% and will be voted by affiliates of CGS in favor of the Consolidation.
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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 on an appraisal of the 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 (which 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.
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. Your investment currently consists of an interest in one or more
Funds, each of which has a fixed portfolio of properties. You participate in the
profits from the rental of your Fund's properties. After the Consolidation, you
will hold common stock of American Spectrum, an operating company, that will own
and lease 35 properties and expects to make additional investments. Your
investment will also change from being an interest in a static, externally
managed, finite-life entity to an investment in a growing, internally managed,
operating company which will have a perpetual term. 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 the Funds. In addition, American Spectrum may incur substantial
indebtedness to make future acquisitions of properties that it may be unable to
repay. In addition, certain properties acquired in the Consolidation may not be
as profitable as others. These risks are more fully discussed below under
"--Real Estate/Business Risks."
As an American Spectrum stockholder, you will receive the benefits of
your investment through dividend distributions and increases in the value of
your American Spectrum Shares. In addition, 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. Continuation of your Fund would, on the other hand, permit you
eventually to receive liquidation proceeds, if any, from the sale of the Fund's
properties. Your share of these sale proceeds could be higher than the amount
realized from the sale of your American Spectrum Shares (or from the payments on
any Notes if you elect the Notes Option). An investment in American Spectrum may
not outperform your investment in a Fund.
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
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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.
Stanger's fairness opinions 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 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.
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. The Amended and Restated Articles of
Incorporation (which we refer to as the Articles of Incorporation) and Bylaws of
American Spectrum 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 is
obligated to indemnify its officers and directors against specified liabilities
that may be incurred in connection with their service to American Spectrum. This
indemnification 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.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes issued by former Limited Partners of the Funds.
American Spectrum may increase its level of secured 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.
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. Accordingly, the Notes should be considered a
long-term, illiquid investment. 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.
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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
Properties.
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 satisfy Note
obligations. This could adversely affect our results of operations and our
ability to satisfy the Notes.
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 and 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.
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 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 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
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appropriate, by financing or refinancing its indebtedness on such properties on
a longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets (based on appraised
value) of American Spectrum is 70% or less. American Spectrum's organizational
documents do not contain any limitation on the amount or percentage of
indebtedness that American Spectrum may incur in the future. Accordingly,
subject to the limitations contained in the Notes, American Spectrum's Board of
Directors could modify the current policy at any time after the Consolidation.
If this policy were changed, American Spectrum could become more highly
leveraged, resulting in an increase in the amounts of debt repayment. This, in
turn, 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.
The results of future property purchases are uncertain.
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:
- the potential ability in American Spectrum's joint venture
partner to perform;
- the joint venture partner may have economic or business
interests or goals which are inconsistent with or adverse to
those of American Spectrum;
- 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
- 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.
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American Spectrum's properties may not be profitable, may not result in
distributions and/or may depreciate.
While American Spectrum will attempt to buy leased, income-producing
properties at attractive prices, properties acquired by American Spectrum:
(1) may not operate at a profit;
(2) may not perform to investor's expectations;
(3) may not appreciate in value;
(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.
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 200_. Upon the expiration of a lease, American Spectrum may
not enter into 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.
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.
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American Spectrum faces intense competition in all of its markets.
American Spectrum will compete with other entities for the acquisition
of office, office/warehouse and apartment properties. Our competitors will often
have greater financial or informational resources than us.
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's management believes that it will operate in a
manner that will enable American Spectrum to meet the requirements for
qualification as a REIT for federal income tax purposes commencing with the
taxable year ending December 31, 2002. Generally, for taxable years beginning
after December 31, 2000, a REIT is not subject to federal taxes at the corporate
level on income it distributes to its stockholders, as long as it distributes at
least 90% of its taxable income to its stockholders annually. In addition, a
REIT must meet certain asset tests at the end of each calendar quarter. 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 (or, PR), that it
will meet the requirements for qualification as a REIT. PR'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, PR'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 ____.
In addition, 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. Until American Spectrum elects REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
The transfer of assets to American Spectrum may fail to qualify as a
transaction where no gain is recognized to the transferor.
The transfer of assets to American Spectrum may fail to qualify as a transaction
when no gain is recognized to the transferor.
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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 "Certain
Funds 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, and you
will be allocated your share of the gain.
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 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
limit the ownership by any single stockholder of any class of American Spectrum
capital stock, including American Spectrum Shares, to 5% of the outstanding
shares of such class. This limitation does not apply to existing stockholders
who own more than 5% of American Spectrum Shares at the effective date of the
Consolidation. The Articles of Incorporation also prohibit anyone from buying
shares if the purchase would cause American Spectrum to lose its REIT status.
For example, American Spectrum would lose its REIT status if it had fewer than
100 different stockholders or if five or fewer stockholders, applying certain
broad attribution rules of the Code, owned 50% or more American Spectrum Shares.
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.
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Certain Funds have liabilities in excess of the tax basis of contributed
assets. Limited Partners in these Funds will recognize additional gain from the
Consolidation.
Certain Funds 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 Affiliates in exchange for Operating
Partnership Units. The Affiliates will recognize gain upon the Operating
Partnership's sale of these assets. This could delay the sale of these assets.
An affiliate of CGS Real Estate Company, Inc. will transfer its assets
to the Operating Partnership in exchange for limited partnership units in the
Operating Partnership. If, as of the date of the Consolidation, an asset
contributed by such affiliate 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 affiliate. As a
result, American Spectrum has generally agreed not to sell these properties for
five to ten years. 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.
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.
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<PAGE> 53
BACKGROUND OF AND REASONS FOR THE CONSOLIDATION
BACKGROUND OF THE FUNDS
Formation of the Funds. From 1979 through 1985, CGS predecessors
sponsored eight Limited Partnerships that were formed to acquire office,
office/warehouse and retail 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 ADMISSION OF
OF TOTAL ORIGINAL
PROPERTIES CAPITAL 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 21,971,000 August, 1984
Sierra Pacific Development Fund III 1 9,222,500 February, 1986
Sierra Pacific Institutional Properties V 1 7,694,250 October, 1987
Sierra Pacific Pension Investors '84 2 19,418,250 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 Real Property Investors-Two,
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.
44
<PAGE> 54
INVESTMENT OBJECTIVES OF FUNDS
For the Funds, the primary investment objectives were generally to
invest in properties which would: (i) preserve, protect and return the Fund's
invested capital; (ii) have the potential for long-term capital gains through
appreciation in value; (iii) provide the Limited Partners with cash
distributions from operations; (iv) provide federal income tax deductions; and
(v) 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
LEGAL LIFE ANTICIPATED
OF FUND PARTNERSHIP FORMED HOLDING
FUND (YEARS) (MO./YR.) PERIOD (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 assuming management 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. However, due to the depression of real
estate values experienced nationwide from 1988 through 1993, the General
Partners did not believe it was in the best interests of the Limited Partners
for the Funds to sell their properties and liquidate. The real estate investment
market began to improve in 1994 and the General Partners determined at that
point that it was in the best interests of the Funds to hold the properties for
a period of years to take advantage of this improvement prior to liquidation.
Your General Partners now believe a consolidation of Funds into American
Spectrum will enable the Limited Partners to realize the value of the Funds'
Properties 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 the potential of growth and increased distributions and investment
values. 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, 2001:
45
<PAGE> 55
- 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.
- 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.
- 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.
- 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. (i) fifty-nine (59) Units of Nooney Income Fund II, L.P.
(NIFII) at a price per Unit of $450, (ii) 1,802 units in Nooney Income Fund
Ltd., L.P. (NIF) at $600 per unit, (iii) 199 units in Nooney Real Property
Investors-Two, L.P. (NRPI) at $360 per unit and (iv) 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 (i) 1,062
Units in NIFII at a price per Unit of $450, (ii) 260 units in NIF at $600 per
unit and (iii) 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:
- In 1998, affiliates of CGS purchased a total of 599 units in Sierra
Pacific Development Fund I at a weighted average of $92.30 per unit
($184.60 per $1,000 investment).
- In 1999, affiliates of CGS purchased a total of 73 units in Sierra
Pacific Development Fund I at a weighted average of $40.44 per unit
($80.88 per $1,000 investment).
- In 2000, affiliates of CGS purchased a total of 38 units in Sierra
Pacific Development Fund I at a weighted average of $63.95 per unit
($127.90 per $1,000 investment).
- 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).
- 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).
- 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).
- 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 per $1,000 investment).
- 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).
46
<PAGE> 56
- 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).
- 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).
- In 1998, affiliates of CGS purchased a total of 16 units in Sierra
Pacific Institutional Properties V at a weighted average of $47.00 per
unit ($188 per $1,000 investment).
- In 1999, affiliates of CGS purchased a total of 58 units in Sierra
Pacific Institutional Properties V at a weighted average of $61.03 per
unit ($244.12 per $1,000 investment).
- In 2000, affiliates of CGS purchased a total of 269 units in Sierra
Pacific Institutional Properties 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
In 1998, the General Partners began to consider a transaction involving
a consolidation of the Funds and other entities controlled by affiliates.
During 1998 and 1999, the General Partner also considered other
alternatives to provide liquidity to Limited Partners. These alternatives
included acquiring units from Limited Partners through tender offers.
The General Partners and CSG Affiliates also considered a transaction
to create liquidity for Limited Partners which would involve a merger with a
public real estate investment trust. Representatives of the General Partners and
CGS met with a third party to discuss a possible transaction in January 1999 and
May 1999, but determined not to pursue this alternative.
In January 1999 representatives of the General Partners and CGS met
with representatives of Stanger. We discussed various matters relating to the
feasibility of a consolidation, including the costs and timing.
In January 1999, we and the General Partners considered retention of an
investment banker in connection with a transaction in which the CGS Affiliates,
including management company affiliates of CGS would be combined to form a
single entity.
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 (BF) and another law firm.
On May 11, 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 Affiliates,
including management company affiliates of CGS and the Funds, would be combined
to form a single entity.
In June 1999 and May 2000 with regard to the appraisals, CGS and the
Funds engaged Stanger to: (i) prepare appraisals of the property portfolios of
the Funds and the CGS Affiliates and (ii) 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 June 1999, we retained the law firm of BF to advise us with respect
to the Consolidation and prepare a Registration Statement on Form S-4.
47
<PAGE> 57
In October-December 1999, representatives of the General Partners met
with representatives of the independent accountants of the Funds, 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 (AA), the independent accountants of the CGS
Affiliates, to discuss the possibility of retaining AA to render advice as to
the accounting and income tax implications of the Consolidation.
In January 2000, we considered bids from AA 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.
On February 3, 2000, representatives of the General Partners and us met
with representatives of AA and BF to review the structure of the Consolidation
and the financial and tax consequences of the Consolidation.
On February 16, 2000, we retained the accounting firm of AA to provide
us with financial and tax advice with respect to the Consolidation, and to audit
financial statements required in connection with the Consolidation.
In ___________, 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 PR 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
BF who were involved in the preparation of the Registration Statement on Form
S-4 became affiliated with PR.
At various times during the period from January 2000 through July 2000,
representatives of the General Partners and us met Stanger, AA, BF and PR to
discuss matters relating to legal and accounting issues, Stanger's appraisals
and fairness opinion, the Consolidation and the Registration Statement on Form
S-4.
YOUR GENERAL PARTNERS' REASONS FOR PROPOSING THE CONSOLIDATION
The Consolidation is being proposed 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:
- 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, units of its Operating Partnership.
The use of Operating Partnership units enables American
Spectrum to make certain 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
48
<PAGE> 58
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.
- Risk Diversification. The combination of the properties owned
by the Funds under the ownership of American Spectrum, as well
as future property acquisitions made by American Spectrum,
will diversify your investment over a larger number of
properties, a broader group of property types and tenants and
geographic locations. Your investment will also change from
being an interest in a static, finite-life entity to an
investment in a growing operating company. 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.
- 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.
- Liquidity. We believe the Consolidation provides you with
liquidity of your investment (which means your American
Spectrum Shares would be freely tradable) 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.
- 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.
-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 quarter of 2000 and could make
distributions in the future, we believe it is possible that you will receive
higher distributions from America Spectrum than the Funds. Additionally, the
ability
49
<PAGE> 59
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.
- 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 total assets
(based on appraised value) of not more than 70%.
- Greater Reduction of Conflicts of Interest. American Spectrum
expects to operate as an internally-advised REIT with
management employed by American Spectrum, thereby eliminating
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 directly accountable to 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 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.
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 Values were determined as of March 31, 2000 to
establish a consistent method of allocating American Spectrum Shares for
purposes of the Consolidation. The Exchange Values do not necessarily reflect
the aggregate price at which American Spectrum Shares or Notes may be sold. See
"RISK FACTORS." The number of American Spectrum Shares to be issued to each Fund
upon consummation of the Consolidation will equal such Fund's Exchange Value
(reduced by the Exchange Value associated with the number of Notes issued to the
Fund) divided by $15, an arbitrary amount chosen for the sole purpose of
allocating American Spectrum Shares and which is not intended to imply that the
American Spectrum Shares will trade at a price of $15 per share. 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 Affiliates, 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 between the Funds, and the CGS Affiliates (including
the CGS Management Company), among the Funds, and then between the Limited
Partners and the General Partners, other than the final computation of the
expenses of the Consolidation, were determined as of March 31, 2000 in the
manner described below under "Determination of Exchange Value." Each Fund and
CGS Affiliate; including 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 March 31, 2000 and before
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<PAGE> 60
the effective date of the Consolidation which cannot be adjusted through the
Funds', CGS Affiliates' 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 Affiliate (including the
CGS Management Company) participating in the Consolidation between March 31,
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
Affiliates and the CGS Management Company, an adjustment may be made to the
Exchange Value of that Fund, the CGS Affiliates or the CGS Management Company.
If the amount of the change in the value of an asset or liability can be
reasonably determined and it is in excess of ten percent of the Exchange Value
of that Fund, the CGS Affiliates or the CGS Management Company, the Exchange
Value of that Fund, the CGS Affiliates or the CGS Management Company will be
redetermined and its allocation of American Spectrum Shares adjusted as though
the asset or liability were in existence on March 31, 2000.
DETERMINATION OF EXCHANGE VALUES
Exchange Values have been determined for the Funds, the CGS Affiliates
(other than the CGS Management Company) and the CGS Management Company, as
described below.
- The Funds and the CGS Affiliates -- The Exchange Value of each
Fund and the CGS Affiliates (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 March 31, 2000;
(B) reduced by (i) the mortgage debt balance as of March 31, 2000, as adjusted
to reflect the market value of such debt, (ii) other balance sheet liabilities
as of March 31, 2000 and (iii) such Fund's share of the expenses related to the
Consolidation.
- The CGS Management Company -- To determine the estimated value
of the CGS Management Company, CGS utilized an earnings multiple approach. CGS
estimated the pro forma earnings before interest, taxes and depreciation
("EBITDA") of the CGS Management Company reflecting only those property
management assets and businesses of CGS and its affiliates which would be
contributed to American Spectrum in the Consolidation. In particular, historical
revenues and expenses for the fiscal year ending December 31, 1999 and the
three-month period ending March 31, 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 portfolio of properties to be contributed
to American Spectrum in the Consolidation by the Funds and the CGS Affiliates.
CGS also estimated revenues and expenses for the fiscal 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.
CGS then applied a multiple of [5.0] to the estimated fiscal year 2000
adjusted EBITDA for the CGS Management Company to arrive at an estimated value
of [$4 million] for the CGS Management Company. Based on its experience in the
real estate industry and with real estate management companies, and its
expectations regarding the future revenues, expenses and profitability of the
CGS Management Company, CGS deemed the multiple utilized to be at the lower end
of appropriate multiples for real estate management companies and therefore
considered the multiple reasonable for establishing the value of the assets and
businesses to be contributed to American Spectrum in the Consolidation.
Utilizing the estimate of value resulting from the earnings multiple
analysis as the basis for Exchange Value, CGS then made the adjustments cited
above for other balance sheet assets and liabilities to be contributed to the
Company in the Consolidation and for the expenses of the Consolidation to arrive
at the final Exchange Value of the CGS Management Company.
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<PAGE> 61
The determination of the Exchange Values of each Fund and the CGS
Affiliates, 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 ESTIMATED
MANAGEMENT ASSETS AND MORTGAGE AND CONSOLIDATION EXCHANGE
FUND BUSINESS (2) LIABILITIES (3) OTHER DEBT (4) EXPENSES VALUE
----------------------------------------- -------------- --------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 7,660,044 $ 2,238,306 $ 3,841,938 $ 181,692 $ 5,874,720
Sierra Pacific Development Fund II 22,148,866 (1,277,759) 7,891,712 389,382 12,590,013
Sierra Pacific Development Fund III 727,384 (2,093) 282,165 13,294 429,832
Sierra Pacific Institutional Properties V 6,067,856 (995,117) -- 152,182 4,920,557
Sierra Pacific Pension Investors '84 20,475,850 3,868,660 5,595,048 562,484 18,186,978
Nooney Income Fund 10,570,800 1,136,285 1,139,303 317,033 10,250,749
Nooney Income Fund Two 22,079,200 552,556 6,842,484 473,678 15,315,594
Nooney Real Property Investors Two 15,590,000 2,280,555 9,435,743 253,044 8,181,768
CGS Affiliates (1) 177,390,000 (5,393,217) 139,166,440 1,082,297 31,748,046
CGS Management Company [4,000,000] 10,641,989 11,512,927 108,940 3,020,122
</TABLE>
----------------------
(1) Includes CGS Affiliates, but excludes the CGS Management Company.
(2) Reflects the independent appraisal of the value of the Funds' real
estate portfolios and the Affiliates' Properties portfolio 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 Affiliates,
including the CGS Management Company is fair to the Limited Partners of
the Funds from a financial point of view.
(3) Net Other Assets and Liabilities are reflected in the table below.
(4) Excludes non-mortgage related party debt which is included in Net Other
Assets and Liabilities. With respect to the CGS Affiliates, the
mortgage debt includes amounts owed by the CGS Affiliates to the Funds,
including $4,202,824 due from CGS Affiliates 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.
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 March 31, 2000 as
adjusted for each Fund's interest in the assets and liabilities in joint
ventures.
52
<PAGE> 62
NET OTHER ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
NET ACCOUNTS RENT DEPOSITS,
RECEIVABLE ACCOUNTS PAYABLE
AND OTHER AND OTHER
FUND CASH(1) ASSETS(2) LIABILITIES(3) TOTAL
----------------------------------------- ----------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Sierra Pacific Development Fund $ 115,019 $ 2,250,337 $ 127,050 $ 2,238,306
Sierra Pacific Development Fund II 204,505 7,146,046 8,628,310 (1,277,759)
Sierra Pacific Development Fund III 15,753 1,002 18,848 (2,093)
Sierra Pacific Institutional Properties V 17,222 60,307 1,072,646 (995,117)
Sierra Pacific Pension Investors '84 249,439 6,163,500 2,544,279 3,868,660
Nooney Income Fund 1,476,170 150,794 490,679 1,136,285
Nooney Income Fund Two 1,154,755 126,149 728,348 552,556
Nooney Real Property Investors Two 2,534,429 279,572 533,446 2,280,555
CGS Affiliates (4) 1,821,872 12,060,705 19,275,794 (5,393,217)
CGS Management Company 197,263 13,963,634 3,518,908 10,641,989
</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 includes
accrued interest payable, escrow liabilities, accounts payable and
accrued expenses, prepaid rental income, security deposits and accounts
and Notes payable to affiliates and adjusted by $5,956,057 to reflect
cash distributions to be made to the limited partners of Sierra Pacific
Development Fund II pursuant to a settlement agreement. With respect to
the CGS Affiliates, the liabilities include amounts due from CGS
Affiliates to the Funds, including $1,753,233 due from CGS Affiliates
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.
(4) Includes Affiliates' Properties, but excludes the CGS Management
Company.
ALLOCATION OF AMERICAN SPECTRUM SHARES
The method utilized to allocate American Spectrum Shares is as follows:
- Level 1 Allocation: American Spectrum Shares will be allocated
between the Funds and the CGS Affiliates, including the CGS Management Company,
and among the Funds based upon the estimated net asset value, computed as
described above (or, the "Exchange Value") of each of the Funds and the CGS
Affiliates, including the CGS Management Company, relative to the aggregate
estimated Exchange Value of all of the Funds, the CGS Affiliates and the CGS
Management Company. The General Partners believe that the Exchange Value of the
Funds and the CGS Affiliates, including the CGS Management Company, represent
fair estimates of the value of their assets, net of liabilities and allocable
expenses of the Consolidation, as of March 31, 2000, and constitute a reasonable
basis for allocating the American Spectrum Shares between the Funds, and the CGS
Affiliates, including the CGS Management Company, and among all the Funds.
- 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.
53
<PAGE> 63
The following paragraphs describe the allocations.
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN THE FUNDS AND THE CGS AFFILIATES,
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
Affiliates, including the CGS Management Company, divided by an arbitrary number
of $15, which amount has been chosen solely for the purpose of allocating the
American Spectrum Shares and which is not intended 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 and the CGS Affiliates, including 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 and the CGS Affiliates, including 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 General
Partners intend to make such pre-Consolidation cash distributions to Limited
Partners in each Fund and/or to partners/shareholders in the CGS Affiliates,
including the CGS Management Company, as may be necessary to cause the relative
Exchange Values of the Funds and the CGS Affiliates, including the CGS
Management Company, as of the Closing Date to be substantially equivalent to the
relative estimated Exchange Values as of March 31, 2000.
The table below shows the allocation of American Spectrum Shares
between each of the Funds and the CGS Affiliates, including 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.
ALLOCATION OF AMERICAN SPECTRUM SHARES BETWEEN
THE FUNDS AND THE CGS AFFILIATES, AND THE CGS MANAGEMENT COMPANY (1)
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL AMERICAN
EXCHANGE PERCENTAGE OF SHARE SPECTRUM
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 Affiliates (2) 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>
54
<PAGE> 64
(1) Certain affiliates 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 certain
limitations, is exchangeable for American Spectrum Shares on a
one-for-one basis after a twelve month period.
(2) Excludes the CGS Management Company.
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 (a
Partnership Agreement) applicable to distributions on liquidation of the Fund.
In accordance with the provisions of the 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 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. 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."
55
<PAGE> 65
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 have had 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 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 and the net proceeds distributed to the Limited Partners
in accordance with the limited partnership agreements; (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; and (iii) the prices at which each Fund's Units have sold in the
illiquid secondary market. See "Prices for Fund Units." 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. Since the value of the
consideration for alternatives to the Consolidation is dependent upon varying
market conditions, 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 analyzing the alternatives in terms of ranges of
estimated value, based on currently available data and, where appropriate,
reasonable assumptions made in good faith, 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 estimates as to each Fund's future income,
expenses, cash flow and other significant financial matters, the capitalization
rates that will be used by prospective buyers when each Fund's assets are
liquidated, securities market conditions and factors affecting the value of
securities of real estate companies, the ultimate asset composition and
capitalization of American Spectrum and appropriate discount rates to apply to
expected cash flows in computing the present value of the cash flows that may
56
<PAGE> 66
be received with respect to Units of each Fund. In addition, these estimates are
based upon certain 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 "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These estimated values are based upon certain assumptions that relate;
among other things, to (i) projections as to each Fund's future revenues;
expenses; cash flow and other significant financial matters; (ii) securities
market conditions and factors affecting the value of securities or real estate
companies; (iii) the ultimate asset composition and capitalization of American
Spectrum; (iv) the capitalization rates that will be used by prospective buyers
when each Fund's assets are liquidated; (v) selling costs; (vi) appropriate
discount rates to apply to expected cash flows in computing the present value of
the cash flows and (vii) 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.
57
<PAGE> 67
COMPARISON OF ALTERNATIVES
(Per $1,000 Investment)
<TABLE>
<CAPTION>
Range of
Secondary
Market Prices
Estimated Estimated (15 Months
Going-Concern Liquidation Ending March Exchange
Value Value 31, 2000)(1) Value (2)
----- ----- ------------- ---------
<S> <C> <C> <C> <C>
Sierra Pacific
Development Fund $340.00-$370.00 $386.00 $100.00-$230.00 $400.27
Sierra Pacific
Development Fund II $456.00-$536.00 $548.00 $400.00-$528.00 581.17
Sierra Pacific
Development Fund III $27.80-$33.08 $44.56 None* 47.08
Sierra Pacific
Institutional Properties V $436.00-$516.00 $620.00 $100.00-$240.00 639.51
Sierra Pacific
Pension Investors '84 $808.00-$900.00 $920.00 $275.00-$600.00 944.78
Nooney Income
Fund Ltd., L.P. $520.00-$585.00 $661.00 $210.00-$344.70 675.28
Nooney Income
Fund Ltd. II, L.P. $663.00-$758.00 $764.00 $200.00-$471.00 796.82
Nooney Real Property $566.00-$624.00 $638.00 $194.00-$390.10 681.81
Investors-Two, L.P.
</TABLE>
------------------------
(1) Does not include purchases by affiliates. The purchases are described
under "Background of and Reasons for the Consolidation -- Consideration
of Liquidation of the Funds and the Decision to Pursue the
Consolidation."
(2) 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. 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. The
price may be either lower or higher than those in the range of estimated
values.
58
<PAGE> 68
* No reported sales.
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
entity during an assumed holding period of ten years. The analysis incorporated
estimates of revenues and operating expenses for each of the Properties, capital
expenditures, entity level general and administrative costs, cash flow,
distributions and proceeds from sale of the Properties. It is assumed the
property portfolio is liquidated in private real estate markets at a residual
value based upon estimated cash flows and residual values utilized in the
portfolio appraisal, and the net proceeds resulting from the liquidation of the
properties and other remaining assets of the Fund 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.
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. This alternative also assumes that non-real estate
assets are sold at their estimated realizable value, that the Funds incur
selling costs at the time of liquidation (real estate commissions and legal and
other closing costs) and that the remaining net liquidation proceeds are
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.
59
<PAGE> 69
Assumptions, Limitations and Qualifications. 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 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 Affiliates participate in
the Consolidation (Maximum Participation) and an initial annual distribution
rate of $____ per share with distributions currently being received from the
Funds.
60
<PAGE> 70
COMPARISON OF DISTRIBUTIONS
BY FUNDS AND AMERICAN SPECTRUM PER $1000 INVESTMENT
<TABLE>
<CAPTION>
Dividends From American
Spectrum Shares
DISTRIBUTION BY FUND (1) Issued In the Consolidation (2)
------------------------ -------------------------------
<S> <C> <C>
Sierra Pacific Development Fund 0 $10.87
Sierra Pacific Development Fund II 0 15.73
Sierra Pacific Development Fund III 0 1.28
Sierra Pacific Institutional Properties V 0 17.36
Sierra Pacific Pension Investors '84 0 26.62
Nooney Income Fund Ltd., L.P. 0 18.33
Nooney Income Fund Ltd. II, L.P. 0 21.63
Nooney Real Property Investors-Two, L.P. 0 18.51
</TABLE>
---------------------
(1) Some of the Funds had cash flow during the year, but did not make
distributions even though they had cash flow. These Funds retained their
cash flow to meet future requirements.
(2) Assumes an annual distribution of $0.407 per American Spectrum Shares in
2001. We estimated the annual distribution based in part on the
annualized pro forma Funds From Operations for the quarter ended March
31, 2000 (assuming Maximum Participation). In addition, we expect Funds
From Operations to increase in 2002 as a result of anticipated
improvement in operating results in connection with properties owned by
the CGS Affiliates. 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:
- the terms of the Consolidation are fair to you and the other
Limited Partners;
- the American Spectrum Shares offered to the Limited Partners
were allocated fairly and constitute fair consideration for
their Units; and
- 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.
61
<PAGE> 71
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 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 Affiliates' Properties by the same appraisal firm, Stanger,
thereby maximizing consistency among the appraisals. Fourth, Stanger, a
recognized independent investment banking firm, has determined that, subject to
the assumptions, limitations and qualifications contained in its opinion, that
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, or will
receive 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
Affiliates, including the CGS Management Company. 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 and the CGS Affiliates, including 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.
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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.
The primary differences among the Funds are:
- 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.
- Date of Formation. The Funds were formed at different times
and, therefore, the Funds formed earlier have already sold
some properties.
- 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.
- Types of Properties. Some of the Funds have purchased
different types of properties.
- 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. The Exchange Value assigned
to the Funds in connection with the Consolidation is greater than the range of
value of the Funds as reflected by the reported secondary sales prices of the
Units. See "Prices for Fund Units" on page __ for the limited information
available with respect to secondary market sales of the Units. 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 with the Notes providing relative security of
principal, a certainty as to maturity date, and regular interest payments, and
the American Spectrum Shares representing 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, and 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
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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."
In rendering its opinions with respect to the fairness to the Funds,
from a financial point of view, with respect to the allocation of the American
Spectrum Shares (i) between the Funds, the CGS Management Company and the CGS
Affiliates; and (ii) among the Funds, Stanger did not address or render any
opinion with respect to any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- 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, Sierra Pacific Development Fund II, Sierra
Pacific Institutional Properties V and Nooney Real Property
Investors-Two, L.P. (the Minimum Participation);
- the allocation of American Spectrum Shares among the Limited
and General Partners of the Funds;
- the fairness of the amounts or allocation of the Consolidation
costs or the amounts of the Consolidation costs allocated to
the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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
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<PAGE> 74
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 March 31, 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, 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 MARCH 31, 2000 EXCHANGE VALUE
---- -------------- --------------
<S> <C> <C>
Sierra Pacific Development Fund $86.03 $400.27
Sierra Pacific Development Fund II 512.09 581.17
Sierra Pacific Development Fund III (39.04) 47.08
Sierra Pacific Institutional Properties V 261.55 639.51
Sierra Pacific Pension Investors '84 484.37 944.78
Nooney Income Fund Ltd., L.P. 359.84 675.28
Nooney Income Fund Ltd. II, L.P. 437.48 796.82
Nooney Real Property Investors-Two, L.P. (35.73) 681.81
</TABLE>
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
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assist the General Partners in fulfilling their fiduciary obligations, we
obtained the fairness opinion and the independent appraisal from Stanger.
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 March 31, 2000 and have been
assigned to each of the Funds and the CGS Affiliates, including 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 Affiliates and a valuation of the CGS Management
Company businesses.
Stanger, an independent appraiser, was engaged by the Funds and CGS to
appraise the portfolios of real properties owned by the Funds and the CGS
Affiliates 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 between
the Funds and the CGS Affiliates, including the CGS Management Company. 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 B and should be read in its
entirety. Certain 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 Affiliates' Properties
portfolio 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
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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
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
Affiliates, 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. The cost and sales comparison (for the
non-developable land properties) 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 the 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 Affiliates 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, certain information
supplied by the property managers, General Partners, the Funds and the CGS
Affiliates, including CGS, including, but not limited to: schedules of current
lease rates and terms, income, expenses, capital expenditures, cash flow and
related financial information; property descriptive information and rentable
square footage; and, 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 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.
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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 Affiliates, including CGS, 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 Affiliates as follows:
<TABLE>
<CAPTION>
REAL ESTATE
PORTFOLIO VALUE
PARTNERSHIP NAME CONCLUSION(1)
---------------- -------------
<S> <C>
SP Development Fund $ 7,660,044
SP Development Fund II $ 22,148,866
SP Development Fund III $ 727,384
SP Institutional Properties V $ 6,067,856
SP Pension Investors '84 $ 20,475,850
Nooney Income Fund $ 10,570,800
Nooney Income Fund II $ 22,079,200
Nooney Real Property Investors-Two $ 15,590,000
CGS Affiliates $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.
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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: (i) the data is limited to the summary
data and conclusions presented; and (ii) 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 certain assumptions to determine the appraised value of the
portfolios. See Appendix B 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 Affiliates
as of March 31, 2000 in the context of the information available on such date
and does not necessarily reflect the prices that would be realized in an actual
sale of the portfolios. Such 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 Affiliates beyond the analysis set forth in Appendix
B. Stanger will not deliver any additional written summary of the analysis.
Compensation and Material Relationships. The Funds and the CGS
Affiliates, including CGS, 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 certain liabilities, including certain 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
Affiliates 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.
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 between the Funds and the CGS Affiliates, including the CGS
Management Company, and 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 C 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 certain assumptions described more fully below which the
Funds and the CGS Affiliates, including CGS and the CGS Management Company,
advised Stanger that it would be reasonable to make, the Funds, the General
Partners and the CGS Affiliates, including 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
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compensation payable by the Funds and the CGS Affiliates, 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: (i) 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; (ii) 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, and the Funds' quarterly reports on Form 10-Q
for the quarter ended March 31, 2000; (iii) 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 Affiliates,
the Affiliates' Properties, and the CGS Management Company; [(iv) reviewed the
CGS Predecessor's audited financial statements for the fiscal year ended
December 31, 1999, interim financial statements prepared by management for the
three months ending March 31, 2000, and pro forma financial statements and pro
forma schedules prepared by management;] (v) performed an appraisal of the
portfolio of properties owned by each of the Funds and the CGS Affiliates as of
March 31, 2000; (vi) reviewed information regarding purchases and sales of
properties by CGS, the Funds or any CGS Affiliates during the prior year and
other information available relating to acquisition criteria for similar
properties; (vii) conducted discussions with management of the Funds and the CGS
Affiliates, including CGS, 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 Affiliates, current and projected
operations and performance, financial condition, and future prospects of the
properties, the Funds and the CGS Management Company; (viii) reviewed financial
information relating to real estate management companies; (ix) reviewed the
methodology utilized by the General Partners to determine the allocation of
American Spectrum Shares between the Funds and the CGS Affiliates, including the
CGS Management Company, and among the Funds, in connection with the
Consolidation; and (x) conducted such other studies, analyses, inquiries and
investigations as Stanger deemed appropriate.
Summary of Analysis. The following is a summary of certain 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 Funds, from a financial point of view, of the allocation of
American Spectrum Shares between the Funds and the CGS Affiliates, 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 (i) performed an
independent appraisal of each Fund's portfolio of properties and the Affiliates'
Properties; (ii) performed site inspections of each property in July through
August 1999; (iii) conducted inquiries into local market conditions affecting
each property; (iv) reviewed summaries of current leases and historical and
budgeted operating statements of each property; (v) conducted interviews with
the management of the Funds, the CGS Affiliates and the properties; (vi)
reviewed acquisition criteria in use in the marketplace by investors and owners
of real estate; (vii) reviewed information concerning transactions involving
similar properties; and (viii) 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.")
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.
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<PAGE> 80
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.]
- 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 _____x based on pro forma
year [2000] EBITDA. Stanger observed that this multiple was [slightly below] the
average EBITDA multiple ascribed to real estate advisory and management
businesses in acquisitions and mergers reviewed by Stanger.
Stanger noted that the CGS Management Company's EBITDA for 2000 does
not fully reflect future management fees from assets currently managed due to
the potential leaseup of certain un-stabilized properties.
- 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 pro forma cash flows during the [four]-year period [2000
through 2003], inclusive. To establish estimated residual value, residual EBITDA
multiples from [5.0x] to [8.0x] were applied to pro forma cash flows for the
year ending December 31, [2003]. 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 [$_______] million to [$______] million,
with a mean of [$______] million. [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 [slightly below] the average multiple for real estate
management companies; 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 discounted cash flow analysis, Stanger concluded
that these analyses support the fairness to the Funds of the allocation of
Shares between the Funds, the CGS Affiliates 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 and the CGS Affiliates, including
and the CGS Management Company, to the aggregate Exchange Value of the Funds and
the CGS Affiliates, 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 Affiliates, including the CGS
Management Company, and among the Funds, Stanger observed that the Exchange
Values were assigned to the Funds and the CGS Affiliates, including the CGS
Management Company, by the General Partners based, in part, on: (i) the
independent appraisal 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 Fund and CGS Affiliates' assets and liabilities as of March
31, 2000 to be contributed to American Spectrum; (iii) the estimated value of
the CGS Management Company as of March 31, 2000 including valuations of other
assets and liabilities to be contributed to American Spectrum by the CGS
Management Company; (iv) adjustments made by the General Partners to the
foregoing
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<PAGE> 81
values to reflect the estimated costs of the Consolidation to be allocated among
the Funds and the CGS Affiliates, including 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 Affiliates, including the CGS Management
Company, as may be necessary to cause the relative Exchange Values of the Funds,
the CGS Affiliates 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 Fund and the CGS Affiliates, including
the CGS Management Company, reflects the net value of the assets contributed to
American Spectrum by each Fund and the CGS Affiliates, 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
between the Funds and the CGS Affiliates, including the CGS Management Company,
and 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
Affiliates and the CGS Management Company. Stanger relied upon the balance sheet
value determinations for the Funds, the CGS Affiliates 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 and the CGS Affiliates,
including the CGS Management Company, that the (i)calculations made to determine
allocations within each of the Funds between the General Partner and Limited
Partners are consistent with the provisions of each Fund's limited partnership
agreement; (ii) that any financial projections, pro forma statements,
projections, 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; (iii) that no material changes have occurred in the Fund's, the CGS
Affiliates' or the CGS Management Company's values subsequent to March 31, 2000,
or in the real estate portfolio values subsequent to March 31, 2000 which are
not reflected in the Exchange Values herein; and (iv) that the Funds, the
General Partners and the CGS Affiliates, including the CGS Management Company,
are not aware of any information or facts regarding the Funds, the CGS
Affiliates, the real estate portfolios or the CGS Management Company that would
cause the information supplied to Stanger to be incomplete or misleading.
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: (i) select the method of determining the
allocation of American Spectrum 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 American Spectrum Shares or Notes offered in the
Consolidation; or (iii) express any opinion as to: the impact of the
Consolidation with respect to combinations of participating Funds other then
those specifically identified in the fairness opinion; the tax consequences of
the Consolidation for Limited Partners, the General Partners or the Funds; 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; the potential capital structure of American Spectrum or its
impact on the financial performance of the American Spectrum Shares or the
Notes; the potential impact on the fairness of the allocations of any
subsequently discovered environmental or contingent liabilities; the terms of
employment agreements or other compensation between American Spectrum and its
officers; or whether or not alternative methods of determining the relative
amounts of American Spectrum Shares and
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<PAGE> 82
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: (a) 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; (b)
the relative value of American Spectrum Shares and Notes to be issued in the
Consolidation; (c) 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; (d) 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; (e) the business decision to effect the Consolidation or
alternatives to the Consolidation; (f) 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;
(g) whether or not American Spectrum will qualify as a REIT; and (h) 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 C. 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 Affiliates 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, up to a maximum of $40,200.
Stanger will also be indemnified against certain liabilities, including certain
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 Affiliates 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> 83
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 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.
CONDITIONS TO CONSOLIDATION
We have established certain conditions that must be satisfied in order
for the Consolidation to be consummated, including the following:
- The American Spectrum Shares must be listed on the _________
prior to or concurrently with the consummation of the
Consolidation; and
- 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
Affiliates, upon consummation of the Consolidation. At March
31, 2000, the appraised value of the real properties owned or
controlled by the CGS Affiliates was $177,390,000. If real
properties with an aggregate value of at least $22,610,000 are
not acquired 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 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, provided
that, with respect to certain 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, we 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
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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 a
minimum participation level of $200 million. The properties owned or contributed
to American Spectrum by CGS Affiliates have a total value of approximately $177
million. Therefore, the consummation of the acquisitions of the various Funds is
conditioned upon the approval of the Limited Partners of Funds with a combined
value of at least $23 million. If the proposed acquisitions are not approved by
the Limited Partners of Funds with an aggregate value of at least $23 million,
then none of the Funds will be acquired in the Consolidation.
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 certain 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 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 (see "BACKGROUND OF AND REASONS FOR THE
CONSOLIDATION -- Comparison of Alternatives -- Estimated Liquidation Values")
which represents __% of the Exchange Value of the American Spectrum Shares that
would otherwise have been allocated to your Fund. The liquidation value was
determined in part based on the portfolio appraisal prepared by Stanger. Such
liquidation value will be lower than the 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 _________ ___, ______
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, 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: (i) the estimated total
number of American Spectrum Shares to be allocated to that Fund; (ii) the
Exchange Value of American Spectrum Shares allocated to that Fund; and (iii) the
Exchange Value of American Spectrum Shares, per $1,000 of original investment by
you and the other Limited Partners of your Fund.
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<PAGE> 85
<TABLE>
<CAPTION>
NUMBER OF EXCHANGE VALUE OF
AMERICAN AMERICAN SPECTRUM
SPECTRUM EXCHANGE VALUE OF SHARES PER AVERAGE
SHARES AMERICAN $1,000 ORIGINAL
ALLOCATED TO SPECTRUM SHARES LIMITED PARTNER
FUND FUND (1) (2) INVESTMENT (2)
---------------------------- ------------- ----------------- ------------------
<S> <C> <C> <C>
Sierra Pacific Development 391,648 $5,874,720 $400.27
Fund
Sierra Pacific Development 839,334 12,590,013 581.17
Fund II
Sierra Pacific Development 28,655 429,832 47.08
Fund III
Sierra Pacific Institutional 328,037 4,920,557 639.51
Properties V
Sierra Pacific Pension 1,212,465 18,186,978 944.78
Investors '84
Nooney Income Fund Ltd., 683,383 10,250,749 675.28
L.P.
Nooney Income Fund Ltd. 1,021,040 15,315,594 796.82
II, L.P.
Nooney Real Property 545,451 8,181,768 681.81
Investors-Two, L.P.
</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 (on a
per Limited Partner, not a per Unit, basis), assuming the Exchange Value.
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
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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.
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 Galardi
and CGS have significant common interests (American Spectrum Predecessor) will
be accounted for as a reorganization in which carry-over basis is applicable.
This accounting reflects the majority ownership and control of these entities by
Messrs. Carden and Galardi. The purchases of the publicly registered Funds and
the other privately-held entities referred to as the Other Affiliates will be
accounted for using purchase accounting under Generally Accepted Accounting
Principles.
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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 (assuming all of the Funds are
acquired), your General Partners and their affiliates expect to receive certain
benefits. These benefits include:
- If the Consolidation is consummated, your General Partners and
their affiliates are expected to receive approximately
2,628,655 American Spectrum Shares and units in the Operating
Partnership in exchange for their interests in the Funds and
the contribution of the CGS Affiliates, including the CGS
Management Company.
- Certain of the officers and directors of your General Partners
will also serve as officers and directors of American
Spectrum. William J. Carden will serve as Chief Executive
Officer, Harry A. Mizrahi as Chief Operating Officer, Thomas
N. Thurber as Chief Financial Officer and Paul E. Perkins and
Patricia A. Nooney as Senior Vice Presidents. Furthermore,
they will be entitled to receive performance-based incentives,
including stock options under American Spectrum's 2000
Performance Incentive Plan or any other such 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.
- The CGS Affiliates include entities which are obligated to
make payments to one or more of the Funds. These payments
include approximately $6,956,000 payable by one of the CGS
Affiliates to Sierra Pacific Development Fund Ltd. II, L.P.
and guaranteed by John Galardi, a principal shareholder of
American Spectrum. In addition, the CGS Affiliates have $2.35
million of debt other than mortgage debt. A substantial
portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS
Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the
CGS Affiliates. As a result of the Consolidation, the
likelihood that they will be required to make payments on the
guarantees could be reduced.
- The CGS Affiliates 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.
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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
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each of the Funds is a Limited American Spectrum is a Maryland
Partnership. The Funds' primary business corporation American Spectrum intends to qualify
is to acquire, own, develop, improve, as a REIT under the Code in 2002. American
lease, manage and otherwise invest in Spectrum's primary business, like the Funds,
office, office/warehouse and/or shopping will be the ownership and management of
center properties. office, office/warehouse, shopping center
and apartment properties.
</TABLE>
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.
LENGTH AND TYPE OF INVESTMENT
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund is a finite-life entity American Spectrum will have a
with a stated term that expires between perpetual term and intends to continue its
2019 and 2085. It was originally operations for an indefinite time period. To
anticipated that each Fund would be the extent American Spectrum sells or
liquidated between the fifth and tenth refinances its assets, the net proceeds
year after acquiring its Properties. therefrom will generally be reinvested in
However, the depression of real estate additional properties or retained by American
values experienced nationwide from Spectrum for working capital and other
1988 to 1993 lengthened this time frame corporate purposes, except to the extent
in order to achieve the Funds' goal of distributions thereof must be made to permit
capital appreciation. As a Limited American Spectrum to continue to qualify as a
Partner of your Fund, you are entitled REIT for tax purposes and that, pursuant to the
to receive cash distributions out of your terms of the Notes, repayments of Notes must
Fund's net operating income, if any, be made to certain former Limited Partners as
and to receive cash distributions, if any, a result of sales of properties formerly held by
upon liquidation of your Fund's real their Funds.
estate investments.
</TABLE>
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
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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
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The investment portfolio of each Assuming all of the Funds are
Fund currently consists of between one acquired by American Spectrum, American
and five properties and certain related Spectrum will own an interest in, directly or
assets. indirectly through the Operating Partnership, a
portfolio of up to 35 properties.
</TABLE>
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.
BORROWING POLICIES
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Your Fund's policy is not to American Spectrum is not restricted
borrow to make new acquisitions and as under its Articles of Incorporation from
a practical matter the amount which your incurring debt. At the time of the
Fund can borrow is limited by its size. Consolidation, American Spectrum will have
The Fund's Partnership Agreements a policy of incurring debt only if immediately
generally limit their borrowing to 50% to following such incurrence the debt-to-total
80% of the appraised value of their assets (based on appraised value) ratio would
properties. be 70% or less. American Spectrum's Board
of Directors has the ability to alter or
eliminate this policy at any time.
</TABLE>
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).
80
<PAGE> 90
OTHER INVESTMENT RESTRICTIONS
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The partnership agreements of the Neither the Articles of Incorporation
Funds contain provisions that prohibit or place nor the Bylaws impose any restrictions upon
significant restrictions on: (i) the reinvestment the types of investments that may be made by
in the Fund of cash available for distribution; American Spectrum, except that under the
(ii) the purchase or lease of any real property Articles of Incorporation, the Board of
without the support of an appraisal report of Directors is prohibited from taking any action
an independent appraiser of properties; that would terminate American Spectrum's
(iii) the acquisition of any property in status as a REIT unless a majority of the
exchange for interests in the Fund; or (iv) the members of the Board of Directors vote to
acquisition of securities of other issuers. The terminate such status. The Articles of
Funds are generally not authorized to: (i) raise Incorporation and Bylaws do not impose any
additional funds for new investments, absent restrictions upon the vote to terminate such
amendments to their partnership agreements; status. The Articles of Incorporation and
and (ii) reinvest net sales or refinancing Bylaws do not impose any restrictions on
proceeds in new investments or redeem or dealings between American Spectrum and
repurchase Units. directors, officers and affiliates thereof. The
Maryland General Corporations Law ("MGCL"),
however, requires that: (i) the fact of the
common directorship 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
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.
</TABLE>
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.
81
<PAGE> 91
MANAGEMENT CONTROL
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The General Partners of the Funds The Board of Directors will direct the
are, subject to certain policies and restrictions management of American Spectrum's business
set forth in the various partnership and affairs subject to restrictions contained in
agreements, generally vested with the American Spectrum's Amended and Restated
exclusive right and power to conduct the Articles of Incorporation and Amended and
business and affairs of the Funds and may Restated Bylaws and applicable law. The
appoint, contract or otherwise deal with any Board of Directors, the majority of which will
person, including employees of our affiliates, be independent directors, will be elected at
to perform any acts or services for the Funds each annual meeting of the stockholders. The
necessary or appropriate for the conduct of the policies adopted by the Board of Directors
business and affairs of the Funds. As a may be altered or eliminated without a vote of
Limited Partner of a Fund, you have no right the stockholders. Accordingly, except for
to participate in the management and control their vote in the elections of directors and their
of your Fund and have no voice in your vote in certain major transactions,
Fund's affairs except on certain limited stockholders will have no control over the
matters that may be submitted to a vote of the ordinary business policies of American
Limited Partners under the terms of your Spectrum. Any director may be removed with
Fund's partnership agreement. Under each or without cause only by the stockholders
Fund's partnership agreement and subject to upon the affirmative vote of at least 75% of all
certain procedural requirements set forth the shares of common stock outstanding and
therein, Limited Partners have the right to entitled to vote in the election of the directors.
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.
</TABLE>
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.
82
<PAGE> 92
FIDUCIARY DUTIES
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The Funds are Limited Under the MGCL, the directors must
Partnerships organized under the laws of perform their duties in good faith, in a manner
either Missouri or California. Both that they reasonably believe to be in the best
Missouri and California law provides that interests of American Spectrum and with the
the Funds' General Partners are accountable care of an ordinary prudent person under similar
as fiduciaries to the Funds and owe the circumstances. Directors of American Spectrum
Funds and its Limited Partners a duty of who act in such a manner generally will not be
loyalty and a duty of care, and are required liable by reason of being or having been a
to exercise good faith and fair dealing in director of American Spectrum.
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.
</TABLE>
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.
83
<PAGE> 93
MANAGEMENT'S LIABILITY AND INDEMNIFICATION
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Under Missouri and California The Articles of Incorporation provide
law, the General Partners of the Funds are that the liability of American Spectrum's
liable for the repayment of Fund directors and officers to American Spectrum
obligations and debts, unless limitations and its stockholders for money damages is
upon such liability are expressly stated in limited to the fullest extent permitted under the
the document or instrument evidencing the MGCL. The Articles of Incorporation and the
obligation (for example, a loan structured MGCL provide broad indemnification to
as a nonrecourse obligation). Each Fund's directors and officers, whether serving
partnership agreement generally provides American Spectrum or, at its request, any other
that the General Partners will not be held entity. American Spectrum will indemnify its
liable for any costs arising out of their present and former directors and officers,
action or inaction that the General Partners among others, against judgments, penalties,
reasonably believed to be in the best fines, settlements and reasonable expenses
interests of a Fund except that they will be actually incurred by them in connection with
liable for any costs which arise from their any proceeding to which they may be made a
own fraud, negligence, misconduct or party by reason of their service in those or
other breach of fiduciary duty. In cases in other capacities, unless it is established that:
which the General Partners are (a) the act or omission of the director or officer
indemnified, any indemnity is payable only was material to the matter giving rise to the
from the assets of the Fund. 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.
</TABLE>
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.
84
<PAGE> 94
ANTI-TAKEOVER PROVISIONS
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
For each Fund, a change in The Articles of Incorporation and
management may be effected only by the Bylaws contain a number of provisions that may
removal of the General Partners of the have the effect of delaying or discouraging a
Fund. See "Management Control" above change in control of American Spectrum, even
for a discussion regarding the removal of if the change in control might be in the best
the General Partners of a Fund. In interests of stockholders. These provisions
addition, the partnership agreements of the include, among others: (i) authorized capital
Funds restrict transfers of your Units. An stock that may be classified and issued as a
assignee of Units may not become a variety of equity securities in the discretion of
substitute Limited Partner, entitling him, the Board of Directors, including securities
her or it to vote on matters that may be having voting rights superior to the American
submitted to the partners for approval, Spectrum Shares; (ii) restrictions on business
unless the General Partners consent to such combinations with persons who acquire more
substitution. 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."
</TABLE>
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
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership Under the MGCL, the Board of
agreement allows the sale of all or Directors is required to obtain approval of the
substantially all of the assets of the Fund stockholders by the affirmative vote of two-
with the consent of the Limited Partners thirds of all the votes entitled to be cast on the
holding a majority of the outstanding matter in order to sell all or substantially all of
Units. 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.
</TABLE>
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.
85
<PAGE> 95
MERGER
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership agreement Under the MGCL, the Board of
is silent with respect to the vote required for Directors is required to obtain approval of the
a Fund to participate in a merger. Under stockholders by the affirmative vote of two-
Maryland and California law, a merger may thirds of all the votes entitled to be cast on the
be effected upon our approval and the matter in order to merge or consolidate
approval of the Limited Partners holding a American Spectrum with another entity not at
majority of the outstanding Units, and the least 90% controlled by it.
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.
</TABLE>
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
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund may be dissolved with the Under the MGCL, the Board of
consent of the Limited Partners holding a Directors is required to obtain approval of the
majority of the outstanding Units. stockholders by the affirmative vote of two-
thirds of all votes entitled to be cast on the
matter in order to dissolve American
Spectrum.
</TABLE>
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.
86
<PAGE> 96
AMENDMENTS
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership agreement Generally, amendments to the
permits amendment of most of its provisions Articles of Incorporation must be approved by
with the consent of Limited Partners holding the Board of Directors and by holders of a
a majority of the outstanding Units. majority of the outstanding American Spectrum
Amendments to the Funds' partnership Shares entitled to be voted.
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.
</TABLE>
Amendment to each Fund's partnership agreement may be made with the
consent 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
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership agreement American Spectrum will pay all
provides that the General Partners are management expenses, including salaries and
entitled to receive a percentage of the net other compensation payable to employees of
cash available for distribution to the partners American Spectrum, but as an internally-
of the Fund. 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.
</TABLE>
87
<PAGE> 97
MANAGEMENT FEES
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The Nooney Funds' partnership The officers and directors of
agreements provide that each Nooney Fund is American Spectrum will receive compensation
authorized to enter into a management for their services as described herein under
contract with Nooney Company. The "Management." American Spectrum will not
maximum management fee for any otherwise pay any management fees.
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.
</TABLE>
REAL ESTATE DISPOSITION FEE
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
The Nooney Fund's partnership agreement None. Certain employees of
provides for the payment to either the American Spectrum may receive incentive
General Partners, Nooney Co. or an affiliate compensation based upon American
of a real estate disposition fee upon the sale Spectrum's profitability.
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 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.
</TABLE>
88
<PAGE> 98
DISTRIBUTIONS OF NET SALES PROCEEDS (NOT IN LIQUIDATION)
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership agreement None. Distributions made by
provides for the payment to the General American Spectrum to its stockholders will be
Partners of a portion of distributable net sales based solely on the profitability of American
proceeds following the payments to the Spectrum and will not be based on asset
Limited Partners of preferred returns and dispositions.
returns of capital required by the partnership
agreements. Each Fund's partnership agree
ment provides a formula by which net sales
proceeds are to be distributed among the
partners prior to dissolution.
</TABLE>
REIMBURSEMENT OF EXPENSES
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Each Fund's partnership agreement provides As a corporation, and upon election,
that operating expenses (which, in general, as a full-service REIT, American Spectrum's
are those expenses relating to the expenses will be paid from its revenues as
administration of the Fund by the General expenses are incurred.
Partners or their affiliates) will be reimbursed
at a lower rate than which comparable
services could have been obtained by the
Fund in the same geographical area.
</TABLE>
REVIEW OF INVESTOR LISTS
<TABLE>
<CAPTION>
FUNDS AMERICAN SPECTRUM
<S> <C>
Under your Fund's partnership Under the MGCL, as a stockholder
agreement, you are entitled, at your expense you must hold at least five percent of the
and upon reasonable request, to obtain a list outstanding American Spectrum Shares, and
of the other Limited Partners in your Fund. have done so for at least six months, before
However, if you are a Limited Partner of you have the right to request a list of
Sierra Pacific Institutional Properties V, you stockholders. If you meet this requirement,
may receive this information free of charge. you may, upon written request, inspect and, at
your expense, copy during normal business
hours the list of stockholders.
</TABLE>
Subject to certain limitations, 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.
89
<PAGE> 99
NATURE OF INVESTMENT
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
The Units you The Notes will be The American Spectrum
hold constitute equity senior, unsecured obligations Shares constitute equity interests in
interests entitling you to of American Spectrum and American Spectrum. As a
your pro rata share of cash will be issued pursuant to an stockholder, you will be entitled to
distributions made to the indenture qualified under the your pro rata share of any
partners of your Fund. Trust Indenture Act of 1939, dividends or distributions paid with
The partnership agreement as amended (the "Indenture"). respect to the American Spectrum
for each Fund specifies American Spectrum may issue Shares. The dividends payable to
how the cash available for additional senior debt, only you are not fixed in amount and
distribution, whether in compliance with the are only paid if, when and as
arising from operation or covenants contained in the declared by the Board of Directors.
sales or refinancing, is to Notes and the Indenture for Once qualified as a REIT, in order
be shared among the the issuance of senior debt. to continue to maintain such
General Partners of your Such senior debt may be qualification, American Spectrum
Fund, you and the other secured. The Notes will bear must distribute at least 90% of its
Limited Partners of your interest at __% annually and taxable income (excluding capital
Fund. The distributions will mature on _______ __, gains), and any taxable income
payable by your Fund to its ____. Prior to maturity, (including capital gains) not
partners are not fixed in interest only payments will distributed will be subject to
amount and depend upon be made to you, on a semi- corporate income tax.
the operating results and annual basis, and on
net sales or refinancing ________ __, ____, the
proceeds available from the outstanding principal balance,
disposition of your Fund's 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 the
Properties owned by your
Fund
</TABLE>
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 senior 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 the Properties.
90
<PAGE> 100
ADDITIONAL EQUITY/POTENTIAL DILUTION
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
Since your Fund is Since Notes will be At the discretion of
not authorized to issue unsecured debt obligations of the Board of Directors,
additional equity securities, American Spectrum, their American Spectrum may issue
there can be no dilution of payment will have priority additional equity securities,
distributions to you and the over dividends or including American Spectrum
other Limited Partners. distributions payable to Shares and shares which may
American Spectrum's be classified as one or more
stockholders. However, classes or series of common or
there are no restrictions on preferred shares and contain
American Spectrum's certain preferences. The
authority to grant secured issuance of additional equity
debt obligations, such as securities by American
mortgages, liens or other Spectrum will result in the
security interests in American dilution of your percentage
Spectrum's real and personal ownership interest in
property, and such security American Spectrum.
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.
</TABLE>
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.
91
<PAGE> 101
LIABILITY OF INVESTORS
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
Under your Fund's As a Noteholder, Under the MGCL, you
partnership agreement and you will not be personally will not be personally liable for
under Missouri and California liable for the debts and the debts or obligations of
law, your liability for your obligations of American American Spectrum.
Fund's debts and obligations is Spectrum.
generally limited to the amount
of your investment in the Fund,
together with an interest in
undistributed income, if any.
</TABLE>
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
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
Generally, with Under the American Spectrum is
some exceptions, you and the Indenture, you will not be managed and controlled by a
other Limited Partners of entitled to voting rights. Board of Directors elected by
your Fund have voting rights the stockholders at the annual
only on significant Fund meeting of American Spectrum.
transactions to the extent The MGCL requires that
provided in your Fund's certain major transactions,
partnership agreement. Such including most amendments to
voting rights include the Articles of Incorporation,
incurrence of debt, sale of all may not be consummated
or substantially all of the without the approval of
assets of your Fund, certain stockholders. You will have
amendments to the one vote for each American
partnership agreement or the Spectrum Share you own. The
General Partners' removal. 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."
</TABLE>
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.
92
<PAGE> 102
LIQUIDITY
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
The Units that While the Notes The American
represent your ownership you hold will be freely Spectrum Shares will be freely
interest in your Fund are transferable, American transferable upon registration
relatively illiquid investments Spectrum will not list the under the Securities Act. The
with a limited resale market. Notes, and no market for American Spectrum Shares will
The trading volume of the the Notes is expected to be listed on the _________, and
Units in the resale market is develop. You should not American Spectrum expects a
limited and the prices at elect to receive Notes unless public market for the American
which certain Funds' Units you are prepared to hold the Spectrum Shares to develop.
trade are generally not equal Notes until their maturity The breadth and strength of this
to their net book value (and which is approximately market will depend upon,
applicable federal income tax eight years from the date among other things, the number
rules and the partnership that the Consolidation of American Spectrum Shares
agreements of the Funds occurs. You should note outstanding, American
effectively prevent the that, due to the lack of Spectrum's financial results and
development of a more active market in the Notes and prospects, and the general
or substantial market for their consequent lack of interest in American Spectrum's
these Units). Neither you liquidity, your tax liability dividend yield and growth
nor any other Limited as a result of the potential compared to that of
Partner, individually, can Consolidation may exceed other debt and equity securities.
require a Fund to dispose of the liquid assets you receive See "The Consolidation--
its assets or redeem your or if you have elected the Consideration."
any other Limited Partner's Notes Option.
interest in the Fund.
</TABLE>
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.
93
<PAGE> 103
EXPECTED DISTRIBUTIONS AND PAYMENTS
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
Your Fund makes As a Noteholder, American Spectrum
quarterly distributions to the you will generally be intends to make quarterly
extent of available cash flow, entitled to receive only the dividend and distribution
if any. Amounts distributed principal and interest payments to its stockholders.
to you are derived from your payments required under the The amount of such dividends
pro rata share of cash flow Notes. You will have no and distributions will be
from operations or cash flow right to participate in any established by the Board of
from sales or financings. See profits derived from Directors, taking into account
"Selected Financial operations of any of the cash needs of American
Information of the Funds" for American Spectrum's Spectrum, funds from
a presentation of the cash assets, including properties operations, yields available to
distributions to you and the acquired as part of the stockholders, the market price
other Limited Partners of the Consolidation. for the American Spectrum
Funds over the five most Shares and the requirements of
recent calendar years. 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.
</TABLE>
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.
94
<PAGE> 104
TAXATION OF TAXABLE INVESTORS
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
Your Fund, as a Interest payments For the taxable year
partnership for federal made on the Notes will commencing January 1, 2002,
income tax purposes, is not constitute portfolio income American Spectrum intends to
subject to tax, but you must which cannot be offset by qualify and be taxed as a REIT.
report your allocable share of "passive losses" from other As a REIT, American Spectrum
partnership income and loss investments. During January of generally would be permitted to
on your tax return, whether each year, holders of Notes deduct distributions to its
or not cash distributions are will receive from American stockholders, which effectively
made to you. Income from Spectrum IRS Form 1099-INT to eliminates the corporate level
your Fund generally show the interest payments of the "double taxation"
constitutes "passive income" made by American Spectrum (imposed at the corporate and
to you, which can generally during the prior calendar stockholder levels) that
be offset by "passive losses" year. The amount of gain or typically results when a
from your other investments. loss recognized at the time of corporation earns income and
Generally, by February 15 of the payments on the Notes will distributes that income to
each year, you receive an be equal to the amount of the stockholders in the form of
annual Schedule K-1 with payment multiplied by a dividends. Dividends received
respect to information about fraction, the denominator of by you as a stockholder would
your Fund for inclusion on which is the face amount of constitute portfolio income,
your federal income tax the Note and the numerator of which cannot be offset by
returns. which is the remainder of the "passive losses" from other
face amount of the Note at the investments. The distributions
You must file state time of the payment less the from American Spectrum might,
income tax returns and incur Noteholder's basis on the in certain circumstances,
state income tax in most Note. constitute a larger portion of
states in which your Fund has taxable income than in the case
properties. 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
</TABLE>
95
<PAGE> 105
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
income taxes in certain states
where it is qualified
to do business.
</TABLE>
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
<TABLE>
<CAPTION>
UNITS NOTES AMERICAN SPECTRUM SHARES
<S> <C> <C>
None of the type of Interest income Dividends received
income distributed by the received by certain tax- from American Spectrum by
Funds is characterized as exempt investors will not be tax-exempt investors should
unrelated business taxable characterized as UBTI so long not constitute UBTI if the tax-
income, or UBTI, if the tax- as the tax-exempt investor exempt American Spectrum
exempt investor did not does not hold its Notes stockholder did not finance its
finance its acquisition of the subject to acquisition acquisition of the American
Units with indebtedness. indebtedness. Spectrum Shares with
indebtedness.
</TABLE>
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.
96
<PAGE> 106
VOTING PROCEDURES
DISTRIBUTION OF SOLICITATION MATERIALS
This Consent Solicitation, together with the accompanying transmittal
letter, the power of attorney and the Limited Partner consent (we refer,
collectively, to the power of attorney and Limited Partner consent as the
consent form), 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.
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. 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 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 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
4.91% to 32.13% and will be voted by affiliates of CGS in favor of the
Consolidation. See "The Consolidation."
97
<PAGE> 107
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 UNITS
NUMBER OF HELD FOR APPROVAL
FUND LIMITED PARTNERS OF RECORD OF CONSOLIDATION
---------------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C>
Sierra Pacific Development Fund 1,850 29,354 14,678
Sierra Pacific Development Fund II 3,833 86,653 43,327
Sierra Pacific Development Fund III 841 36,521 18,260
Sierra Pacific Institutional Properties V 1,485 30,777 15,389
Sierra Pacific Pension Investors '84 2,814 77,000 38,501
Nooney Income Fund Ltd., L.P. 1,211 15,180 7,591
Nooney Income Fund Ltd. II, L.P. 1,335 19,221 9,611
Nooney Real Property Investors-Two, L.P. 933 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 $0.25 per page.
Tabulation of Votes. An automated system administered by [ ] will
tabulate the votes. Abstentions will be tabulated with respect to the
Consolidation and related matters. Abstentions will have the effect of a vote
against the Consolidation, as will the failure to return a consent form and
broker nonvotes (where a broker submits a consent but does not have authority to
vote a Limited Partner's Units on one or more matters).
Revocability of Consent. You can change your vote at any time before
consents from Limited Partners equal to more than 50% of the required vote are
received by your Fund. You can send us a written statement that you would like
to revoke your consent, or you can send us a new consent form.
98
<PAGE> 108
SELECTED HISTORICAL COMBINED FINANCIAL DATA FOR AMERICAN SPECTRUM PREDECESSOR
The following table sets forth certain selected historical financial data of the
Company. The selected operating and financial position data as of and for each
of the five years ended December 31, 1999 have been derived from the audited
financial statements of the Company. The selected operating and financial
position data as of March 31, 2000 and for the three months ended March 31, 2000
and 1999 have been derived from the unaudited financial statements of the
Company. This information should be read in conjunction the Combined Financial
Statements and Notes thereto which follow.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
----------------------- -----------------------
($ 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 $ 3,241 $ 3,627
Interest and other income 541 1,610 141 265 205 424 267
Property management 2,821 3,264 6,355 10,736 7,809 1,814 1,310
-------- -------- -------- -------- -------- -------- --------
Total revenues 10,962 14,155 16,500 24,387 22,622 5,479 5,204
======== ======== ======== ======== ======== ======== ========
EXPENSES:
Property operating 5,137 7,443 1,683 2,886 3,396 921 940
Property management 55 92 7,472 12,164 10,766 2,578 1,886
Real estate and other taxes 894 1,166 848 1,523 1,597 301 558
Depreciation and amortization 2,213 2,202 2,203 3,313 3,259 914 942
Interest expense 4,644 5,801 7,901 9,585 9,982 2,221 2,840
Impairment charges -- -- -- 126 5,164
-------- -------- -------- -------- -------- -------- --------
Total expenses 12,943 16,704 20,107 29,597 34,164 6,935 7,166
======== ======== ======== ======== ======== ======== ========
</TABLE>
99
<PAGE> 109
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
-------------------------------------------------------- -----------------------
($ 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) (1,456) (1,962)
Gain on sale of property -- -- -- -- -- -- 1,193
Equity in earnings (losses) of non combined
partnerships -- -- (127) 224 (330) 12 22
-------- -------- -------- -------- -------- -------- --------
Net loss before extraordinary item (1,981) (2,549) (3,734) (4,986) (11,872) (1,444) (747)
Extraordinary item - extinguishment of debt -- -- 50 163 (214) -- --
Net loss $ (1,981) $ (2,549) $ (3,684) $ (4,823) $(12,086) $ (1,444) $ (747)
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
--------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
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 loss per share $ (1.27) $ (1.64) $ (2.37) $ (3.10) $ (7.76) $ (0.93) $ (0.48)
Deficiency of earnings to cover fixed charges(1) 1,981 2,549 3,684 4,823 12,086 1,444 747
Total properties owned at end of period 8 14 16 17 16 15
</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.
100
<PAGE> 110
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 282 $ 404 $ 670 $ 522 $ 458 $ 594 $ 486
Real estate held for investment, net 47,209 62,016 78,676 90,348 95,588 89,735 91,506
Accounts receivable, net 1,035 1,000 1,437 1,161 1,241 2,050 1,554
Accounts receivable from affiliates 4,376 16,121 17,072 4,539 3,970 4,995 7,869
Investment in/due from partnerships 357 2,053 1,840 1,517 3,297 628 3,545
Other assets 2,575 3,177 7,510 6,741 3,881 6,393 5,513
Total assets, at book value 55,834 84,771 107,205 104,828 108,435 104,395 110,473
Total assets, at valued assigned for the
consolidation 115,095
Total liabilities 60,982 89,803 115,601 120,094 133,411 118,651 135,664
Total equity (deficit) (5,148) (5,032) (8,396) (15,266) (24,976) (14,256) (25,191)
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 266 (148) (64) 72 28
Cash used in operating activities (939) (2,269) (4,916) (11,615) 2,076
</TABLE>
101
<PAGE> 111
(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 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 consolidation. 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, QUARTER ENDED MARCH 31,
---------------------- -----------------------
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 $ 1,431 $ 1,589
Interest and other income ......... 356 365 350 475 460 103 150
-------- -------- -------- -------- -------- -------- --------
Total revenues .................... 5,961 6,172 6,152 6,006 6,159 1,534 1,739
======== ======== ======== ======== ======== ======== ========
EXPENSES:
Property operating ................ 1,956 2,131 2,257 2,095 3,256 704 812
Management and advisory fees ...... 288 298 314 291 286 25 32
Ground Lease ...................... 383 383 382 374 410 93 29
Real estate and other taxes ....... 940 875 858 823 870 89 94
Depreciation and amortization ..... 1,904 2,144 2,221 1,867 1,802 443 470
Interest expense .................. 1,611 1,505 1,478 1,145 1,116 277 357
-------- -------- -------- -------- -------- -------- --------
Total expenses .................... 7,082 7,336 7,510 6,595 7,740 1,631 1,794
======== ======== ======== ======== ======== ======== ========
</TABLE>
102
<PAGE> 112
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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 -- 1.04 1.25
Deficiency of earnings to cover fixed
charges (3) $ 888 149 $ 2,351 -- $ 199 -- --
Cash distributions to minority investors 1,355 1,803 3,110 1,177 105 -- 2,419
Total properties owned at end of period (4) 19 19 18 18 18 18 18
BALANCE SHEET DATA:
Cash and cash equivalents $ 5,030 $ 2,970 $ 3,158 $ 2,723 $ 5,884 $ 5,221
Real estate held for investment, net 63,758 65,220 57,899 56,198 54,680 54,311
Accounts receivable, net 2,758 3,290 2,642 2,596 2,763 2,888
Other assets 10,879 10,771 11,448 12,425 13,120 15,098
Total assets, at book value 82,425 82,251 75,147 73,942 76,447 77,518
Total assets, at valued assigned for the
consolidation -- -- -- -- -- 127,265
</TABLE>
103
<PAGE> 113
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------ --------------------
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 $ 38,258
General partners equity 8,561 8,876 9,189 9,034 9,427 8,320
Limited partners equity 34,024 32,012 28,686 28,207 27,184 30,940
Other equity 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 (28) (357)
Cash (used in) provided by operating
activities 55 2,798 837 3,209 2,279 571 (125)
</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 properties, 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 an industrial property known as Sorrento I
in San Diego, California. Nooney Income Fund Ltd. II owns a 24%
interest in Leawood Fountain Plaza. Nooney Income Fund Ltd., an
affiliate of Nooney Income Fund Ltd. II, owns the remaining 76%
ownership of Leawood Fountain Plaza.
104
<PAGE> 114
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 financial statements of the Funds. These amounts reflect solely
the combination of the entities comprising the Funds 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 "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, QUARTER ENDED MARCH 31,
------------------------------------------------------- -----------------------
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 $ 3,647 $ 3,971
Interest and other income .............. 872 773 758 919 904 194 308
-------- -------- -------- -------- -------- -------- --------
Total revenues ......................... 12,473 14,892 14,838 15,290 16,082 3,841 4,279
-------- -------- -------- -------- -------- -------- --------
EXPENSES:
Property operating ..................... 4,306 5,213 5,274 5,168 6,913 1,666 1,761
Management and advisory fees ........... 629 767 795 803 823 106 149
Ground Lease ........................... 383 383 382 374 410 93 29
Real estate and other taxes ............ 1,836 2,132 2,035 1,937 2,010 314 317
Depreciation and amortization .......... 4,149 4,781 4,806 4,268 4,144 1,025 1,024
Interest expense ....................... 2,209 2,965 2,930 2,579 2,503 614 759
-------- -------- -------- -------- -------- -------- --------
Total expenses ......................... 13,512 16,241 16,222 15,129 16,803 3,818 4,039
-------- -------- -------- -------- -------- -------- --------
Net income (loss) before gain
(loss) on sale of property and
extraordinary item ..................... (1,039) (1,349) (1,384) 161 (721) 23 240
Gain (loss )on sale of property ........ 151 -- (967) -- 83 -- --
Extraordinary item - extinguishment
of debt ................................ -- 1,200 -- -- -- -- (46)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ...................... $ (888) $ (149) $ (2,351) $ 161 $ (638) $ 23 $ 194
======== ======== ======== ======== ======== ======== ========
</TABLE>
105
<PAGE> 115
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net 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) (97) (55)
Equity in earnings (losses) of
non-consolidated partnerships ........ (572) 575 (276) 1 152 29 48
Loss on sale of property ............. -- -- (967) -- -- -- --
------- ------ ------- ------ ------- ------ ------
Net loss before minority interest .... (1,693) (589) (2,601) (588) (1,429) ( 68) (7)
Minority interest .................... 225 285 840 109 30 23 (51)
------- ------ ------- ------ ------- ------ ------
Net loss ............................. $(1,468) $ (304) $(1,761) $ (479) $(1,399) $ (45) $ (58)
======= ====== ======= ====== ======= ====== ======
</TABLE>
106
<PAGE> 116
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------- --------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges (2) ... -- -- -- -- -- -- --
Deficiency of earnings to cover fixed 1,468 304 1,761 479 1,399 45 58
charges(3) ...............................
Cash distributions to minority
investors ................................ 281 491 2,464 195 18 -- 57
Total properties owned at end of period .. 9 9 8 8 8 8 8
BALANCE SHEET DATA:
Cash and cash equivalents ................ $ 914 $ 725 $ 557 $ 561 $ 2,972 -- $ 2,471
Real estate held for investment, net ..... 30,448 30,485 24,052 23,303 22,582 -- 22,568
Accounts receivable, net ................. 1,010 1,184 965 969 1,026 -- 1,005
Investments in/due from partnerships ..... 4,682 4,839 3,417 3,194 3,023 -- 2,265
Other assets ............................. 4,252 4,409 5,626 6,039 6,906 -- 6,231
Total assets, at book value .............. 41,306 41,642 34,617 34,066 36,509 -- 34,540
Total assets, at valued assigned for the
consolidation ............................ 54,792
</TABLE>
107
<PAGE> 117
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Total liabilities 18,922 19,544 15,437 15,419 18,321 -- 17,493
General partners deficit (83) (83) (456) (419) (428) (562)
Limited partners equity 16,909 16,305 14,868 14,350 12,961 13,037
Other equity 5,558 5,876 4,768 4,716 5,655 4,572
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net (1,237) (189) (168) 4 2,411 (124) (499)
Cash (used in) provided by operating
activities (758) 1090 (1,368) 1,021 (412) 84 (436)
</TABLE>
(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
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<PAGE> 118
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 MARCH 31,
--------------------------------- -----------------------
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income ........ $ 4,909 $ 5,078 $ 5,156 $ 1,255 $ 1,348
Interest and other income .............. 97 29 40 9 12
------- ------- ------- ------- -------
Total revenues ......................... 5,006 5,107 5,196 1,264 1,360
======= ======= ======= ======= =======
EXPENSES:
Property operating ..................... 1,875 1,821 1,881 464 472
Management and advisory fees ........... 135 134 132 32 35
Real estate and other taxes ............ 368 379 392 98 107
Depreciation and amortization .......... 791 856 891 212 216
Interest expense ....................... 2,076 2,031 1,942 473 501
------- ------- ------- ------- -------
Total expenses ......................... 5,245 5,221 5,238 1,279 1,331
======= ======= ======= ======= =======
Net income (loss) before
extraordinary item ..................... (239) (114) (42) (15) 29
Extraordinary item - extinguishment
of debt ................................ 71 -- -- -- --
------- ------- ------- ------- -------
Net income (loss) ...................... (310) (114) (42) (15) 29
======= ======= ======= ======= =======
</TABLE>
109
<PAGE> 119
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------ -----------------------
1998 1999 1999 2000
--------- --------- --------- -------
<S> <C> <C> <C> <C>
OTHER DATA:
Ratio of earnings to fixed charges (2) ...... -- -- -- 1.06
Deficiency of earnings to cover fixed
charges (3) ................................. $ 114 $ 42 $ 15 $ --
Cash distributions .......................... 240 258 60 50
Total properties owned at end of period ..... 3 3 3 3
BALANCE SHEET DATA:
Cash and cash equivalents ................... $ 221 $ 364 $ 390
Real estate held for investment, net ........ 9,292 16,310 16,122
Mortgages/notes receivable, net ............. -- 394 --
Accounts receivable, net .................... 100 111 628
Other assets ................................ 683 2,046 2,058
Total assets, at book value ................. 10,296 19,225 19,198
Total assets, at valued assigned for the
consolidation ............................... 40,478
Total liabilities ........................... 16,031 29,459 29,452
Total equity (deficit) ...................... (5,735) (10,234) (10,254)
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net ............................ $ (231) $ (116) $ 10 $ 27
Cash provided by operating activities ....... 739 639 198 186
</TABLE>
110
<PAGE> 120
1) Includes the accounts of Meadow Wood Apartments Ltd., Nooney-Hazelwood
Associates, LP and Nooney Rider Trails. 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.
111
<PAGE> 121
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 March 31,
2000 and the pro forma results of operations are presented as if the
Consolidation occurred on January 1, 1999. Proforma 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.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 to the Three Months
Ended March 31, 1999
Total revenues for the three months ended March 31, 2000 decreased by
$275,000 or 5% to $5,204,000 as compared to $5,479,000 for the three months
ended March 31, 1999. The decrease was caused by a reduction in revenue from
property management operations of 41% to $824,000 for the three months ended
March 31, 2000 as compared to $1,398,000 for the three months ended March 31,
1999. Revenue from property management operations decreased due to sale of
properties by third party clients of the American Spectrum Predecessor.
Purchasers of the properties involved either elected to self-manage or appoint a
manager other than the American Spectrum Predecessor. Rental income for the
three months ended March 31, 2000 increased by $229,000 or 6.2% to $3,894,000 as
compared to $3,665,000 for the three months ended March 31, 1999. The increase
in rental income results primarily from the acquisition of the Autumn Ridge
apartments in May, 1999.
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<PAGE> 122
Total expenses for the three months ended March 31, 2000 decreased by
$398,000 or 8.5% to $4,304,000 as compared to $4,702,000 for the three months
ended March 31, 1999. Expenses excluding interest, depreciation, and
amortization for the three months ended March 31, 2000 decreased by $426,000 or
11.2% to $3,362,000 as compared to $3,788,000 for the three months ended March
31, 1999. Expenses, excluding interest, depreciation, and amortization, as a
percentage of total revenues, decreased from 69.1% for the three months ended
March 31, 1999 to 64.6% for the three months ended March 31, 2000 due primarily
to increases in rental income ($229,000) that were achieved with minimal
increases in property operating expenses ($19,000). Components of expenses
excluding interest, depreciation, and amortization as a percentage of total
revenues were as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Property operating and maintenance 18.1% 16.8%
Real estate taxes 10.7% 5.5%
General office and administration 36.2% 47.1%
Other (income) -.4% -.2%
</TABLE>
Interest expense increased by $619,000, or 27.9%, to $2,840,000 for the
three months ended March 31, 2000 as compared to $2,221,000 for the three months
ended March 31, 1999 resulting primarily from interest incurred on the Autumn
Ridge loan placed in May 1999 and increased debt levels due to refinancing
efforts.
Net loss decreased by $697,000, or 48.3%, to $747,000 for the three
months ended March 31, 2000 as compared to $1,444,000 for the three months ended
March 31, 1999 due primarily to a gain on sale of property ($1,193,000) in the
first quarter of 2000.
Comparison of the Year Ended December 31, 1999 with the Year Ended December 31,
1998
Total revenues for the three months 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.
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<PAGE> 123
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.
Total 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
93.9% for the year ended December 31, 1999, due primarily to impairment charges
of $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>
1999 1998
---- ----
<S> <C> <C>
Property operating and maintenance 15.0% 11.8%
Real estate taxes 7.1% 6.2%
Property management operations 47.6% 49.9%
Impairment charges 22.8% .5%
Other (income) expense (0.9)% 2.4%
</TABLE>
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
114
<PAGE> 124
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 management company
operations in 1997, the effect of which was only partially included in 1997.
Total 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 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>
1998 1997
---- ----
<S> <C> <C>
Property operating and maintenance 11.8% 10.2%
Real estate taxes 6.2% 5.1%
</TABLE>
115
<PAGE> 125
<TABLE>
<CAPTION>
<S> <C> <C>
Property management operations 49.9% 45.3%
Impairment charges .5% .0%
Other (income) expenses -.9% .8%
</TABLE>
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
American Spectrum believes that following the Consolidation, its
financial performance will improve due to its ability to reposition certain
assets, place favorable financing on others and reduce overhead due to
consolidation into one entity from the existing multiple entities. American
Spectrum anticipates 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.
American Spectrum believes that its principal short-term liquidity
needs are to fund normal operating expenses, debt service requirements, and the
distributions required for American Spectrum to retain REIT status under the
Code. The Properties require periodic investment of capital for tenant-related
improvements and general capital improvements.
CASH FLOWS
Overview. American Spectrum Predecessor incurred net losses in each of
the five years. However, after adding back interest, depreciation, and
amortization, American Spectrum Predecessor generated positive EBITDA (as
defined herein). For the year ended December 31, 1999 and the three months ended
March 31, 2000, American Spectrum generated cash flow from
116
<PAGE> 126
operations on a pro forma basis of ($503,000) and $2,076,000 respectively.
American Spectrum has cash available on a pro forma basis, at March 31, 2000 of
$705,000. American Spectrum believe that its cash on consummation of the
Consolidation, together with future cash from operations and cash from
refinancing, will be sufficient to meet its cash requirements. However,
additional cash could be required if there are unforeseen expenses. Under the
minimum participation scenario whereby all Funds do not participate, American
Spectrum may require additional capital.
The business plan of American Spectrum Predecessor involves acquisition
and turnaround of under-performing assets. Financial statement losses are
common during the turn around period due to initially low rent levels caused by
high vacancy or below market rents combined with overhead costs associated with
renovating or repositioning the property. Although the increase in value
generated by the turn around effort cannot be recognized under Generally
Accepted Accounting Principles ("GAAP"), refinancing the property after it has
stabilized normally creates cash flow.
FUNDS FROM OPERATIONS AND EBITDA
American Spectrum calculates Funds from Operations based upon guidance
from NAREIT. Funds from Operations is defined as net income or loss (computed in
accordance with GAAP), excluding gains or losses from debt restructuring and
sales of properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. American
Spectrum believes that Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow from
operating activities, financing activities, and investing activities, it
provides investors with an indication of the ability of American Spectrum to
incur and service debt, to make capital expenditures, and to fund other cash
needs. American Spectrum computes Funds from Operations in accordance with
standards established by NAREIT that may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than American Spectrum. Funds from Operations does not
represent cash generated from operating activities determined in accordance with
GAAP and should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of American Spectrum's financial
performance or to cash flow from operating activities (determined in accordance
with GAAP) as a measure of American Spectrum's liquidity, nor is it indicative
of funds available to fund American Spectrum's cash needs, including its ability
to make cash distributions.
American Spectrum's pro forma Funds from Operations the year ended
December 31, 1999 were below zero. However, Funds from Operations for the three
months ended March 31,
117
<PAGE> 127
2000 were approximately $926,000 on a pro forma basis, reflecting an upward
trend that American Spectrum expects to continue into the foreseeable future.
The increase is a result higher occupancy levels, increased rent and stable
expenses.
EBITDA
EBITDA is defined as operating income before mortgage interest, other
interest, income taxes, depreciation, amortization, and other non-cash expenses
such as impairment charges. American Spectrum believes EBITDA is also useful to
investors as an indicator of American Spectrum's ability to service debt or pay
cash distributions. EBITDA, as calculated by American Spectrum may not be
comparable to EBITDA reported by other REITs that do not define EBITDA exactly
as American Spectrum defines the term. EBITDA does not represent cash generated
from operating activities determined in accordance with GAAP and should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of American Spectrum's financial performance or to cash flow
from operating activities (determined in accordance with GAAP) as a measure of
American Spectrum's liquidity, nor is it indicative of funds available to fund
American Spectrum's cash needs, including its ability to make cash
distributions.
American Spectrum's pro forma EBITDA for the year ended December 31,
1999 was $7,343,000 and for the three months ended March 31, 2000, pro forma
EBITDA was $5,363,000. The increase in annualized EBITDA is a further indication
of improved performance of American Spectrum's real estate operations. The pro
forma EBITDA for the quarter ended March 31, 2000 also included a gain on sale
of a property of $1.1 million in the quarter ended March 31, 2000.
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
certain CGS Affiliates (the "Affiliates") for periods prior to completion of the
Consolidation. The pro forma condensed balance sheet and the pro forma results
of operations are presented as if the Consolidation had occurred on March 31,
2000 and the pro forma results of operations are presented as if the
Consolidation 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.
118
<PAGE> 128
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2000 to the Three Months
Ended March 31, 1999
Total revenues for the three months ended March 31, 2000 increased by
$96,000 or 7.6% to $1,360,000 as compared to $1,264,000 for the three months
ended March 31, 1999. Rental income for the three months ended March 31, 2000
increased by $93,000 or 7.4% to $1,348,000 as compared to $1,255,000 for the
three months ended March 31, 1999. The increase was caused by an increase in
occupancy in the first quarter of 2000.
Total expenses for the three months ended March 31, 2000 increased by
$52,000 or 4.1% to $1,331,000 as compared to $1,279,000 for the three months
ended March 31, 1999. Expenses excluding interest, depreciation, and
amortization for the three months ended March 31, 2000 increased by $20,000 or
3.4% to $614,000 as compared to $594,000 for the three months ended March 31,
1999. Expenses, excluding interest, depreciation, and amortization, as a
percentage of total revenues, decreased from 47.0% for the three months ended
March 31, 1999 to 45.1% for the three months ended March 31, 2000 due to an
increase in occupancy in the first quarter of 2000. Components of expenses
excluding interest, depreciation, and amortization changed as a percentage of
total revenues as follows:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Property operating and maintenance 34.7 36.7
Real estate taxes 7.9 7.8
Property management operations 2.6 2.5
Other (income) expense 36.8 37.4
</TABLE>
119
<PAGE> 129
Interest expense increased by $28,000 or 5.9%, to $501,000 for the
three months ended March 31, 2000 as compared to $473,000 for the three months
ended March 31, 1999 due to interest rate increases.
The net income of $29,000 for the three months ended March 31, 2000
compares to a net loss of $15,000 for the three months ended March 31, 1999. The
$44,000 increase in profitability is due primarily to higher rental revenues
resulting from an increase in occupancy.
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.
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 three months 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 expense. Components of expenses excluding interest,
depreciation, and amortization changed as a percentage of total revenues as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Property operating and maintenance 36.2 35.7
Real estate taxes 7.5 7.4
Property management operations 2.5 2.6
Other (income) expense 37.4 39.8
</TABLE>
120
<PAGE> 130
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.
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 89.0% 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>
1998 1997
---- ----
<S> <C> <C>
Property operating and maintenance 35.7 37.5
Real estate taxes 7.4 7.4
Property management operations 2.6 2.7
Other (income) expense 39.8 41.5
</TABLE>
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<PAGE> 131
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 interest rate adjustments.
Net loss decreased by $125,000 or 52.3%, to $114,000 for the year ended
December 31, 1998 as compared to $239,000 for the year ended December 31, 1997
due to higher rental revenue resulting from an increase in occupancy and lower
property operating expenses.
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 Affiliates believe 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 $29,000 in the three months ended March 31, 2000.
However, after, depreciation, and amortization, the Affiliates generated
positive cash flow of $481,000, $742,000, and $849,000 for 1997, 1998, and 1999
respectively.
Comparison for the Three Months Ended March 31, 2000 to the Three
Months Ended March 31, 1999
The Affiliates' cash and cash equivalents were $390,000 and $489,000 at
March 31, 2000 and March 31, 1999, respectively. Cash and cash equivalents
increased $27 during the three months ended March 31, 2000 due to $186,000 of
cash flow provided by operating activities, $1 used in investing activities, and
$158 used in financing activities. The increase in cash from operating
activities is primarily due to an increase in collections from accounts
receivables and
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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 and $479 at
December 31, 1999 and 1998, respectively. Cash and cash equivalents decreased
$116 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
increase in collection from accounts receivables and 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.
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.
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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.
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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. American Spectrum will
continue and expand the real estate businesses formerly conducted by CGS Real
Estate Company, Inc. and its affiliates. Upon completion of the Consolidation,
American Spectrum expects to 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.
American Spectrum intends to qualify as a REIT for federal income tax
purposes beginning in 2002, and will be a fully integrated, self-administered
and internally managed real estate company. 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 the 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 continue to 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 1995,
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%.
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 (including individual developers as well as such institutions as banks,
insurance companies and pension funds). In
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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: (i) strong local market expertise; (ii)
long-standing relationships with tenants, real estate brokers and institutional
and other owners of real estate in each local market; (iii) fully integrated
real estate operations which allow quick response to acquisition opportunities;
(iv) its access to capital markets at competitive rates as a public company
following the Consolidation; and (v) 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.
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 the Properties will be a
substantial factor in its ability to realize its objective of maximizing
earnings from the 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.
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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.
As the sole general partner of the Operating Partnership, American
Spectrum generally has the exclusive power under the Partnership Agreement to
manage and conduct the business 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.
Management Company
American Spectrum conducts its real estate management business through
the CGS Management Company. The CGS Management Company will manage all of the
Properties. The CGS Management Company does not manage any 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 does not approve the
Consolidation. The CGS Management Company will manage only properties owned by
American Spectrum or the Funds. 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 were distributed to CGS's controlling shareholders
prior to the Consolidation.
CREDIT FACILITY
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. 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 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
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Spectrum's knowledge of diverse geographical markets and property types, as well
as its established capability to identify, and negotiate with, highly-motivated
sellers (including 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 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. The 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.
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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.
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: (i) 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; (ii) make any loan to or borrow from
any of the foregoing persons; or (iii) 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 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.
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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.
THE PROPERTIES
The Properties consist of 12 office buildings properties, 12
office/warehouse properties, 5 apartment properties, five 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 93% leased by 40 tenants at December 31,
1999.
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 90% leased by 32 tenants at December 31, 1999.
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 19,500, 24,000 and 48,000
net rentable square feet respectively, or an aggregate of approximately 91,500
net rentable square feet. The buildings are located on a 8.4-acre site which
provides paved parking for 366 cars. The complex was 100% leased by 33 tenants
at December 31, 1999.
5850 San Felipe in Houston, Texas is a 6-story office building
comprising 100,900 rentable square feet. It was 98% occupied at December 31,
1999 by 32 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
December 31, 1999 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 rentable square
feet. Parking is provided for 1,367 automobiles. The property was 86% occupied
with 63 tenants as of December 31, 1999.
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 100% occupied
by 6 tenants as of December 31, 1999.
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 78%
occupied with 4 tenants as of December 31, 1999.
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
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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 89%
occupied with 35 tenants as of December 31, 1999.
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 217,000
rentable square feet. Parking for 815 cars is provided. The building was 91%
occupied with 60 tenants as of December 31, 1999.
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 25% occupied as of
December 31, 1999 by 4 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 December 31, 1999 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 61% leased by 2 tenants at November 30, 1999.
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 100% leased by 29 tenants at December 31, 1999.
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 98% leased by 27 tenants at November 30, 1999.
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 92% leased by
48 tenants at November 30, 1999.
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 78% occupied by 17
tenants as of December 31, 1999.
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
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situated on a 7.5-acre site which provides parking for 278 cars. The buildings
were 49% leased by 4 tenants at December 31, 1999.
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 Dade Behring, Inc.
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 86%
occupied as of December 31, 1999 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 December 31, 1999.
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 December 31, 1999.
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 62% occupied with 3 tenants at December 31, 1999.
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 and is located
on a 5.3-acre site with 162 parking spaces. The property was 100% occupied by 5
tenants as of December 31, 1999.
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 92% occupancy at December 31, 1999.
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 97%
occupancy at December 31, 1999.
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 99% occupied as of December 31, 1999.
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
132
<PAGE> 142
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 94% occupied as of December 31, 1999.
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 68% occupied as of December 31, 1999.
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 November 30, 1999.
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 87% occupied with
five tenants as of December 31, 1999.
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 nine tenants as of
December 31, 1999.
Richardson Plaza Shopping Center is located at 537 St. Andrews Road in
Columbia, South Carolina. Built in 1982, the one-story building contains
approximately 108,799 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
88% occupied with nine tenants as of December 31, 1999.
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 December 31, 1999.
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.
[MAP SHOWING LOCATION OF PROPERTIES]
133
<PAGE> 143
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 December 31, 1999 is set forth below.
<TABLE>
<CAPTION>
PROPERTIES BY REGION
--------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
-------------------- ----------------------
NUMBER OF % OF PERCENT
PROPERTY TYPE BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT TOTAL LEASED
----------------------- ---------- ------ ---------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Office/Warehouse Properties
California-Arizona Region 2 125,620 3.21% $ 785,206 2.36% 98.01%
Carolinas Region 0 0.00% - 0.00 0.00
Upper Midwest Region 7 864,865 16.80% 3,672,546 11.06 91.80
Texas Region 3 281,172 7.18% 1,769,859 5.33 85.01
----- --------- ------ ----------- ------ ------
Total Office/Warehouse properties 12 1,271,657 32.465 $ 6,227,611 18.76% 91.61%
Office:
California-Arizona Region 6 553,587 14.13% $10,200,475 30.72% 93.34%
Carolinas Region 0 0.00% 0.00 0.00
Upper Midwest Region 5 713,304 18.21% 5,625,040 16.94 67.74
Texas Region 1 100,900 2.58% 1,176,560 3.54 98.32
----- --------- ------ ----------- ------ ------
Total Office properties 12 1,367,791 34.91% $17,985,546 51.21% 85.47%
Shopping Centers:
California-Arizona Region 1 13,017 0.33% $ 59,463 0.18% 27.54%
Carolinas Region 3 265,353 6.77% 1,031,766 3.11 73.53
Upper Midwest Region 1 72,149 1.84% 481,833 1.45 100.00
Texas Region 0 0.00% 0.00 0.00
----- --------- ------ ----------- ------ ------
Total Shopping Centers 5 350,519 8.95% $ 1,573,063 4.74% 67.02%
Total Commercial Leasing 29 2,989,967 76.32% $24,802,748 74.70% 81.37%
Apartment Properties:
California-Arizona Region 3 318,356 8.13% $ 4,667,544 14.06% 96.56%
Carolinas Region 0 0.00
Upper Midwest Region 1 312,000 7.96% 2,388,060 7.19 95.10
Texas Region 1 297,400 7.59% $ 1,344,000 4.05 68.01
----- --------- ------ ----------- ------ ------
Total Apartment Properties 5 927,756 23.68% $ 8,399,604 25.30% 86.56%
----- --------- ------ ----------- ------ ------
Total 34* 3,917,723 100.00% $33,202,352 100.00% 84.51%
===== ========= ====== =========== ====== ======
</TABLE>
* Vacant land not included
134
<PAGE> 144
PROPERTIES BY REGION
<TABLE>
<CAPTION>
PER LEASED
PROPERTY STATE TYPE YEAR BUILT RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) SQUARE FOOT
SQ. FT. % OF
NUMBER % LEASED LEASED AMOUNT TOTAL
--------------------------------- ----------------------- --------------------- ---------- ------------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CALIFORNIA ARIZONA REGION
Valencia AZ OFF/WARE 1987 82,520 96.97% 80,020 $ 506,758 1.53% $ 6.33
Sorento 1 CA OFF/WARE 1986 43,100 100.00% 43,100 $ 278,448 0.84% $ 6.46
Total Industrial AZ 125,620 98.01% 123,120 $ 785,206 $ 6.40
--------- ------ --------- ----------- ------ ---------
Pacific Spectrum CA OFFICE 1986 70,511 89.44% 63,065 $ 1,021,750 3.08% $ 16.20
Mira Mesa CA OFFICE 1986 89,560 100.00% 89,560 $ 1,921,322 5.79% $ 21.45
Creekside Office CA OFFICE 1984 47,800 100.00% 47,800 $ 936,602 2.82% $ 19.59
Sorrento II - Office CA OFFICE 1988 88,073 100.00% 88,073 $ 1,016,374 3.06% $ 11.54
Back Bay CA OFFICE 1988 50,371 78.26% 39,420 $ 961,966 2.90% $ 24.40
Chrysler Building CA OFFICE 1989 207,272 91.09% 188,804 $ 4,342,461 13.08% $ 23.00
--------- ------ --------- ----------- ------ ---------
Total Office 553,587 93.34% 516,722 $10,200,475 $ 19.37
Beach & Lampson Pad D CA RETAIL 1987 13,017 27.54% 3,585 $ 59,463 0.18% $ 16.59
--------- ------ --------- ----------- ------ ---------
Total Retail 13,017 27.54% 3,585 $ 59,463 $ 16.59
Creekside Apts. CA APTS 1991 75,190 99.34% 74,694 $ 949,164 2.86%
Villa Redondo CA APTS 1990 96,802 93.60% 90,607* $ 1,562,232 4.71%
Meadow Wood CA APTS 1985 146,364 97.09% 142,105* $ 2,156,148 6.49%
--------- ------ --------- ----------- ------ ---------
Total Apts 318,356 96.56% 307,405 $ 4,667,544
Sorrento II - Land CA LAND
Phoenix Van Buren AZ LAND
Total Land
--------- ------ ------- ----------- ----- ---------
CALIFORNIA ARIZONA REGION TOTAL 1,010,580 94.09% 950,832 $15,712,688 47.32% $ 16.53
--------- ------ --------- ----------- ------ ---------
UPPER-MIDWEST REGION
Oak Grove Commons IL OFF/WARE 1972-76 137,678 100.00% 137,678 $ 966,530 2.91% $ 7.02
Jackson Industrial A IN OFF/WARE 1976-80 320,000 96.33% 308,256 $ 796,460 2.40% $ 2.58
Morenci Professional Park IN OFF/WARE 1975-79 105,600 92.05% 97,205 $ 397,380 1.20% $ 4.09
Tower Industrial Bldg IL OFF/WARE 1974 42,120 100.00% 42,120 $ 158,641 0.48% $ 3.77
Northeast Commerce Ctr. OH OFF/WARE 1985 100,000 49.21% 49,210 $ 288,214 0.87% $ 5.86
Business Center MO OFF/WARE 1985 64,387 100.00% 64,387 $ 536,616 1.62% $ 8.33
Park Plaza I and II IN OFF/WARE 1975-79 95,080 100.00% 95,080 $ 528,705 1.59% $ 5.56
--------- ------ --------- ----------- ------ ---------
Total Industrial 864,865 91.80% 793,936 $ 3,672,546 $ 9.30
Countryside Executive Ctr. IL OFFICE 1984 91,975 89.78% 82,575 $ 1,335,186 4.02% $ 16.17
Leawood Fountain Plaza KS OFFICE 1982 85,778 92.80% 79,602 $ 1,354,136 4.08% $ 17.01
NorthCreek Office Park OH OFFICE 1984-86 91,731 95.43% 87,539 $ 1,299,550 3.91% $ 14.85
Northwest Corporate Center MO OFFICE 1983-87 221,848 9.80% 21,741 $ 305,088 0.92% $ 14.03
Parkade Center MO OFFICE 1965 221,972 85.75% 190,341 $ 1,331,081 4.01% $ 6.99
--------- ------ --------- ----------- ------ ---------
Total Office 713,304 64.74% 461,798 $ 5,625,040 $ 8.63
Maple Tree Shopping Ctr. MO RETAIL 1974 72,149 100.00% 72,149 $ 481,833 1.45% $ 6.68
Total Retail 72,149 100.00% 72,149 $ 481,833
The Lakes MO APTS 1985 312,000 95.10% 296,712* $ 2,388,060 7.19%
--------- ------ --------- ----------- ------ ---------
Total Apts. 312,000 95.10% 296,712 $ 2,388,060
--------- ------ --------- ----------- ------ ---------
UP-MID REGION TOTAL 1,962,318 82.79% 1,624,595 $12,167,480 36.65% $ 7.49
--------- ------ --------- ----------- ------ ---------
CAROLINA REGION
Columbia North East SC RETAIL 1991 56,505 86.58% 48,922 $ 181,833 0.55% $ 3.72
Marketplace SC RETAIL 1980 100,709 50.51% 50,868 $ 286,828 0.86% $ 5.64
Richardson Plaza SC RETAIL 1992 108,139 88.16% 95,335 $ 563,105 1.70% $ 5.91
--------- ------ --------- ----------- ------ ---------
CAROLINA REGION TOTAL 265,353 73.53% 195,125 $ 1,031,766 3.11% $ 5.29
--------- ------ --------- ----------- ------ ---------
TEXAS REGION
--------- ------ --------- ----------- ------ ---------
Technology TX OFF/WARE 1986 109,012 100.00% 109,012 $ 711,596 2.14% $ 6.53
Southwest POint TX OFF/WARE 1972 100,868 76.06% 76,720 $ 422,603 1.27% $ 5.51
Westlakes TX OFF/WARE 1985 71,292 74.75% 53,291 $ 635,659 1.91% $ 11.93
--------- ------ --------- ----------- ------ ---------
Total Industrial 281,172 85.01% 239,023 $ 1,769,859 $ 7.99
San Felipe TX OFFICE 1977 100,900 98.32% 99,205 $ 1,176,560 3.54% $ 11.86
Total Office 100,900 68.01% 99,205 $ 1,176,560 $ 11.86
Autumn Ridge TX APTS 1999 297,400 68.01% 202,262* $ 1,344,000 4.05%
--------- ------ --------- ----------- ------ ---------
Total Apts. 297,400 68.01% 202,262
--------- ------ --------- ----------- ------ ---------
TEXAS REGION TOTAL 679,472 79.55% 540,490 $ 4,290,418 12.92% $ 7.49
TOTALS 3,917,723 84.51% 3,311,042 $33,202,352 100.00% $ 10.00
========= ====== ========= =========== ====== =========
</TABLE>
135
<PAGE> 145
PROPERTIES BY TYPE
<TABLE>
<CAPTION>
YEAR PER LEASED
PROPERTY STATE REGION BUILT RENTABLE SQUARE FEET ANNUALIZED NET RENT SQUARE FOOT
SQ. FT. % OF
NUMBER % LEASED LEASED AMOUNT TOTAL
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE/WAREHOUSE
Valencia AZ CAL-AZ 1987 82,520 96.97% 80,020 $ 506,758 1.53% $ 6.33
Sorento 1 CA CAL-AZ 1986 43,100 100.00% 43,100 $ 278,448 0.84% $ 6.46
---------- ------ --------- ----------- ------ -----------
Total CAL-AZ Industrial 125,620 98.01% 123,120 $ 785,206 1.59% $ 6.40
--------- ------ --------- ----------- ----- -----------
Park Plaza I and II IN UP-MID 1975-79 95,080 100.00% 95,080 $ 528,705 1.59% $ 5.56
Oak Grove Commons IL UP-MID 1972-76 137,678 100.00% 137,678 $ 966,530 2.91% $ 7.02
Jackson Industrial A IN UP-MID 1976-80 320,000 96.33% 308,256 $ 796,460 2.40% $ 2.58
Tower Industrial Bldg. IL UP-MID 1974 42,120 100.00% 42,120 $ 158,641 0.48% $ 3.77
Northeast Commerce Ctr. OH UP-MID 1985 100,000 49.21% 49,210 $ 288,214 0.87% $ 5.86
Business Center MO UP-MID 1985 64,387 100.00% 64,387 $ 536,616 1.62% $ 8.33
Morenci Professional Park IN UP-MID 1975-79 105,600 92.05% 97,205 $ 397,380 1.20% $ 4.09
--------- ------ --------- ----------- ----- -----------
Total UP-MD Industrial 864,865 91.80% 793,936 $ 3,672,546 $ 5.32
--------- ------ --------- ----------- ----- -----------
Technology TX TEXAS 1986 109,012 100.00% 109,012 $ 711,596 2.14% $ 6.53
Southwest Point TX TEXAS 1972 100,868 76.06% 76,720 $ 422,603 1.27% $ 5.51
Westlakes TX TEXAS 1985 71,292 74.75% 53,291 $ 635,659 1.91% $ 11.93
--------- ------ --------- ----------- ----- -----------
Total TEXAS Industrial 281,172 85.01% 239,023 $ 1,769,859 $ 7.99
--------- ------ --------- ----------- ----- -----------
OFFICE/WAREHOUSE TOTAL 1,271,657 90.92% 1,156,078 $ 6,227,611 18.76% $ 5.39
--------- ------ --------- ----------- ----- -----------
OFFICE PROPERTIES
Pacific Spectrum AZ CAL-AZ 1986 70,511 89.44% 63,065 $ 1,021,750 3.08% $ 16.20
Mira Mesa CA CAL-AZ 1986 89,560 100.00% 89,560 $ 936,602 5.79% $ 21.45
Creekside Office CA CAL-AZ 1984 47,800 100.00% 47,800 $ 936,602 2.82% $ 19.59
Sorrento II-Office CA CAL-AZ 1988 88,073 100.00% 88,073 $ 1,016,374 3.06% $ 11.54
Back Bay CA CAL-AZ 1988 50,371 78.26% 39,420 $ 961,966 2.90% $ 24.40
Chrysler Building CA CAL-AZ 1989 207,272 91.09% 188,804 $ 4,342,461 13.08% $ 23.00
--------- ------ --------- ----------- ----- -----------
Total CAL-AZ Office 553,587 93.34% 516,722 $10,200,475 $ 19.37
--------- ------ --------- ----------- ----- -----------
Countryside Executive Ctr. IL UP-MID 1984 91,975 89.78% 82,575 $ 1,335,186 4.02% $ 16.17
Leawood Fountain Plaza KS UP-MID 1982 85,778 92.80% 79,602 $ 1,354,136 4.08% $ 17.01
NorthCreek Office Park OH UP-MID 1984-86 91,731 95.43% 87,539 $ 1,299,550 3.91% $ 14.85
Parkade Center MO UP-MID 1983-87 221,848 9.80% 21,741 $ 305,088 0.92% $ 14.03
--------- ------ --------- ----------- ----- -----------
Total UP-MID Office MO 713,304 64.74% 461,798 $ 5,625,040 $ 6.99
San Felipe TX TEXAS 1977 100,900 98.32% 99,205 $ 1,176,560 $ 8.63
--------- ------ --------- ----------- ----- -----------
Total TEXAS Office 100,900 98.32% 99,205 $ 1,176,560 $ 11.86
--------- ------ --------- ----------- ----- -----------
OFFICE PROPERTIES TOTAL 1,367,791 78.79% 1,077,725 $32,827,590 51.21% $ 11.86
--------- ------ --------- ----------- ----- -----------
SHOPPING CENTERS
Beach & Lampson Pad D CA CAL-AZ 1987 13,017 27.54% 3,585 $ 59,463 0.18% $ 16.59
--------- ------ --------- ----------- ----- -----------
Total CAL-AZ Retail 13,017 27.54% 3,585 $ 59,463 $ 16.59
Maple Tree Shopping Ctr. MO UP-MID 1974 72,149 100.00% 72,149 $ 481,833 1.45% $ 6.68
--------- ------ --------- ----------- ----- -----------
Total UP-MID Retail 72,149 100.00% 72,149 $ 481,833 $ 6.68
Columbia North East SC CAROL 1991 56,505 86.58% 48,922 $ 181,833 0.55% $ 3.72
Marketplace SC CAROL 1980 100,709 50.51% 50,868 $ 268,828 0.86% $ 5.64
Richardson Plaza SC CAROL 1992 108,139 88.16% 95,335 $ 563,105 1.70% $ 5.91
--------- ------ --------- ----------- ----- -----------
Total CAROL Retail 265,353 73.53% 195,125 $ 1,031,766 $ 5.29
--------- ------ --------- ----------- ----- -----------
SHOPPING CENTERS TOTAL 350,519 77.27% 270,859 $ 1,573,063 4.74% $ 5.81
--------- ------ --------- ----------- ----- -----------
APARTMENT PROPERTIES
Creekside Apts. CA CAL-AZ 1991 75,190 99.34% 74,694 $ 949,164 2.86% $ 12.71
Villa Redondo CA CAL-AZ 1990 96,802 93.60% 90,607 $ 1,562,232 4.71% $ 17.24
Meadow Wood CA CAL-AZ 1985 146,364 97.09% 142,105 $ 2,156,148 6.49% $ 15.17
--------- ------ --------- ----------- ----- -----------
Total CAL-AZ Apts 318,356 96.56% 307,405 $ 4,667,544 $ 15.18
The Lakes MO UP-MID 1985 312,000 95.10% 296,712 $ 2,388,060 7.19% $ 8.05
--------- ------ --------- ----------- ----- -----------
Total UP-MID Apts 312,000 95.10% 296,712 $ 2,388,060 $ 8.05
Autumn Ridge TX TEXAS 1999 297,400 68.01% 202,262 $ 1,344,000 4.05% $ 6.64
--------- ------ --------- ----------- ----- -----------
Total TEXAS Apts 297,400 68.01% 202,262 $ 1,344,000 $ 6.64
--------- ------ --------- ----------- ----- -----------
APARTMENT PROPERTIES TOTAL 927,756 86.92% 806,379 $ 8,399,604 25.30% $ 10.42
--------- ------ --------- ----------- ----- -----------
</TABLE>
136
<PAGE> 146
<TABLE>
<CAPTION>
YEAR PER LEASED
PROPERTY STATE REGION BUILT RENTABLE SQUARE FEET ANNUALIZED NET RENT SQUARE FOOT
SQ. FT. % OF
NUMBER % LEASED LEASED AMOUNT TOTAL
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTALS 3,917,723 84.51% 3,311,042 $33,202,352 100.00% $ 10.00
========= ======= ========= =========== ====== ==========
</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 December 31, 1999. Net Rent means contractual rent, excluding any
reimbursements for real estate taxes and operating expenses.
137
<PAGE> 147
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(1)
<TABLE>
<CAPTION>
NUMBER OF BASE RENT PERCENT
YEAR LEASES(2) AMOUNT
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000............................................. 197 $ 5,918,637 23.86%
2001............................................. 107 4,010,903 16.17%
2002............................................. 105 4,027,205 16.24%
2003............................................. 54 5,453,767 21.99%
2004............................................. 39 3,101,486 12.50%
2005............................................. 4 655,458 2.64%
2006............................................. 3 423,933 1.71%
2007............................................. 4 632,527 2.55%
2008............................................. 4 134,045 0.54%
2009............................................. 2 188,187 0.76%
Thereafter....................................... 3 256,600 1.03%
------ ------------ -------
Totals........................................... 522 $ 24,802,748 100.00%
====== ============ =======
</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 December, 1999 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.
138
<PAGE> 148
TENANT INFORMATION
The following table sets forth the Company's 15 largest tenants based
on annualized base rent as of December 31, 1999.
<TABLE>
<CAPTION>
Weighted Average
Percent of Months Remaining
Total Leased Annualized Base Annualized After
Tenants Square Feet Rent (1) (2) Base Rent (1) December 31, 1999
------- ----------- ------------ ------------- -----------------
<S> <C> <C> <C> <C>
State Comp. Insurance, CA 74,567 $1,638,037 6.604% 38
Chrysler Motors, CA 40,320 933,888 3.765% 59
Insight Electronics, CA 58,923 601,020 2.423% 38
Von Duprin, Inc., IN 194,000 518,604 2.091% 23
Sears, Inc., TX 45,935 431,789 1.741% 96
Cincinnati Group Health, OH 30,633 404,587 1.631% 48
Harte-Hanks, CA 29,150 354,306 1.428% 67
US Dept of Agriculture, MO 41,488 348,084 1.403% 19
Advanced Micro Systems, SC 31,495 340,140 1.371% 41
Quanterra, Inc., MO 31,927 336,444 1.356% 24
Food Lion, Inc., SC 59,803 309,126 1.246% 18
Cubic Communications, CA 43,100 295,152 1.190% 40
Cummins & White, CA 12,844 285,912 1.153% 12
Paper Mfg. Company, IN 126,000 264,600 1.067% 31
Dietzgen Corp., IL 12,899 211,544 0.853% 62
------- --------- ------ --
833,084 7,273,233 29.324% 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 December 31, 1999.
<TABLE>
<CAPTION>
Percent of
Number Annualized Portfolio
Square Footage of Percent of All Total Leased Base Rent Annualized
Under Lease Leases Leases Square Feet (in Thousands) Base Rent
----------- ------ ------ ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Less than 10,001 472 90.421% 1,177,655 13,930 56.16%
10,001-20,000 28 5.364% 398,369 4,079 16.45%
20,001-50,000 19 3.640% 545,821 4,360 17.58%
50,001-100,000 1 0.192% 74,567 1,638 6.60%
100,001 and over 2 0.383% 308,256 796 3.21%
--- ------- --------- ------ ------
522 100.000% 2,504,688 24,803 100.00%
</TABLE>
139
<PAGE> 149
MORTGAGE DEBT
Upon consummation of the Consolidation, American Spectrum will have
debt of approximately $173 million. Such debt is generally limited recourse
mortgage debt and is secured by mortgages on 32 properties. Mortgage debt
totaling $80 million is fixed rate and self-amortizing, and $96 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 8.48% (based on the interest rates in effect at March 31,
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>
DEBT AS OF INTEREST MATURITY
PROPERTY MARCH 31, 2000 RATE(2) DATE
-------- -------------- ------- ----
<S> <C> <C> <C>
Shopping Center
Beach & Lampson Pad D 663,226 8.80% March 2015
Columbia North East 1,038,619 9.52% 2000 - 2003 (1)
Maple Tree Shopping Ctr. 1,958,358 9.01% December 2004
Marketplace 4,143,885 9.53% 2000 - 2003 (1)
Richardson Plaza 4,614,897 10.08% 1999 - 2008 (1)
Total Shopping Center 12,418,985 9.61%
Office
Bristol Bay 7,025,566 8.80% March 2015
Countryside Executive Ctr. 1,190,922 9.75% December 2002
Chrysler Building 31,764,610 8.67% 2001 & 2003 (1)
Creekside 4,045,109 8.80% January 2000
Mira Mesa 4,476,259 7.74% October 2010
NorthCreek Office Park 3,768,866 9.75% December 2002
Northwest Corporate Center 14,639,987 8.49% 2000 - 2001 (1)
Park Plaza I and II 1,815,999 9.01% December 2004
San Felipe 3,000,000 5.00% April 2004
Spectrum 7,475,509 8.44% 2000 & 2009 (1)
Total Offices 79,202,827 8.52%
Mixed Use
Parkade Center 6,255,555 7.68% October 2000
Office/Warehouse
----------------
Jackson Industrial A 3,611,327 9.31% November 2000
Morenci Professional Park 1,890,000 9.01% December 2004
Business Center 3,349,729 9.75% April 2002
Northeast Commerce Ctr. 1,882,696 9.75% December 2002
Oak Grove Commons 1,119,303 8.82% December 2002
Sorrento I 1,632,559 8.75% September 2009
Southwest Point 1,490,415 8.35% September 2009
Technology 11,673,506 10.08% May 2008
Valencia 1,383,343 9.29% 2000 & 2007 (1)
Westlakes 1,894,834 9.00% March 2006
Total Office/Warehouse 29,927,712 9.55%
Apartment Properties
Autumn Ridge 6,246,737 8.63% May 2001
August 5, 2000 5,527,557 8.06% 2002 & 2009 (1)
Villa Redondo 9,375,675 6.51% January 2009
Meadow Wood 10,885,000 6.88% December 2003
The Lakes 13,066,599 6.81% 2006 & 2031 (1)
Total Apartment Properties 45,101,568 7.17%
Development Land
Phoenix Van Buren 2,943,530 12.07% 2001 & 2005 (1)
TOTALS 175,850,177 8.45%
</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.
140
<PAGE> 150
ENVIRONMENTAL MATTERS
American Spectrum will undertake 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 the 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 the Properties
are adequately insured. No assurance can be given that material losses in excess
of insurance proceeds will not occur in the future.
COMPETITION
American Spectrum itself will compete with other entities both to
locate suitable properties for acquisition and to locate purchasers for its
properties.
EMPLOYEES
American Spectrum will employ 72 individuals, including __ 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.
141
<PAGE> 151
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 March 31, 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.
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 March 31, 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 December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF
STATES IN PERCENT
TOTAL WHICH AVERAGE OF TOTAL
NUMBER PROPERTIES AGE OF AGGREGATE AMERICAN
OF ARE BUILDING TOTAL SPECTRUM
FUND PROPERTIES LOCATED ON PROPERTY REVENUE REVENUE
---- ---------- ------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
Sierra Pacific Development Fund (2) 1 1 16 $ 915,183 2.65%
Sierra Pacific Development Fund II (2) 3 1 22 2,519,873 7.29%
Sierra Pacific Development Fund III (2) 1 1 14 278,448 0.81%
Sierra Pacific Institutional Properties V (2) 1 1 12 972,179 2.81%
Sierra Pacific Pension Investors '84 (2) 2 2 13.5 2,458,834 7.11%
Nooney Income Fund Ltd., L.P. (1) 2 2 22 1,718,596 4.97%
Nooney Income Fund Ltd. II, L.P. (1) 4 2 18 3,163,448 9.15%
Nooney Real Property Investors-Two, L.P. 4 2 23.5 $1,882,886 5.45%
</TABLE>
142
<PAGE> 152
(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.
As of December 31, 1999, the average remaining initial lease term with
respect to the Funds' Properties was approximately three years. Leases
accounting for approximately 48.35% of annualized base rent for the year ended
December 31, 1999, have initial lease terms extending until at least December
31, 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............................................. 68 2,245,072.20 14.35%
2001............................................. 83 2,742,243.52 17.53%
2002............................................. 76 2,576,580.12 16.47%
2003............................................. 53 4,632,561.08 29.61%
2004............................................. 21 1,600,813.80 10.23%
2005............................................. 14 878,346.92 5.61%
</TABLE>
143
<PAGE> 153
<TABLE>
<CAPTION>
BASE RENT
--------------------------------------------------------------------------
YEAR NUMBER AMOUNT PERCENT
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2006............................................. 1 104,902.56 0.67%
2007............................................. 4 573,973.04 3.67%
2008............................................. 1 134,045.16 0.86%
2009............................................. 1 36,387.12 0.23%
Thereafter....................................... 2 118,217.56 0.77%
Totals........................................... 324 15,643,143.08 100.00%
</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 March 31, 2000, the Funds had a ratio of total
indebtedness to total assets of 38.64%.
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 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.
144
<PAGE> 154
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.
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.
145
<PAGE> 155
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
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
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.
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<PAGE> 156
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of American Spectrum are as
follows:
<TABLE>
<CAPTION>
APPROXIMATE TIME
NAME POSITION AGE 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 Geary 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 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, 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 Geary - 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 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 registered representative
with the New York Stock Exchange and National Association of Securities Dealers,
as well as 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.
147
<PAGE> 157
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 an officer
and Partner of Eastdil Realty. 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, 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.
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
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
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<PAGE> 158
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. Under the plan (as
described below) each non-employee director will also be entitled to an initial
grant of an option to acquire 10,000 American Spectrum Shares and an annual
automatic grant of an option to acquire 5,000 American Spectrum Shares. This
initial grant will be at the Exchange Value and the annual grant will be at the
fair market value on the date of the grant.
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.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William J. Carden, Chairman of the Board, President and 1999 $470,000 $50,000
Chief 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 which
options will be granted at Exchange Value on the date of the consummation of the
Consolidation and 50% of which 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
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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 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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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>
NAME OF BENEFICIAL OWNER (1) NUMBER OF SHARES OF COMMON PERCENTAGE OF OUTSTANDING
STOCK(2) COMMON 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 Noony 2,563 *
Timothy R. Brown (6) 2,500 *
William Geary (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 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 4400 Van Karman Ave., Suite 222, Newport
Beach, California 92660. 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 2 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 Galardi
and their family members and affiliates (collectively, the "Principal
Shareholders") will be merged into American Spectrum. Upon completion of the
Consolidation, 17 Properties in which the Principal Shareholders hold interests,
in addition to the Properties owned by the Funds, will be owned by American
Spectrum. Upon completion of these transactions, the Principal Shareholders will
own ___ American Spectrum Shares and Operating Partnership Units.
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, including the Principal Shareholders. Among other things, the
exchange rights agreement provides that holders of Operating Partnership Units
have the right, on and after the first anniversary of the Closing 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, including the Principal Shareholders, under which American
Spectrum will agree to register for resale under the Securities Act American
Spectrum Shares issued to them, 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. In
addition, an agreement will be entered into between the Third Party Management
Company and the CGS Management Company pursuant to which the Third Party
Management Company will agree to make available certain facilities and related
office services required by the CGS Management Company at the Third Party
Management Company's cost.
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 Affiliates. These transactions include loans
and advances and furnishing of services. Mr. Carden received a salary and bonus
from CGS, which is set forth in the table under "Management - Executive
Compensation," and Messrs. Carden and Galardi have received distributions from
CGS Affiliates with respect to their ownership interests on the same basis as
unaffiliated third parties.
Obligations of the CGS Affiliates, 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 Affiliates will
become indebtedness of American Spectrum, which aggregate approximately $9.091
million. A substantial portion of these liabilities were
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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.
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.
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Each Fund's partnership agreement also generally provides that the
General Partners and certain 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 our 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: (a) 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; (b) a court of competent jurisdiction
has dismissed such claims with prejudice on the merits, and the court approves
indemnification of the litigation costs; or (c) 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: (a) the legal action relates to the
performance of duties or services by such person on behalf of the Fund; (b) the
legal action is initiated by a party other than a Limited Partner; and (c) 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. 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.
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DESCRIPTION OF CAPITAL STOCK
The Articles of Incorporation will 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 (Preferred Stock).
As of the consummation of the Consolidation, American Spectrum will have
7,367,892 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 therefor. 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: (i) 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; (ii)
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 (iii) American Spectrum must satisfy certain complex
requirements with respect to the nature of its income and assets for it to
maintain such REIT status.
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.
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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 (or, Prohibited
Transferee) as to that number of shares in excess of the Ownership Limit or such
other limit (or, Excess Shares), and the Prohibited Transferee shall acquire no
right or interest (or, in the case of any event other than a purported transfer,
the person or entity holding record title to any such Excess Shares (or,
Prohibited Owner) shall cease to own any right or interest) in such Excess
Shares. Any such Excess Shares described above 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 (or, Beneficiary). Such
automatic transfer shall be deemed to be effective as of the close of business
on the business day prior to the date of such violative transfer. Within 20 days
of receiving notice from the American Spectrum of the transfer of shares to the
trust, the trustee of the trust (who shall be designated by American Spectrum
and be unaffiliated with American Spectrum and any Prohibited Transferee or
Prohibited Owner) will be required to Excess Shares to a person or entity who
could own such shares without violating the Ownership Limit, or such other limit
as provided in the Articles of Incorporation or as otherwise permitted by the
Board of Directors, and distribute to the Prohibited Transferee or Prohibited
Owner an amount equal to the lesser of the price paid by the Prohibited
Transferee or Prohibited Owner for such 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 such Excess
Shares to a qualified person or entity and distribute to the Prohibited Owner an
amount equal to the lesser of the Market Price (as defined in the Articles of
Incorporation) of such Excess Shares as of the date of such event or the sales
proceeding received by the trust for such 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 such 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 such Excess Shares, and also will be
entitled to exercise all voting rights with respect to such Excess Shares.
Subject to the MGCL, effective as of the date that such shares have been
transferred to the trust, the trustee shall have the authority (at the trustee's
sole discretion) to: (i) 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 (ii)
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.
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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: (i) 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 such gift); and (ii) 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 Amended and Restated 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 (or, 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 (or, the Trust Indenture Act). 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 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 March 31, 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 $173 million, to which the Notes were
effectively subordinated or which ranked equal with such Notes.
The Notes will mature on _________ ___, ______ (the Maturity Date),
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:
- a highly leveraged or similar transaction involving American
Spectrum or the management of American Spectrum (for example,
a leveraged buy-out);
- a change of control of American Spectrum; or
- 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 (or, the Redemption Price).
In the event that, following the closing of the Consolidation, American
Spectrum: (i) 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 (ii) 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
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.
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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:
- 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
- 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:
- 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,
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 shall mean the appraised value of the
Properties or any property subsequently purchased by American Spectrum, as
determined by Stanger or another independent real estate appraiser retained by
American Spectrum.
Subsidiary means: (i) 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; (ii) 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 (iii) one or more corporations which, either
individually or in the aggregate, would be Significant Subsidiaries (as defined
below, except that the
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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: (i) Appraised Real Estate Value; and
(ii) 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:
- 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;
- 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
- 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:
- default for 30 days in the payment of any installment of
interest on any Note of such series;
- default in the payment of the principal of any Note when due
and payable at maturity, redemption, by acceleration or
otherwise;
- 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;
- 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
- 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.
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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: (i) 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; (ii) 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. 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: (i) to cure any ambiguity,
defect or inconsistency in the Indenture; (ii) to evidence the succession of
another Person to American Spectrum as obligor under the Indenture; (iii) to
permit or facilitate the issuance of the Notes in uncertificated form; (iv) to
make any change that does not adversely affect the rights of any holder of
Notes; (v) to provide for the issuance of and establish
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the form and terms and conditions of the Notes of any series as permitted by the
Indenture; (vi) 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; (vii) 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; (viii) to provide for guarantors or collateral for the Notes of any
series; or (xi) 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: (i) change the stated maturity of the principal of, any
installment of interest on, any Note; (ii) reduce the principal amount of or
interest on any Note; (iii) change the place of payment, or the coin or
currency, for the payment of principal of or interest on any Note; (iv) impair
the right to institute suit for the enforcement of any payment on or with
respect to any Note; (v) 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 (vi) 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.
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 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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COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
The following information has been prepared to compare the amounts of
compensation paid and cash 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 services performed for each
Fund, such as legal, accounting, transfer agent, data processing and duplicating
services.
American Spectrum intends to operate as an internally-advised REIT. 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 three
months ended March 31, 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 are shown below under "Pro
Forma":
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COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS
<TABLE>
<CAPTION>
Three
Months
Ended
Year Ended December 31, March 31,
----------------------- ---------
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
HISTORICAL:
Management Fees $ 780,080 $ 789,171 $ 808,656 $213,286
Administrative Fees 676,009 647,457 741,617 175,629
Leasing Fees 360,379 230,545 56,621 18,141
Construction Supervision Fees 151,001 46,801 30,332 -
Broker Fees 61,000 - - -
General Partner Distributions 146,369 64,239 - -
------------ ------------- ------------ ----------
Total historical $2,174,838 $1,778,213 $1,637,226 $407,056
============ ============= ============ ==========
Pro Forma:
Cash Distributions on American Spectrum Shares
issuable in respect of the CGS Management
Company(1)
Salary Compensation
------------ ------------- ------------ ----------
Total pro forma - - - -
============ ============= ============ ==========
</TABLE>
(1) 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 be
internally managed, expenses of this type will be borne by American Spectrum
after the Consolidation.
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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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax issues
associated with the Consolidation was prepared by PR, 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. 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. PR 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 PR 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), the tax treatment of a REIT and
potential changes in applicable tax laws.
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.
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
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. 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 American Spectrum (following an appropriate
election) qualifies as a REIT 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
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 certain properties than that used by the Funds. 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 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 consistent with Proposed Treasury Regulation Section 1.708-1 (F.R.
January 11, 2000) 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 regulation, 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. 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, 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 PR 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
from qualifying under Section 351 of the Code. American Spectrum and each
transferor 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 each transferor 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,
the transferor Funds will not recognize gain upon their transfer of assets to
American Spectrum except to the extent the liabilities assumed by American
Spectrum exceed the basis of the transferor Fund in the assets contributed. If
the liabilities of your Fund assumed by American Spectrum exceed the bases of
the assets contributed, your Fund will recognize gain. Such gain will be equal
to the amount by which the liabilities assumed exceed the bases of the assets
transferred, and you will be allocated your share of the gain. 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. PR is not opining as to whether gain will be recognized by the
contributing Funds 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
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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 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 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.
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TREATMENT 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
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 measured by the difference between: (i) 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
(ii) 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.
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 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.
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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, which include: (i) United States real estate; and (ii)
interests in certain entities (including 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 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 (including alternative minimum 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, commencing with
its taxable year ending December 31, 2002. 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,
the applicable Code sections, rules and regulations issued thereunder, and
administrative and judicial interpretations thereof.
If American Spectrum qualifies to be treated 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"
(imposed at the corporate level when earned and once again at the stockholder
level when distributed) that generally results from investments in a
corporation.
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:
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- American Spectrum will be taxed at regular corporate rates on
any undistributed real estate investment trust taxable income,
including undistributed net capital gains.
- Under certain circumstances, American Spectrum may be subject
to the alternative minimum tax on its items of tax preference.
- If American Spectrum has net income from foreclosure property,
which 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, it will be subject to tax on this
income at the highest corporate rate.
- If American Spectrum has net income derived from a prohibited
transaction, which is a sale or other disposition of property
(other than foreclosure property) that is held primarily for
sale to customers in the ordinary course of business, this
income will be subject to a 100% tax.
- 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.
- 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.
- In addition, 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 for any taxable year
and certain relief provisions do not apply, American Spectrum will be subject to
federal income tax (including alternative minimum 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 and, subject to certain
limitations, certain investors would be eligible for the corporate dividends
received deduction, but 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:
- is managed by one or more trustees or directors;
- uses transferable shares or transferable certificates to
evidence beneficial ownership;
- would be taxable as a domestic corporation, but for sections
856 through 860 of the Code;
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- is neither a financial institution nor an insurance company;
- has at least 100 persons as beneficial owners;
- is not closely held as defined in section 856(h) of the Code;
and
- 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 to 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, and will, 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. First, at least 75% of American
Spectrum's gross income (excluding gross income from prohibited transactions)
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 rents from real property, interest on
mortgages on real property, 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, income from foreclosure property, dividends or other distributions on,
and gain (other than from prohibited transactions) from the sale or disposition
of, shares in other REITs and amounts received as consideration for entering
into either loans secured by real property or purchases or leases of real
property. Second, at least 95% of American Spectrum's gross income (excluding
gross income from prohibited transactions) 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.
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:
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- 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;
- 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;
- 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
- 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 PR 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," and it 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: (i) American
Spectrum's failure is due to reasonable cause and not willful neglect; (ii) it
reports the nature and amount of each item of its income on a schedule attached
to its tax return for such year; and (iii) 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, except
that securities holdings not within the 75% class of assets generally must not
(with the exception of holdings by American Spectrum's stock of taxable REIT
subsidiaries) with respect to any one issuer exceed 5% of the value of 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 real property, interests in real property,
leaseholds of land or improvements thereon, and 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.
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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 of 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:
- 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
- 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 an
election is made to be treated as a REIT. In keeping with these requirements,
American Spectrum's Amended and Restated Articles of Incorporation generally
prohibit any person or entity from actually, constructively or beneficially
acquiring or owning (applying certain attribution rules) more than 5% of the
issued and outstanding American Spectrum Shares (including any Preferred Stock).
This limitation does not apply to existing stockholders who own more than 5% of
American Spectrum shares 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: (a) 90% of the sum of (i) its "real estate investment trust taxable
income" (computed before deduction of dividends and excluding any net capital
gains) and; (ii) the excess of net income from foreclosure property over the tax
on such income, minus (b) 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. Distributions must be
made 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.
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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 PR's independent review of relevant
documents, and upon the assumption that American Spectrum will operate in the
manner described in this Consent Solicitation, PR has opined the following:
- American Spectrum is organized in conformity with the
requirements for qualification as a REIT; and
- 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. PR'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 PR's opinion.
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 (generally, any person other than a
nonresident alien individual, a foreign trust or estate or a foreign partnership
or corporation), you generally will be taxed in the following manner:
- Distributions made by American Spectrum to you generally will
be taxed as ordinary income;
- Amounts that you receive that are properly designated as
capital gain dividends by American Spectrum 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;
- If you are a corporate stockholder, you may be required 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;
- 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, and 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;
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- 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. 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 long-term capital gain (or short-term capital gain
if you have held the American Spectrum shares for one year or
less), assuming the shares are a capital asset in your hands;
- Any distribution that is: (i) 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 (ii) 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;
- You may not deduct on your income tax returns any net
operating or net capital losses of American Spectrum;
- 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, the American Spectrum Shares
involved have been held for more than one year;
- 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
recognized by you will be treated as long-term capital loss to
the extent of the amount of the capital gain dividend that was
treated as long-term capital gain; and
- 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.
American Spectrum will notify you of which portions of each
distribution, in its judgment, constitute ordinary income, capital gain or
return of capital for federal income tax purposes. In addition, American
Spectrum will report to you and to the IRS the amount of dividends paid or
treated as paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, you may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless you: (a)
are a corporation or fit within certain other exempt categories and, when
required, demonstrate this fact; or (b) provide a taxpayer identification
number, certify as to no loss of exemption from backup withholding, and
otherwise comply with applicable requirements of the backup withholding rules.
If you do not provide American Spectrum with a correct taxpayer identification
number, you may also be subject to penalties imposed by the IRS. You may credit
any amount paid to the IRS as backup withholding against your income tax
liability. In addition, American Spectrum may be required to withhold a portion
of capital gain dividends from you if you fail to certify your non-foreign
status to American Spectrum as described below in "--Foreign Stockholders."
The state and local income tax treatment of you and American Spectrum
may not conform to the federal income tax treatment described above. As a
result, you should consult your tax advisors for an explanation of how state and
local tax laws would affect your ownership of American Spectrum Shares.
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.
176
<PAGE> 186
Tax-Exempt Stockholders. If you are an American Spectrum stockholder
and a tax-exempt entity, you generally will be taxed in the following manner:
- Dividends paid by American Spectrum to you generally will not
constitute 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
- 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: (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
(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.
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:
- 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 that they are made out of current and
accumulated earnings and profits of American Spectrum. 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;
- 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;
- 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;
177
<PAGE> 187
- 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;
- 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 that the distributions are determined by American
Spectrum to exceed current or accumulated earnings and
profits, they will generally be subject to a 10% withholding
tax, which may be refunded to the extent it exceeds your
actual U.S. tax liability, provided the required information
is furnished to the IRS;
- 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. American Spectrum is required by applicable
Treasury Regulations to withhold 35% of any distribution that
could be designated by American Spectrum as a capital gain
dividend. You may credit this amount against your FIRPTA tax
liability; and
- 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: (i)
investment in the American Spectrum Shares is treated as "effectively connected"
with your U.S. trade or business; or (ii) 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 realized by you 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), and 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 financial statements of American Spectrum Predecessor and
the financial statements of Nooney Rider Trail, LP and Meadow Wood Village
Apartments Ltd., LP as of December 31, 1998 and 1999 and the related
178
<PAGE> 188
statements of operations, equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1999, included in this Consent
Solicitation, 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 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, 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.
The appraisals included as exhibits to this Registration Statement on
Form S-4 have been prepared by Stanger and are included therein in reliance upon
the authority of said firm as experts in giving such reports.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed
upon for American Spectrum by PR.
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) ___________.
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.
179
<PAGE> 189
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 unaudited financial statements of Nooney Real Property
Investors-Two for the quarter ended May 31, 2000 and the Management's Discussion
and Analysis of Financial Condition and Results of Operations for the quarter
ended May 31, 2000 are incorporated by reference to the Quarterly Report on Form
10-Q for Nooney Real Property Investors-Two for the quarter ended May 31, 2000.
180
<PAGE> 190
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pro Forma Combined:
<S> <C>
- Unaudited Pro Forma Combined Balance Sheet of American Spectrum; fund participation
maximum as of March 31, 2000...........................................................F-7
- Unaudited Pro Forma Combined Statement Of Operations of American Spectrum; fund
participation assumption maximum year ended December 31, 1999.........................F-9
- Unaudited Pro Forma Combined Statement of Operations of American Spectrum; fund
participation assumption maximum three months ended March 31, 2000.....................F-11
- Unaudited Pro Forma Combined Cash Flow Statement of American Spectrum; fund
participation assumption maximum year ended December 31, 1999..........................F-13
- Unaudited Pro Forma Combined Cash Flow Statement of American Spectrum; fund
participation assumption maximum three months ended March 31, 2000.....................F-14
- Unaudited Pro Forma Combined Balance Sheet of American Spectrum; fund participation
assumption minimum as of March 31, 2000................................................F-15
- Summary Unaudited Pro Forma Combined Balance Sheet of American Spectrum; fund
participation assumption minimum as of March 31, 2000..................................F-16
- Unaudited Pro Forma Combined Statement of Operations of American Spectrum; fund
participation assumption minimum year ended December 31, 1999..........................F-17
- Unaudited Pro Forma Combined Statement of Operations of American Spectrum; fund
participation assumption minimum three months ended March 31, 2000.....................F-19
- Unaudited Pro Forma Combined Cash Flow Statement of American Spectrum; fund
participation assumption minimum year ended December 31, 1999..........................F-21
- Unaudited Pro Forma Combined Cash Flow Statement of American Spectrum; fund
participation assumption minimum three months ended March 31, 2000.....................F-22
- Notes to Unaudited Pro Forma Combined Data of American Spectrum........................F-23
- Pro forma Combining Balance Sheets of the Funds; fund participation assumption maximum
as of March 31, 2000...................................................................F-26
- Summary Historical Combining Balance Sheet of the Funds; fund participation assumption
maximum as of March 31, 2000...........................................................F-27
- Pro forma Combining Statement of Operations of the Funds; fund participation assumption
maximum year ended December 31, 1999...................................................F-28
- Pro Forma Combining Statement of Operations of the Fund; fund participation assumption
maximum three months ended March 31, 2000..............................................F-29
- Pro Forma Combining Cash Flow of the Funds; fund participation assumption maximum year
ended December 31, 1999................................................................F-30
- Pro Forma Combining Cash Flow of the Funds; fund participation assumption maximum year
ended March 31, 2000...................................................................F-31
- Pro Forma Combining Balance Sheets of the Funds; fund participation assumption minimum
as of March 31, 2000...................................................................F-32
- Pro Forma Combining Statement of Operations of the Funds; fund participation assumption
minimum year ended December 31, 1999...................................................F-33
- Pro Forma Historical Combining Statement of Operation of the Funds; fund
participation assumption minimum three months ended March 31, 2000.....................F-34
- Pro Forma Combining Cash Flow of the Funds; fund participation assumption minimum year
ended December 31, 1999................................................................F-35
- Pro Forma Combining Cash Flow of the Funds; fund participation assumption minimum three
months ended March 31, 2000............................................................F-36
- Pro Forma Combining Balance Sheets of Other Affiliates as of March 31, 2000............F-37
- Pro Forma Combining Statement of Operation of Other Affiliates year ended December
31, 1999...............................................................................F-38
- Pro Forma Combining Statements of Operations of Other Affiliates three months ended
March 31, 2000.........................................................................F-39
- Pro Forma Combining Cash Flows of Other Affiliates year ended December 31, 1999........F-40
- Pro Forma Combining Cash Flows of Other Affiliates three months ended March 31, 2000...F-41
American Spectrum Predecessor:
- Report of Independent Public Accountants...............................................F-43
- Combined Balance Sheets - December 31, 1998 and 1999 and March 31, 2000 (Unaudited)....F-44
- Combined Statements of Operations - for the years ended December 31, 1997, 1998
and 1999 and for the three months ended March 31, 1999 and 2000 (Unaudited)............F-45
- Combined Statements of Cash flows for the years ended December 31, 1997, 1998 and
1999 and for the three months ended March 31, 1999 and 2000 (Unaudited)................F-46
- Combined Statements of Equity (Deficit) for the years ended December 31, 1997, 1998
and 1999 and for the three months ended March 31, 1999 and 2000 (Unaudited)............F-47
- Notes to Combined Financial Statements.................................................F-49
</TABLE>
F-1
<PAGE> 191
<TABLE>
<CAPTION>
<S> <C>
Meadow Wood Village Apartments, Ltd., LP:
Selected Historical Financial Data...................................................................... F-65
Report of Independent Public Accountants................................................................ F-67
Balance Sheets - December 31, 1998 and 1999 and March 31, 2000 (Unaudited).............................. F-68
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999 and for the three
months ended March 31, 1999 and 2000 (Unaudited)........................................................ F-69
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and for the three
months ended March 31, 1999 and 2000 (Unaudited)........................................................ F-70
Statements of Equity (Deficit) for the years ended December 31, 1997, 1998 and for the three months
ended March 31, 1999 and 2000 (Unaudited)............................................................... F-71
Notes to Financial Statements........................................................................... F-72
Nooney Rider Trail, LLC
Selected Historical Financial Data..................................................................... F-79
Report of Independant Public Accountants................................................................ F-81
Balance Sheets - December 31, 1998 and 1999 and March 31, 2000 (Unaudited).............................. F-82
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and for the three
months ended March 31, 199 and 2000 (Unaudited) ........................................................ F-83
Statements of Equity (Deficit) for the years ended December 31, 1997, 1998 and for the three months
ended March 31, 199 and 2000 (Unaudited)................................................................ F-84
Notes to Financial Statements........................................................................... F-86
Nooney Hazelwood Associates, L.P.
Selected Historical Financial Data...................................................................... F-93
Independent Auditors' Report............................................................................ F-96
Consolidated Balance Sheets - December 31, 1999, 1998 and 1997 and March 31, 2000 (unaudited)........... F-97
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1998 and
for the three months ended March 31, 1999 and 2000 (unaudited).......................................... F-98
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 and for
the three months ended March 31, 1999 and 2000 (unaudited).............................................. F-99
Consolidated Statements of Partners' Capital (Deficit) for the years ended December 31, 1997, 1998 and
1999 and for the three months ended March 31, 1999 and 2000 (unaudited)................................. F-100
Sierra Pacific Development Fund I
Selected Historical Financial Data...................................................................... F-108
Independent Auditor's Report............................................................................ F-116
Balance Sheets - December 31, 1998 and 1999............................................................. F-117
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999......................... F-118
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999............ F-119
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999........................... F-120
Notes to Financial Statements........................................................................... F-121
</TABLE>
F-2
<PAGE> 192
<TABLE>
<S> <C>
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-132
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-133
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-134
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-135
Notes to Financial Statements............................................................................. F-136
Sierra Pacific Development Fund II
Selected Historical Financial Data........................................................................ F-140
Independent Auditor's Report.............................................................................. F-148
Balance Sheets - December 31, 1998 and 1999............................................................... F-149
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-150
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-151
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-152
Notes to Financial Statements............................................................................. F-153
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-185
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-186
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-187
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-188
Notes to Financial Statements............................................................................. F-189
Sierra Pacific Development Fund III
Selected Historical Financial Data........................................................................ F-193
Independent Auditor's Report.............................................................................. F-202
Balance Sheets - December 31, 1998 and 1999............................................................... F-203
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-204
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-206
</TABLE>
F-3
<PAGE> 193
<TABLE>
<S> <C>
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-207
Notes to Financial Statements............................................................................. F-209
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-227
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-228
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-229
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-230
Notes to Financial Statements............................................................................. F-231
Sierra Pacific Pension Investors '84
Selected Historical Financial Data........................................................................ F-237
Independent Auditor's Report.............................................................................. F-247
Balance Sheets - December 31, 1998 and 1999............................................................... F-248
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-250
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-252
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-253
Notes to Financial Statements............................................................................. F-255
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-291
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-293
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-294
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-295
Notes to Financial Statements............................................................................. F-297
Sierra Pacific Institutional Properties V
Selected Historical Financial Data........................................................................ F-301
Independent Auditor's Report.............................................................................. F-308
Balance Sheets - December 31, 1998 and 1999............................................................... F-309
</TABLE>
F-4
<PAGE> 194
<TABLE>
<S> <C>
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-310
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-311
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-312
Notes to Financial Statements............................................................................. F-313
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-323
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-324
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-325
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-326
Notes to Financial Statements............................................................................. F-327
Nooney Income Fund Ltd., L.P.
Selected Historical Financial Data........................................................................ F-331
Independent Auditor's Report.............................................................................. F-343
Balance Sheets - December 31, 1998 and 1999............................................................... F-344
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-345
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-346
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-347
Notes to Financial Statements............................................................................. F-348
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-358
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-359
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-359
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-360
Notes to Financial Statements............................................................................. F-361
Nooney Income Fund Ltd., II, L.P.
Selected Historical Financial Data........................................................................ F-367
</TABLE>
F-5
<PAGE> 195
<TABLE>
<S> <C>
Independent Auditor's Report.............................................................................. F-381
Balance Sheets - December 31, 1998 and 1999............................................................... F-382
Statements of Operations - for the years ended December 31, 1997, 1998 and 1999........................... F-383
Statement of Partners' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999.............. F-384
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999............................. F-385
Notes to Financial Statements............................................................................. F-387
Balance Sheets - March 31, 2000 (Unaudited)............................................................... F-399
Statements of Operations for the three months ended March 31, 1999 and 2000 (Unaudited) .................. F-400
Statements of Equity (Deficit) for three months ended March 31, 1999 and 2000 (Unaudited)................. F-400
Statements of Cash Flows for the three months ended March 31, 1999 and 2000 (Unaudited)................... F-401
Notes to Financial Statements............................................................................. F-402
Nooney Real Property Investors - Two L.P.
Selected Historical Financial Data........................................................................ F-407
Independent Auditor's Report.............................................................................. F-420
Balance Sheets - November 30, 1998 and 1999............................................................... F-421
Statements of Operations - for the years ended November 30, 1997, 1998 and 1999........................... F-422
Statement of Partners' Equity (Deficit) for the years ended November 30, 1997, 1998 and 1999.............. F-423
Statements of Cash Flows for the years ended November 30, 1997, 1998 and 1999............................. F-424
Notes to Financial Statements............................................................................. F-426
Balance Sheets - February 29, 2000 (Unaudited)............................................................ F-438
Statements of Operations for the three months ended February 28, 1999 February 29, 2000 (Unaudited) ...... F-439
Statements of Equity (Deficit) for three months ended February 28, 1999 February 29, 2000 (Unaudited)..... F-439
Statements of Cash Flows for the three months ended February 28, 1999 February 29, 2000 (Unaudited)....... F-440
Notes to Financial Statements............................................................................. F-441
</TABLE>
F-6
<PAGE> 196
UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
----------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
----------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 91,506 $ 54,311 $ 16,122
Cash (8) (10) 486 5,221 390
Accounts receivable, net 1,554 2,888 95
Accounts and notes receivable from affiliates,
net 6,569 8,390 532
Investment in uncombined partnerships
and joint ventures 3,545 -- --
Equipment, net 624 -- --
Goodwill and other 4,889 6,707 2,059
--------- --------- ---------
Total assets $ 109,173 $ 77,517 $ 19,198
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
-----------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ (992) $ 62,263 $ 223,210
Cash (8) (10) (3,836) (1,556) 705
Accounts receivable, net (320) (41) 4,176
Accounts and notes receivable from affiliates, net (11,767) -- 3,724
Investment in uncombined partnerships
and joint ventures (3,265) -- 280
Equipment, net (126) -- 498
Goodwill and other (1,271) (238) 12,146
--------- --------- ---------
Total assets $ (21,577) $ 60,428 $ 244,739
========= ========= =========
</TABLE>
F-7
<PAGE> 197
SUMMARY UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 6,090 $ 2,538 $ 1,204
Deferred revenue 240 -- 25
Mortgage notes payable, net 112,251 35,183 27,982
Notes payable to affiliates 15,783 -- 170
Other -- 536 71
--------- --------- ---------
Total liabilities 134,364 38,257 29,452
MANDATORILY-REDEEMABLE PREFERRED STOCK OF 1,045 -- --
SUBSIDIARY
EQUITY (DEFICIT) (8) (10) (26,236) 39,260 (10,254)
--------- --------- ---------
Total liabilities and equity (deficit) $ 109,173 $ 77,517 $ 19,198
========= ========= =========
OTHER PRO FORMA DATA:
Book value per share (6)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
---------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
-----------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ (919) $ 15 $ 8,928
Deferred revenue -- -- 265
Mortgage notes payable, net (1,676) -- 173,740
Notes payable to affiliates (13,621) -- 2,332
Other -- (15) 592
--------- --------- ---------
Total liabilities (16,216) (1) 188,856
MANDATORILY-REDEEMABLE PREFERRED STOCK OF
SUBSIDIARY -- -- 1,045
EQUITY (DEFICIT) (8) (10) (5,361) 60,429 57,838
--------- --------- ---------
Total liabilities and equity (deficit) $ (21,577) $ 60,428 $ 244,739
========= ========= =========
OTHER PRO FORMA DATA:
Book value per share (6) $ 7.85
=========
</TABLE>
F-8
<PAGE> 198
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>
Historical
-----------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-----------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 14,813 $ 15,177 $ 5,157
Property management 5,452 -- --
Income from affiliates 2,357 903 39
-------- -------- --------
Total revenues 22,622 16,080 5,196
EXPENSES:
Property operating 3,396 6,813 1,762
Property management 10,766 -- --
Fees to related parties -- 1,337 265
Real estate and other taxes 1,597 2,009 378
Depreciation and amortization 3,259 4,144 891
Interest 9,982 2,502 1,943
Impairment charges 5,164 -- --
-------- -------- --------
Total expenses 34,164 16,805 5,239
Loss before equity in loss of noncombined
partnerships and gain on sale of property (11,542) (725) (43)
Equity in loss of noncombined partnerships (330) -- --
Gain on sale of property -- 83 --
-------- -------- --------
Net income (loss) before extraordinary item $(11,872) $ (642) $ (43)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
---------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ (518) $ 551 $ 35,180
Property management (5,452) -- --
Income from affiliates (1,638) -- 1,661
-------- -------- --------
Total revenues (7,608) 551 36,841
EXPENSES:
Property operating (386) -- 11,585
Property management (5,843) -- 4,923
Fees to related parties (1,602) -- --
Real estate and other taxes (48) -- 3,936
Depreciation and amortization (337) 2,044 10,001
Interest (326) -- 14,101
Impairment charges (1,724) -- 3,440
-------- -------- --------
Total expenses (10,266) 2,044 47,986
Loss before equity in loss of noncombined
partnerships and gain on sale of property 2,658 (1,493) (11,145)
Equity in loss of noncombined partnerships 330 -- --
Gain on sale of property -- -- 83
-------- -------- --------
Net income (loss) before extraordinary item $ 2,988 $ (1,493) $(11,062)
</TABLE>
F-9
<PAGE> 199
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Extraordinary item - extinguishment of debt (214) -- --
-------- -------- -------
Net income (loss) (9) (12,086) (642) (43)
======== ======== =======
OTHER PRO FORMA DATA:
Basic and diluted loss per share
Weighted average shares outstanding (6)
Deficiency to cover fixed charges (7)
</TABLE>
<TABLE>
<S> <C> <C> <C>
Extraordinary item - extinguishment of debt -- -- (214)
-------- -------- --------
Net income (loss) (9) 2,988 (1,493) (11,276)
======== ======== ========
OTHER PRO FORMA DATA:
Basic and diluted loss per share $ (1.63)
========
Weighted average shares outstanding (6) 7,368
========
Deficiency to cover fixed charges (7) (8,664)
========
</TABLE>
F-10
<PAGE> 200
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
---------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
---------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 3,894 $ 3,971 $ 1,348
Property management 824 -- --
Income from affiliates 486 308 12
-------- -------- --------
Total Revenues 5,204 4,279 1,360
EXPENSES:
Property operating 940 1,594 446
Property management 1,886 -- --
Fees to related parties -- 347 66
Real estate and other taxes 558 317 102
Depreciation and amortization 942 1,024 216
Interest 2,840 759 500
-------- -------- --------
Total expenses 7,166 4,041 1,330
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale of
property (1,962) 238 30
Equity in income of noncombined partnerships 22 -- --
Gain on sale of property 1,193 -- --
-------- -------- --------
Net income (loss) before extraordinary item (747) 238 30
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
---------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ (68) $ 138 $ 9,283
Property management (824) -- --
Income from affiliates (413) -- 393
-------- -------- --------
Total Revenues (1,305) 138 9,676
EXPENSES:
Property operating (31) -- 2,949
Property management (1,129) -- 757
Fees to related parties (413) -- --
Real estate and other taxes (14) -- 963
Depreciation and amortization (32) 511 2,661
Interest (53) -- 4,046
-------- -------- --------
Total expenses (1,672) 511 11,376
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale of
property 367 (373) (1,700)
Equity in income of noncombined partnerships (22) -- --
Gain on sale of property -- -- 1,193
-------- -------- --------
Net income (loss) before extraordinary item 345 (373) (507)
</TABLE>
F-11
<PAGE> 201
<TABLE>
<S> <C> <C> <C>
Extraordinary item - extinguishment of debt - (46) -
-------- -------- --------
Net income (loss) (9) $ (747) $ 192 $ 30
======== ======== ========
OTHER PRO FORMA DATA:
Basic and diluted income per share
Weighted average shares outstanding (6)
Deficiency to cover fixed charges (7)
</TABLE>
<TABLE>
<S> <C> <C> <C>
Extraordinary item - extinguishment of debt - - (46)
-------- -------- --------
Net income (loss) (9) $ 345 $ (373) $ (553)
======== ======== ========
OTHER PRO FORMA DATA:
Basic and diluted income per share $ (0.08)
========
Weighted average shares outstanding (6) 7,368
========
Deficiency to cover fixed charges (7) (90)
========
</TABLE>
F-12
<PAGE> 202
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>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
----------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (4,916) $ 2,279 $ 639
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (4,523) (1,913) (218)
Other (2,062) (838) 48
-------- -------- --------
Net cash used in investing activities (6,585) (2,751) (170)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 10,322 2,793 (425)
Net borrowings (repayments) of affiliate notes 132 -- 98
Net equity contributions (distributions) 983 838 (258)
Other -- -- --
-------- -------- --------
Net cash used in (provided by) financing 11,437 3,631 (585)
Net increase (decrease) in cash (64) 3,159 (116)
Cash, beginning of period (8) 522 2,724 479
-------- -------- --------
Cash, end of period $ 458 $ 5,883 $ 363
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Proforma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
--------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,988 $ (1,493) $ (503)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- -- (6,654)
Other -- -- (2,852)
-------- -------- --------
Net cash used in investing activities -- (9,506)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable -- -- 12,690
Net borrowings (repayments) of affiliate notes -- -- 230
Net equity contributions (distributions) (3,000) -- (1,437)
Other -- -- --
-------- -------- --------
Net cash used in (provided by) financing (3,000) -- 11,483
Net increase (decrease) in cash (12) (1,493) 1,474
Cash, beginning of period(8) (732) (1,556) 1,437
-------- -------- --------
Cash, end of period $ (744) $ (3,049) $ 2,911
======== ======== ========
</TABLE>
F-13
<PAGE> 203
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: Three months ended March 31, 2000
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-----------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,076 $ 28 $ 186
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (721) (2,329) (14)
Other (274) (792) 13
-------- -------- --------
Net cash used in investing activities (995) (3,121) (1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 796 2,155 (95)
Net borrowings (repayments) of affiliate notes (2,381) -- (13)
Net equity contributions (distributions) 532 (497) (50)
Other -- 774 --
-------- -------- --------
Net cash used in (provided by) financing (1,053) 2,432 (158)
Net increase (decrease) in cash 28 (661) 27
Cash, beginning of period(8) 458 5,882 363
-------- -------- --------
Cash, end of period $ 486 $ 5,221 $ 390
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Proforma Adjustments
------------------------------- Proforma
Eliminations (4) Purchase (5) Combined
-------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 269 $ (373) $ 2,186
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- -- (3,064)
Other -- -- (1,053)
-------- -------- --------
Net cash used in investing activities -- (4,117)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable -- -- 2,856
Net borrowings (repayments) of affiliate notes -- -- (2,394)
Net equity contributions (distributions) (3,000) -- (3,015)
Other -- -- 774
-------- -------- --------
Net cash used in (provided by) financing (3,000) -- (1,779)
Net increase (decrease) in cash (2,731) (373) (3,710)
Cash, beginning of period(8) (732) (1,556) 4,415
-------- -------- --------
Cash, end of period $ (3,463) $ (1,929) $ 705
======== ======== ========
</TABLE>
F-14
<PAGE> 204
UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
---------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
---------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 91,506 $ 22,568 $ 16,122
Cash (8) (10) 486 2,471 390
Accounts receivable, net 1,554 1,005 95
Accounts and notes receivable from affiliates, net 6,569 4,480 532
Investment in uncombined partnerships --
and joint ventures 3,545 2,552 --
Equipment, net 624 -- --
Goodwill and other 4,889 1,462 2,059
--------- --------- ---------
Total assets $ 109,173 $ 34,538 $ 19,198
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
---------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ (992) $ 30,887 $ 160,091
Cash (8) (10) (3,836) (537) (1,026)
Accounts receivable, net (320) -- 2,334
Accounts and notes receivable from affiliates, net (36) -- 11,545
Investment in uncombined partnerships
and joint ventures (726) 4,185 9,556
Equipment, net (126) -- 498
Goodwill and other (1,271) 806 7,945
--------- --------- ---------
Total assets $ (7,477) $ 35,341 $ 190,773
========= ========= =========
</TABLE>
F-15
<PAGE> 205
SUMMARY UNAUDITED PRO FORMA COMBINED BALANCE SHEET OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
---------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
---------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 6,090 $ 1,353 $ 1,204
Distributions in excess of investment in
uncombined partnerships and joint ventures -- 347 --
Deferred revenue 240 -- 25
Mortgage notes payable, net 112,251 15,685 27,982
Notes payable to affiliates 15,783 -- 170
Other -- 108 71
--------- --------- ---------
Total liabilities 134,364 17,493 29,452
MINORITY INTEREST -- 4,571 --
MANDATORILY-REDEEMABLE PREFERRED STOCK OF SUBSIDIARY 1,045 -- --
EQUITY (DEFICIT) (8) (10) (26,236) 12,474 (10,254)
--------- --------- ---------
Total liabilities and equity (deficit) $ 109,173 $ 34,538 $ 19,198
========= ========= =========
OTHER PRO FORMA DATA:
Book value per share (6)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
---------------------------------------------------
<S> <C> <C> <C>
LIABILITIES:
Accounts payable and accrued expenses $ (919) $ -- 7,728
Distributions in excess of investment in
uncombined partnerships and joint ventures -- -- 347
Deferred revenue -- -- 265
Mortgage notes payable, net (1,676) -- 154,242
Notes payable to affiliates (2,060) -- 13,893
Other -- -- 179
--------- --------- ---------
Total liabilities (4,655) -- 176,654
MINORITY INTEREST -- -- 4,571
MANDATORILY-REDEEMABLE PREFERRED STOCK OF SUBSIDIARY -- -- 1,045
EQUITY (DEFICIT) (8) (10) (2,822) 35,341 8,503
--------- --------- ---------
Total liabilities and equity (deficit) $ (7,477) $ 35,341 $ 190,773
========= ========= =========
OTHER PRO FORMA DATA:
Book value per share (6) $ 2.09
=========
</TABLE>
F-16
<PAGE> 206
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>
Historical
---------------------------------------------------
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)
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
--------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ (518) $ 43 $ 25,194
Property management (5,452) -- --
Income from affiliates (988) -- 1,867
--------- -------- --------
Total revenues (6,958) 43 27,061
EXPENSES:
Property operating (386) -- 8,039
Property management (5,843) -- 4,923
Fees to related parties (952) -- --
Real estate and other taxes (48) -- 2,797
Depreciation and amortization (337) 252 5,867
Interest (326) -- 12,715
Impairment charges (1,724) -- 3,440
--------- -------- --------
Total expenses (9,616) 252 37,781
Loss before equity in income (loss) of noncombined
partnerships 2,658 (210) (10,721)
Equity in income (loss) of noncombined partnerships 152 -- (24)
--------- -------- --------
Net income (loss) before minority interest and
extraordinary item 2,810 (210) (10,745)
</TABLE>
F-17
<PAGE> 207
<TABLE>
<S> <C> <C> <C>
Minority interest in (loss) income -- 31 --
Extraordinary item - extinguishment of debt (214) -- --
--------- -------- --------
Net income (loss) (9) $(12,086) $ (1,399) $ (43)
========= ======== ========
OTHER PRO FORMA DATA:
Basic and diluted loss per share
Weighted average shares outstanding (6)
Deficiency to cover fixed charges (7)
</TABLE>
<TABLE>
<S> <C> <C> <C>
Minority interest in (loss) income -- -- 31
Extraordinary item - extinguishment of debt -- -- (214)
--------- -------- --------
Net income (loss) (9) $ 2,810 $ (210) $(10,928)
========= ======== ========
OTHER PRO FORMA DATA:
Basic and diluted loss per share $ (2.69)
========
Weighted average shares outstanding (6) 4,060
========
Deficiency to cover fixed charges (7) (9,269)
========
</TABLE>
F-18
<PAGE> 208
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS OF AMERICAN SPECTRUM
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Historical
---------------------------------------------------
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
---------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 3,894 $ 1,589 $ 1,348
Property management 824 -- --
Income from affiliates 486 150 12
------- ------- -------
Total revenues 5,204 1,739 1,360
EXPENSES:
Property operating 940 692 446
Property management 1,886 -- --
Fees to related parties -- 182 66
Real estate and other taxes 558 94 102
Depreciation and amortization 942 470 216
Interest 2,840 357 500
------- ------- -------
Total expenses 7,166 1,795 1,330
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale of (1,962) (56) 30
property
Equity in income of noncombined partnerships 22 49 --
Gain on sale of property 1,193 -- --
------- ------- -------
Net income (loss) before minority interest (747) (7) 30
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
-------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Rental and reimbursement $ (68) $ 43 $ 6,806
Property management (824) -- --
Income from affiliates (248) -- 400
------- ------- -------
Total revenues (1,140) 43 7,206
EXPENSES:
Property operating (31) -- 2,047
Property management (1,129) -- 757
Fees to related parties (248) -- --
Real estate and other taxes (14) -- 740
Depreciation and amortization (32) 63 1,659
Interest (53) -- 3,644
------- ------- -------
Total expenses (1,507) 63 8,847
Loss before equity in loss of noncombined
partnerships and gain (loss) on sale of 367 (20) (1,641)
property
Equity in income of noncombined partnerships (24) -- 47
Gain on sale of property -- -- 1,193
------- ------- -------
Net income (loss) before minority interest 343 (20) (401)
</TABLE>
F-19
<PAGE> 209
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Minority interest in (loss) - (52) - - (52)
--------- --------- ------- -------- --------- ---------
Net income (loss) (9) $ (747) $ (59) $ 30 $ 343 $ (20) $ (453)
========= ========= ======= ======== ========= =========
OTHER PRO FORMA DATA:
Basic and diluted loss per share $ (0.11)
=========
Weighted average shares outstanding (6) 4,060
=========
Deficiency to cover fixed charges (7) (508)
=========
</TABLE>
F-20
<PAGE> 210
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>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-----------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (4,916) $ (412) $ 543
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (4,523) (790) (116)
Other (2,062) 326 (78)
-------- -------- --------
Net cash used in investing activities (6,585) (464) (194)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 10,322 2,316 (224)
Net borrowings (repayments) of affiliate notes 132 -- 98
Net equity contributions (distributions) 983 969 (258)
-------- -------- --------
Net cash used in (provided by) financing 11,437 3,285 (384)
Net increase (decrease) in cash (64) 2,409 (35)
Cash, beginning of period (8) 522 563 479
-------- -------- --------
Cash, end of period $ 458 $ 2,972 $ 444
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Proforma Adjustments
------------------------------- Proforma
Eliminations (4) Purchase (5) Combined
------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,810 $ (210) $ (2,185)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- -- (5,429)
Other -- -- (1,814)
-------- -------- --------
Net cash used in investing activities -- (7,243)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable -- -- 12,414
Net borrowings (repayments) of affiliate notes -- -- 230
Net equity contributions (distributions) (3,000) -- (1,306)
-------- -------- --------
Net cash used in (provided by) financing (3,000) -- 11,338
Net increase (decrease) in cash (190) (210) (1,910)
Cash, beginning of period (8) (732) (537) 295
-------- -------- --------
Cash, end of period $ (922) $ (747) $ (2,205)
======== ======== ========
</TABLE>
F-21
<PAGE> 211
UNAUDITED PRO FORMA COMBINED CASH FLOW STATEMENT OF AMERICAN SPECTRUM
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: Three months ended March 31, 2000
<TABLE>
<CAPTION>
American Pro Forma
Spectrum Pro Forma Other
Predecessor (1) Funds (2) Affiliates (3)
-----------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,076 $ (436) $ 186
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (721) (2,238) (14)
Other (274) (404) 13
------- ------- -------
Net cash used in investing activities (995) (2,642) (1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of debt 796 (98) (95)
Net borrowings (repayments) of affiliate notes (2,381) -- (13)
Net equity contributions (distributions) 532 1,865 (50)
Other -- 812 --
------- ------- -------
Net cash used in (provided by) financing (1,053) 2,579 (158)
Net increase (decrease) in cash 28 (499) 27
Cash, beginning of period (8) 458 2,970 363
------- ------- -------
Cash, end of period $ 486 $ 2,471 $ 390
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
------------------------------- Pro Forma
Eliminations (4) Purchase (5) Combined
-----------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (84) $ (20) $ 1,722
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- -- (2,973)
Other -- -- (665)
------- ------- -------
Net cash used in investing activities -- (3,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of debt -- -- 603
Net borrowings (repayments) of affiliate notes -- -- (2,394)
Net equity contributions (distributions) (3,000) -- (653)
Other -- -- 812
------- ------- -------
Net cash used in (provided by) financing (3,000) -- (1,632)
Net increase (decrease) in cash (3,084) (20) (3,548)
Cash, beginning of period (8) (732) (537) 2,522
------- ------- -------
Cash, end of period $(3,816) $ (557) $(1,026)
======= ======= =======
</TABLE>
F-22
<PAGE> 212
NOTES TO UNAUDITED PRO FORMA COMBINED DATA OF AMERICAN SPECTRUM
(1) The combined historical financial data of American Spectrum Predecessor
includes 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.
(2) Historical information of the Funds has been combined on a pro forma
basis and all inter-fund balances and transactions have been eliminated
in the pro forma presentation.
The "Maximum Participation" scenario includes all eight publicly-traded
Limited Partnerships (the "Funds") which are managed by CGS or its
subsidiaries. This scenario also includes the accounts of Sierra Mira
Mesa Partners (SMMP), an unconsolidated partnership that is
wholly-owned by two of the 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.
(3) The Other Affiliates represent other parties in which affiliates of
Mssrs. Carden, Galardi and/or their affiliates 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 and Nooney-Hazelwood Associates, LP. The historical
information of these entities has been combined on a pro forma basis.
There were no intercompany transactions or balances.
(4) The various entities included in the transaction have paid management
fees and ground lease rent to subsidiaries of CGS. A subsidiary of
American Spectrum will manage the properties subsequent to the
Consolidation. Intercompany fees and rent are eliminated in the pro
forma combination. Also, there have historically been certain loans
between CGS and the Funds. These amounts have also been eliminated in
the pro forma combination.
The management company subsidiaries have historically provided
management, brokerage and leasing services to unrelated parties. The
specific revenues related thereto have been eliminated and a pro rata
share of expenses have been eliminated, since American Spectrum will
not provide such services to third parties. The third party management
activities will be distributed to the shareholders of CGS prior to the
Consolidation.
West Florrisant is a property owned by American Spectrum Predecessor
that will not be included in the transaction. All amounts related to
this property have been eliminated.
F-23
<PAGE> 213
NOTES TO UNAUDITED PRO FORMA COMBINED DATA OF AMERICAN SPECTRUM
The eliminating entries are summarized below:
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1999 March 31, 2000
------------------------ ------------------------
Minimum Maximum Minimum Maximum
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Third party management $ (5,452) $ (5,452) $ (824) $ (824)
Intercompany (1,362) (2,012) (277) (442)
West Florissant (144) (144) (39) (39)
-------- -------- -------- --------
(6,958) (7,608) (1,140) (1,305)
-------- -------- -------- --------
Expenses:
Third party management (8,033) (8,033) (1,179) (1,179)
Intercompany (1,514) (2,342) (253) (420)
West Florissant (221) (221) (51) (51)
-------- -------- -------- --------
(9,768) (10,596) (1,483) (1,650)
-------- -------- -------- --------
Net effect $ 2,810 $ 2,988 $ 343 $ 345
======== ======== ======== ========
</TABLE>
(5) Reflects adjustments to apply purchase accounting to the entities
comprising the Funds and Other Affiliates - see "Accounting Treatment."
The 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. Where applicable, the exchange values, based in
part on preliminary appraisals, have been used to allocate purchase
price. 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 $ 95,669 $ 32,034 $ 37,814
Other 20,584 16,153 3,076
-------- -------- --------
Total assets 116,253 48,187 40,890
Less: Liabilities 40,501 22,064 29,452
-------- -------- --------
Total purchase price $ 75,752 $ 26,123 $ 11,438
======== ======== ========
</TABLE>
The purchase adjustments to the statements of operations consist
primarily of adjustments to (1) depreciation resulting from the
adjusted carrying amounts of the properties, and (2) lease rent revenue
recognition to straight-line rent as of the assumed purchase date.
F-24
<PAGE> 214
NOTES TO UNAUDITED PRO FORMA COMBINED DATA OF AMERICAN SPECTRUM
(6) 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.
(7) 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.
(8) Total transaction fees are estimated to be approximately $3.4 million,
of which approximately $1.1 million was paid as of March 31, 2000 of
the remainder $0.7 million is attributable to the reorganization of
American Spectrum Predecessor and which has been reflected as a
reduction in cash and increase in accumulated deficit in the pro forma
balance sheet. Approximately $1.6 million of the transaction fees is
attributable to the acquisition of the Funds and the Other Affiliates.
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.
(9) 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.
<TABLE>
<CAPTION>
Year ended Three months ended
December 31, 1999 March 31, 2000
--------------------- ----------------------
Minimum Maximum Minimum Maximum
------- ------- ------- -------
<S> <C> <C> <C> <C>
Assuming 5% Debt
Net loss (11,388) (11,736) (568) (503)
Net loss per share (2.75) (1.61) (0.14) (0.07)
Cash flows from operations (2,645) (1,059) 1,607 2,071
Assuming 10% Debt
Net loss (11,848) (12,196) (683) (618)
Net loss per share (2.86) (1.67) (0.16) (0.08)
Cash flows from operations (3,105) (1,519) 1,492 1,956
</TABLE>
(10) Reflects distributions to limited partners of Sierra Pacific
Development Fund II of cash received from subsidiaries of CGS totaling
approximately $3.0 million pursuant to a settlement agreement. The
consideration to be received by the limited partners of the fund was
considered in the exchange values assigned - see "Exchange Value
Allocation of American Spectrum Shares."
F-25
<PAGE> 215
PRO FORMA COMBINING BALANCE SHEETS OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific
Development Development Development Institutional Pension
Fund Fund II Fund III Properties V Investors 84
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 2,497 $ 10,473 $ - $ 5,766 $ 1,153
Cash
82 23 12 30 22
Accounts receivable, net
51 349 - 544 96
Accounts receivable from affiliates, net
- 4,480 - - 1,459
Investment in uncombined partnerships
and joint ventures
- 2,265 - - 7,357
Other
2,812 904 - 289 851
--------- --------- ------- --------- ---------
Total assets $ 5,442 $ 18,494 $ 12 $ 6,629 $ 10,938
========= ========= ======= ========= =========
</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(A) Adjustments Combined
------------ ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 8,617 $ 5,250 $ 14,226 $ 6,329 $ - $ 54,311
Cash
15 1,476 1,155 2,406 - 5,221
Accounts receivable, net
1,282 191 263 112 - 2,888
Accounts receivable from affiliates, net
2,451 - - - - 8,390
Investment in uncombined partnerships
and joint ventures
2,076 - - - (11,698) -
Other
803 154 336 558 - 6,707
--------- --------- --------- --------- ---------- ---------
Total assets $ 15,244 $ 7,071 $ 15,980 $ 9,405 $ (11,698) $ 77,517
========= ========= ========= ========= ========== =========
</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.
F-26
<PAGE> 216
SUMMARY HISTORICAL COMBINING BALANCE SHEETS OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific
Development Development Development Institutional Pension
Fund Fund II Fund III Properties V Investors 84
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 132 $ 858 $ 4 $ 66 $ 151
Distributions in excess of investment in
Uncombined partnerships and joint ventures - - 347 - -
Mortgage notes payable, net 4,047 6,385 - - 1,381
Other - - - - -
-------------- ------------- ------------- ------------- -------------
Total liabilities 4,179 7,243 351 66 1,532
MINORITY INTEREST - - 21 4,550 -
EQUITY (DEFICIT) 1,263 11,251 (360) 2,013 9,406
-------------- ------------- ------------- ------------- -------------
Total liabilities and equity (deficit) $ 5,442 $ 18,494 $ 12 $ 6,629 $ 10,938
============== ============= ============= ============= =============
OTHER DATA:
Cash flows from operations-12/31/99 182 85 - (493) 497
============== ============= ============= ============= =============
Pro-rata share of appraised value 7,660 22,149 727 6,068 20,476
============== ============= ============= ============= =============
Include for minimum calculation (x) X X X
85 - (493)
============= ============= =============
22,149 727 6,068
============= ============= =============
</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(A) Adjustments Combined
------------- ----------- ----------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 96 $ 335 $ 470 $ 426 $ - $ 2,538
Distributions in excess of investment in
Uncombined partnerships and joint ventures - - - - (347) -
Mortgage notes payable, net 6,109 1,119 6,842 9,300 - 35,183
Other 15 155 258 108 - 536
------------- ----------- ----------- -------------- ------------ ----------
Total liabilities 6,220 1,609 7,570 9,834 (347) 38,257
MINORITY INTEREST - - - - (4,571) -
EQUITY (DEFICIT) 9,024 5,462 8,410 (429) (6,780) 39,260
------------- ----------- ----------- -------------- ------------ ----------
Total liabilities and equity (deficit) $ 15,244 $ 7,071 $ 15,980 $ 9,405 $ (11,698) $ 77,517
============= =========== =========== ============== ============ ==========
OTHER DATA:
Cash flows from operations-12/31/99 615 684 (4) 1,566
=========== =========== ============== ==========
Pro-rata share of appraised value 5,570 27,080 15,590 105,320
=========== =========== ============== ==========
Include for minimum calculation (x) X
(4) 578
============== ==========
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
F-27
<PAGE> 217
PRO FORMA COMBINING STATEMENT OF OPERATIONS OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MAXIMUM
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific Sierra 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 $ 919 $ 2,356 $ - $ 1,193 $ 622
Interest and other - 410 15 34 187
-------------- ------------- ------------- ------------- ------------
Total revenues 919 2,766 15 1,227 809
EXPENSES:
Property operating 330 2,029 15 606 296
Fees to related parties (5) 88 396 - 156 36
Real estate and other taxes 102 373 - 111 141
Depreciation and amortization 337 869 - 442 249
Interest 153 437 - - 136
-------------- ------------- ------------- -------------- ------------
Total expenses 1,010 4,104 15 1,315 858
Gain (loss) before equity in noncombined
Partnerships and gain on sale of property (91) (1,338) - (88) (49)
Equity in noncombined partnerships - 161 (7) - 323
Gain on sale of property - - - - 83
-------------- ------------- ------------- ------------- ------------
Net income (loss) before minority interest (91) (1,177) (7) (88) 357
Minority interest in (loss) income 7 - - 31 -
-------------- ------------- ------------- ------------- ------------
Net income (loss) $ (84) $ (1,177) $ (7) $ (57) $ 357
============== ============= ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Sierra Mira Nooney Nooney Property
Mesa Income Fund Income Fund Investors Two,
Partners Ltd., LP Ltd., II LP LP(A) Adjustments Combined
----------- ----------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 2,126 $ 2,087 $ 3,724 $ 2,150 $ - $ 15,177
Interest and other 224 29 4 - - 903
----------- ----------- ------------ ------------- ----------- ---------
Total revenues 2,350 2,116 3,728 2,150 - 16,080
EXPENSES:
Property operating 583 795 1,542 617 - 6,813
Fees to related parties (5) 119 150 257 135 - 1,337
Real estate and other taxes 99 253 544 386 - 2,009
Depreciation and amortization 587 403 766 491 - 4,144
Interest 450 93 554 679 - 2,502
----------- ----------- ------------ ------------- ----------- ---------
Total expenses 1,838 1,694 3,663 2,308 - 16,805
Gain (loss) before equity in noncombined
Partnerships and gain on sale of property 512 422 65 (158) - (725)
Equity in noncombined partnerships (36) - - - (441) -
Gain on sale of property - - - - - 83
----------- ----------- ------------ ------------- ----------- ---------
Net income (loss) before minority interest 476 422 65 (158) (441) (642)
Minority interest in (loss) income 8 - - (46) -
----------- ----------- ------------ ------------- ----------- ---------
Net income (loss) $ 484 $ 422 $ 65 $ (158) $ (487) $ (642)
=========== =========== ============ ============= =========== =========
</TABLE>
F-28
<PAGE> 218
PRO FORMA COMBINING STATEMENT OF OPERATIONS OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific Sierra 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 $ 229 $ 568 $ - $ 386 $ 148
Interest and other - 114 - 11 40
------------- -------------- -------------- ------------- -------------
Total revenues 229 682 - 397 188
EXPENSES:
Property operating 132 393 14 130 88
Fees to related parties (5) 22 118 - 24 40
Real estate and other taxes - - - - -
Depreciation and amortization 81 218 - 115 36
Interest 73 112 - - 33
------------- -------------- -------------- ------------- -------------
Total expenses 308 841 14 269 197
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of
property and extraordinary item (79) (159) (14) 128 (9)
Equity in income (loss) of noncombined
partnerships - 55 (6) - 128
Extraordinary item - extinguishment of debt
(46) - - - -
------------- -------------- -------------- ------------- -------------
Net income (loss) before minority interest
(125) (104) (20) 128 119
Minority interest's share in loss (income) 7 - 4 (56) -
------------- -------------- -------------- ------------- -------------
Net income (loss) $ (118) $ (104) $ (16) $ 72 $ 119
============= ============== ============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Sierra Mira Nooney Nooney Property
Mesa Income Fund Income Fund Investors Two,
Partners Ltd., LP Ltd., II LP LP(A) Adjustments Combined
------------ ----------- ------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 556 $ 507 $ 942 $ 635 $ - $ 3,971
Interest and other 106 11 1 25 - 308
------------ ----------- ------------- --------------- ----------- ----------
Total revenues 662 518 943 660 - 4,279
EXPENSES:
Property operating 195 173 314 155 - 1,594
Fees to related parties (5) - 37 66 40 - 347
Real estate and other taxes 25 62 136 94 - 317
Depreciation and amortization 143 95 199 137 - 1,024
Interest 123 26 147 245 - 759
------------ ----------- ------------- --------------- ----------- ----------
Total expenses 486 393 862 671 - 4,041
Loss before equity in loss of noncombined
partnerships, gain (loss) on sale of
property and extraordinary item 1,176 125 81 (11) - 238
Equity in income (loss) of noncombined
partnerships - - - - (177) -
Extraordinary item - extinguishment of debt
- - - - - (46)
------------ ----------- ------------- --------------- ----------- ----------
Net income (loss) before minority interest
1,176 125 81 (11) (177) 192
Minority interest's share in loss (income) - - - - 45 -
------------ ----------- ------------- --------------- ----------- ----------
Net income (loss) $ 1,176 $ 125 $ 81 $ (11) $ (132) $ 192
============ =========== ============= =============== =========== ==========
</TABLE>
F-29
<PAGE> 219
PRO FORMA COMBINING CASH FLOW OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: Year ended December 31, 1999
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific
Development Development Development Institutional
Fund Fund II Fund III Properties V
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 182 $ 85 $ -- $ (493)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (37) (387) -- (343)
Other -- 326 -- --
-------------- -------------- -------------- --------------
Net cash used in investing activities (37) (61) -- (343)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (47) 166 -- --
Net equity contributions (distributions) (47) -- 2 967
-------------- -------------- -------------- --------------
Net cash used in (provided by) financing
activities (94) 166 2 967
Net increase (decrease) in cash 51 190 2 131
Cash, beginning of period 83 71 2 4
-------------- -------------- -------------- --------------
Cash, end of period $ 134 $ 261 $ 4 $ 135
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Sierra Pacific Sierra Nooney Nooney Property
Pension Mira Mesa Income Fund Income Fund Investors Two,
Investors 84 Partners Ltd., LP Ltd., II LP LP(A) Combined
-------------- --------- ----------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 497 $ 713 $ 615 $ 684 $ (4) $ 2,279
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (148) (161) (158) (619) (60) (1,913)
Other (241) (923) -- -- -- (838)
-------------- --------- ----------- ----------- -------------- --------
Net cash used in investing activities (389) (1,084) (158) (619) (60) (2,751)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (87) 760 (25) (124) 2,150 2,793
Net equity contributions (distributions) -- (84) -- -- -- 838
-------------- --------- ----------- ----------- -------------- --------
Net cash used in (provided by) financing
activities (87) 676 (25) (124) 2,150 3,631
Net increase (decrease) in cash 21 305 432 (59) 2,086 3,159
Cash, beginning of period 10 14 805 1,249 486 2,724
-------------- --------- ----------- ----------- -------------- --------
Cash, end of period $ 31 $ 319 $ 1,237 $ 1,190 $ 2,572 $ 5,883
============== ========= =========== =========== ============== ========
</TABLE>
F-30
<PAGE> 220
PRO FORMA COMBINING CASH FLOWS OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MAXIMUM
Period Covered: Three months ended March 31, 2000
<TABLE>
<CAPTION>
Sierra Pacific Sierra Pacific Sierra Pacific Sierra Pacific Sierra 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 $ 47 $ (575) $ (9) $ 224 $ (64)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- (58) -- (2,176) (2)
Other -- (404) -- -- --
-------------- -------------- -------------- -------------- --------------
Net cash used in investing activities -- (462) -- (2,176) (2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 2,374 (12) -- -- (17)
Net equity contributions (distributions) 2,362 -- 18 1,847 --
Other (111) 812 -- -- 73
-------------- -------------- -------------- -------------- --------------
Net cash used in (provided by) financing
activities (99) 800 18 1,847 56
Net increase (decrease) in cash (52) (237) 9 (105) (10)
Cash, beginning of period 134 260 3 135 32
-------------- -------------- -------------- -------------- --------------
Cash, end of period $ 82 $ 23 $ 12 $ 30 $ 22
============== ============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Nooney Real
Sierra Mira Nooney Nooney Property
Mesa Income Fund Income Fund Investors Two,
Partners Ltd., LP Ltd., II LP LP(A) Combined
----------- ----------- ----------- -------------- --------
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 154 $ 250 $ 77 $ (76) $ 28
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- (6) (83) (4) (2,329)
Other (388) -- -- -- (792)
----------- ----------- ----------- -------------- --------
Net cash used in investing activities (388) (6) (83) (4) (3,121)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (70) (5) (29) (86) 2,155
Net equity contributions (distributions) -- -- -- -- (497)
Other -- -- -- -- 774
----------- ----------- ----------- -------------- --------
Net cash used in (provided by) financing
activities (70) (5) (29) (86) 2,433
Net increase (decrease) in cash (304) 239 (35) (166) 661
Cash, beginning of period 319 1,237 1,190 2,572 5,882
----------- ----------- ----------- -------------- --------
Cash, end of period $ 15 $ 1,476 $ 1,155 $ 2,406 $ 5,221
=========== =========== =========== ============== ========
</TABLE>
F-31
<PAGE> 221
PRO FORMA COMBINING BALANCE SHEETS OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: AS OF MARCH 31, 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>
ASSETS:
Real estate held for investment, net $ 10,473 $ -- $ 5,766 $ 6,329 $ 22,568
Cash 23 12 30 2,406 2,471
Accounts receivable, net 349 -- 544 112 1,005
Accounts receivable from affiliates, net 4,480 -- -- -- 4,480
Investment in uncombined partnerships
and joint ventures 2,265 -- 289 -- 2,554
Other 904 -- -- 558 1,462
-------------- -------------- -------------- -------------- --------
Total assets $ 18,494 $ 12 $ 6,629 $ 9,405 $ 34,540
============== ============== ============== ============== ========
LIABILITIES AND EQUITY (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 858 $ 4 $ 66 $ 426 $ 1,354
Distributions in excess of investment in
Uncombined partnerships and joint ventures -- 347 -- -- 347
Mortgage notes payable, net 6,385 -- -- 9,300 15,685
Other -- -- -- 108 108
-------------- -------------- -------------- -------------- --------
Total liabilities 7,243 351 66 9,834 17,493
MINORITY INTEREST -- 21 4,550 -- 4,571
EQUITY (DEFICIT) 11,251 (360) 2,013 (429) 12,475
-------------- -------------- -------------- -------------- --------
Total liabilities and equity (deficit) $ 18,494 $ 12 $ 6,629 $ 9,405 $ 34,540
============== ============== ============== ============== ========
</TABLE>
F-32
<PAGE> 222
PRO FORMA COMBINING STATEMENT OF OPERATIONS OF THE FUNDS
(Amounts in thousands)
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
-------------- -------------- -------------- -------------- --------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 2,356 $ -- $ 1,193 $ 2,150 $ 5,699
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
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
-------------- -------------- -------------- -------------- --------
Total expenses 4,104 15 1,315 2,308 7,742
Loss before equity in loss of noncombined
partnerships (1,338) -- (88) (158) (1,584)
Equity in loss of noncombined partnerships 161 (7) -- -- 154
-------------- -------------- -------------- -------------- --------
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>
F-33
<PAGE> 223
PRO FORMA HISTORICAL COMBINING STATEMENT OF OPERATION OF THE FUNDS
(Amounts in thousands)
Fund Participation Assumption: MINIMUM
Period Covered: THREE MONTHS ENDED MARCH 31, 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 $ 568 $ -- $ 386 $ 635 $ 1,589
Interest and other 114 -- 11 25 150
-------------- -------------- -------------- -------------- --------
Total revenues 682 -- 397 660 1,739
EXPENSES:
Property operating 393 14 130 155 692
Fees to related parties (5) 118 -- 24 40 182
Real estate and other taxes -- -- -- 94 94
Depreciation and amortization 218 -- 115 137 470
Interest 112 -- -- 245 357
-------------- -------------- -------------- -------------- --------
Total expenses 841 14 269 671 1,795
Gain (loss) before equity in loss of noncombined
partnerships (159) (14) 128 (11) (56)
Equity in loss of noncombined partnerships 55 (6) -- -- 49
-------------- -------------- -------------- -------------- --------
Net income (loss) before minority interest (104) (20) 128 (11) (7)
Minority interest's share in loss (income) -- 4 (56) -- (52)
-------------- -------------- -------------- -------------- --------
Net income (loss) $ (104) $ (16) $ 72 $ (11) $ (59)
============== ============== ============== ============== ========
</TABLE>
F-34
<PAGE> 224
PRO FORMA COMBINING CASH FLOW 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
-------------- -------------- -------------- -------------- --------
<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)
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 equity contributions (distributions) -- 2 967 -- 969
-------------- -------------- -------------- -------------- --------
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>
F-35
<PAGE> 225
PRO FORMA COMBINING CASH FLOW OF THE FUNDS
(Amounts in thousands, except per share data)
Fund Participation Assumption: MINIMUM
Period Covered: Three months ended March 31, 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>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (575) $ (9) $ 224 $ (76) $ (436)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (58) -- (2,176) (4) (2,238)
Other (404) -- -- -- (404)
-------------- -------------- -------------- -------------- --------
Net cash used in investing activities (462) -- (2,176) (4) (2,642)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (12) -- -- (86) (98)
Net equity contributions (distributions) -- 18 1,847 -- 1,865
Other 812 -- -- -- 812
-------------- -------------- -------------- -------------- --------
Net cash used in (provided by) financing
activities 800 18 1,847 (86) 2,579
Net increase (decrease) in cash (237) 9 (105) (166) (499)
Cash, beginning of period 260 3 135 2,572 2,970
-------------- -------------- -------------- -------------- --------
Cash, end of period $ 23 $ 12 $ 30 $ 2,406 $ 2,471
============== ============== ============== ============== ========
</TABLE>
F-36
<PAGE> 226
PRO FORMA COMBINING BALANCE SHEETS OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LP Apartments, Ltd. Associates, LP Combined
---------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
ASSETS:
Real estate held for investment, net $ 1,458 $ 7,447 $ 7,217 $ 16,122
Cash 14 6 370 390
Accounts receivable, net 73 14 8 95
Accounts receivable from affiliates, net 51 477 4 532
Other 53 696 1,310 2,059
---------- ---------------- -------------- --------
Total assets $ 1,649 $ 8,640 $ 8,909 $ 19,198
========== ================ ============== ========
LIABILITIES AND DEFICIT:
LIABILITIES:
Accounts payable and accrued expenses $ 837 $ 179 $ 188 $ 1,204
Deferred revenue -- 14 11 25
Mortgage notes payable, net 4,030 10,885 13,067 27,982
Notes payable to affiliates 103 67 -- 170
Other -- -- 71 71
---------- ---------------- -------------- --------
Total liabilities 4,970 11,145 13,337 29,452
DEFICIT (3,321) (2,505) (4,428) (10,254)
---------- ---------------- -------------- --------
Total liabilities and equity (deficit) $ 1,649 $ 8,640 $ 8,909 $ 19,198
========== ================ ============== ========
</TABLE>
F-37
<PAGE> 227
PRO FORMA COMBINING STATEMENTS OF OPERATION OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LP Apartments, Ltd. Associates, LP Combined
---------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 561 $ 2,194 $ 2,402 $ 5,157
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
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
---------- ---------------- -------------- --------
Total expenses 668 1,932 2,639 5,239
---------- ---------------- -------------- --------
Net income (loss) $ (97) $ 280 $ (226) $ (43)
========== ================ ============== ========
</TABLE>
F-38
<PAGE> 228
PRO FORMA COMBINING STATEMENTS OF OPERATIONS OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LP Apartments, Ltd. Associates, LP Combined
---------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
REVENUES:
Rental and reimbursement $ 148 $ 558 $ 642 $ 1,348
Interest and other 3 6 3 12
---------- ---------------- -------------- --------
Total revenues 151 564 645 1,360
EXPENSES:
Property operating 12 184 250 446
Fees to related parties (5) 7 24 35 66
Real estate and other taxes 32 30 40 102
Depreciation and amortization 19 89 108 216
Interest 100 183 217 500
Impairment charges - - - -
---------- ---------------- -------------- --------
Total expenses 170 510 650 1,330
---------- ---------------- -------------- --------
Net loss $ (19) $ 54 $ (5) $ 30
========== ================ ============== ========
</TABLE>
F-39
<PAGE> 229
PRO FORMA COMBINING CASH FLOWS OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LP Apartments, Ltd. Associates, LP Combined
---------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES $ 42 $ 370 $ 227 $ 639
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment (9) (107) (102) (218)
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)
---------- ---------------- -------------- --------
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-40
<PAGE> 230
PRO FORMA COMBINING CASH FLOWS OF OTHER AFFILIATES
(Amounts in thousands)
Period Covered: THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Nooney Meadow Wood Nooney-
Rider Village Hazelwood
Trails, LP Apartments, Ltd. Associates, LP Combined
---------- ---------------- -------------- --------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 30 $ (27) $ 183 $ 186
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate held for investment -- (14) -- (14)
Other -- -- 13 13
---------- ---------------- -------------- --------
Net cash used in investing activities -- (14) 13 (1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable (21) (45) (29) (95)
Net borrowings (repayments) of affiliate notes (16) 3 -- (13)
Net equity contributions (distributions) -- (50) -- (50)
---------- ---------------- -------------- --------
Net cash used in (provided by) financing activities (37) (92) (29) (158)
Net increase (decrease) in cash (7) (133) 167 27
Cash, beginning of period 21 139 203 363
---------- ---------------- -------------- --------
Cash, end of period $ 14 $ 6 $ 370 $ 390
========== ================ ============== ========
</TABLE>
F-41
<PAGE> 231
AMERICAN SPECTRUM PREDECESSOR
COMBINED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
F-42
<PAGE> 232
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-43
<PAGE> 233
AMERICAN SPECTRUM PREDECESSOR
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, December 31, March 31,
(In 000's) 1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
Real estate held for investment, net $ 90,348 $ 95,588 $ 91,506
Cash 522 458 486
Accounts receivable, net 1,161 1,241 1,554
Notes and accounts receivable from affiliates 4,539 3,970 6,569
Investments in uncombined partnerships 1,517 3,297 3,545
Equipment, net 1,036 705 624
Goodwill, net 2,469 -- 1,595
Other assets 3,236 3,176 3,294
------------ ------------ ------------
Total assets $ 104,828 $ 108,435 $ 109,173
============ ============ ============
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 3,842 $ 4,893 $ 6,090
Deferred revenue 899 1,553 240
Notes payable 96,318 110,590 112,251
Notes and accounts payable to affiliates 18,335 15,675 15,783
Note payable to shareholders 700 700 --
------------ ------------ ------------
Total liabilities 120,094 133,411 134,364
------------ ------------ ------------
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) (28,763)
------------ ------------ ------------
Total equity (deficit) (16,311) (26,021) (26,236)
------------ ------------ ------------
Total liabilities and equity (deficit) $ 104,828 $ 108,435 $ 109,173
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-44
<PAGE> 234
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
-------------------------------------------- ----------------------------
(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 $ 3,665 $ 3,894
Property management operations 4,546 8,689 5,452 1,398 824
Income from affiliates 1,809 2,047 2,357 416 486
------- ------------ ------------ ------------ ------------
Total revenues 16,500 24,387 22,622 5,479 5,204
------- ------------ ------------ ------------ ------------
COSTS AND EXPENSES
Property operating expense 1,683 2,886 3,396 921 940
Property management expense 7,472 12,164 10,766 2,578 1,886
Depreciation and amortization 2,203 3,313 3,259 914 942
Real estate taxes 848 1,523 1,597 301 558
Equity in (income) loss of
uncombined partnerships 127 (224) 330 (12) (22)
Impairment charges -- 126 5,164 -- --
------ ------------ ------------ ------------ ------------
Total costs and expenses 12,333 19,788 24,512 4,702 4,304
OTHER (INCOME) EXPENSES
Interest expense 7,901 9,585 9,982 2,221 2,840
Gain on sale of property -- -- -- -- (1,193)
------ ------------ ------------ ------------ ------------
Total other (income) expenses 7,901 9,585 9,982 2,221 1,647
------ ------------ ------------ ------------ ------------
Net loss before extraordinary
items (3,734) (4,986) (11,872) (1,444) (747)
Extraordinary items -- gain (loss) on
extinguishment of debt 50 163 (214) -- --
------ ------------ ------------ ------------ ------------
Net loss $ (3,684) $ (4,823) $ (12,086) $ (1,444) $ (747)
======== ============ ============ ============ ============
PRO FORMA BASIC AND DILUTED LOSS PER COMMON
SHARE: (Unaudited)
Loss before extraordinary item $ (2.40) $ (3.20) $ (7.62) $ (.93) $ (.48)
Extraordinary item .03 .10 (.14) -- --
-------- ------------ ------------ ------------ ------------
Net loss $ (2.37) $ (3.10) $ (7.76) $ (.93) $ (.48)
========= ============ ============ ============ ============
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-45
<PAGE> 235
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
December 31, (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) $ (1,444) $ (747)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,203 3,313 3,259 914 942
Equity in losses (income) of investees 127 (224) 330 (12) (22)
Impairment charges -- 126 5,164 -- --
Extraordinary (gain) loss (50) (163) 214 -- --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net (437) 276 (80) (889) (313)
Decrease (increase) in note receivable, net -- -- -- -- (1,927)
Decrease (increase) in accounts receivable from 1,751 (12) 569 (9,107) --
affiliates
Decrease (increase) in other assets, net (3,434) (369) (687) 1,757 526
Increase (decrease) in deferred revenue 1,019 (198) 654 (24) 1,313
Increase (decrease) in accounts payable and
accrued expenses 463 1,151 986 (207) 1,197
Increase (decrease) in accounts payable - affiliates 1,103 (1,346) (3,239) (2,603) 1,107
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (939) (2,269) (4,916) (11,615) 2,076
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from (investments in) uncombined
investees, net 244 99 (2,062) 901 (274)
Purchases of) sale of real estate held
for investment (3,120) (985) (4,597) (1,710) (721)
-------- -------- -------- -------- --------
Net cash used in operating activities (2,876) (886) (6,659) (809) (995)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, net 2,529 3,511 10,322 10,057 796
Equity contributions (distributions), net 803 (3,398) 1,057 2,454 532
Proceeds from (repayments of) loan from shareholders -- 700 -- -- (700)
Borrowings (repayments) on notes payable to affiliates 749 2,194 132 (15) (1,681)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 4,081 3,007 11,511 12,496 (1,053)
-------- -------- -------- -------- --------
Increase (decrease) in cash 266 (148) (64) 72 28
Cash, beginning of period 404 670 522 522 458
-------- -------- -------- -------- --------
Cash, end of period $ 670 $ 522 $ 458 $ 594 $ 486
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest, net of amounts capitalized of
$320 and $1,200 for 1998 and 1999, respectively $ 6,833 $ 7,763 $ 8,253 $ 1,570 $ 2,646
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-46
<PAGE> 236
AMERICAN SPECTRUM PREDECESSOR
COMBINED STATEMENTS OF EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Accumulated
Equity Deficit Total
(In 000's) ------------ ------------ ------------
<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 -- (747) (747)
Contributions (distributions), net - unaudited -- 532 532
------------ ------------ ------------
Balance as of March 31, 2000 - unaudited $ 2,527 $ (28,763) $ (26,236)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-47
<PAGE> 237
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 three months ended March 31, 2000, the Company purchased a 100%
interest in two management companies and issued debt of $670,000, short-term
payables of $925,000, and recorded goodwill for a total of $1,595,000.
During the three months ended March 31, 2000, the Company transferred land with
book value of $3,398,000 to Sierra Pacific Development Fund, an affiliated
company.
F-48
<PAGE> 238
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.
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
with other entities in which Mssrs. Carden
and Galardi have interests ("the
Transaction"). 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. 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
the accounts of CGS Real Estate Company,
Inc. and its consolidated subsidiaries
("CGS"); Parkade Center; Creekside/Riverside
LLC; Pacific Spectrum, LLC; Pasadena Autumn
Ridge LP; Villa Redondo, LLC; Back Bay, LLC;
Seventy-Seven, LLC; Richardson Plaza; Sierra
Technology; CGS Properties
Marketplace/Columbia, LP; McDonnell
Associates, LLP; and Beach & Lampson Pad
"D"; after the elimination of intercompany
items and transactions.
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-49
<PAGE> 239
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 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"). 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.
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.
(See also Note 4).
F-50
<PAGE> 240
2. SUMMARY OF SIGNIFICANT
ACCOUNTING ALLOWANCE FOR CREDIT LOSSES
POLICIES A provision for credit losses is recorded
(CONTINUED) 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 (94) (14) 84 (24)
1998 (34) (80) 20 (94)
1997 (20) (14) -- (34)
------------ ------------ ------------ ------------ ------------
</TABLE>
F-51
<PAGE> 241
2. SUMMARY OF SIGNIFICANT
ACCOUNTING EQUIPMENT
POLICIES Equipment is stated at cost and is
(CONTINUED) 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. Certain investees are included in
the combined financial statements and the
respective investments and losses for these
entities have been eliminated.
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. The Company does not
record any losses in excess of investments
in its limited partnership interests. 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-52
<PAGE> 242
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, upon the occurrence of certain
events, as defined.
F-53
<PAGE> 243
2. SUMMARY OF
SIGNIFICANT INCOME TAXES
ACCOUNTING POLICIES Currently, the Company includes various
(CONTINUED) 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
carryforwards.
The successor to the Company intends to
qualify as a REIT beginning in 2002 for
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
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 each recipient will
receive 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. 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.
UNAUDITED INTERIM INFORMATION
The accompanying financial information as of
March 31, 2000 and for the three months
ended March 31, 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-54
<PAGE> 244
2. SUMMARY OF COMPREHENSIVE INCOME
SIGNIFICANT Net income as reported by the Company
ACCOUNTING POLICIES reflects total comprehensive income for the
(CONTINUED) years ended December 31, 1998 and 1999, and
the three months ended March 31, 1999 and
2000.
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
Disclosures of estimated fair value were
determined by management, using available
market information and appropriate valuation
methodologies. Considerable judgment is
necessary to interpret market data and
develop estimated fair value. Accordingly,
the estimates presented herein are not
necessarily indicative of the amounts the
Company could realize on disposition of the
financial instruments. The use of different
market assumptions and/or estimation may
have a material effect on the estimated fair
value amounts.
Cash equivalents, and variable and fixed
rate debt are carried at amounts that
reasonably approximate their fair values
based on discounted cash flow models.
Disclosure about fair value of financial
instruments is based on pertinent
information available to management as of
December 31, 1999. Although management is
not aware of any factors that would
significantly affect fair value, such
amounts have not been comprehensively
revalued for purposes of these financial
statements since that date and the current
estimates of fair value may differ
significantly from the amounts presented
herein.
F-55
<PAGE> 245
2. SUMMARY OF
SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING On December 3, 1999, the Securities and
POLICIES Exchange Commission issued Staff Accounting
(CONTINUED) 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.
F-56
<PAGE> 246
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.
F-57
<PAGE> 247
4. REAL ESTATE Real estate held for investment consists of
HELD FOR the following (see Note 7):
INVESTMENT
<TABLE>
<CAPTION>
December 31,
(IN 000'S) 1998 1999
--------------- ---------------
<S> <C> <C>
Income producing property:
Land $ 21,597 $ 23,087
Building and improvements 77,232 83,220
--------------- ---------------
98,829 106,307
Accumulated depreciation and amortization (8,481) (10,719)
--------------- ---------------
$ 90,348 $ 95,588
--------------- ---------------
</TABLE>
Included in real estate held for investment
is a mixed-use commercial operating property
with 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 $1,282,000 in
accordance with SFAS No. 121.
During 1999, the Company also recorded
impairment losses of $1,752,000 on two other
properties, in accordance with SFAS No 121.
F-58
<PAGE> 248
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 Partner Limited Partner
--------------- ---------------
<S> <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 1).
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-59
<PAGE> 249
7. DEBT Debt consists of the following:
<TABLE>
<CAPTION>
December 31,
(IN 000'S) 1998 1999
--------------- ---------------
<S> <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
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
--------------- ---------------
96,544 110,710
Discount on Debt (226) (120)
--------------- ---------------
$ 96,318 $ 110,590
--------------- ---------------
</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:
F-60
<PAGE> 250
7. DEBT (CONTINUED)
<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>
The Company expects to refinance the debt
that matures in 2000, except for a portion
related to the McDonnell property which is
being listed for sale.
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.
--------------------------------------------------------------------------------
F-61
<PAGE> 251
8. RELATED PARTY TRANSACTIONS
(CONTINUED) 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
noncancelable 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>
The Company's lease rent income from overage
or percentage rents was not material for
each 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 noncancelable 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
-----------------
$ 1,453
=================
</TABLE>
F-62
<PAGE> 252
9. COMMITMENTS
AND EMPLOYEE OBLIGATIONS
CONTINGENCIES The Company is obligated under various
(CONTINUED) 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 expires in
August 2000. As of December 31, 1999 the
interest rate swap had an estimated market
value of $23,000.
10. SIGNIFICANT 2000 EVENTS -
REAL ESTATE TRANSACTIONS
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.
On July 11, 2000, the Company received a
letter of intent from an unrelated third
party to purchase land in Phoenix, Arizona.
The sale price is $4,250,000 and the land
has a carrying value of $1,033,000.
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-63
<PAGE> 253
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-64
<PAGE> 254
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 March 31, 2000 and for the three months ended
March 31, 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, QUARTER ENDED MARCH 31,
----------------------- -----------------------
(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 $ 538 $ 558
Interest and other income 86 20 18 5 6
-------- -------- -------- -------- --------
Total revenues 1,949 2,059 2,212 543 564
-------- -------- -------- -------- --------
EXPENSES:
Property operating 731 757 764 167 208
Real estate and other taxes 120 120 120 30 30
Depreciation and amortization 260 332 376 87 89
Interest expense 731 715 672 158 183
-------- -------- -------- -------- --------
Total expenses 1,842 1,924 1,932 442 510
-------- -------- -------- -------- --------
Net income before extraordinary item 107 135 280 101 54
Extraordinary item - loss on
extinguishment of debt (71) -- -- -- --
Net income $ 36 $ 135 $ 280 $ 101 $ 54
======== ======== ======== ======== ========
</TABLE>
F-65
<PAGE> 255
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ -------------------
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 1.64 1.30
Cash distributions 195 240 260 72 60
Total properties owned at end of period 1 1 1 1 1
BALANCE SHEET DATA:
Cash and cash equivalents 255 191 140 6
Real estate held for investment, net 7,946 7,766 7,520 7,447
Accounts receivable, net 5 57 402 491
Other assets 680 652 629 696
Total assets, at book value 8,886 8,666 8,691 8,640
Total assets, at valued assigned for the
consolidation -- -- -- -- 20,844
Total liabilities 11,311 11,196 11,200 11,145
Total deficit (2,425) (2,530) (2,509) (2,505)
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 182 (64) (52) (11) (133)
Cash provided by operating activities 735 420 370 115 (27)
</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-66
<PAGE> 256
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-67
<PAGE> 257
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, March 31,
(In 000's) 1998 1999 2000
------------ ------------ ---------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Real estate held for investment $ 7,766 $ 7,520 $ 7,447
Cash 191 139 6
Accounts receivable, net of allowance for doubtful accounts of
$10, $14, and $32, as of December 31, 1998, 1999, and
March 31, 2000, respectively 37 9 14
Accounts receivable from affiliates 20 394 477
Other assets, net 652 629 696
-------- -------- --------
Total assets $ 8,666 $ 8,691 $ 8,640
======== ======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 145 $ 195 $ 179
Deferred revenue 1 11 14
Notes payable 11,050 10,930 10,885
Notes payable to affiliates -- 64 67
-------- -------- --------
Total liabilities 11,196 11,200 11,145
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT)
Capital 135 135 135
Accumulated deficit (2,665) (2,644) (2,640)
-------- -------- --------
Total partners' capital (deficit) (2,530) (2,509) (2,505)
-------- -------- --------
Total liabilities and partners' capital (deficit) $ 8,666 $ 8,691 $ 8,640
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-68
<PAGE> 258
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------------- -------------------
(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 $ 538 $ 558
Other income 86 20 18 5 6
------- ------- ------- ------- -------
Total revenues 1,949 2,059 2,212 543 564
------- ------- ------- ------- -------
COSTS AND EXPENSES
Property operating 342 351 341 79 95
Depreciation and amortization 260 332 376 87 89
Real estate taxes 120 120 120 30 30
Management fees to affiliate 95 105 105 27 24
Repairs and maintenance 168 164 184 43 52
Other 126 137 134 18 37
------- ------- ------- ------- -------
Total costs and expenses 1,111 1,209 1,260 284 327
------- ------- ------- ------- -------
OTHER EXPENSE
Interest expense 731 715 672 158 183
------- ------- ------- ------- -------
Net income before extraordinary
item 107 135 280 101 54
Extraordinary item -- loss on
extinguishment of debt (71) -- -- -- --
------- ------- ------- ------- -------
Net income $ 36 $ 135 $ 280 $ 101 $ 54
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-69
<PAGE> 259
MEADOW WOOD VILLAGE APARTMENTS, LTD., LP
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended March 31,
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 $ 101 $ 54
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 260 332 376 87 89
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 32 (31) 28 (35) (5)
Decrease (increase) in accounts receivable from affiliates -- (20) (374) 20 (83)
Decrease (increase) in other assets, net 353 (1) -- (128) (67)
Decrease (increase) in deferred revenue 4 (7) 10 5 3
Increase (decrease) in accounts payable and
accrued expenses 50 12 50 65 (16)
------- ----- ----- ----- -----
Net cash provided by (used in) operating activities 735 420 370 115 (25)
------- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for tenant improvements (222) (124) (108) (36) (16)
------- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable, net 30 (120) (120) (30) (45)
Partner contributions (distributions), net (361) (240) (258) (60) (50)
Increase in notes payable to affiliates -- -- 64 -- 3
------- ----- ----- ----- -----
Net cash (used in) financing activities (331) (360) (314) (90) (92)
------- ----- ----- ----- -----
Increase (decrease) in cash 182 (64) (52) (11) (133)
Cash, beginning of period 73 255 191 191 139
------- ----- ----- ----- -----
Cash, end of period $ 255 $ 191 $ 139 $ 180 $ 6
======= ===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,127 $ 715 $ 672 $ 158 $ 183
======= ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
F-70
<PAGE> 260
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 -- (195) (195)
------- ------- -------
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 (2,644) (2,509)
Net income (unaudited) -- 54 54
Distributions, net (unaudited) -- (60) (60)
------- ------- -------
Balance, March 31, 2000 (unaudited) $ 135 (2,640) $(2,505)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-71
<PAGE> 261
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 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 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-72
<PAGE> 262
2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES EVALUATION OF IMPAIRMENT
(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 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-73
<PAGE> 263
2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES DEFERRED REVENUES
(CONTINUED)
Deferred revenues represent non-refundable
prepayments of rents on certain 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 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 March
31, 2000 and for the three months ended March 31,
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 three months
ended March 31, 1999 and 2000.
F-74
<PAGE> 264
2 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES USE OF ESTIMATES
(CONTINUED)
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 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.
3 REAL ESTATE Real estate held for investment consists of the
HELD FOR following:
INVESTMENT
<TABLE>
<CAPTION>
December 31,
------------------------- March 31,
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 8,358
-------- -------- --------
$ 10,537 $ 10,644 $ 10,658
Accumulated depreciation and amortization (2,771) (3,124) (3,211)
-------- -------- --------
$ 7,766 $ 7,520 $ 7,447
-------- -------- --------
</TABLE>
F-75
<PAGE> 265
4 NOTES PAYABLE Notes payable consist of:
<TABLE>
<CAPTION>
December 31, March 31,
------------------- 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
March 31, 2000, due 2003. $11,050 $10,930 $10,885
------- ------- -------
$11,050 $10,930 $10,885
======= ======= =======
</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
TRANSACTIONS MANAGEMENT COMPANY
The Partnership pays property management fees to
an entity affiliated with the general partner for
providing leasing, brokerage, and other services.
F-76
<PAGE> 266
6 COMMITMENTS AND
CONTINGENCIES LITIGATION
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-77
<PAGE> 267
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-78
<PAGE> 268
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 March 31, 2000 and for the three months ended March 31, 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, QUARTER ENDED MARCH 31,
------------------------------- -----------------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
REVENUES:
Rental and reimbursement income .... $ 585 $ 594 $ 561 $ 132 $ 148
Interest and other income .......... 1 3 10 1 3
----- ----- ----- ----- -----
Total revenues ..................... 586 597 571 133 151
===== ===== ===== ===== =====
EXPENSES:
Property operating ................. 98 101 100 27 19
Real estate and other taxes ........ 84 90 99 26 32
Depreciation and amortization ...... 62 70 74 19 19
Interest expense ................... 423 413 395 93 100
----- ----- ----- ----- -----
Total expenses ..................... 667 674 668 165 170
===== ===== ===== ===== =====
Net loss ........................... $ (81) $ (77) $ (97) $ (32) $ (19)
===== ===== ===== ===== =====
</TABLE>
F-79
<PAGE> 269
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Deficiency of earnings to cover fixed
charges (1) 81 77 97 32 19
Total properties owned at end of period 1 1 1 1 1
BALANCE SHEET DATA:
Cash and cash equivalents $ 46 $ 30 $ 21 $ 14
Real estate held for investment, net 1,533 1,526 1,474 1,458
Accounts receivable, net 56 43 134 124
Other assets 44 31 54 53
Total assets, at book value 1,679 1,630 1,683 1,649
Total assets, at valued assigned for the
consolidation 3,545
Total liabilities 4,807 4,835 4,985 4,970
Total deficit (3,128) (3,205) (3,302) (3,321)
CASH FLOW DATA:
Decrease in cash and equivalents, net
(41) (16) (9) (5) (7)
Cash provided by (used in) operating
activities 84 78 42 (48) 30
</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-80
<PAGE> 270
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-81
<PAGE> 271
NOONEY RIDER TRAIL, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
December 31, March 31,
------------------ ---------
(In 000's) 1998 1999 2000
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Real estate held for investment $ 1,526 $ 1,474 $ 1,458
Cash 30 21
14
Accounts receivable
43 63 73
Accounts receivable from affiliates
-- 71 51
Other assets, net
31 54 53
------- ------- -------
Total assets $ 1,630 $ 1,683 $ 1,649
======= ======= =======
LIABILITIES AND EQUITY (DEFICIT)
LIABILITIES
Accounts payable and accrued expenses $ 676 $ 796 $ 837
Accounts payable to affiliates
31 67 --
Notes payable 4,128 4,051 4,030
Notes payable to affiliates -- 71 103
------- ------- -------
Total liabilities 4,835 4,985 4,970
------- ------- -------
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 $ 1,649
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets
F-82
<PAGE> 272
NOONEY RIDER TRAIL
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------- -----------------
(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) $ (32) $ (19)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 62 70 74 19 19
Changes in assets and liabilities:
(Increase) in accounts receivable, net (14) -- (19) (9) (10)
Decrease (increase) in other non-current assets -- (3) (36) 2 (2)
(Decrease) in deferred revenue -- (28) -- -- --
Increase (decrease) in accounts payable and
Accrued expenses 117 116 120 (28) 42
----- ----- ----- ----- -----
Net cash provided by (used in) operating 84 78 42 (48) 30
activities
----- ----- ----- ----- -----
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) -- 20
Repayments on notes payable (84) (91) (77) (21) (21)
Borrowings on notes payable to affiliates, net -- -- 71 64 31
Increase (decrease) in accounts payable to affiliates -- 32 35 -- (67)
----- ----- ----- ----- -----
Net cash provided by (used in) financing
activities (84) (46) (42) 43 (37)
----- ----- ----- ----- -----
Decrease in cash (41) (16) (9) (5) (7)
Cash, beginning of period 87 46 30 30 21
----- ----- ----- ----- -----
Cash, end of period $ 46 $ 30 $ 21 $ 25 $ 14
===== ===== ===== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 357 $ 356 $ 300 $ 79 $ 116
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
F-83
<PAGE> 273
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, March 31, 2000 (unaudited) $ 601 $(3,922) $(3,321)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-84
<PAGE> 274
NOONEY RIDER TRAIL, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------- ------------------------
(In 000's) 1997 1998 1999 1999 2000
----- ----- ----- ----- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $ 547 $ 541 $ 505 $ 116 $ 135
Tenant reimbursements 38 53 56 16 13
Other income 1 3 10 1 3
----- ----- ----- ----- -----
Total revenues 586 597 571 133 151
----- ----- ----- ----- -----
COSTS AND EXPENSES
Property operating 34 30 29 10 8
Depreciation and amortization 62 70 74 19 19
Real estate taxes 84 90 99 26 32
Management fees to affiliate 2 32 28 6 7
Repairs and maintenance 23 20 27 10 3
Other 39 19 16 1 1
----- ----- ----- ----- -----
Total costs and expenses 244 261 273 72 70
----- ----- ----- ----- -----
OTHER EXPENSE
Interest expense
423 413 395 93 100
----- ----- ----- ----- -----
Net loss $ (81) $ (77) $ (97) $ (32) $ (19)
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements
F-85
<PAGE> 275
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
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 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.
F-86
<PAGE> 276
2 SUMMARY OF SIGNIFICANT
ACCOUNTING EVALUATION OF IMPAIRMENT
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-87
<PAGE> 277
2 SUMMARY OF SIGNIFICANT
ACCOUNTING UNAUDITED INTERIM INFORMATION
POLICIES (CONTINUED) The accompanying financial information as of
March 31, 2000 and for the three months ended
March 31, 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 three
months ended March 31, 1999 and 2000.
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.
F-88
<PAGE> 278
3 REAL ESTATE Real estate held for investment consists of
HELD FOR the following (see Note 4):
INVESTMENT
<TABLE>
<CAPTION>
December 31, March 31,
------------------ 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) (989)
------ ------ ------
$1,526 $1,474 $1,458
====== ====== ======
</TABLE>
4 Notes Payable Notes payable consist of:
<TABLE>
<CAPTION>
December 31, March 31,
------------------ 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 2000 $3,748 $3,671 $3,650
Various unsecured debt bearing interest at
15% per annum, due in 2000 380 380 380
------ ------ -----------
$4,128 $4,051 $4,030
====== ====== ===========
</TABLE>
F-89
<PAGE> 279
5 RELATED PARTY
TRANSACTIONS MANAGEMENT COMPANY
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
and LEASE COMMITMENTS AS LESSOR
Contingencies The Company is a lessor under various
non-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> <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.
F-90
<PAGE> 280
NOONEY - HAZELWOOD ASSOCIATES, L.P.
HISTORICAL FINANCIAL DATA
F-91
<PAGE> 281
Nooney-Hazelwood Associates, LP
Table of Contents
A. Selected Historical Data
B. Audited Financial Statements - December 31, 1999, 1998 and 1997
F-92
<PAGE> 282
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 March 31, 2000 and for the three months ended
March 31, 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, QUARTER ENDED MARCH 31,
----------------------- -----------------------
(In thousands) 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 $ 585 $ 642
Interest and other income ........ 24 18 10 6 11 3 3
------- ------- ------- ------- ------- ----- -----
Total revenues ................... 2,392 2,486 2,471 2,451 2,413 588 645
======= ======= ======= ======= ======= ===== =====
EXPENSES:
Property operating ............... 844 905 1,065 977 1,031 274 250
Management and advisory fees ..... 131 133 135 134 132 32 35
Real estate and other taxes ...... 136 138 145 155 159 39 40
Depreciation and amortization .... 460 635 469 454 441 106 108
Interest expense ................. 825 854 922 903 876 221 217
------- ------- ------- ------- ------- ----- -----
Total expenses ................... 2,396 2,665 2,736 2,623 2,639 672 650
------- ------- ------- ------- ------- ----- -----
Net loss ......................... $ (4) $ (179) $ (265) $ (172) $ (226) $ (84) $ (5)
======= ======= ======= ======= ======= ===== =====
</TABLE>
F-93
<PAGE> 283
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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 84 5
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 $ 284 $ 370
Real estate held for investment, net 8,728 8,389 7,969 7,611 7,316 7,514 7,217
Accounts receivable from affiliates - - - 2 4 2 4
Accounts receivable, net 40 2 - - - - 8
Other assets 226 1,579 1,509 1,449 1,363 1,487 1,310
Total assets, at book value 9,595 10,258 9,887 9,320 8,886 9,287 8,909
Total assets, at valued assigned for
the consolidation 16,089
Total liabilities 13,175 14,017 13,911 13,517 13,309 13,567 13,336
General partners deficit (264) (265) (268) (270) (272) (271) (272)
Limited partners deficit (3,316) (3,494) (3,756) (3,927) (4,151) (4,009) (4,155)
</TABLE>
F-94
<PAGE> 284
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 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 93 165 121 (151) (55) 26 167
Cash provided by operating activities 314 608 245 241 227 131 183
</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-95
<PAGE> 285
B. AUDITED FINANCIAL STATEMENTS - DECEMBER 31, 1999, 1998 AND 1997 AND UNAUDITED
FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 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-96
<PAGE> 286
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999 and March 31, 2000
<TABLE>
<CAPTION>
UNAUDITED
December 31, MARCH 31,
------------ ---------
1998 1999 2000
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Cash $ 258,129 $ 203,188 $ 369,799
Accounts receivable, net of allowance for doubtful accounts of
$9,826, $10,807, $18,672, $9,425, and $10,848 respectively 200 - 8,085
Accounts receivable from affiliates 2,125 4,350 4,350
Prepaid expenses 68,667 67,879 37,665
Restricted deposits and funded reserves (Note 2) 575,800 527,395 514,125
Property and equipment, net (Note 3) 7,610,637 7,315,684 7,216,575
Loan fees, net of amortization 804,578 767,761 758,557
-------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 9,320,136 $ 8,886,257 $ 8,909,156
=========================================================================================================================
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT):
LIABILITIES:
Accounts payable and accrued expenses $ 116,598 $ 132,786 $ 187,896
Tenant security deposits 70,735 70,750 70,950
Deferred revenue 4,808 9,444 11,290
Notes payable (Note 3) 13,324,609 13,096,120 13,066,598
-------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,516,750 13,309,100 13,336,734
=========================================================================================================================
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) (4,735)
-------------------------------------------------------------------------------------------------------------------------
Total Partners' Capital (Deficit) (4,196,614) (4,422,843) (4,427,578)
=========================================================================================================================
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) $ 9,320,136 $ 8,886,257 $ 8,909,156
=========================================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated balance sheets.
F-97
<PAGE> 287
NOONEY-HAZELWOOD ASSOCIATES, L.P. AND INVESTEE
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1998 and 1999 and
For the Three Months Ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
Year Ended December 31, MARCH 31,
----------------------- ---------
1997 1998 1999 1999 2000
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income $ 2,461,069 $ 2,445,448 $2,402,432 $ 584,640 $ 642,044
Other income 10,190 5,648 10,651 3,161 3,372
-----------------------------------------------------------------------------------------------------------------
Total Revenues 2,471,259 2,451,096 2,413,083 587,801 645,416
-----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Property operating 769,866 732,795 754,513 190,882 191,802
Depreciation and amortization 469,019 453,924 440,762 106,096 108,313
Real estate taxes 145,177 154,875 159,338 38,719 39,834
Management fees 135,147 134,272 132,123 32,232 35,553
Repairs and maintenance 294,771 244,110 276,320 82,268 57,736
-----------------------------------------------------------------------------------------------------------------
Total Costs and Expenses 1,813,980 1,719,976 1,763,056 450,197 433,238
-----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE 922,183 903,038 876,256 221,469 216,913
-----------------------------------------------------------------------------------------------------------------
NET LOSS $ (264,904) $ (171,918) $ ( 226,229) $ (83,865) $ (4,735)
=================================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated statements of operations.
F-98
<PAGE> 288
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 Three Months Ended March 31, 1999 and 2000
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(264,904) $(171,918) $(226,229)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 469,019 453,924 440,762
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net 114 200 200
Decrease (increase) in accounts receivable from affiliates 1,955 (2,125) (2,225)
Decrease (increase) in prepaid expenses 44,713 (6,308) 788
Increase (decrease) in deferred revenue (4,375) 347 4,636
Increase (decrease) in security deposit liabilities (4,290) (860) 15
Increase (decrease) in accounts payable and accrued expenses 2,685 (32,749) 9,360
-------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 244,917 240,511 227,307
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted deposits and funded reserves (767) 29,142 48,405
Additions to rental property and improvements (11,732) (59,058) (102,164)
-------------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (12,499) (29,916) (53,759)
-------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage (99,909) (361,484) (228,489)
Additions to loan fees (11,174) -- --
-------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (111,083) (361,484) (228,489)
-------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 121,335 (150,889) (54,941)
CASH, BEGINNING OF PERIOD 287,683 409,018 258,129
-------------------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 409,018 $ 258,129 $ 203,188
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 944,849 $ 912,623 $ 873,741
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS ENDED
MARCH 31,
---------
1999 2000
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (83,865) $ (4,735)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 106,096 108,313
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net (500) (8,085)
Decrease (increase) in accounts receivable from affiliates 370 --
Decrease (increase) in prepaid expenses 30,465 30,214
Increase (decrease) in deferred revenue 3,338 1,846
Increase (decrease) in security deposit liabilities 1,750 200
Increase (decrease) in accounts payable and accrued expenses 73,502 55,110
-------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 131,156 182,863
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted deposits and funded reserves (77,611) 13,270
Additions to rental property and improvements -- --
-------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (77,611) 13,270
-------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage (27,697) (29,522)
Additions to loan fees -- --
-------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (27,697) (29,522)
-------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 25,848 166,611
CASH, BEGINNING OF PERIOD 258,129 203,188
-------------------------------------------------------------------------------------------------------------
CASH, END OF PERIOD $ 283,977 $ 369,799
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 194,422 $ 192,599
=============================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
consolidated statements of cash flows.
F-99
<PAGE> 289
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 Three Months Ended March 31, 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 three months ended March 31, 1999, unaudited (839) (83,026) (83,865)
--------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999, unaudited (270,870) (4,009,609) (4,280,479)
Net loss for the nine months ended December 31,1999 (1,423) (140,941) (142,364)
--------------------------------------------------------------------------------------------------------------
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 (47) (4,688) (4,735)
--------------------------------------------------------------------------------------------------------------
Balance, March 31, 2000, unaudited $(272,340) $(4,155,238) $(4,427,578)
==============================================================================================================
</TABLE>
The notes to the financial statements are an integral part of these consolidated
statements of partners' capital (deficit).
F-100
<PAGE> 290
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-101
<PAGE> 291
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 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 amounted to $90,610
at December 31, 1999. In accordance with generally accepted accounting
principles, this amount has been absorbed by the Partnership.
F-102
<PAGE> 292
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.
NOTE 2
RESTRICTED CASH ACCOUNTS
Restricted cash accounts included in the balance sheet are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Tenant security deposits $ 73,944 $ 70,035
Mortgage escrow deposits 78,815 80,969
Replacement reserve 374,636 424,796
--------------------------------------------------------------------------------
$527,395 $575,800
================================================================================
</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-103
<PAGE> 293
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 GMAC Commercial Mortgage Corporation 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
Less: Current portion (120,959) (125,000) (245,959)
--------------------------------------------------------------------------------
Long-term Portion $11,945,161 $ 905,000 $12,850,161
================================================================================
</TABLE>
F-104
<PAGE> 294
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 paid to American
Spectrum Midwest by the Investee in 1999 and 1998 were $120,123 and $122,272,
respectively. In 1999 and 1998, 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 March 31, 2000 and for the three
months ended March 31, 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-105
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SIERRA PACIFIC DEVELOPMENT FUND
HISTORICAL FINANCIAL DATA
F-106
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Sierra Pacific Development Fund
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 March 31, 2000 and 1999
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts and reserves
2. Schedule III - Real estate and accumulated depreciation
F. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
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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 March 31, 2000 and for the three months ended
March 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 DECEMBER 31, QUARTER ENDED MARCH 31,
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 $ 215 $ 229
Interest and other income 7 8 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total revenues 592 756 758 920 919 215 229
======= ======= ======= ======= ======= ======= =======
EXPENSES:
Property Operating 407 390 379 348 377 126 154
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 86 81
Interest expense 70 164 160 157 153 39 72
------- ------- ------- ------- ------- ------- -------
Total expenses 1,002 1,128 1,060 1,010 1,009 251 307
======= ======= ======= ======= ======= ======= =======
Net loss before extraordinary item
and minority interest (410) (372) (302) (90) (90) (36) (78)
Extraordinary item - loss from
write off of deferred loan costs -- -- -- -- -- -- (46)
Minority interest 97 70 15 8 6 2 6
------- ------- ------- ------- ------- ------- -------
Net loss $ (313) $ (302) $ (287) $ (82) $ (84) $ (34) $ (118)
======= ======= ======= ======= ======= ======= =======
</TABLE>
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<PAGE> 298
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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) (1.16) (3.99)
Deficiency of earnings to cover fixed
charges (2) 313 302 287 82 84 34 118
Cash distributions to minority investors (408) (541) (25) (178) (87) -- (2,362)
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 49 46
Per unit value assigned for the consolidation -- -- -- -- -- -- 5,875
BALANCE SHEET DATA:
Cash and cash equivalents $ 787 $ 56 $ 87 $ 83 $ 134 $ 85 $ 82
Real estate held for investment, net 3,422 3,223 2,981 2,773 2,557 207 2,497
Accounts receivable, net 74 104 72 56 61 59 51
Investment in/due from partnerships -- 27 27 103 129 182 2,496
Other assets 272 300 269 252 238 243 316
Total assets, at book value 4,555 3,710 3,436 3,267 3,119 376 5,442
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31
------------ --------
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 1,738 146 4,179
General partners deficit -- -- -- -- -- -- (82)
Limited partners equity 2,136 1,834 1,547 1,465 1,381 131 1,345
Other equity (deficit) 477 (103) 25 -- -- -- --
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 748 (732) 32 (4) 51 1 (52)
Cash (used in) provided by operating
activities (587) 46 19 210 182 91 48
</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.
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.
F-111
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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
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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<PAGE> 302
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> 303
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - QUARTERS ENDED MARCH 31, 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 as of 3/31/2000 and 1999.
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 three months ended March 31, 2000 increased by
approximately $15,000, or 7%, when compared to the corresponding period in the
prior year, primarily due to higher occupancy and rental rates. Occupancy at the
Property increased from 96% at March 31, 1999 to 100% at March 31, 2000.
Operating expenses for the three months ended March 31, 2000 increased by
approximately $28,000, or 22%, in comparison to the same period in 1999. This
increase was principally due to higher maintenance and repair costs and
utilities. In addition, data processing and accounting and auditing costs rose
during the quarter.
Interest expense of approximately $73,000 was recorded during the first quarter
compared to approximately $39,000 for the same period 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 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 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).
The Partnership is in an illiquid position at March 31, 2000 with cash of
approximately $82,000 and accrued and other liabilities of approximately
$132,000. However, a 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.
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Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
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<PAGE> 305
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> 306
SIERRA PACIFIC DEVELOPMENT FUND
(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 $ 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> 307
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> 308
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> 309
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> 310
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
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<PAGE> 311
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 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.
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<PAGE> 312
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.
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.
F-123
<PAGE> 313
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 137,271 184,129
$175,256 in 1998
-------- --------
$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.
F-124
<PAGE> 314
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-125
<PAGE> 315
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-126
<PAGE> 316
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-127
<PAGE> 317
E. Financial Statement Schedules
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-128
<PAGE> 318
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-129
<PAGE> 319
SCHEDULE III
SIERRA PACIFIC DEVELOPMENT FUND
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 ---------------------------------------
Encumb- Improve- After Acquis- Improve- Total Accum.
Description rances Land ments ition (2) Land ments (3)(4)(5)(6) Deprec. (6)
----------- ------ ---- ----- ------------- ---- ----- ------------ -----------
<S> <C> <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 $2,289,481
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------
Date Date Deprec.
Description Constructed Acquired Life
----------- ----------- -------- ----
<S> <C> <C> <C>
OFFICE
BUILDING-
INCOME -
PRODUCING:
Sierra
Creekside (4)
San Ramon,
California 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.
(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-130
<PAGE> 320
<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-131
<PAGE> 321
F. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND
(A Limited Partnership)
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
(Unaudited)
----------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 82,081 $ 134,154
Receivables:
Unbilled rent 51,068 51,981
Billed rent 0 8,640
Income-producing property - net of
accumulated depreciation and valuation
allowance of $3,343,695 and $3,289,481,
respectively 2,497,050 2,557,487
Other assets - net of accumulated amortization
of $248,218 and $263,977, respectively 315,574 238,197
Excess distributions to minority Partner 2,496,394 128,513
----------- -----------
Total Assets $ 5,442,167 $ 3,118,972
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities $ 132,001 $ 64,825
Notes payable 4,047,554 1,673,186
----------- -----------
Total Liabilities 4,179,555 1,738,011
----------- -----------
Partners' equity (deficit):
General Partner (81,954) 0
Limited Partners:
30,000 units authorized, 29,354 issued
and outstanding 1,344,566 1,380,961
----------- -----------
Total Partners' equity 1,262,612 1,380,961
----------- -----------
Total Liabilities and Partners' equity $ 5,442,167 $ 3,118,972
=========== ===========
</TABLE>
F-132
<PAGE> 322
See Accompanying Notes 4
SIERRA PACIFIC DEVELOPMENT FUND
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
REVENUES:
Rental income $ 229,440 $ 214,772
--------- ---------
Total revenues 229,440 214,772
--------- ---------
EXPENSES:
Operating expenses 154,180 126,351
Depreciation and amortization 81,042 86,305
Interest 72,881 38,537
--------- ---------
Total costs and expenses 308,103 251,193
--------- ---------
LOSS BEFORE EXTRAORDINARY LOSS (78,663) (36,421)
EXTRAORDINARY LOSS FROM WRITE-OFF
OF DEFERRED LOAN COSTS (46,020) 0
--------- ---------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS (124,683) (36,421)
--------- ---------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS 6,334 2,386
--------- ---------
NET LOSS $(118,349) $ (34,035)
========= =========
Per limited partnership unit:
Loss before extraordinary loss $ (2.44) $ (1.16)
Extraordinary loss (1.55) 0
--------- ---------
Net loss per limited partnership unit $ (3.99) $ (1.16)
========= =========
</TABLE>
F-133
<PAGE> 323
See Accompanying Notes 5
SIERRA PACIFIC DEVELOPMENT FUND
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Year Ended December 31, 1999 and
for the Three Months Ended March 31, 2000
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited Partners Total
----------------------------- General Partners'
Per Unit Total Partner Equity
------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 2000 (audited) 47.04 1,380,961 0 1,380,961
Transfer among general partners and Limited 2.26 80,771 (80,771) 0
Partners
Net loss (unaudited) (3.99) (117,166) (1,183) (118,349)
------ ----------- ----------- -----------
Partners' equity (deficit) - March 31, 2000
(unaudited) $45.31 $ 1,344,566 $ (81,954) $ 1,262,612
====== =========== =========== ===========
</TABLE>
F-134
<PAGE> 324
See Accompanying Notes 6
SIERRA PACIFIC DEVELOPMENT FUND
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (118,349) $ (34,035)
Adjustments to reconcile net loss
to cash (used in) provided by operating activities:
Depreciation and amortization 81,042 86,305
Extraordinary loss from write-off of deferred
loan costs 46,020 0
Minority interest's share of consolidated
joint venture loss (6,334) (2,386)
Decrease (increase) in receivables 9,553 (2,724)
Increase in other assets (31,566) (11,329)
Increase in accrued and other liabilities 67,176 54,690
----------- -----------
Net cash (used in) provided by operating activities 47,542 90,521
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable secured by property 4,050,000 0
Principal payments on notes payable (1,675,632) (11,391)
Payments on deferred loan costs (112,436) 0
Distributions to minority partner (2,361,547) 0
Loan to affiliate 0 (78,000)
----------- -----------
Net cash used in financing activities (99,615) (89,391)
----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (52,073) 1,130
CASH AND CASH EQUIVALENTS
Beginning of period 134,154 83,408
----------- -----------
CASH AND CASH EQUIVALENTS
End of period $ 82,081 $ 84,538
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 55,108 $ 38,622
=========== ===========
</TABLE>
F-135
<PAGE> 325
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 March 31, 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 March 31, 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 three months ended March 31, 2000
and 1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
March 31
----------------------
2000 1999
------- -------
<S> <C> <C>
Management fees $10,987 $ 9,324
Administrative fees 10,632 8,936
</TABLE>
F-136
<PAGE> 326
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 percent of cumulative operating income,
gains, losses, deductions and credits of the Partnership is allocated among the
limited partners and 1 percent is allocated to the general partner. Management
does not believe that the effect of this transfer is significant.
F-137
<PAGE> 327
SIERRA PACIFIC DEVELOPMENT FUND II
HISTORICAL FINANCIAL DATA
F-138
<PAGE> 328
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 March 31, 2000 and 1999
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts and reserves
2. Schedule III - Real estate and accumulated depreciation
F. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
F-139
<PAGE> 329
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 March 31, 2000 and for the three months ended
March 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>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------
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 $ 624 $ 568
Interest and other income 346 350 339 375 410 103 114
------- ------- ------- ------- ------- ------ -------
Total revenues 2,082 2,128 2,082 2,673 2,766 727 682
======= ======= ======= ======= ======= ====== =======
EXPENSES:
Property operating 907 968 1,068 1,039 2,312 389 511
Management and advisory fees 87 90 93 119 112 -- --
Real estate and other taxes 325 334 311 344 373 -- --
Depreciation and amortization 517 633 787 891 869 216 218
Interest expense 462 465 436 439 437 108 112
------- ------- ------- ------- ------- ------ -------
Total expenses 2,298 2,490 2,695 2,832 4,103 713 841
======= ======= ======= ======= ======= ====== =======
Net income (loss) before
partnership's share of
unconsolidated joint venture income
(loss) (216) (362) (515) (159) (1,337) 14 (159)
------- ------- ------- ------- ------- ------ -------
</TABLE>
F-140
<PAGE> 330
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Partnership's share of
unconsolidated joint venture income
(loss) (307) 162 (285) (15) 160 30 55
------- ------- ------- ------- ------- ------ -------
Net income (loss) $ (523) $ (200) $ (800) $ (174) $(1,177) $ 44 $ (104)
======= ======= ======= ======= ======= ====== =======
</TABLE>
F-141
<PAGE> 331
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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 86 87
Income (loss) per unit (6.04) (2.30) (9.24) (2.01) (13.59) .51 (1.18)
Ratio of earnings to fixed charges (1) -- -- -- -- -- 1.41 --
Deficiency of earnings to cover fixed
charges (2) 523 200 800 174 1,177 -- 104
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
161 156 146 144 131 130
Per unit value assigned for the consolidation 145
BALANCE SHEET DATA:
Cash and cash equivalents $ 203 $ 23 $ 70 $ 71 $ 261 $ 23
Real estate held for investment, net 10,900 11,206 11,212 10,899 10,591 10,473
Mortgages/notes receivable, net 2,164 2,164 2,454 2,773 3,063 3,467
Accounts receivable, net 407 360 356 364 378 349
Investment in/due from partnerships 5,494 5,857 4,368 4,200 4,037 3,279
Other assets 508 620 1,017 1,036 874 903
Total assets, at book value 19,676 20,230 19,477 19,343 19,204 18,494
</TABLE>
F-142
<PAGE> 332
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets, at valued assigned for the
consolidation 29,499
Total liabilities 5,620 6,674 6,771 6,811 7,849 7,243
General partners deficit -- -- -- -- -- (65)
Limited partners equity 14,056 13,556 12,706 12,532 11,355 11,316
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net (1,338) (180) 47 1 190 (64) (238)
Cash (used in) provided by operating
activities (842) 401 (673) 242 85 52 (575)
</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
F-143
<PAGE> 333
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.
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
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<PAGE> 334
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 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.
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<PAGE> 335
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.
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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<PAGE> 336
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 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
as of 3/31/2000 and 1999.
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 three months ended March 31, 2000 decreased by
approximately $56,000, or 9%, primarily due to lower occupancy at Sierra
Southwest Pointe. Occupancy at Sierra Southwest Pointe decreased from 94% at
March 31, 1999 to 73% at March 31, 2000. At 5850 San Felipe, occupancy rose
slightly from 97% to 100% between the same periods. Sierra Westlakes remained
75% occupied. The decrease in rental income was also attributable to lower
common area maintenance fees billed during the quarter when compared to the same
period in 1999.
Operating expenses for the three months ended March 31, 2000 increased by
approximately $122,000, or 31%, 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 data processing
costs and accounting and auditing fees were incurred during the quarter
The Partnership's share of unconsolidated joint venture income was approximately
$55,000 for the three months ended March 31, 2000 compared to approximately
$30,000 for the corresponding period in 1999.
(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 February and March 2000, the Partnership made
scheduled payments totaling $500,000, with the remaining $500,000 due by
December 31, 2000.
The Partnership is in an illiquid position as of March 31, 2000 with cash and
billed rents of approximately $136,000 and current liabilities of approximately
$858,000, which includes the remaining legal liability of $500,000.
The Partnership's primary capital requirements will be for the construction of
new tenant space. 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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<PAGE> 337
D. 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> 338
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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<PAGE> 339
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> 340
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> 341
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>
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> 342
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). 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%
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<PAGE> 343
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
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.
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<PAGE> 344
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).
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.
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<PAGE> 345
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:
<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
========== ==========
</TABLE>
F-156
<PAGE> 346
<TABLE>
<S> <C> <C>
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).
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
F-157
<PAGE> 347
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>
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
F-158
<PAGE> 348
$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 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 accum-
ulated amortization of
$63,160 and $58,302
in 1999 and 1998, respec-
tively $ 145,032 $ 149,890
---------- ----------
Investment in unconsolidated
joint venture $3,023,177 $3,193,894
========== ==========
</TABLE>
F-159
<PAGE> 349
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
------------ ------------
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)
------------ ------------
General Partners' equity 10,073,543 9,674,717
------------ ------------
Total Liabilities and General Partners' equity $ 16,013,071 $ 15,012,125
============ ============
</TABLE>
F-160
<PAGE> 350
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 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-161
<PAGE> 351
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-162
<PAGE> 352
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-163
<PAGE> 353
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 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
F-164
<PAGE> 354
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-165
<PAGE> 355
E. Financial Statement Schedules
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-166
<PAGE> 356
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-167
<PAGE> 357
SCHEDULE III
SIERRA PACIFIC DEVELOPMENT FUND II 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 ----------------------------------------
Encumb- Improve- After Acquis- Improve- Total
Description rances Land ments ition (2) Land ments (5) (3)(4)(5)
----------- ------ ---------- ------------ -------------- ----------- ----------- --------
<S> <C> <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 $ 7,112,29
Sierra Southwest Pointe
Houston, Texas 1,494,678 570,124 2,279,488 495,844 570,124 2,561,913 3,132,03
Sierra Westlakes Development
Houston, Texas 1,902,438 1,743,622 3,759,827 1,743,622 2,331,415 4,075,03
----------- ----------- ----------- ----------- ----------- ----------- ----------
TOTAL $ 6,397,116 $ 4,263,746 $ 5,086,420 $ 6,683,836 $ 4,263,746 $10,055,624 $14,319,37
=========== =========== =========== =========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Accumulated Date Date Depreciation
Description Depreciation Constructed Acquired Life
----------- ------------- ----------- -------- ------------
<S> <C> <C> <C> <C>
OFFICE/INDUSTRIAL BUILDINGS
INCOME -PRODUCING:
5850 San Felipe
Houston, Texas $ 1,437,594 3/77 12/94 1-30 yrs.
Sierra Southwest Pointe
Houston, Texas 765,965 8/72 7/91 2-30 yrs.
Sierra Westlakes Development
Houston, Texas 1,075,160 10/85 8/84 1-30 yrs.
-----------
TOTAL $ 3,278,719
===========
</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 $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-168
<PAGE> 358
<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-169
<PAGE> 359
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-170
<PAGE> 360
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-171
<PAGE> 361
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)
----------- ----------- -----------
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-172
<PAGE> 362
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-173
<PAGE> 363
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 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)
----------- ----------- -----------
</TABLE>
F-174
<PAGE> 364
<TABLE>
<S> <C> <C> <C>
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-175
<PAGE> 365
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 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.
F-176
<PAGE> 366
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 asset, the Partnership shall recognize an impairment loss in accordance with
the Statement. No such impairment has been recognized by the Partnership.
F-177
<PAGE> 367
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-178
<PAGE> 368
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-179
<PAGE> 369
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-180
<PAGE> 370
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-181
<PAGE> 371
- 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-182
<PAGE> 372
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>
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
F-183
<PAGE> 373
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-184
<PAGE> 374
F. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
------------ -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,153 $ 260,963
Receivables:
Note, net of deferred gain of $736,271 3,466,553 3,062,629
Unbilled rent 237,144 239,271
Billed rent 112,487 140,211
Due from affiliates 1,013,698 1,013,698
Interest 114,176 0
Income-producing properties - net of
accumulated depreciation and valuation
allowance of $3,886,195 and $3,728,719,
respectively 10,473,255 10,590,651
Investment in unconsolidated joint venture 2,265,201 3,023,177
Other assets - net of accumulated amortization
of $408,815 and $393,674, respectively 788,661 873,728
------------ ------------
Total Assets $ 18,494,328 $ 19,204,328
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities $ 858,033 $ 1,452,577
Notes payable 6,385,248 6,397,116
------------ ------------
Total Liabilities 7,243,281 7,849,693
------------ ------------
Partners' equity (deficit):
General Partner (65,041) 0
Limited Partners:
Class A Limited Partners:
60,000 units authorized,
56,674 issued and outstanding 7,401,124 7,426,335
Class B Limited Partners:
60,000 units authorized,
29,979 issued and outstanding 3,914,964 3,928,300
------------ ------------
Total Partners' equity 11,251,047 11,354,635
------------ ------------
Total Liabilities and Partners' equity $ 18,494,328 $ 19,204,328
============ ============
</TABLE>
F-185
<PAGE> 375
See Accompanying Notes 4
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
REVENUES:
Rental income $ 567,727 $ 624,219
Interest income 114,371 102,404
--------- ---------
Total revenues 682,098 726,623
--------- ---------
EXPENSES:
Operating expenses 511,105 389,112
Depreciation and amortization 217,826 215,764
Interest 111,766 107,783
--------- ---------
Total costs and expenses 840,697 712,659
--------- ---------
(LOSS) INCOME BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE INCOME (158,599) 13,964
--------- ---------
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT
VENTURE INCOME 55,011 29,875
--------- ---------
NET (LOSS) INCOME $(103,588) $ 43,839
========= =========
Net (loss) income per limited partnership unit $ (1.18) $ 0.51
========= =========
</TABLE>
F-186
<PAGE> 376
See Accompanying Notes 5
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Year Ended December 31, 1999 and
for the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Total
Limited General Partners'
Partners
----------------------------
Per Class A Class B Total Partner Equity
Unit
--------- ------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Partners' equity -
January 1, 2000 (audited) 131.03 7,426,335 3,928,300 11,354,635 0 11,354,635
Transfer among general partners
and limited partners 0.74 41,861 22,144 64,005 (64,005) 0
Net loss (unaudited) (1.18) (67,072) (35,480) (102,552) (1,036) (103,588)
------- ------------ ------------ ------------ ------------ ------------
Partners' equity (deficit) -
March 31, 2000 (unaudited) $130.59 $ 7,401,124 $ 3,914,964 $ 11,316,088 $ (65,041) $ 11,251,047
======= ============ ============ ============ ============ ============
</TABLE>
F-187
<PAGE> 377
See Accompanying Notes 6
SIERRA PACIFIC DEVELOPMENT FUND II
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(103,588) $ 43,839
Adjustments to reconcile net (loss) income
to cash (used in) provided by operating activities:
Depreciation and amortization 217,826 215,764
Partnership's share of unconsolidated
joint venture income (55,011) (29,875)
Decrease (increase) in rent receivable 29,851 (47,884)
Increase in interest receivable (114,176) (101,859)
Decrease in other receivables 0 7,946
Decrease in other assets 44,169 67,879
Decrease in accrued and other liabilities (594,544) (104,146)
--------- ---------
Net cash (used in) provided by operating activities (575,473) 51,664
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to affiliate of the general partner (403,924) 0
Payments for property additions (58,318) (119,778)
--------- ---------
Net cash used in investing activities (462,242) (119,778)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (11,868) (6,952)
Distributions from unconsolidated joint venture 811,773 0
Borrowings from affiliate 0 11,055
--------- ---------
Net cash provided by financing activities 799,905 4,103
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (237,810) (64,011)
--------- ---------
CASH AND CASH EQUIVALENTS - Beginning of period 260,963 71,180
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 23,153 $ 7,169
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for property taxes $ 223,178 $ 210,727
========= =========
Cash paid during the period for interest $ 111,766 $ 107,783
========= =========
</TABLE>
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<PAGE> 378
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 March 31,
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 three months ended March 31, 2000
and 1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
March 31
-----------------------------
2000 1999
----------- ------------
<S> <C> <C>
Management fees $ 29,800 $ 25,320
Administrative fees 69,864 62,297
Leasing fees 18,141 3,571
</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 March 31, 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 three months ended March 31, 2000
and 1999 follows:
F-189
<PAGE> 379
<TABLE>
<CAPTION>
March 31
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Rental income $ 556,156 $500,720
Total revenues 617,334 556,010
Operating expenses 219,914 190,270
Share of unconsolidated
joint venture income (loss) 45,176 (25,266)
Net income 175,848 87,978
</TABLE>
As of March 31, 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 three months ended March
31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
SCP SVP SIIP
---------------------------------------------------------------------------------------
March 31 March 31 March 31
----------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 229,440 $ 214,772 $ 0 $ 0 $ 385,844 $ 260,066
Total revenues 229,440 214,772 0 11,907 397,049 260,066
Operating expenses 154,180 126,351 13,665 13,797 124,762 123,578
Extraordinary loss 46,020 0 0 0 0 0
Net (loss) income (124,683) (36,421) (20,154) (2,457) 127,660 (63,391)
</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 percent of cumulative operating income,
gains, losses, deductions and credits of the Partnership is allocated among the
limited partners and 1 percent is allocated to the general partner. Management
does not believe that the effect of this transfer is significant.
F-190
<PAGE> 380
SIERRA PACIFIC DEVELOPMENT FUND III
HISTORICAL FINANCIAL DATA
F-191
<PAGE> 381
Sierra Pacific Development Fund III
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 March 31, 2000 and 1999
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts and reserves
F. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
F-192
<PAGE> 382
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 March 31, 2000 and for the three months ended
March 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 DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------------------------- -----------------------
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-193
<PAGE> 383
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
---------------------------------------------------------- -----------------------
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-194
<PAGE> 384
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ------------------
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) (2)
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 $12
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-195
<PAGE> 385
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------------------- ------------------
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 12
Total assets, at valued assigned for the
consolidation 744
Total liabilities 4,339 3,978 338 333 341 351
General partners deficit - - (374) (337) (344) (360)
Limited partners equity 450 497 - - - -
Other equity 1,271 1,797 57 5 7 21
CASH FLOW DATA:
Increase (decrease) in cash and
equivalents, net 12 81 (83) (14) 3 (1) 9
Cash provided by (used in) operating
activities (313) (163) (508) 58 - 9 (9)
</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.
F-196
<PAGE> 386
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.
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
F-197
<PAGE> 387
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.
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.
F-198
<PAGE> 388
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.
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-199
<PAGE> 389
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 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 as of 3/31/2000 and 1999.
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 an 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.
(b) RESULTS OF OPERATIONS
No income was recorded for the three months ended March 31, 2000. The
Partnership recorded other income of $11,907 during the first quarter of the
prior year 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 three months ended March 31, 2000 remained relatively
unchanged when compared to the same period in the prior year. Operating expenses
for the quarters ended March 31, 2000 and 1999 consisted primarily of accounting
and auditing costs.
The Partnership's share of loss from its investment in SIP was $6,489 for the
three months ended March 31, 2000 compared to $567 for the same period 1999.
(c) LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Partnership is in a liquid position with cash of
$12,365 and accrued and other liabilities of $4,251.
The Partnership's primary capital requirements are 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, 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.
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
F-200
<PAGE> 390
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-201
<PAGE> 391
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.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-202
<PAGE> 392
SIERRA PACIFIC DEVELOPMENT FUND III
(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 $ 3,722 $ 935
------------ ------------
Total Assets $ 3,722 $ 935
============ ============
LIABILITIES AND PARTNERS' EQUITY
Investment in unconsolidated
joint venture (Notes 1 and 4) $ 340,614 $ 332,996
------------ ------------
Total Liabilities 340,614 332,996
------------ ------------
Minority interest in consolidated
joint venture (Note 3) 7,516 4,981
------------ ------------
Partners' equity (deficit) (Notes 1 and 5):
General Partner (344,408) (337,042)
Limited Partners:
60,000 units authorized,
36,521 issued and
outstanding 0 0
------------ ------------
Total Partners' equity (deficit) (344,408) (337,042)
------------ ------------
Total Liabilities and Partners' equity $ 3,722 $ 935
============ ============
</TABLE>
F-203
<PAGE> 393
See Accompanying Notes
SIERRA PACIFIC DEVELOPMENT FUND III
(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) $ 0 $ 0 $ 558,091
Other income (Note 3) 15,139 93,656 633
----------- ----------- -----------
Total revenues 15,139 93,656 558,724
----------- ----------- -----------
EXPENSES:
Operating expenses:
Depreciation and amortization 0 0 464,427
Maintenance and repairs 0 0 104,981
Property taxes and insurance 0 0 63,209
Administrative fees (Note 2) 0 0 75,180
Utilities 0 0 58,037
Legal and accounting 14,651 16,818 44,128
Management fees (Note 2) 0 0 40,248
Salaries and payroll taxes 0 0 35,565
General and administrative 101 20,226 13,261
Renting expenses 0 0 3,535
Other operating expenses 0 0 49,533
----------- ----------- -----------
Total operating expenses 14,752 37,044 952,104
Interest 0 0 299,404
----------- ----------- -----------
Total expenses 14,752 37,044 1,251,508
----------- ----------- -----------
INCOME (LOSS) BEFORE LOSS FROM
PROPERTY DISPOSITION 387 56,612 (692,784)
LOSS FROM PROPERTY DISPOSITION (Note 3) 0 0 (967,764)
----------- ----------- -----------
</TABLE>
F-204
<PAGE> 394
<TABLE>
<S> <C> <C> <C>
INCOME (LOSS) BEFORE PARTNERSHIP'S
SHARE OF UNCONSOLIDATED JOINT
VENTURE (LOSS) INCOME 387 56,612 (1,660,548)
----------- ----------- -----------
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
(LOSS) INCOME (7,618) 787 7,906
(LOSS) INCOME BEFORE MINORITY
INTEREST'S SHARE OF CONSOLIDATED
JOINT VENTURE (INCOME) LOSS (7,231) 57,399 (1,652,642)
----------- ----------- -----------
MINORITY INTEREST'S SHARE OF
CONSOLDIATED JOINT VENTURE
(INCOME) LOSS (Note 3) (135) (19,774) 781,288
----------- ----------- -----------
NET (LOSS) INCOME $ (7,366) $ 37,625 $ (871,354)
=========== =========== ===========
Net loss per limited partnership unit (Note 1) $ 0 $ 0 $ (13.60)
=========== =========== ===========
</TABLE>
F-205
<PAGE> 395
See Accompanying Notes
SIERRA PACIFIC DEVELOPMENT FUND III
(A California Limited Partnership)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS'
EQUITY (DEFICIT)
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 $ 13.60 $ 496,687 $ 0 $ 496,687
Net loss (13.60) (496,687) (374,667) (871,354)
---------- ----------- ----------- ----------
Partners' equity (deficit) - December 31, 1997 0 0 (374,667) (374,667)
Net income 0 0 37,625 37,625
---------- ----------- ----------- ----------
Partners' equity (deficit) - December 31, 1998 0 0 (337,042) (337,042)
Net loss 0 0 (7,366) (7,366)
---------- ----------- ----------- ----------
Partners' equity (deficit) - December 31, 1999 $ 0 $ 0 $ (344,408) $(344,408)
========== =========== =========== ==========
</TABLE>
F-206
<PAGE> 396
See Accompanying Notes
SIERRA PACIFIC DEVELOPMENT FUND III
(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) income $ (7,366) $ 37,625 $ (871,354)
Adjustments to reconcile net (loss) income
to cash provided by (used in) operating activities:
Depreciation and amortization 0 0 464,427
Loss from property disposition 0 0 967,764
Partnership's share of unconsolidated
joint venture loss (income) 7,618 (787) (7,906)
Minority interest's share of consolidated
joint venture income (loss) 135 19,774 (781,288)
Decrease in rent receivable 0 0 21,374
Decrease (increase) in other receivables 0 6,137 (4,876)
Increase in other assets 0 0 (280,515)
Increase (decrease) in accrued and other liabilities 0 (4,660) (15,891)
----------- ----------- -----------
Net cash provided by (used in) operating activities 387 58,089 (508,265)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions 0 0 (394,584)
Net cash proceeds from property disposition 0 0 2,140,598
----------- ----------- -----------
Net cash provided by investing activities 0 0 1,746,014
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor 16,400 36,900 1,193,141
Distributions to minority investor (14,000) (108,656) (2,152,098)
Repayment of loan to affiliate 0 0 4,770
Funding of note payable secured by property 0 0 3,050,000
Principal payments on notes payable 0 0 (3,416,399)
----------- ----------- -----------
Net cash provided by (used in) financing activities 2,400 (71,756) (1,320,586)
----------- ----------- -----------
</TABLE>
F-207
<PAGE> 397
<TABLE>
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 2,787 (13,667) (82,837)
CASH AND CASH EQUIVALENTS - Beginning of year 935 14,602 97,439
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - End of year $ 3,722 $ 935 $ 14,602
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 0 $ 0 $ 324,853
=========== =========== ===========
</TABLE>
F-208
<PAGE> 398
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.
Going Concern Considerations
F-209
<PAGE> 399
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
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).
F-210
<PAGE> 400
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.
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
F-211
<PAGE> 401
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.
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.
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<PAGE> 402
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.
F-213
<PAGE> 403
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-214
<PAGE> 404
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-215
<PAGE> 405
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.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-216
<PAGE> 406
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-217
<PAGE> 407
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-218
<PAGE> 408
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-219
<PAGE> 409
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>
F-220
<PAGE> 410
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 amounts of assets and
F-221
<PAGE> 411
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
developed by management. Unanticipated
F-222
<PAGE> 412
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.
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<PAGE> 413
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:
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<PAGE> 414
<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-225
<PAGE> 415
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.
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<PAGE> 416
F. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
SIERRA PACIFIC DEVELOPMENT FUND III
(A Limited Partnership)
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000
(Unaudited) December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,365 $ 3,722
----------- -----------
Total Assets $ 12,365 $ 3,722
=========== ===========
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities $ 4,251 $ 0
Investment in unconsolidated
joint venture 347,103 340,614
----------- -----------
Total Liabilities 351,354 340,614
----------- -----------
Minority interest in consolidated
joint venture 21,014 7,516
----------- -----------
Partners' equity (deficit):
General Partner (360,003) (344,408)
Limited Partners:
60,000 units authorized,
36,521 issued and outstanding 0 0
----------- -----------
Total Partners' equity (deficit) (360,003) (344,408)
----------- -----------
Total Liabilities and Partners' equity $ 12,365 $ 3,722
=========== ===========
</TABLE>
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<PAGE> 417
See Accompanying Notes 4
SIERRA PACIFIC DEVELOPMENT FUND III
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
REVENUES:
Other income $ 0 $ 11,907
---------- ----------
Total revenues 0 11,907
---------- ----------
EXPENSES:
Operating expenses 13,665 13,797
---------- ----------
Total costs and expenses 13,665 13,797
---------- ----------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE LOSS (13,665) (1,890)
---------- ----------
PARTNERSHIP'S SHARE OF UNCONSOLIDATED
JOINT VENTURE LOSS (6,489) (567)
---------- ----------
LOSS BEFORE MINORITY INTEREST'S SHARE
OF CONSOLIDATED JOINT VENTURE LOSS (20,154) (2,457)
---------- ----------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE LOSS 4,559 630
---------- ----------
NET LOSS $ (15,595) $ (1,827)
========== ==========
Net loss per limited partnership unit $ 0 $ 0
========== ==========
</TABLE>
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<PAGE> 418
See Accompanying Notes 5
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 Three
Months Ended March 31, 2000
<TABLE>
<CAPTION>
Limited Partners Total
--------------------------- General Partners'
Per Unit Total Partner Equity
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Partners' equity (deficit) - January 1, 2000 (344,408) (344,408)
(audited) 0 0
Net loss 0 0 (15,595) (15,595)
---------- ----------- ----------- ----------
Partners' equity (deficit) - March 31, 2000
(unaudited) $ 0 $ 0 $ (360,003) $ (360,003)
========== =========== ========== ==========
</TABLE>
F-229
<PAGE> 419
See Accompanying Notes 6
SIERRA PACIFIC DEVELOPMENT FUND III
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,595) $ (1,827)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Partnership's share of unconsolidated joint
venture loss 6,489 567
Minority interest's share of consolidated joint
venture loss (4,559) (630)
Increase in accrued and other liabilities 4,251 10,905
---------- ----------
Net cash (used in) provided by operating activities (9,414) 9,015
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan to affiliate 0 (9,600)
Contributions from minority investor 20,000 0
Distributions to minority investor (1,943) 0
---------- ----------
Net cash provided by (used in) financing activities 18,057 (9,600)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 8,643 (585)
CASH AND CASH EQUIVALENTS
Beginning of period 3,722 935
---------- ----------
CASH AND CASH EQUIVALENTS
End of period $ 12,365 $ 350
========== ==========
</TABLE>
F-230
<PAGE> 420
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.
2. BASIS OF FINANCIAL STATEMENTS
F-231
<PAGE> 421
The accompanying unaudited consolidated condensed financial statements include
the accounts of the Partnership and Sierra Vista Partners, a majority owned
joint venture at March 31, 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 March 31, 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 March 31, 2000, the Partnership has a 16.76% equity
interest in the Property. This investment is accounted for using the equity
method.
Summarized income statement information for SIP for the three months ended March
31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
March 31
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Rental income $ 70,909 $ 70,909
Total revenue 70,909 70,909
Operating expenses 40,255 29,841
Net loss 38,718 4,773
</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.
F-232
<PAGE> 422
E. Financial Statement Schedules
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 E of the Table of Contents. 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.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-233
<PAGE> 423
SCHEDULE II
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-234
<PAGE> 424
SIERRA PACIFIC PENSION INVESTORS '84
HISTORICAL FINANCIAL DATA
F-235
<PAGE> 425
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 March 31, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Sierra Mira Mesa Partners and Subsidiary Audited Financial Statements -
December 31, 1999, 1998 and 1997
F. Financial Statement Schedules
1. Schedule II - Valuation and qualifying accounts and reserves
2. Schedule III - Real estate and accumulated depreciation
G. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
F-236
<PAGE> 426
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 March 31, 2000 and for the three months ended
March 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>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------
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 $ 144 $ 148
Interest and other income ........... 277 193 198 222 187 61 40
----- ----- ----- ----- ----- ----- -----
Total revenues ...................... 714 669 671 726 810 205 188
===== ===== ===== ===== ===== ===== =====
EXPENSES:
Property operating .................. 267 237 214 218 295 122 128
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 68 36
Interest expense .................... -- -- 115 148 137 35 33
----- ----- ----- ----- ----- ----- -----
Total expenses ...................... 711 627 723 797 859 225 197
===== ===== ===== ===== ===== ===== =====
</TABLE>
F-237
<PAGE> 427
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------ ------------------
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) (20) (8)
Gain on sale of property ............ 151 -- -- -- 83 -- --
Equity in earnings (losses) of non
consolidated partnerships ........... (296) 156 (507) 196 323 58 127
----- ----- ----- ----- ----- ----- -----
Net income (loss) ................... $(142) $ 198 $(559) $ 125 $ 357 $ 38 $ 119
===== ===== ===== ===== ===== ===== =====
</TABLE>
F-238
<PAGE> 428
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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 0.50 1.52
Ratio of earnings to fixed charges (1) -- -- -- 1.84 3.61 2.09 4.61
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 122 122 114 116 121 125
Per unit value assigned for the consolidation 236
</TABLE>
F-239
<PAGE> 429
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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 $ 22
Real estate held for investment, net 1,524 1,429 1,373 1,212 1,174 1,153
Mortgages/notes receivable, net 1,698 1,698 2,005 2,228 1,459 1,459
Accounts receivable, net 115 251 50 43 47 96
Investment in/due from partnerships 5,772 5,974 6,768 6,791 7,304 7,357
Other assets 133 116 252 274 792 851
Total assets, at book value 9,497 9,510 10,475 10,558 10,808 10,938
Total assets, at valued assigned for the
consolidation 26,889
Total liabilities 80 96 1,670 1,628 1,521 1,532
General partners deficit -- -- -- -- -- (185)
Limited partners equity 9,417 9,414 8,805 8,930 9,287 9,591
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net (88) (213) (15) (17) 21 (3) (10)
Cash provided by (used in) operating
activities 86 133 (97) (67) 497 12 (64)
</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.
F-240
<PAGE> 430
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 an industrial property known as Sorrento I in San Diego,
California
F-241
<PAGE> 431
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.
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.
F-242
<PAGE> 432
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.
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
F-243
<PAGE> 433
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-244
<PAGE> 434
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 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
as of March 31, 2000 and 1999.
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 three months ended March 31, 2000 increased by
approximately $5,000, or 3%, when compared to the corresponding period in the
prior year, primarily due to higher common area maintenance fees billed during
the quarter. This increase was partially offset by a decrease in occupancy at
the Property from 100% at March 31, 1999 to 87% at March 31, 2000.
Interest income for the quarter ended March 31, 2000, decreased by approximately
$21,000, or 35%, 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 increased by approximately $6,000, or 5%, principally due to
an increase in administrative costs and property taxes. This increase was
partially offset as a result of lower accounting and auditing costs incurred
during the quarter.
Depreciation and amortization expenses for the three months ended March 31, 2000
decreased by approximately $32,000, or 47%, when compared 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 $69,000 for the three months ended March 31, 2000 in comparison to
the same period in the prior year.
(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 March 31, 2000, the Partnership is in an illiquid position. Total cash and
billed receivables amount to approximately $33,000 compared to approximately
$151,000 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.
F-245
<PAGE> 435
Inflation:
The Partnership does not expect inflation to be a material factor in its
operations in 2000.
F-246
<PAGE> 436
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-247
<PAGE> 437
SIERRA PACIFIC PENSION INVESTORS '84 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 $ 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 and 5) 7,303,940 6,743,274
Other assets (Notes 1, 2 and 3) 791,968 274,381
----------- -----------
Total Assets $10,808,318 $10,558,178
=========== ===========
</TABLE>
F-248
<PAGE> 438
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
<S> <C> <C>
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
------------ ------------
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-249
<PAGE> 439
See Accompanying Notes
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
--------- --------- ---------
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
--------- --------- ---------
</TABLE>
F-250
<PAGE> 440
<TABLE>
<S> <C> <C> <C>
INCOME (LOSS) BEFORE PARTNERSHIP'S 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-251
<PAGE> 441
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>
Total
Limited Partners 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>
See Accompanying Notes
F-252
<PAGE> 442
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
----------- ----------- -----------
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
----------- ----------- -----------
</TABLE>
F-253
<PAGE> 443
<TABLE>
<S> <C> <C> <C>
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-254
<PAGE> 444
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 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%,
F-255
<PAGE> 445
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.
Income-Producing Properties
F-256
<PAGE> 446
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.
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".
F-257
<PAGE> 447
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
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
F-258
<PAGE> 448
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 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:
F-259
<PAGE> 449
<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.
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% -
F-260
<PAGE> 450
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
------------ ------------
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
</TABLE>
F-261
<PAGE> 451
<TABLE>
<S> <C> <C>
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)
------------ ------------
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
</TABLE>
F-262
<PAGE> 452
<TABLE>
<S> <C> <C> <C>
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 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
=========== ===========
</TABLE>
F-263
<PAGE> 453
<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
----------- ----------- -----------
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.
F-264
<PAGE> 454
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 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
F-265
<PAGE> 455
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-266
<PAGE> 456
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-267
<PAGE> 457
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-268
<PAGE> 458
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
=========== ===========
</TABLE>
F-269
<PAGE> 459
LIABILITIES AND GENERAL PARTNERS' EQUITY
<TABLE>
<S> <C> <C>
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-270
<PAGE> 460
See Accompanying Notes
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
</TABLE>
F-271
<PAGE> 461
<TABLE>
<S> <C> <C> <C>
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
CONSOLIDATED JOINT VENTURE LOSS
(INCOME)
7,618 (787) (7,906)
----------- ----------- -----------
NET INCOME (LOSS) $ 483,726 $ 181,082 $ (791,768)
=========== =========== ===========
</TABLE>
F-272
<PAGE> 462
See Accompanying Notes
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-273
<PAGE> 463
See Accompanying Notes
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
----------- ----------- -----------
</TABLE>
F-274
<PAGE> 464
<TABLE>
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
F-275
<PAGE> 465
<TABLE>
<S> <C> <C> <C>
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-276
<PAGE> 466
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 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.
F-277
<PAGE> 467
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 asset, the
F-278
<PAGE> 468
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-279
<PAGE> 469
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-280
<PAGE> 470
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-281
<PAGE> 471
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:
F-282
<PAGE> 472
<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;
- 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
F-283
<PAGE> 473
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-284
<PAGE> 474
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 (177,022) (460,614) (1,232,209)
of property
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>
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,
F-285
<PAGE> 475
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-286
<PAGE> 476
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-287
<PAGE> 477
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-288
<PAGE> 478
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 --------------------------------
Encumb- Improve- After 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. Const- Acqui- Deprec.
Description (5) ructed red 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 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-289
<PAGE> 479
<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-290
<PAGE> 480
G. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
SIERRA PACIFIC PENSION INVESTORS '84
(A Limited Partnership)
BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000 December 31,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,788 $ 31,562
Receivables:
Note receivable, net of deferred gain of
$132,471 1,459,139 1,459,139
Unbilled rent 44,652 44,708
Billed rent 11,293 2,762
Interest 39,790 0
Income-producing property -
accumulated depreciation and valuation
allowance of $2,813,436 and $2,864,363
respectively 1,153,354 1,174,239
Investment in unconsolidated joint venture 7,357,261 7,303,940
Other assets - net of accumulated amortization
of $156,401 and $172,144, respectively 850,937 791,968
------------ ------------
Total Assets $ 10,938,214 $ 10,808,318
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accrued and other liabilities $ 151,065 $ 122,891
Notes payable 1,381,483 1,398,368
------------ ------------
Total Liabilities 1,532,548 1,521,259
------------ ------------
Partners' equity (deficit):
General Partner (185,170) 0
Limited Partners:
80,000 units authorized,
77,000 issued and outstanding 9,590,836 9,287,059
------------ ------------
</TABLE>
F-291
<PAGE> 481
<TABLE>
<S> <C> <C>
Total Partners' equity 9,405,666 9,287,059
------------ ------------
Total Liabilities and Partners' equity $ 10,938,214 $ 10,808,318
============ ============
</TABLE>
See Accompanying Notes
F-292
<PAGE> 482
SIERRA PACIFIC PENSION INVESTORS '84
(A Limited Partnership)
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
REVENUES:
Rental income $ 148,485 $ 143,659
Interest income 39,793 61,088
--------- ---------
Total revenues 188,278 204,747
--------- ---------
EXPENSES:
Operating expenses 128,074 122,176
Depreciation and amortization 36,355 68,349
Interest expense 32,568 34,769
--------- ---------
Total costs and expenses 196,997 225,294
--------- ---------
LOSS BEFORE PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
INCOME (8,719) (20,547)
PARTNERSHIP'S SHARE OF
UNCONSOLIDATED JOINT VENTURE
--------- ---------
INCOME 127,326 58,670
--------- ---------
NET INCOME $ 118,607 $ 38,123
========= =========
Net income per limited partnership unit $ 1.52 $ 0.50
========= =========
</TABLE>
See Accompanying Notes
F-293
<PAGE> 483
SIERRA PACIFIC PENSION INVESTORS '84
(A Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the Year Ended December 31, 1999 and
For the Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Limited Partners Total
------------------------ General Partners'
Per Unit Total Partner Equity
-------- ----- ------- ------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 2000 (audited) 120.61 9,287,059 0 9,287,059
Transfer among general partners and 2.42 186,356 (186,356) 0
limited partners
Net income (unaudited) 1.52 117,421 1,186 118,607
------- ---------- ---------- ----------
Partners' equity (deficit) - March 31, 2000 $124.55 $9,590,836 $ (185,170) $9,405,666
(unaudited)
======= ========== ========== ==========
</TABLE>
See Accompanying Notes
F-294
<PAGE> 484
SIERRA PACIFIC PENSION INVESTORS '84
(A Limited Partnership)
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 118,607 $ 38,123
Adjustments to reconcile net income to cash
(used in) provided by operating activities:
Depreciation and amortization 36,355 68,349
Partnership's share of unconsolidated joint
venture income (127,326) (58,670)
Increase in rent receivable (8,475) (626)
Increase in interest receivable (39,790) (61,085)
(Increase) decrease in other assets (71,621) 28,466
Increase (decrease) in accrued and other
liabilites 28,174 (2,876)
--------- ---------
Net cash (used in) provided by operating
activities (64,076) 11,681
</TABLE>
F-295
<PAGE> 485
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for property additions (1,813) (48,025)
--------- ---------
Net cash used in investing activities (1,813) (48,025)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (16,885) (21,159)
Capital contributions to unconsolidated joint
venture (34,000) 0
Distributions from unconsolidated joint
venture 107,000 0
Loan from affiliate 0 54,500
--------- ---------
Net cash provided by financing activities 56,115 33,341
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,774) (3,003)
CASH AND CASH EQUIVALENTS--
Beginning of period 31,562 10,122
--------- ---------
CASH AND CASH EQUIVALENTS - End of period $ 21,788 $ 7,119
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for interest $ 32,504 $ 34,888
========= =========
</TABLE>
F-296
<PAGE> 486
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 March 31,
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 three months ended March 31, 2000
and 1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
March 31
------------------
2000 1999
---- ----
<S> <C> <C>
Management fees $ 4,449 $ 4,585
Administrative fees 19,744 16,596
</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 March 31, 2000 the
Partnership's interest in SMMP was 69.83%; the remaining 30.17% interest is
owned by SPDFII.
F-297
<PAGE> 487
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 three months ended March 31, 2000
and 1999 follows:
<TABLE>
<CAPTION>
March 31
--------
2000 1999
---- ----
<S> <C> <C>
Rental income $ 556,156 $ 500,720
Total revenues 617,334 556,010
Operating expenses 219,914 190,270
Share of unconsolidated
joint venture income (loss) 45,176 (25,266)
Net income 175,848 87,978
</TABLE>
As of March 31, 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 three months ended March
31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
SCP SVP SIIP
--- --- ----
March 31 March 31 March 31
-------- -------- --------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Rental income $ 229,440 $ 214,772 $ 0 $ 0 $ 385,844 $ 260,066
Total revenues 229,440 214,772 0 11,907 397,049 260,066
Operating expenses 154,180 126,351 13,665 13,797 124,762 123,578
Extraordinary loss 46,020 0 0 0 0 0
Net (loss) income (124,683) (36,421) (20,154) (2,457) 127,660 (63,391)
</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 percent of cumulative operating income,
gains, losses, deductions and credits of the Partnership is allocated among the
limited partners and 1 percent is allocated to the general partner. Management
does not believe that the effect of this transfer is significant.
F-298
<PAGE> 488
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
HISTORICAL FINANCIAL DATA
F-299
<PAGE> 489
Sierra Pacific Institutional Properties V
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 March 31, 2000 and 1999
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Financial Statement Schedule III - Real estate and accumulated
depreciation
F. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
F-300
<PAGE> 490
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 March 31, 2000 and for the three months ended
March 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 DECEMBER 31, QUARTER ENDED MARCH 31,
----------------------- -----------------------
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 $ 260 $ 386
Interest and other income .................... -- -- -- -- 35 -- 11
------- ------- ------- ------- ------- ------- -----
Total revenues ............................... $ 923 $ 991 $ 979 $ 815 $ 1,228 $ 260 $ 397
======= ======= ======= ======= ======= ======= =====
EXPENSES:
Property operating ........................... 220 246 238 255 283 124 125
Management and advisory fees ................. 47 54 60 50 69 -- --
Ground Lease ................................. 383 383 382 374 410 93 29
Real estate and other taxes .................. 108 91 89 105 111 -- --
Depreciation and amortization ................ 423 447 447 458 442 106 115
------- ------- ------- ------- ------- ------- -----
Total expenses ............................... 1,181 1,221 1,216 1,242 1,315 323 269
======= ======= ======= ======= ======= ======= =====
Net income (loss) before
minority interest ............................ (258) (230) (237) (427) (87) (63) 128
Minority interest ............................ 52 62 59 143 30 22 (56)
------- ------- ------- ------- ------- ------- -----
Net income (loss) ............................ $ (206) $ (168) $ (178) $ (284) $ (57) $ (41) $ 72
======= ======= ======= ======= ======= ======= =====
</TABLE>
F-301
<PAGE> 491
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
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) (1.34) 2.30
Ratio of earnings to fixed charges (1) -- -- -- -- -- -- 8.20
Deficiency of earnings to cover fixed
charges(2) 206 168 178 284 57 41 --
Cash distributions to minority investors (24) (191) (262) (86) (4) -- (55)
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 67
Per unit value assigned for the 159
consolidation
BALANCE SHEET DATA:
Cash and cash equivalents $ 67 $ 9 $ 23 $ 3 $ 135 $ 30
Real estate held for investment, net 6,333 5,992 5,630 5,571 5,552 5,766
Accounts receivable, net 401 490 476 486 528 544
Investment in/due from partnerships -- 19 19 19 -- --
Other assets 329 276 1,065 1,068 1,659 289
Total assets, at book value 7,130 6,786 7,213 7,147 7,874 6,629
Total assets at value assigned for the
consolidation 6,145
</TABLE>
F-302
<PAGE> 492
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total liabilities 216 248 220 439 285 65
General partners deficit -- -- -- -- -- (53)
Limited partners equity 2,627 2,459 2,282 1,997 1,941 2,066
Other equity 4,287 4,079 4,711 4,711 5,648 4,551
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net 64 (58) 15 (20) 132 45 (104)
Cash (used in) provided by operating
activities (96) 159 (647) 177 (493) 13 224
</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
F-303
<PAGE> 493
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.
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
F-304
<PAGE> 494
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:
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-305
<PAGE> 495
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-306
<PAGE> 496
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 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 as of 3/31/2000 and 1999.
The Partnership currently owns a 56.08% interest in the Sorrento II Partnership,
which operates the Sorrento II property in San Diego, California.
(b) RESULTS OF OPERATIONS
Rental income for the three months ended March 31, 2000 increased by
approximately $126,000, or 48%, when compared to the corresponding period in the
prior year. This increase was primarily due to higher common area maintenance
fees billed during the quarter. The Property was 100% occupied at March 31, 2000
and March 31, 1999.
Total operating expenses for the three months ended March 31, 2000 increased by
approximately $1,000, or 1%, in comparison to the same period in 1999. The
Partnership incurred higher auditing, data processing and administrative costs
during the quarter. This increase was partially offset by a decrease in
maintenance and repairs costs and other operating expenses.
(c) LIQUIDITY AND CAPITAL RESOURCES
The Partnership is in a liquid position at March 31, 2000 with cash and billed
rents of approximately $136,000 and current liabilities of approximately
$65,000. 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-307
<PAGE> 497
D. 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.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-308
<PAGE> 498
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-309
<PAGE> 499
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-310
<PAGE> 500
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-311
<PAGE> 501
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-312
<PAGE> 502
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.
F-313
<PAGE> 503
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 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.
F-314
<PAGE> 504
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.
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-315
<PAGE> 505
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 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.
F-316
<PAGE> 506
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.
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 improvements 5,178,562 5,761,800
----------- -----------
Total 7,748,377 8,331,615
Accumulated depreciation (2,195,937) (2,760,889)
----------- -----------
Net $ 5,552,440 $ 5,570,726
=========== ===========
</TABLE>
F-317
<PAGE> 507
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:
<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>
F-318
<PAGE> 508
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-319
<PAGE> 509
E. Financial Statement Schedule III
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 E of the Table of
Contents. 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.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2000
F-320
<PAGE> 510
SCHEDULE III
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
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 ----------------------------------
Encumb- Improve- After Acquis- Improve- Total Accum.
Description rances Land ments ition (2) Land ments (3)(4)(6) Deprec. (5)
----------- ------ ---- ----- ------------- ---- ----- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Sorrento II (3)
San Diego, $3,000,000 $2,420,186 0 $ 6,133,211 $2,569,815 $ 5,178,562 $7,748,377 $ 2,195,937
California
</TABLE>
<TABLE>
<CAPTION>
Date Date Deprec.
Description Constructed Acquired Life
----------- ----------- -------- ----
<S> <C> <C> <C>
OFFICE BUILDING-
INCOME -PRODUCING:
Sierra Sorrento II (3)
San Diego, (5) 8/87 3-30 yrs.
California
</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-321
<PAGE> 511
<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-322
<PAGE> 512
F. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A Limited Partnership)
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
(Unaudited)
-------------- -----------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 30,301 $ 134,781
Receivables:
Unbilled rent 437,419 451,414
Billed rent 106,131 76,707
Prepaid ground lease 0 1,344,540
Income-producing property - net of
accumulated depreciation of $2,289,793
and $2,195,937, respectively 5,766,091 5,552,440
Other assets - net of accumulated amortization
of $328,005 and $306,675, respectively 288,764 314,313
----------- ----------
Total Assets $ 6,628,706 $7,874,195
=========== ==========
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Accrued and other liabilities $ 65,298 $ 90,908
Ground lease payable 0 194,539
----------- ----------
Total Liabilities 65,298 285,447
----------- ----------
Ground lessor's equity in income-
producing property 0 3,000,000
----------- ----------
Minority interest in consolidated
joint venture 4,550,940 2,647,872
----------- ----------
Partners' equity (deficit):
General Partner (53,638) 0
Limited Partners:
140,000 units authorized,
30,777 issued and outstanding 2,066,106 1,940,876
----------- ----------
Total Partners' equity 2,012,468 1,940,876
----------- ----------
Total Liabilities and Partners' equity $ 6,628,706 $7,874,195
=========== ==========
</TABLE>
See Accompanying Notes 4
F-323
<PAGE> 513
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
REVENUES:
Rental income $ 385,844 $ 260,066
Interest income 11,205 0
--------- ---------
Total revenues 397,049 260,066
--------- ---------
EXPENSES:
Operating expenses 124,762 123,578
Ground lease 29,441 93,451
Depreciation and amortization 115,186 106,428
--------- ---------
Total costs and expenses 269,389 323,457
--------- ---------
INCOME (LOSS) BEFORE MINORITY
INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE
(INCOME) LOSS 127,660 (63,391)
--------- ---------
MINORITY INTEREST'S SHARE OF
CONSOLIDATED JOINT VENTURE
(INCOME) LOSS (56,068) 22,250
--------- ---------
NET INCOME (LOSS) $ 71,592 $ (41,141)
========= =========
Net income (loss) per limited partnership unit $ 2.30 $ (1.34)
========= =========
</TABLE>
See Accompanying Notes 5
F-324
<PAGE> 514
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 Three Months Ended March 31, 2000
<TABLE>
<CAPTION>
Limited Partners Total
------------------------- General Partners'
Per Unit Total Partner Equity
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Partners' equity - January 1, 2000 (audited) 63.06 1,940,876 0 1,940,876
Transfer among general and limited partners 1.77 54,354 (54,354) 0
Net income 2.30 70,876 716 71,592
--------- ---------- -------- ----------
Partners' equity (deficit) - March 31, 2000
(unaudited) $ 67.13 $2,066,106 $(53,638) $2,012,468
========= ========== ======== ==========
</TABLE>
See Accompanying Notes 6
F-325
<PAGE> 515
SIERRA PACIFIC INSTITUTIONAL PROPERTIES V
(A Limited Partnership)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 71,592 $ (41,141)
Adjustments to reconcile net income (loss)
to cash provided by operating activities:
Depreciation and amortization 115,186 106,428
Minority interest's share of consolidated
joint venture income (loss) 56,068 (22,250)
Increase in rent receivable (15,429) (51,038)
Decrease in prepaids and other assets 23,014 50,417
Decrease in accrued and other liabilities (26,169) (29,309)
----------- ---------
Net cash provided by operating activities 224,262 13,107
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property additions (2,175,742) (23,731)
----------- ---------
Net cash used in investing activities (2,175,742) (23,731)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contributions from minority investor 1,902,000 0
Distributions to minority investor (55,000) 0
Loan from affiliate 0 56,000
----------- ---------
Net cash provided by financing activities 1,847,000 56,000
----------- ---------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (104,480)
45,376
CASH AND CASH EQUIVALENTS -
Beginning of period 134,781 3,203
----------- ---------
CASH AND CASH EQUIVALENTS -
End of period $ 30,301 $ 48,579
=========== =========
</TABLE>
F-326
<PAGE> 516
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 March 31, 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 March 31, 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 three months ended March 31, 2000
and 1999 are affiliate transactions as follows:
<TABLE>
<CAPTION>
March 31
-------------------------
2000 1999
-------------------------
<S> <C> <C>
Management fees $ 18,957 $15,800
Administrative fees 21,263 17,873
</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.
F-327
<PAGE> 517
During the quarter ended March 31, 2000, an amount was transferred between the
partners' equity accounts such that 99 percent of cumulative operating income,
gains, losses, deductions and credits of the Partnership is allocated among the
limited partners and 1 percent is allocated to the general partner. Management
does not believe that the effect of this transfer is significant.
F-328
<PAGE> 518
NOONEY INCOME FUND LTD., L.P.
HISTORICAL FINANCIAL DATA
F-329
<PAGE> 519
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 March 31, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Unaudited Financial Statements - Quarters Ended March 31, 2000 and 1999
F-330
<PAGE> 520
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 March 31, 2000 and for the three months ended
March 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 DECEMBER 31, QUARTER ENDED MARCH 31,
------------------------------------------------ -----------------------
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 $ 500 $ 507
Interest and other income 19 20 24 16 29 -- 11
------ ------ ------ ------ ------ ------ ------
Total revenues 1,708 1,798 1,796 1,868 2,116 500 518
------ ------ ------ ------ ------ ------ ------
EXPENSES:
Property operating 588 681 662 733 820 176 179
Management and advisory fees 102 107 107 112 125 30
31
Real estate and other taxes 200 247 274 250 253 62 62
Depreciation and amortization 495 466 443 434 403 101 95
Interest expense 135 122 117 106 93 23 26
------ ------ ------ ------ ------ ------ ------
Total expenses 1,520 1,623 1,603 1,635 1,694 392 393
------ ------ ------ ------ ------ ------ ------
Net income $ 188 $ 175 $ 193 $ 233 $ 422 $ 108 $ 125
====== ====== ====== ====== ====== ====== ======
</TABLE>
F-331
<PAGE> 521
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------------------------- ----------------
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 5.93 6.98
Ratio of earnings to fixed charges (1) 2.39 2.43 2.65 3.20 5.54 5.70 5.81
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 364 354 346 334 362 370
Per unit value assigned for the consolidation -- -- -- -- -- -- 683
</TABLE>
F-332
<PAGE> 522
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------- -------------
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 $ 1,476
Real estate held for investment, net 6,137 5,836 5,661 5,537 5,329 5,250
Accounts receivable, net 117 175 115 97 172 191
Other assets 118 75 72 124 134 155
Total assets, at book value 7,029 6,883 6,713 6,563 6,872 7,072
Total assets, at valued assigned for the
consolidation 12,198
Total liabilities 1,662 1,657 1,610 1,648 1,535 1,610
General partners deficit (86) (88) (90) (91) (88) (90)
Limited partners equity 5,453 5,314 5,193 5,006 5,425 5,552
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net (88) 140 68 (61) 433 146 239
Cash provided by operating activities 628 635 680 680 615 176 250
</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-333
<PAGE> 523
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-334
<PAGE> 524
<TABLE>
<CAPTION>
Oak Grove Leawood Fountain
Commons Plaza (76%)
--------- ----------------
<S> <C> <C>
1998
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-335
<PAGE> 525
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 is necessary to estimate fair value. Accordingly, actual results could
vary significantly from such estimates.
F-336
<PAGE> 526
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 $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.
F-337
<PAGE> 527
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-338
<PAGE> 528
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 2000 AND 1999
It should be noted that this document 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 March 31, 2000 is $1,476,170 an increase of $238,876 from
year end December 31, 1999. During the first quarter, net cash provided by
operating activities was $250,227. Cash was used for payments on mortgage notes
payable in the amount of $5,699 and capital additions were made in the amount of
$5,652. The Registrant expects cashflow and cash on hand to adequately fund
anticipated capital expenditures for the remainder of 2000. The anticipated
capital expenditures are as follows:
<TABLE>
<CAPTION>
Leasing Capital Other Capital Total
--------------- ------------- ----------
<S> <C> <C> <C>
Oak Grove Commons $ 39,063 $ 85,000 $ 124,063
Leawood Fountain Plaza (76%) 204,641 -0- 204,641
---------- ---------- ----------
$ 243,704 $ 85,000 $ 328,704
========== ========== ==========
</TABLE>
Oak Grove Commons' and Leawood Fountain Plaza's Leasing Capital includes funds
for tenant alterations and lease commissions for new and renewal tenants. At Oak
Grove Commons, Other Capital includes 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 Operations by Property
The results of operations for the Registrant's properties for the quarters ended
March 31, 2000 and 1999 are detailed in the schedule below. Expenses and
revenues of the Registrant are excluded.
<TABLE>
<CAPTION>
Oak Grove Leawood Fountain
Commons Plaza (76%)
-------- ----------------
<S> <C> <C>
2000
Revenues $252,218 $265,263
Expenses 169,934 197,177
-------- --------
Net Income $ 82,284 $ 68,086
======== ========
1999
Revenues $231,658 $266,984
Expenses 172,804 216,726
-------- --------
Net Income $ 58,854 $ 50,258
======== ========
</TABLE>
F-339
<PAGE> 529
Revenues for the quarters ended March 31, 2000 and 1999 at Oak Grove Commons
were $252,218 and $231,658, respectively. The increase in revenues of $20,560 is
primarily attributable to increases in rental revenues ($13,652), interest
revenue (5,083), and common area maintenance revenue ($1,793). The increase in
rental revenue is due to an increase in occupancy over that of prior year.
Expenses at Oak Grove Commons remained relatively stable for the quarter ended
March 31, 2000 as compared to the quarter ended March 31, 1999. The decrease of
$2,870 in expenses is primarily attributable to decreases in depreciation and
amortization ($8,297) and other operating expenses ($1,011). These decreases
were partially offset by an increase in professional fees ($6,438). The increase
in professional fees is primarily attributable to space planning fees incurred
during the first quarter of 2000.
At Leawood Fountain Plaza, revenues remained consistent with only a $1,721
decrease when comparing the quarter ended 2000 to 1999. The decrease in revenue
can primarily be attributed to decreases in escalation revenue ($2,007) and base
rental revenue ($4,360), partially offset by an increase in interest revenue
($4,382). Expenses decreased $19,549 when comparing 2000 to 1999. The decrease
in expenses is primarily attributable to decreases in depreciation and
amortization ($28,870). These decreases were partially offset by increases in
fire and crime prevention ($6,228) and various other operating expenses
($3,092). The decrease in depreciation and amortization is primarily due to
fully amortized and depreciated assets.
The occupancy levels at the Registrant's properties during the first quarter of
2000 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.
Occupancy levels as of March 31,
<TABLE>
<CAPTION>
Property 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
Oak Grove Commons 100% 97% 89%
Leawood Fountain Plaza (76%) 93% 98% 90%
</TABLE>
Occupancy at Oak Grove Commons remained stable at 100% during the first quarter
of 2000. Leasing activity consisted of two new tenants occupying 5,936 square
feet, two tenants renewing their leases for 5,221 square feet and two tenants
vacating 5,936 square feet. Oak Grove Commons has no tenant occupying more than
10% of the available space.
During the first quarter of 2000, occupancy at Leawood Fountain Plaza remained
stable at 93%. Leasing activity consisted of one new tenant occupying 1,946
square feet, two tenants renewing their leases for 2,927 square feet, and one
tenant vacating 1,769 square feet. The property has two major tenants, one of
whom occupies 14% of the available space whose lease expires in October 2001 and
a second major tenant who occupies 10% of the available space whose lease
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 is necessary to estimate fair value. Accordingly, actual results could
vary significantly from such estimates.
F-340
<PAGE> 530
Results of Consolidated Operations 2000
As of March 31, 2000, the Registrant's consolidated revenues are $517,951, an
increase of $18,085 when compared to quarter ended March 31, 1999. This increase
in revenues can primarily be attributed to an increase in base rent at Oak Grove
Commons and increases in interest revenue at both Leawood Fountain Plaza and Oak
Grove Commons.
Consolidated expenses for the quarters ending March 31, 2000 and 1999 are
$392,687 and $391,731 respectively. Although consolidated expenses only
increased $956 when comparing the two three-month periods, the following
fluctuation in expenses should be noted: increases in interest expense ($2,335),
professional services ($7,157), cleaning expenses ($2,420), and payroll
($2,001), partially offset by decreases in depreciation and amortization
($5,803), snow removal ($4,352), and insurance ($3,087). The increase in
professional services is due to space planning fees at Leawood Fountain Plaza,
as mentioned previously in the property comparisons.
Results of Consolidated Operations 1999
As of March 31, 1999, the Registrant's consolidated revenues are $499,866, an
increase of $79,478 when compared to quarter ended March 31, 1998. This increase
in revenues can be attributable to increases in rental revenue ($80,641) and
escalation revenue ($12,511). The increase in rental revenue is attributable to
the higher occupancy levels at both Oak Grove Commons and Leawood Fountain
Plaza. The increased revenues were offset by decreases in miscellaneous income
($4,449), common area maintenance reimbursements ($3,907), and interest income
($5,318).
Consolidated expenses for the quarters ended March 31, 1999 and 1998 are
$391,731 and $351,913, respectively. This resulted in an increase of $39,818
from that of prior year. The increase in expenses can primarily be attributed to
increases in management fees ($4,737), repairs and maintenance related expenses
($13,350), professional services ($7,923), payroll ($4,976), snow removal
($4,519), insurance ($3,424), and other operating expenses ($14,676). These
increases were partially offset by decreases in interest expense ($4,783),
depreciation and amortization ($6,079), and real estate tax expense ($3,142).
The increase in other operating expenses can be attributed to increases in
promotional, vacancy, fire and crime prevention, and common area related
expenses at both properties. The increase in professional fees is due to annual
audit fees. The increase in repairs and maintenance related expenses was
primarily due to heating, ventilation, and air-conditioning costs as mentioned
in the property comparisons. The increase in snow removal is due to a more
severe winter during the first quarter of 1999 when compared to 1998. Interest
expense decreased due to a lower balance of long term debt outstanding.
F-341
<PAGE> 531
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operation in fiscal 1999 and are not expected to materially affect the
Registrant's operation in 2000.
F-342
<PAGE> 532
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
schedule 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, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 22, 2000
F-343
<PAGE> 533
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>
See notes to financial statements.
F-344
<PAGE> 534
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>
See notes to financial statements.
F-345
<PAGE> 535
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>
See notes to financial statements.
F-346
<PAGE> 536
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-347
<PAGE> 537
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-348
<PAGE> 538
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-349
<PAGE> 539
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-350
<PAGE> 540
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-351
<PAGE> 541
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-352
<PAGE> 542
<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-353
<PAGE> 543
<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-354
<PAGE> 544
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(1)
----------- ------------ ------------ ------------- ------------ -----------------
<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)
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-355
<PAGE> 545
<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:
Oak Grove Commons
Office/Warehouse Complex $ 693,000
Leawood Fountain Plaza
Office Complex 2,389,000
F-356
<PAGE> 546
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-357
<PAGE> 547
E. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,476,170 $ 1,237,294
Accounts receivable 190,752 171,996
Prepaid expenses and deposits 7,206 14,948
Investment property, at cost:
Land 1,946,169 1,946,169
Buildings and improvements 8,660,055 8,654,403
----------- -----------
10,606,224 10,600,572
Less accumulated depreciation 5,355,988 5,271,378
----------- -----------
5,250,236 5,329,194
Deferred expenses - at amortized cost 147,991 118,876
----------- -----------
$ 7,072,355 $ 6,872,308
=========== ===========
LIABILITIES AND PARTNERS' EQUITY:
Liabilities:
Accounts payable and accrued expenses $ 87,244 $ 79,070
Accrued real estate taxes 247,822 185,415
Mortgage notes payable 1,119,303 1,125,002
Refundable tenant deposits 155,612 145,711
----------- -----------
1,609,981 1,535,198
Partners' equity 5,462,374 5,337,110
----------- -----------
$ 7,072,355 $ 6,872,308
=========== ===========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-358
<PAGE> 548
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
2000 1999
---------- ----------
<S> <C> <C>
REVENUES:
Rental and other income $ 507,173 $ 499,862
Interest 10,778 4
---------- ----------
517,951 499,866
---------- ----------
EXPENSES:
Interest 25,663 23,328
Depreciation and amortization 95,395 101,198
Real estate taxes 62,407 61,605
Property management fees paid to
American Spectrum Midwest 30,949 29,918
Reimbursement to American Spectrum Midwest
for partnership management services
and indirect expenses 6,250 6,250
Repairs & maintenance 24,671 24,813
Professional services 26,781 19,624
Utilities 27,997 27,263
Cleaning 14,515 12,095
Payroll 18,752 16,751
Snow removal 14,083 18,435
Insurance 9,675 12,762
Other operating expenses 35,549 37,689
---------- ----------
392,687 391,731
---------- ----------
NET INCOME $ 125,264 $ 108,135
========== ==========
NET INCOME PER LIMITED
PARTNERSHIP UNIT $ 6.98 $ 5.93
========== ==========
PARTNERS' EQUITY:
Beginning of period $5,337,110 $4,914,656
Net income 125,264 108,135
---------- ----------
End of period $5,462,374 $5,022,791
========== ==========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-359
<PAGE> 549
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 125,264 $ 108,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 95,395 101,198
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (18,756) 4,611
Decrease in prepaid expenses and deposits 7,742 6,258
Increase in deferred assets (39,900) (5,367)
Increase (decrease) in accounts payable and accrued expenses 8,174 (105,932)
Increase in accrued real estate taxes 62,407 61,604
Increase in refundable tenant deposits 9,901 5,742
----------- -----------
Total adjustments 124,963 68,114
----------- -----------
Net cash provided by operating activities 250,227 176,249
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Net additions to investment property (5,652) (22,733)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on mortgage notes payable (5,699) (7,600)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 238,876 145,916
CASH AND CASH EQUIVALENTS, beginning of period 1,237,294 804,739
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,476,170 $ 950,655
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during period for interest 25,663 23,328
=========== ===========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-360
<PAGE> 550
NOONEY INCOME FUND LTD., L.P.
(A LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NOTE A:
Refer to the Registrant's financial statements for the fiscal year ended
December 31, 1999, which are contained herein, 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 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
March 31, 2000 and for all periods presented have been made. The results of
operations for the three-month period ended March 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. Nooney
Income Investments, Inc., a general partner, is a 75% 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 months ended March 31,
2000 and 1999 was computed on 15,180 units, the number of units outstanding
during the periods.
NOTE E:
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the corporate general
partner of the Registrant, is in 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.
F-361
<PAGE> 551
NOTE F:
The Registrant has no items of other comprehensive income, accordingly, net
income and other comprehensive income are the same for all periods presented.
NOTE G:
The Partnership has two reportable operating segments: Leawood Fountain Plaza
and Oak Grove Commons. In the first quarter of 1999, 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 2000, the
Partnership is evaluating each segment's operations including allocation of
property writedowns.
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Leawood Fountain Plaza (76%) $265,263 $266,984
Oak Grove Commons 252,218 231,658
-------- --------
517,481 498,642
======== ========
Operating Profit:
Leawood Fountain Plaza (76%) $ 68,086 $ 50,258
Oak Grove Commons 82,284 58,854
-------- --------
150,370 109,112
======== ========
Capital Expenditures:
Leawood Fountain Plaza (76%) $ 2,811 $ 13,174
Oak Grove Commons 2,842 9,559
-------- --------
5,653 27,733
======== ========
Depreciation and Amortization:
Leawood Fountain Plaza (76%) $ 46,783 $ 75,653
Oak Grove Commons 48,612 56,910
-------- --------
95,395 132,563
======== ========
</TABLE>
F-362
<PAGE> 552
<TABLE>
<CAPTION>
Assets:
As of:
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Leawood Fountain Plaza (76%) $3,065,925 $2,998,208
Oak Grove Commons 3,597,525 3,498,609
---------- ----------
6,663,450 6,496,817
========== ==========
</TABLE>
Reconciliation of segment data to the Partnership's consolidated data follow:
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Revenues:
Segments $ 517,481 $ 498,642
Corporate and other 470 1,224
--------- ---------
517,951 499,866
========= =========
Operating profit:
Segments $ 150,370 $ 109,112
Corporate and other income 470 1,224
General and administrative expenses (25,576) (2,201)
--------- ---------
125,264 108,135
========= =========
Depreciation and Amortization
Segments $ 95,395 $ 132,563
Corporate and other -0- (31,365)
--------- ---------
95,395 101,198
========= =========
</TABLE>
F-363
<PAGE> 553
<TABLE>
<CAPTION>
Assets:
As of:
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Segments $6,663,450 $6,496,817
Corporate and other 408,905 375,491
---------- ----------
7,072,355 6,872,308
========== ==========
</TABLE>
F-364
<PAGE> 554
NOONEY INCOME FUND LTD. II L.P.
HISTORICAL FINANCIAL DATA
F-365
<PAGE> 555
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 March 31, 2000 and 1999.
D. Audited Financial Statements - December 31, 1999, 1998 and 1997
E. Unaudited Financial Statements - Quarters Ended March 31, 2000 and
1999
F-366
<PAGE> 556
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 March 31, 2000 and for the three months ended
March 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>
QUARTER ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------
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 $ 856 $ 942
Interest and other income .......... 32 8 2 -- 4 -- 1
------ ------ ------ ------ ------ ------ ------
Total revenues ..................... 1,787 3,510 3,357 3,681 3,728 856 943
====== ====== ====== ====== ====== ====== ======
EXPENSES:
Property operating ................. 652 1,193 1,226 1,227 1,582 371 324
Management and advisory fees ....... 107 211 202 215 217 51 56
Real estate and other taxes ........ 367 755 598 535 544 139 136
Depreciation and amortization ...... 450 653 671 755 766 181 199
Interest expense ................... 1 614 596 584 554 134 147
------ ------ ------ ------ ------ ------ ------
Total expenses ..................... 1,577 3,426 3,293 3,317 3,663 876 862
====== ====== ====== ====== ====== ====== ======
Net Income (loss) .................. $ 210 $ 84 $ 64 $ 364 $ 65 $ (20) $ 81
====== ====== ====== ====== ====== ====== ======
</TABLE>
F-367
<PAGE> 557
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------- --------------------
($ amounts, except per share data in thousands) 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 (1.03) 4.19
Ratio of earnings to fixed charges (1) 211 1.14 1.11 1.62 1.12 -- 1.55
Deficiency of earnings to cover fixed
charges (2) -- -- -- -- -- 20 --
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 462 453 443 442 445 450
Per unit value assigned for the consolidation 806
</TABLE>
F-368
<PAGE> 558
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------
(in thousands) 1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,092 $ 1,323 $ 1,378 $ 1,250 $ 1,190 $ 1,155
Real estate held for investment, net 15,167 14,798 14,745 14,373 14,315 14,226
Accounts receivable, net 321 220 153 205 258 263
Other assets 224 132 288 302 346 336
Total assets, at book value 16,804 16,473 16,564 16,130 16,109 15,980
Total assets, at valued assigned for the
consolidation 23,360
Total liabilities 8,160 8,001 8,283 7,867 7,782 7,571
General partnership deficit (127) (128) (131) (131) (131) (132)
Limited partnership equity 8,771 8,600 8,412 8,394 8,458 8,541
CASH FLOW DATA:
Increase (decrease) in cash and equivalents,
net (26) 231 55 (129) (59) (73) (35)
Cash provided by operating activities 824 711 955 644 684 11 77
</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 Leawood Fountain Plaza. Nooney Income Fund Ltd., an affiliate of
Nooney Income Fund Ltd. II, owns the remaining 76% ownership of Leawood
Fountain Plaza.
F-369
<PAGE> 559
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-370
<PAGE> 560
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.
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<PAGE> 561
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-372
<PAGE> 562
The occupancy levels at the Registrant's properties as of December 31, 1999,
1998 and 1997 are detailed in the schedule below. Occupancy rates at December
31,
<TABLE>
<CAPTION>
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 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
F-373
<PAGE> 563
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 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.
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<PAGE> 564
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 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-375
<PAGE> 565
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED MARCH 31, 2000 AND 1999
It should be noted that this document 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 March 31, 2000, is $1,154,755, a
decrease of ($35,456) when compared to year end December 31, 1999. During the
quarter, net cash provided by operating activities was $76,526. Cash was used
for payment of capital additions in the amount of $83,221 and payments on
mortgage notes payable of $28,761. The Registrant expects cash flow and cash on
hand to fund the properties anticipated capital expenditures for the remainder
of 2000. The anticipated capital expenditures by property are as follows:
<TABLE>
<CAPTION>
Leasing Capital Other Capital Total
--------------- ------------- ---------
<S> <C> <C> <C>
NorthCreek Office Park $ 5,103 $ 66,000 $ 71,103
Tower Industrial Building 0 0 0
Northeast Office Park 349,377 28,400 377,777
Countryside Office Park 50,815 23,390 74,205
Leawood Fountain Plaza (24%) 61,711 0 61,711
--------- --------- ---------
$ 467,006 $ 117,790 $ 584,796
========= ========= =========
</TABLE>
Leasing capital at all of the partnership's properties relates to tenant
improvements and lease commissions for new and renewal tenants. At NorthCreek
Office Park, other capital has been budgeted for parking lot restoration. At
Northeast Commerce Center, other capital has been budgeted for parking lot
overlay and striping. 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.
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 92% at March 31,
2000, from 74% at March 31, 1999. The Registrant is evaluating sale and other
options regarding the property due to the increased occupancy level and improved
market conditions in the surrounding areas during the second half of 1999 and
continuing on in the year 2000.
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-376
<PAGE> 566
Results of Operations by Property
The results of operations for the Registrant's properties for the quarters ended
March 31, 2000 and 1999 are detailed in the schedule below. Expenses and
revenues 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>
2000
Revenues $ 366,830 $ 50,784 $ 101,267 $ 338,198 $ 83,767
Expenses 296,609 29,708 163,608 274,127 62,266
----------- ---------- --------- ----------- -----------
Net Income (Loss) $ 70,221 $ 21,076 $ (62,341) $ 64,071 $ 21,501
=========== ========== ========= =========== ===========
1999
Revenues $ 359,666 $ 50,450 $ 92,178 $ 260,579 $ 84,311
Expenses 313,498 26,728 206,269 240,499 68,440
----------- ---------- --------- ----------- -----------
Net Income (Loss) $ 46,168 $ 23,722 $(114,091) $ 20,080 $ 15,871
=========== ========== ========= =========== ===========
</TABLE>
Revenues at NorthCreek Office Park increased $7,164 when comparing quarter end
March 31, 2000 to the first quarter ended March 31, 1999. This increase can be
primarily attributed to a termination fee received by a former tenant in the
amount of $7,212. All other revenues have remained consistent with that of prior
year. Expenses decreased from $313,498 for the quarter ended March 31, 1999 to
$296,609 for the quarter ended March 31, 2000. This decrease of $16,889 is
primarily attributable to decreases in depreciation and amortization expense
($11,479), electrical repairs ($11,085), and snow removal ($6,280). These
decreases were partially offset by increases in interest expense ($6,957) and
landscaping expense ($4,417). The decrease in depreciation and amortization can
be attributed to fully amortized and depreciated assets. The decrease in
electrical repairs is due to major repairs and maintenance electrical costs
incurred in 1999. The increased interest expense is related to increased
interest rates.
Operating results at Tower Industrial Building for the quarter ended March 31,
2000 and 1999 remained stable with minimal fluctuations. Slight increases
occurred in both depreciation and general and administrative related expenses.
Revenues at Northeast Commerce Center were $101,267 for the quarter ended March
31, 2000 and $92,178 for the quarter ended March 31, 1999. This increase in
revenue of $9,089 is due to increases in base rental revenue ($6,839) and
escalation revenue ($2,249). The increase in base rent is primarily due to
higher rental rates. Expenses for the quarters ending March 31, 2000 and March
31, 1999 were $163,608 and $206,269, respectively. The decrease of $42,661 can
primarily be attributable to decreases in vacancy expense ($35,276),
amortization and depreciation expense ($10,084), and repairs and maintenance
related expenses ($5,517). These decreases were partially offset by increases in
interest expense ($3,541), fire and crime prevention ($1,979), and various other
operating expenses ($2,696). The decrease in vacancy expense is due to the costs
of rehabilitating vacant space in 1999. The decreased amortization and
depreciation expense is primarily attributable to fully depreciated and
amortized assets.
At Countryside Office Park revenues were $338,198 and $260,579 for the quarters
ended March 31, 2000 and March 31, 1999, respectively. Revenues increased
$77,619 primarily due to increases in base rental revenues which can be
attributable to the increased occupancy level at the property. Operating
expenses increased $33,628 when comparing the two years. The expenses which
increased include interest expense
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<PAGE> 567
($2,151), amortization expense ($9,112), contract cleaning and day porter
service ($13,510), utilities ($6,212), management fees ($4,657), advertising
expense ($2,359), vacancy related expenses ($2,541), payroll expense ($1,582),
and legal fees ($2,541). These increases were partially offset by a decrease in
snow removal ($10,589). The increased amortization expense is due to the
addition of tenant improvements as the property continues to lease available
space. The increases in both cleaning/day porter and utility expense can also be
attributed directly to the rise in the occupancy level, therefore increasing the
demand for both of these expenses. The decrease in snow removal is due to milder
weather conditions than that of 1999.
At Leawood Fountain Plaza, revenues remained consistent when comparing the two
three-month periods. Operating expenses decreased $6,174 when comparing the two
periods. The decrease in expenses is mainly due to a decrease in depreciation
and amortization expense ($9,117), partially offset by an increase in fire and
crime prevention expense ($1,967), and various other operating expenses ($976).
The occupancy levels at the Registrant's properties are listed below:
<TABLE>
<CAPTION>
Occupancy levels as of March 31,
--------------------------------
Property 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
NorthCreek Office Park 96% 100% 95%
Tower Industrial Building 100% 100% 100%
Northeast Commerce Center 49% 50% 94%
Countryside Office Park 92% 74% 69%
Leawood Fountain Plaza (24%) 93% 98% 90%
</TABLE>
During the first quarter of 2000, NorthCreek Office Park occupancy decreased 4%
to 96%. Leasing activity at NorthCreek Office Park consisted of one tenant
signing a lease for 52 square feet, two tenants renewing their leases for a
total of 5,638 square feet and three tenants vacating 3,579 square feet.
NorthCreek Office Park has one major tenant which occupies spaces under two
leases which together comprise 33% of the available space. These leases both
expire in December 2003.
Tower Industrial Building is leased to a single tenant whose lease expires on
December 31, 2001.
At Northeast Commerce Center, occupancy remained at 49% during the quarter.
There was no leasing activity during this three-month reporting period. The
property has two major tenants who occupy 23% and 11% of the available space.
Their leases expire September 2003 and December 2006, respectively. The
Registrant is working with a local Cincinnati brokerage firm to handle the
leasing of the remaining space.
At Countryside Office Park, occupancy increased 2% to 92% from the rate at the
beginning of the quarter. Leasing activity during the first quarter consisted of
two tenants occupying 5,856 square feet renewing their leases and two tenants
vacating 2,294 square feet. There are two major tenants at Countryside Office
Park who occupy 14% and 13% of the available space with leases which expire in
2005 and 2002, respectively.
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<PAGE> 568
During the first quarter of 2000, occupancy at Leawood Fountain Plaza remained
stable at 93%. Leasing activity consisted of one new tenant occupying 1,946
square feet, two tenants renewing their leases for 2,927 square feet, and one
tenant vacating 1,769 square feet. The property has two major tenants, one of
whom occupies 14% of the available space whose lease expires in October 2001 and
a second major tenant who occupies 10% of the available space whose lease
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 is necessary to estimate fair value. Accordingly, actual results could
vary significantly from such estimates.
Results of Consolidated Operations 2000
For the quarter ended March 31, 2000, consolidated revenues are $943,531
compared to $855,615 for the quarter ended March 31, 1999. Revenues, at a
consolidated level, increased $87,916 primarily due to increases in base rental
revenue at Countryside Office Park, as mentioned in the property comparisons.
Increases in revenue were also reflected at NorthCreek Office Park and Northeast
Commerce Center when comparing the two three-month ending periods. Consolidated
expenses for the quarters ending March 31, 2000 and March 31, 1999 are $862,117
and $875,689, respectively. The $13,572 decrease in expenses is a result of a
combination of factors. Decreases were reflected in real estate tax expense
($2,886), repairs and maintenance related expenses ($13,985), professional
services ($16,157), insurance ($1,645), snow removal ($19,355), and other
operating expenses ($10,846). These decreases were partially offset by
consolidated increases in interest expense ($12,651), depreciation and
amortization ($18,392), management fees ($5,555), utilities ($8,376), and
cleaning ($6,872). The decrease in repairs and maintenance related expenses is
primarily due to the decrease in electrical repairs at NorthCreek Office Park.
The decrease in professional services can be attributed to appraisal fees
incurred for the Registrant's properties in the first quarter of 1999. The
decrease in snow removal, as well as the increases in interest expense,
depreciation and amortization expense, and utilities have all been addressed at
the property level comparisons. The decrease in consolidated other operating
expenses can mostly be attributed to vacancy costs at Northeast Commerce Center.
The increase in management fees is due to the overall increase in revenues.
Results of Consolidated Operations 1999
For the quarter ended March 31, 1999, consolidated revenues are $855,615
compared to $875,317 for the quarter ended March 31, 1998. Revenues decreased
$19,702 primarily due to an increase in bad debt expense ($39,114), partially
offset by an increase in miscellaneous income ($20,696) due to the receipt of a
prior year tax refund. Consolidated expenses for the quarters ended March 31,
1999 and 1998 are $875,689 and $814,801, respectively. This $60,888 increase in
expenses is a result of significant
F-379
<PAGE> 569
increases in repairs and maintenance related expenses ($16,231), professional
fees ($24,481), payroll expenses ($8,093), snow removal ($18,780), and other
operating expenses ($46,514). There were also less significant increases in
utility expense ($2,569) and insurance ($2,309). These increases were partially
offset by decreases in interest expense ($11,932), depreciation and amortization
expense ($13,836), real estate tax expense ($21,732), and cleaning services
($10,223). The increase in professional fees is due to appraisal fees. The
increase in other operating expense is primarily due to the increase in vacancy
expenses for first quarter 1999 at Northeast Commerce Center. The decrease in
interest expense can be attributed to increased principal payments made per
mortgage agreement.
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operation in fiscal 1999 and are not expected to materially affect the
Registrant's operation in 2000.
F-380
<PAGE> 570
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 immediately following the financial
statements. 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, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 22, 2000
F-381
<PAGE> 571
NOONEY INCOME FUND LTD. II, L.P. (A LIMITED PARTNERSHIP)
BALANCE SHEETS - DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 1,190,211 $ 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-382
<PAGE> 572
OONEY 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-383
<PAGE> 573
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>
F-384
<PAGE> 574
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-385
<PAGE> 575
- 2 -
<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>
F-386
<PAGE> 576
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-387
<PAGE> 577
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 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-388
<PAGE> 578
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 those with shareholders. The Partnership had no other
comprehensive income items, accordingly net income and other comprehensive
income are the same.
F-389
<PAGE> 579
3. MORTGAGE NOTE PAYABLE
Mortgage note payable as of December 31, 1999 and 1998, consists of the
following:
<TABLE>
1999 1998
-------------- -------------
<S> <C> <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% $ 6,871,246 $ 6,995,876
maturing December 28, 2002 ============== =============
</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-390
<PAGE> 580
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-391
<PAGE> 581
<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-392
<PAGE> 582
<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-393
<PAGE> 583
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-394
<PAGE> 584
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-395
<PAGE> 585
- 2 -
<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-396
<PAGE> 586
- 3 -
<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-397
<PAGE> 587
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
------------ ------------ ------------
(A) Reconciliation of amounts in Column E:
<S> <C> <C> <C>
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-398
<PAGE> 588
E. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED MARCH 31, 2000 AND 1999
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 1,154,755 $ 1,190,211
Accounts receivable 263,399 257,599
Prepaid expenses and deposits 10,432 24,430
Investment property, at cost:
Land 2,618,857 2,618,857
Buildings and improvements 13,986,187 13,997,112
----------- -----------
16,605,044 16,615,969
Less accumulated depreciation 5,248,466 5,162,333
----------- -----------
11,356,578 11,453,636
Investment property-held for sale 2,869,044 2,860,890
----------- -----------
14,225,622 14,314,526
Deferred expenses - at amortized cost 325,517 321,834
----------- -----------
$15,979,725 $16,108,600
=========== ===========
LIABILITIES AND PARTNERS' EQUITY:
Liabilities:
Accounts payable and accrued expenses $ 78,228 $ 174,137
Accrued real estate taxes 391,947 485,507
Refundable tenant deposits 258,173 250,231
Mortgage note payable 6,842,484 6,871,246
----------- -----------
7,570,832 7,781,121
Partners' equity 8,408,893 8,327,479
----------- -----------
$15,979,725 $16,108,600
=========== ===========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-399
<PAGE> 589
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
REVENUES:
Rental and other income $ 942,147 $ 855,615
Interest 1,384 0
----------- -----------
943,531 855,615
----------- -----------
EXPENSES:
Interest expense 146,739 134,088
Depreciation and amortization 199,432 181,040
Real estate taxes 136,139 139,025
Property management fees paid to
Nooney Inc. 56,451 50,896
Reimbursement to Nooney Inc.
for partnership management
services and indirect expenses 10,000 10,000
Repairs & maintenance 46,523 60,508
Professional services 30,523 46,680
Utilities 48,716 40,340
Payroll 30,132 30,676
Cleaning 37,517 30,645
Insurance 16,127 17,772
Snow removal 17,343 36,698
Other operating expenses 86,475 97,321
----------- -----------
862,117 875,689
----------- -----------
NET INCOME (LOSS) $ 81,414 $ (20,074)
=========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 4.19 $ (1.03)
=========== ===========
PARTNERS' EQUITY:
Beginning of period $ 8,327,479 $ 8,262,543
Net income (loss) 81,414 (20,074)
----------- -----------
End of period $ 8,408,893 $ 8,242,469
=========== ===========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-400
<PAGE> 590
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, March 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 81,414 $ (20,074)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 199,432 181,040
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,800) 53,807
Decrease in prepaid expenses & deposits 13,998 1,424
Increase in deferred assets (30,991) (5,497)
Decrease in accounts payable and accrued expenses (95,909) (101,622)
Decrease in accrued real estate taxes (93,560) (99,336)
Increase in refundable tenant deposits 7,942 1,063
----------- -----------
Total adjustments (4,888) 30,879
----------- -----------
Net cash provided by operating activities 76,526 10,805
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to investment property (83,221) (57,188)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Payments on mortgage notes payable (28,761) (26,783)
----------- -----------
NET DECREASE IN CASH (35,456) (73,166)
AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period 1,190,211 1,249,605
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,154,755 $ 1,176,439
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid during year for interest $ 146,739 $ 134,088
=========== ===========
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-401
<PAGE> 591
NOONEY INCOME FUND LTD. II, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NOTE A:
Refer to the Registrant's financial statements for the year ended December 31,
1999, which are contained herein, 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 March 31, 2000 and for all periods presented
have been made. The results of operations for the three-month period ended March
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. Nooney
Income Investments Two, Inc., a general partner, is a 75% 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 months ended March 31,
2000 and 1999 was computed based on 19,221 units, the number of units
outstanding during the periods.
NOTE E:
CGS Real Estate Company, Inc. ("CGS"), an affiliate of the corporate general
partner of the Registrant, is in 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.
F-402
<PAGE> 592
NOTE G:
The partnership has five reportable operating segments: Leawood Fountain Plaza,
Tower Industrial, Countryside Office Park, Northeast Commerce Center, and
NorthCreek Office Park. In the first quarter of 1999, 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 2000, the
Partnership is evaluating each segment's operations including allocation of
property writedowns.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Leawood Fountain Plaza (24%) $ 83,767 $ 84,311
Tower Industrial 50,784 50,450
Countryside Office Park 338,198 260,579
Northeast Commerce Center 101,267 92,178
NorthCreek Office Park 366,830 359,666
------------ ------------
940,846 847,184
============ ============
Operating Profit (Loss):
Leawood Fountain Plaza (24%) $ 21,501 $ 15,871
Tower Industrial 21,076 23,722
Countryside Office Park 64,071 20,080
Northeast Commerce Center (62,341) (114,091)
NorthCreek Office Park 70,221 46,168
------------ ------------
114,528 (8,250)
============ ============
Capital Expenditures:
Leawood Fountain Plaza (24%) $ 888 $ 4,160
Tower Industrial -0- 3,850
Countryside Office Park 35,616 16,374
Northeast Commerce Center -0- 5,860
NorthCreek Office Park 48,214 26,944
------------ ------------
84,718 57,188
============ ============
Depreciation and Amortization:
Leawood Fountain Plaza (24%) $ 14,774 $ 23,892
Tower Industrial 12,003 10,411
Countryside Office Park 41,295 32,183
Northeast Commerce Center 52,654 62,738
NorthCreek Office Park 78,706 90,185
------------ ------------
199,432 219,409
============ ============
</TABLE>
F-403
<PAGE> 593
<TABLE>
<CAPTION>
Assets:
As Of: March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Leawood Fountain Plaza (24%) $ 968,187 $ 946,803
Tower Industrial 971,290 985,935
Countryside Office Park 3,110,049 3,126,218
Northeast Commerce Center 3,497,645 3,512,653
NorthCreek Office Park 6,384,872 6,410,529
-------------- --------------
14,932,043 14,982,138
============== ==============
</TABLE>
Reconciliation of segment data to the Partnership's consolidated data follow:
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Segments $ 940,846 $ 847,184
Corporate and other 2,685 8,431
------------ ------------
943,531 855,615
============ ============
Operating Profit (Loss):
Segments $ 114,528 $ (8,250)
Corporate and other income 2,685 8,430
General and administrative expenses (35,799) (20,254)
------------ ------------
81,414 (20,074)
============ ============
Depreciation and Amortization
Segments $ 199,432 $ 219,409
Corporate and other -0- (38,369)
------------ ------------
199,432 181,040
============ ============
Assets:
As of: March 31, December 31,
2000 1999
------------ ------------
Segments $ 14,932,043 $ 14,982,138
Corporate and other 1,047,682 1,126,462
------------ ------------
15,979,725 16,108,600
</TABLE>
F-404
<PAGE> 594
NOONEY REAL PROPERTY INVESTORS - TWO L.P.
HISTORICAL FINANCIAL DATA
F-405
<PAGE> 595
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 February 29, 2000 and February 28, 1999
D. Audited Financial Statements - November 30, 1999, 1998 and 1997
E. Unaudited Financial Statements - Quarters Ended February 29, 2000 and
February 28, 1999
F-406
<PAGE> 596
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 February 29, 2000 and for the three months
ended February 28(29), 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>
QUARTER ENDED
YEAR ENDED NOVEMBER 30, FEBRUARY 28(29)
----------------------------------------------------- --------------------
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 $ 535 $ 635
Interest and other income ......... 10 15 10 6 -- -- 25
-------- -------- -------- -------- -------- -------- --------
Total revenues .................... 2,341 2,317 2,434 2,424 2,150 535 660
======== ======== ======== ======== ======== ======== ========
EXPENSES:
Property operating ................ 427 511 564 763 647 177 162
Management and advisory fees ...... 116 115 121 122 105 25 32
Real estate and other taxes ....... 413 380 395 374 386 89 94
Depreciation and amortization ..... 493 518 523 518 491 121 137
Interest expense .................. 838 776 743 706 679 169 245
-------- -------- -------- -------- -------- -------- --------
Total expenses .................... 2,287 2,300 2,346 2,483 2,308 581 670
======== ======== ======== ======== ======== ======== ========
Net Income (loss) ................. $ 54 $ 17 $ 88 $ (59) $ (158) $ (46) $ (10)
======== ======== ======== ======== ======== ======== ========
</TABLE>
F-407
<PAGE> 597
(In thousands)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28(29),
-------------------------------------------------------- --------------------
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) (3.78) (0.79)
Ratio of earnings to fixed charges (1) 1.06 1.02 1.12 -- -- -- --
Deficiency of earnings to cover fixed
charges (2) -- -- -- 59 158 46 10
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) (29)
Per unit value assigned for the
consolidation -- -- -- -- -- -- 682
BALANCE SHEET DATA:
Cash and cash equivalents $ 628 $ 596 $ 449 $ 486 $ 2,572 $ 2,406
Real estate held for investment, net 7,515 7,459 7,210 6,833 6,439 6,329
Accounts receivable, net 118 147 127 119 120 112
Other assets 179 152 120 137 296 558
Total assets, at book value 8,440 8,354 7,906 7,575 9,427 9,405
Total assets, at valued assigned for the
consolidation -- -- -- -- -- -- 18,404
Total liabilities 8,747 8,644 8,108 7,836 9,846 9,834
General partners deficit (83) (83) (82) (82) (84) (84)
Limited partners deficit (224) (207) (120) (179) (335) (345)
</TABLE>
F-408
<PAGE> 598
<TABLE>
<CAPTION>
(In thousands) NOVEMBER 30, FEBRUARY 28(29),
-------------------------------------------- ----------------
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 (104) (166)
Cash (used in) provided by operating
activities 493 693 460 544 (4) 10 (76)
</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.
F-409
<PAGE> 599
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 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.
F-410
<PAGE> 600
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
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999
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
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.
F-411
<PAGE> 601
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>
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
F-412
<PAGE> 602
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.
F-413
<PAGE> 603
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
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
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
F-414
<PAGE> 604
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 l999, 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-415
<PAGE> 605
C. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
It should be noted that this document 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 February 29, 2000 is $2,405,754, a decrease of $166,449 from
year end November 30, 1999. The decrease in cash can primarily be attributed to
the annual payment for real estate taxes made in December 1999 for Maple Tree
Shopping Center. During the quarter, capital additions were made in the amount
of $3,711 and payments were made on mortgage notes of $86,583. The Registrant
plans to maintain adequate cash reserves and to fund capital expenditures for
the remaining three quarters of 2000. The capital expenditures anticipated for
the balance of 2000 are as follows:
<TABLE>
<CAPTION>
Leasing Capital Other Capital Total
--------------- -------------- --------------
<S> <C> <C> <C>
Park Plaza I & II $ 31,284 $ 82,419 $ 113,703
Morenci Professional Park 23,472 148,200 171,672
Maple Tree Shopping Center 0 378,800 378,800
Jackson Industrial 244,608 15,000 259,608
-------------- -------------- --------------
$ 299,364 $ 624,419 $ 923,783
============== ============== ==============
</TABLE>
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 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 Industrial 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.
Other capital at Park Plaza, Morenci and Maple Tree will be funded by the cash
reserves for such improvements from new loan agreements. Other capital at
Jackson Industrial will be funded from operations. Leasing capital at all four
of the Registrant's properties will be funded from operations. Jackson
Industrial's future funding for leasing capital is based upon anticipated higher
occupancy levels.
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 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 balance of this mortgage at
February 29, 2000 was $5,678,048. 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 $3,622,427 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.
F-416
<PAGE> 606
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 the lenders the refinancing of
the mortgage debt as it matures.
Results of Operations
The results of operations for the Registrant"s properties for the quarter ended
February 29, 2000 and February 28, 1999 are detailed in the schedule below.
Expenses of the Registrant are excluded.
<TABLE>
<CAPTION>
Jackson Maple Tree Park Plaza Morenci
Industrial Shopping Center I and II Prof. Park
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
2000
Revenues $ 212,614 $ 143,024 $ 143,407 $ 135,890
Expenses 247,481 137,080 111,154 143,623
------------ ------------ ------------ ------------
Net (Loss) Income $ (34,867) $ 5,944 $ 32,253 $ (7,733)
============ ============ ============ ============
1999
Revenues $ 124,092 $ 134,740 $ 128,608 $ 118,610
Expenses 222,781 116,200 79,932 134,735
------------ ------------ ------------ ------------
Net (Loss) Income $ (98,689) $ 18,540 $ 48,676 $ (16,125)
============ ============ ============ ============
</TABLE>
The operating results at Jackson Industrial show a significant increase in
revenue when comparing the quarter ended February 29, 2000 to the quarter ended
February 28, 1999. This increase of $88,522 is attributable to the increased
occupancy level when compared to that of the prior year. Expenses increased
$24,700 when comparing the two quarters. This increase was primarily due to an
increase in interest expense ($25,537).
At Maple Tree Shopping Center, revenues increased $8,284 when comparing the two
quarters. This increase is due to slight increases in base rental revenue,
common area maintenance reimbursements, and real estate tax revenue, partially
offset by a decrease in percentage rent revenues. Expenses for the quarter ended
February 29, 2000 increased $20,880 when compared to the quarter ended February
28, 1999, primarily due to increases in depreciation and amortization ($3,245),
interest expense ($6,979), repairs and maintenance-plumbing ($7,347), and real
estate tax expense ($5,054). The increase in interest expense is due to a higher
principal balance with the new mortgage obtained in November 1999. The increase
in repairs and maintenance-plumbing can be attributed to additional repairs
necessary in 1999.
Revenues at Park Plaza I & II increased $14,799 when comparing the quarter ended
February 29, 2000 to February 28, 1999. This increase in revenue can primarily
be attributed to an increase in base rental revenue related to the slightly
higher occupancy level than prior year. Expenses increased when comparing the
two quarters by $31,222 primarily due to increases in interest expense ($27,817)
and depreciation and amortization ($4,328). The increase in interest expense is
due to a higher principal balance with the new mortgage obtained in November
1999.
F-417
<PAGE> 607
At Morenci Professional Park, revenues increased $17,280 primarily due to
increases in both common area maintenance reimbursements ($13,063) and real
estate tax revenue ($3,435). Expenses increased $8,888 due to increases in
interest expense ($15,445), depreciation and amortization ($3,562), and various
other operating expenses ($4,108). These increases were offset by decreases in
repairs and maintenance related expenses ($11,275) and snow removal ($2,953).
The increase in interest expense is due to a higher principal balance with the
new mortgage obtained in November 1999. The decrease in repairs and maintenance
related expenses is can be attributed to extensive plumbing and electrical
repairs that were necessary only in 1998.
The occupancy levels at February 29, 2000 and February 28, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
Occupancy levels as of February 29 and 28,
------------------------------------------
Property 2000 1999 1998
-------- ---- ---- ----
<S> <C> <C> <C>
Park Plaza I & II 100% 98% 98%
Morenci Professional Park 90% 95% 92%
Maple Tree Shopping Center 100% 96% 100%
Jackson Industrial 96% 61% 100%
</TABLE>
At Park Plaza I & II, the occupancy level increased 2% to 100% during the
quarter. Leasing activity consisted of two new tenants occupying 4,340 square
feet and three tenants renewing their leases for 12,600 square feet. No suites
were vacated during the quarter. At Park Plaza there is one major tenant who
occupies 10% of the total space, with a lease expiring in August 2004.
At Morenci Professional Park, occupancy decreased 2% to 90% during the quarter.
Leasing activity consisted of seven tenants renewing leases for 9,600 square
feet and three tenants occupying 3,600 square feet vacating their space. Morenci
Professional Park has no tenants that occupy more than 10% of the available
space.
Occupancy at Maple Tree Shopping Center remained at 100% during the quarter.
Leasing activity consisted of one tenant renewing their lease for 14,720 square
feet. There are two major tenants occupying approximately 18% and 42% of the
available space with lease expirations in April 2005 and July 2004,
respectively.
At Jackson Industrial, occupancy increased to 96% during the quarter. The
property had three major tenants during the quarter who occupied 39%, 17%, and
40% of the available space. The tenant which occupied 17% was on a short-term
lease that ended February 29, 2000. Effective March 1, 2000, the major tenant
which previously occupied 39% will expand to 51% with a lease expiring in
January 2001. The major tenant occupying 40% of the available space has a lease
that extends through July 2002.
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
F-418
<PAGE> 608
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 Comparisons
The Registrant's consolidated revenues were $660,026 for the three month period
ended February 29, 2000 and $535,316 for the same period ended February 28,
1999. Revenues increased $124,710 when comparing the two periods. This increase
is primarily due to increases in revenue at all four of the Registrants
properties, primarily at Jackson Industrial as previously mentioned in the
property comparisons. Consolidated expenses were $669,645 and $581,088 for the
three month periods ended February 29, 2000 and February 28, 1999, respectively.
This increase of $88,557 when comparing the two periods is primarily due to
increases in interest expense ($75,778), depreciation and amortization
($15,769), real estate tax expense ($5,137), management fees ($6,444), insurance
expense ($5,744), and payroll expense ($11,072). These increased expenses were
partially offset by decreases in parking lot expenses ($2,319), repairs and
maintenance related expenses ($6,579), vacancy related expenses ($9,222), and
various other operating expenses ($11,667). The increase in interest expense has
been addressed previously in the property comparisons. The increase in
depreciation and amortization is due to additional assets recorded when compared
to total assets for the same period in prior year. The increase in payroll can
be attributed to slight increases in administrative payroll at all four of the
Registrant"s properties. The decrease in other operating expenses is primarily
due to decreased snow removal costs.
1999 Comparisons
As of February 28, 1999, the Registrant's consolidated revenues were $535,316
for the three month period and for the same period ended February 28, 1998,
consolidated revenues were $585,693. Revenues decreased by $50,377. This
decrease was mainly due to a decrease in rental income at Jackson Industrial
attributable to the vacancy of a former major tenant. During the first quarter
of 1999, consolidated expenses as of February 28, 1999 were $581,088 compared to
$565,238 for the quarter ended February 28, 1998. The increase in consolidated
expenses of $15,850 can primarily be attributed to an increase in other
operating expenses ($36,887) and repairs and maintenance related expenses
($9,683). The increase in other operating expenses is due to the large volume of
snow removal costs related to recent weather conditions. The increased expenses
mentioned previously were partially offset by decreases in real estate tax
($9,062), depreciation/amortization ($7,763), management fees ($4,077), parking
lot ($2,494), payroll ($5,063), and other tax expense ($2,651).
Inflation
The effects of inflation did not have a material impact upon the Registrant's
operation in fiscal 1999, and are not expected to materially affect the
Registrant's operation in 2000.
F-419
<PAGE> 609
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 schedule 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, presents fairly, in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 4, 2000
F-420
<PAGE> 610
NOONEY REAL PROPERTY INVESTORS-TWO, L.P. (A LIMITED PARTNERSHIP)
BALANCE SHEETS - NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
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>
F-421
<PAGE> 611
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>
F-422
<PAGE> 612
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>
F-423
<PAGE> 613
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-424
<PAGE> 614
<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-425
<PAGE> 615
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-426
<PAGE> 616
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.
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-427
<PAGE> 617
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 --
10.25%, due in monthly installments
of $15,682, including interest, to
2005. Paid off on November 30, 1999 -- 929,636
</TABLE>
F-428
<PAGE> 618
<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-429
<PAGE> 619
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-430
<PAGE> 620
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-431
<PAGE> 621
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-432
<PAGE> 622
<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-433
<PAGE> 623
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-434
<PAGE> 624
<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-435
<PAGE> 625
<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-436
<PAGE> 626
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-437
<PAGE> 627
E. UNAUDITED FINANCIAL STATEMENTS - QUARTERS ENDED FEBRUARY 29, 2000 AND
FEBRUARY 28, 1999
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
February 29, November 30,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 2,405,754 $ 2,572,203
Accounts receivable 111,606 120,110
Prepaid expenses and deposits 317,351 58,448
Investment property
Land 1,886,042 1,886,042
Buildings and improvements 14,191,566 14,187,855
------------ ------------
16,077,608 16,073,897
Less accumulated depreciation 9,748,366 9,634,858
------------ ------------
6,329,242 6,439,039
Deferred expenses-at amortized cost 241,156 237,432
------------
$ 9,405,109 $ 9,427,232
============ ============
LIABILITIES AND PARTNERS' DEFICIT:
Liabilities:
Accounts payable and accrued expenses $ 425,504 $ 359,278
Mortgage notes payable 9,300,475 9,387,057
Refundable tenant deposits 107,942 100,090
------------ ------------
9,833,921 9,846,425
Partners' Deficit (428,812) (419,193)
------------ ------------
$ 9,405,109 $ 9,427,232
============ ============
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-438
<PAGE> 628
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Rental and other income $ 634,911 $ 535,307
Interest 25,115 9
------------ ------------
660,026 535,316
EXPENSES:
Interest 244,718 168,940
Depreciation and amortization 136,900 121,131
Real estate taxes 93,861 88,724
Property management fees paid to
American Spectrum Midwest 31,747 25,303
Reimbursement to American Spectrum Midwest for
partnership management services and indirect expenses 7,500 7,500
Insurance 16,395 10,651
Office - general 10,120 10,101
Parking lot 4,651 6,970
Payroll 26,148 15,076
Professional services 22,871 24,490
Repairs & maintenance 14,282 20,861
Taxes - other 6,821 6,821
Vacancy 6,893 16,115
Other operating expenses 46,738 58,405
------------ ------------
669,645 581,088
------------
------------ ------------
NET LOSS $ (9,619) $ (45,772)
============ ============
NET LOSS PER LIMITED
PARTNERSHIP UNIT $ (0.79) $ (3.78)
============ ============
PARTNERS' DEFICIT:
Beginning of period $ (419,193) $ (261,183)
Net loss (9,619) (45,772)
------------ ------------
End of period $ (428,812) $ (306,955)
============ ============
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-439
<PAGE> 629
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
February 29, February 28,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,619) $ (45,772)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 136,900 121,131
Changes in assets and liabilities:
Accounts receivable 8,504 2,926
Prepaid expenses and deposits (263,903) (27,978)
Deferred expenses (22,116) 34,773
Accounts payable and accrued expenses 66,226 (92,273)
Refundable tenant deposits 7,852 16,703
------------ ------------
Total adjustments (66,537) 55,282
------------ ------------
Net cash provided by (used in) operating activities (76,156) 9,510
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to investment property (3,711) (8,606)
------------ ------------
Net cash used in investing activities (3,711) (8,606)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on mortgage notes payable (86,582) (104,657)
------------ ------------
------------ ------------
Net cash used in financing activities (86,582) (104,657)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (166,449) (103,753)
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period 2,572,203 486,156
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,405,754 $ 382,403
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during period for interest $ 244,718 $ 168,940
============ ============
</TABLE>
SEE NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
F-440
<PAGE> 630
NOONEY REAL PROPERTY INVESTORS-TWO, L.P.
(A LIMITED PARTNERSHIP)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
NOTE A:
Refer to the Registrant's financial statements for the year ended November 30,
1999, which are contained herein, 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 February 29, 2000 and for all periods presented have been
made. The results of operations for the three-month period ended February 29,
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
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 Real
Estate Company.
NOTE D:
The loss per limited partnership unit for the three months ended February 29,
2000 and February 28, 1999 was computed based on 12,000 units, the number of
units outstanding during the periods.
NOTE E:
The Registrant has no other comprehensive income items, accordingly,
comprehensive income and net income are the same for all periods presented.
F-441
<PAGE> 631
NOTE F:
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.
THREE MONTHS ENDED
<TABLE>
<CAPTION>
February 29, February 28,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Jackson Industrial $ 212,614 $ 124,092
Maple Tree Shopping Center 143,024 134,740
Park Plaza I & II 143,407 128,608
Morenci Professional Park 135,890 118,610
----------- -----------
634,935 506,050
=========== ===========
Operating Profit (Loss):
Jackson Industrial $ (34,867) $ (98,689)
Maple Tree Shopping Center 5,944 18,540
Park Plaza I & II 32,253 48,676
Morenci Professional Park (7,733) (16,125)
----------- -----------
(4,403) (47,598)
=========== ===========
Capital Expenditures:
Jackson Industrial $ 3,711 $ 0
Maple Tree Shopping Center 0 (143)
Park Plaza I & II 0 1,405
Morenci Professional Park 0 7,344
----------- -----------
3,711 8,606
=========== ===========
Depreciation and Amortization:
Jackson Industrial $ 60,063 $ 55,369
Maple Tree Shopping Center 20,515 17,270
Park Plaza I & II 20,114 15,786
Morenci Professional Park 36,208 32,646
----------- -----------
136,900 121,071
=========== ===========
</TABLE>
F-442
<PAGE> 632
<TABLE>
<CAPTION>
Assets:
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Jackson Industrial $3,243,959 $3,238,441
Maple Tree Shopping Center 1,111,359 1,152,425
Park Plaza I & II 901,186 900,312
Morenci Professional Park 1,544,019 1,521,530
---------- ----------
6,800,523 6,812,708
========== ==========
</TABLE>
Reconciliation of segment data to the Partnership's consolidated data is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
February 29, February 28,
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Segments $ 634,935 $ 506,050
Corporate and other 25,091 29,266
----------- -----------
660,026 535,316
=========== ===========
Operating (Loss)
Segments $ (4,403) $ (47,598)
Corporate and other income 25,091 29,266
General and administrative expenses 30,307 27,440
----------- -----------
(9,619) (45,772)
=========== ===========
Depreciation and Amortization
Segments $ 136,900 $ 121,071
Corporate and other 0 60
----------- -----------
136,900 121,131
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Assets:
February 29, 2000 November 30, 1999
----------------- -----------------
<S> <C> <C>
Segments $6,800,523 $6,812,708
Corporate and other 2,604,586 2,614,524
---------- ----------
9,405,109 9,427,232
========== ==========
</TABLE>
F-443
<PAGE> 633
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, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. S-P Properties, Inc. is the managing
general partner of your Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- 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, office/warehouse,
apartment and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas. While this
diversification of assets may reduce certain risks of investment
attributable to a single type of property or location, it also may
subject an investment in American Spectrum to additional risks.
<PAGE> 634
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-12
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-13
FAIRNESS OF THE CONSOLIDATION............................... S-14
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-22
VOTING PROCEDURES........................................... S-22
CONFLICTS OF INTEREST....................................... S-24
FEDERAL INCOME TAX CONSIDERATIONS........................... S-25
FINANCIAL INFORMATION....................................... S-27
</TABLE>
i
<PAGE> 635
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
S-2
<PAGE> 636
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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
S-3
<PAGE> 637
must be approved by greater than 50% of the outstanding Units. To vote "For" the
Consolidation, you must also vote "For" the amendment.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we
refer to as the "Notes." The value of the Notes will be based on the estimated
liquidation value of your Fund. The liquidation value will be lower than the
aggregate exchange value of the American Spectrum Shares offered to your Fund in
the Consolidation. The Notes will bear interest at a fixed rate equal to %.
The interest rate was determined based on 120% of the applicable federal rate on
, 2000. Please note that you may only receive the Notes if you vote
"Against" the Consolidation and you elect to receive the Notes on your consent
form. You will receive American Spectrum Shares if your Fund elects to be
acquired in the Consolidation and you vote "For" the Consolidation, or you vote
"Against" the Consolidation and do not affirmatively select the Notes on your
consent form. The Notes will not be listed on any exchange or automated
quotation system, and a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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.
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. 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.
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.
S-4
<PAGE> 638
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, the CGS
Affiliates and the other Funds consolidated with by American Spectrum. 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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
S-5
<PAGE> 639
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has an interest in one property located in California. You
participate in the profits from the rental of your Fund's property. After the
Consolidation, you will hold common stock of American Spectrum, an operating
company, that will own 35 Properties of various types and locations, assuming
all the Funds are included in the Consolidation. American Spectrum also expects
to make additional investments. Your investment will also change from being an
interest in a static finite-life entity to an investment in a growing operating
company which will have a perpetual term. 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 American
Spectrum anticipated. Upon consummation of the Consolidation, we will have
greater leverage than your Funds. In addition, in order to make future
acquisitions of properties, we intend to incur substantial indebtedness that we
may be unable to repay. Also, certain properties acquired in the Consolidation
by American Spectrum may not be as profitable as others. While diversification
of assets may reduce certain risks of investment attributable to a single
property type or location, it also may subject an investment in American
Spectrum to additional risks. In addition, there can be no assurance as to the
value or performance of American Spectrum's securities and portfolio of
properties as compared to the value of your Units and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of your Fund's property. Continuation of your Fund would, on the other
hand, permit you eventually to receive liquidation proceeds, if any, from the
sale of your Fund's property, and your share of these sale proceeds could be
higher than the amount realized from the sale of your American Spectrum Shares
or from the payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund made
no distributions to you per limited partnership unit. We believe that
distributions by American Spectrum will be higher than distributions you
received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
S-6
<PAGE> 640
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 9,432 Units or 32.13% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming 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.
S-7
<PAGE> 641
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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-8
<PAGE> 642
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 74% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
S-9
<PAGE> 643
American Spectrum's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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 .
In addition, 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
S-10
<PAGE> 644
amount of the built-in gains at the time American Spectrum becomes a REIT. Until
American Spectrum elects the REIT status it will be subject to Federal income
tax at regular corporate rates. In addition, it may be subject to the federal
alternative minimum tax and various state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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.
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<PAGE> 645
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF AMERICAN EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
SPECTRUM SHARES ALLOCATED SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT(1)
------------------------- -------------------------- ---------------------------
<S> <C> <C>
391,648 $5,874,720 $400.27
</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.
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<PAGE> 646
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/Consent
Solicitation Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
-----------------------------------------------------------------------------------------------------
PERCENTAGE
PERCENTAGE OF TOTAL
OF TOTAL AMERICAN
EXCHANGE SHARE SPECTRUM SHARES
EXCHANGE VALUE VALUE ALLOCATION ISSUED(1)
-------------- ---------- ---------- ---------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)..................... 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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.
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<PAGE> 647
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
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<PAGE> 648
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund owns an interest in an office property.
American Spectrum's properties also include apartment and shopping center
properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
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<PAGE> 649
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 two percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
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<PAGE> 650
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY
MARKET PRICES PER $1,000 EXCHANGE
ESTIMATED LIQUIDATION VALUE INVESTMENT (15 MONTHS VALUE PER
ESTIMATED GOING CONCERN VALUE PER $1,000 ORIGINAL ENDED MARCH 31, $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT INVESTMENT 2000)(1)(2) INVESTMENT(3)
------------------------------ --------------------------- ------------------------ ---------------
<S> <C> <C> <C>
$340.00 - $370.00 $386.00 $100.00 - $230.00 $400.27
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-17
<PAGE> 651
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.
(2) Does not include 73 units purchased by affiliates of the general partner in
1999 at a weighted average price per unit of $40.44 ($80.88 per $1000
investment) and 38 units purchased by affiliates of the general partner at a
weighted average price per unit of $63.95 ($127.90 per $1000).
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1000 original investment was $86.03
and the Exchange Value allocated to the Fund per $1,000 original investment was
$400.27.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-18
<PAGE> 652
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
CLOSING TRANSACTION COSTS
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $181,692*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of your Fund's total assets
as of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
S-19
<PAGE> 653
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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
Three months ended March 31, 2000........................... $0
==
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $34,870
1998........................................................ $38,922
1999........................................................ $50,428
Three Months Ended March 31, 2000........................... $10,632
========
</TABLE>
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD
--------------
<S> <C>
1997........................................................ $65,015
1998........................................................ $90,463
1999........................................................ $42,529
Three Months Ended March 31, 2000........................... $10,987
========
</TABLE>
S-20
<PAGE> 654
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $96,026 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-21
<PAGE> 655
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 Prospectus/Consent Solicitation Statement, 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.
S-22
<PAGE> 656
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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-23
<PAGE> 657
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-24
<PAGE> 658
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
consistent with Proposed Treasury Regulation Section 1.708-I (F.R. January 11,
2000) 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
regulation, 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 (iii) 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 PR 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
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
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 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 Funds
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. PR 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
form 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 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.
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FINANCIAL 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. In addition, pro
forma financial information for American Spectrum is set forth on page F- of
the Consent Solicitation Statement.
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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, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying Prospectus/
Consent Solicitation Statement, which includes detailed discussions regarding
American Spectrum and the other Funds and assets being consolidated with
American Spectrum. Accordingly, the discussions in this Supplement are qualified
by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. S-P Properties, Inc. is the managing
general partner of your Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns 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, office/ warehouse, apartment and shopping center properties
located primarily in the midwestern and western United States, Texas and
the Carolinas. While this diversification of assets may reduce certain
risks of investment attributable to a single type of property or
location, it also may subject an investment in American Spectrum to
additional risks.
<PAGE> 661
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-13
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-14
FAIRNESS OF THE CONSOLIDATION............................... S-15
EXPENSES OF THE CONSOLIDATION............................... S-20
REQUIRED VOTE............................................... S-23
VOTING PROCEDURES........................................... S-24
CONFLICTS OF INTEREST....................................... S-25
FEDERAL INCOME TAX CONSIDERATIONS........................... S-26
FINANCIAL INFORMATION....................................... S-28
</TABLE>
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OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
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<PAGE> 663
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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.
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<PAGE> 664
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , ,
which we refer to as the "Notes." The value of the Notes will be based on the
estimated liquidation value of your Fund. The liquidation value will be lower
than the aggregate exchange value of the American Spectrum Shares offered to
your Fund in the Consolidation. The Notes will bear interest at a fixed rate
equal to %. The interest rate was determined based on 120% of the
applicable federal rate on , 2000. Please note that
you may only receive the Notes if you vote "Against" the Consolidation and you
elect to receive the Notes on your consent form. You will receive American
Spectrum Shares if your Fund elects to be acquired in the Consolidation and you
vote "For" the Consolidation, or you vote "Against" the Consolidation and do not
affirmatively select the Notes on your consent form. The Notes will not be
listed on any exchange or automated quotation system, and a market for the Notes
is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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. 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. 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.
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.
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<PAGE> 665
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, the
CGS Affiliates and the other Funds consolidated with by American Spectrum.
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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
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American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has a fixed portfolio of office and office/ warehouse properties
located in Texas and California. You participate in the profits from the rental
of your Fund's properties. After the Consolidation, you will hold common stock
of American Spectrum, an operating company, that will own 35 Properties of
various types and locations, assuming all the Funds are included in the
Consolidation. American Spectrum also expects to make additional investments.
Your investment will also change from being an interest in a static finite-life
entity to an investment in a growing operating company which will have a
perpetual term. 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 American Spectrum anticipated. Upon
consummation of the Consolidation, we will have greater leverage than your
Funds. In addition, in order to make future acquisitions of properties, we
intend to incur substantial indebtedness that we may be unable to repay. Also,
certain properties acquired in the Consolidation by American Spectrum may not be
as profitable as others. While diversification of assets may reduce certain
risks of investment attributable to a single property type or location, it also
may subject an investment in American Spectrum to additional risks. In addition,
there can be no assurance as to the value or performance of American Spectrum's
securities and portfolio of properties as compared to the value of your Units
and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of properties. Continuation of your Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Fund's properties, and your share of these sale proceeds could be higher than
the amount realized from the sale of your American Spectrum Shares or from the
payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In the year ended December 31, 1997, your Fund distributed $2.31 per $1000
investment. Your Fund made no distributions in 1998 and 1999. While no
distributions were made during 1998 or 1999, your Fund had cash flow during the
period. The managing general partner determined to retain this cash for future
requirements. We believe that distributions by American Spectrum will be higher
than distributions you
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received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 6,870 Units or 7.75% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming there is an active trading market
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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.
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
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<PAGE> 669
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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.
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 35% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
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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's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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
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<PAGE> 671
requirements discussed in more detail under the heading "Federal Income Tax
Considerations -- Taxation of American Spectrum" beginning on page .
In addition, 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. Until American Spectrum elects the REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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.
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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.
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<PAGE> 673
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF AMERICAN EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
SPECTRUM SHARES ALLOCATED SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT(1)
------------------------- -------------------------- ---------------------------
<S> <C> <C>
839,334 $12,590,013 $581.17
</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.
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ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/ Consent Solicitation
Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
--------------------------------------------------------------------------------------------------------
PERCENTAGE
PERCENTAGE OF TOTAL
OF TOTAL AMERICAN
EXCHANGE SHARE SPECTRUM SHARES
EXCHANGE VALUE VALUE ALLOCATION ISSUED(1)
-------------- ---------- ---------- ---------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)........................... 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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.
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<PAGE> 675
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
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<PAGE> 676
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund has purchased primarily office and
office/warehouse properties. American Spectrum's properties also include
apartment and shopping center properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
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<PAGE> 677
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 four percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-17
<PAGE> 678
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET
PRICE PER $1,000 EXCHANGE
ESTIMATED LIQUIDATION INVESTMENT (15 MONTHS VALUE PER
ESTIMATED GOING CONCERN VALUE VALUE PER ENDED MARCH 31, $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT $1,000 ORIGINAL INVESTMENT 2000(1)(2) INVESTMENT(3)
------------------------------ ---------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
$456.00 - $536.00 $548.00 $400.00 - $528.00 $581.17
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-18
<PAGE> 679
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.
(2) Does not include 1499 units purchased by affiliates of the general partner
in 1999 at a weighted average price of $125.37 per unit ($501.48 per $1,000
investment) and 788 units purchased by affiliates of the general partner in
2000 at a weighted average price $128.27 per unit ($513.08 per $1,000
investment).
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
$512.09 and the Exchange Value allocated to the Fund per $1,000 original
investment was $573.03.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-19
<PAGE> 680
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
CLOSING TRANSACTION COSTS
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $389,382*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of the value of the American
Spectrum Share consideration payable to your Fund, based on the Exchange
Value, to the total value of the American Spectrum Share consideration
payable to all of the Funds, and the CGS Affiliates, including the CGS
Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion of
these fees was determined based on the ratio of your Fund's total assets as
of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
S-20
<PAGE> 681
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be $ .
Your Fund's pro rata portion of these fees was determined based on the ratio
of the value of Fund's portfolio value to the total real estate portfolio
values of the Funds and the CGS Affiliates, based on appraisal prepared by
Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of your Fund's total assets
as of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
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........................................................ 9.23
1996........................................................ 13.85
1997........................................................ 2.31
1998........................................................ 0(1)
1999........................................................ 0(1)
Three months ended March 31, 2000........................... $ 0(1)
======
</TABLE>
---------------
(1) The Fund did not make any distribution during 1998, 1999 or the first three
months of 2000. The managing general partner determined to retain the cash
flow during this period for future requirements.
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $313,951
1998........................................................ $285,752
1999........................................................ $329,670
Three Months Ended March 31, 2000........................... $ 79,028
----------
</TABLE>
S-21
<PAGE> 682
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- ----------
<S> <C>
1997........................................................ $403,599
1998........................................................ $238,201
1999........................................................ $210,368
Three Months Ended March 31, 2000........................... $ 56,976
----------
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $228,394 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-22
<PAGE> 683
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 Prospectus/Consent Solicitation Statement, 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.
S-23
<PAGE> 684
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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-24
<PAGE> 685
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-25
<PAGE> 686
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 consistent with Proposed Treasury Regulation Section 1.708-1
(F.R. January 11, 2000) 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 regulation, 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 PR 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
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 Funds 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. PR is not opining as to whether gain will be recognized by your or any
other Fund in the Consolidation.
In general, gains and 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 a 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
recognized 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 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 carrier forward
to future years subject to the same limitations.
Tax Consequences to Limited Partners Who Receive Notes. If you 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. Notes 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 and 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 a 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
recognized 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 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 carrier 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).
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<PAGE> 687
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 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 "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 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).
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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 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 service 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.
FINANCIAL 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. 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> 689
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, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. S-P Properties, Inc. is the managing
general partner of your Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns an interest in one office/warehouse
properties located in California, American Spectrum will own a large
portfolio of properties of various types. These properties include
office, office/warehouse, apartment and shopping center properties
located primarily in the midwestern and western United States, Texas and
the Carolinas. While this diversification of assets may reduce certain
risks of investment attributable to a single type of property or
location, it also may subject an investment in American Spectrum to
additional risks.
<PAGE> 690
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-12
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-13
FAIRNESS OF THE CONSOLIDATION............................... S-14
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-22
VOTING PROCEDURES........................................... S-22
CONFLICTS OF INTEREST....................................... S-24
FEDERAL INCOME TAX CONSIDERATIONS........................... S-25
FINANCIAL INFORMATION....................................... S-27
</TABLE>
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OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment, and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited partnership
Units in the Funds. In addition, Limited Partners will participate in future
growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
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<PAGE> 692
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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 amendments must be approved by greater
than 50% of the outstanding Units. To vote "For" the Consolidation, you must
also vote "For" the amendment.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
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<PAGE> 693
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , ,
which we refer to as the "Notes." The value of the Notes will be based on the
estimated liquidation value of your Fund. The liquidation value will be lower
than the aggregate exchange value of the American Spectrum Shares offered to
your Fund in the Consolidation. The Notes will bear interest at a fixed rate
equal to %. The interest rate was determined based on 120% of the
applicable federal rate on , 2000. Please note that you may only
receive the Notes if you vote "Against" the Consolidation and you elect to
receive the Notes on your consent form. You will receive American Spectrum
Shares if your Fund elects to be acquired in the Consolidation and you vote
"For" the Consolidation, or you vote "Against" the Consolidation and do not
affirmatively select the Notes on your consent form. The Notes will not be
listed on any exchange or automated quotation system, and a market for the Notes
is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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 except to the extent the liabilities of
your Fund assumed by American Spectrum exceed the bases of the assets that your
Fund contributed to American Spectrum. The liabilities of your Fund assumed by
American Spectrum exceed the bases of the assets contributed. Accordingly, your
Fund will recognize gain equal to the amount by which the liabilities assumed
exceed the bases of the assets transferred, and you will be allocated your share
of the gain. The estimate of your tax liability is set forth in "Tax
Considerations--Taxable Gain or Loss Estimates Per $1,000 Original Limited
Partner Investment" in the Summary to the Consent Solicitation Statement/Proxy.
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 in addition to that set forth above. 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. 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.
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.
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<PAGE> 694
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, the CGS
Affiliates and the other Funds consolidated with by American Spectrum. 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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent
Solicitation Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could exceed those shown on the
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<PAGE> 695
balance sheets. As a result, we may expend cash to pay these liabilities. Any
payments would reduce cash available for distribution.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has an interest in an office/warehouse property located in
California. You participate in the profits from the rental of your Fund's
properties. After the Consolidation, you will hold common stock of American
Spectrum, an operating company, that will own 35 Properties of various types and
locations, assuming all the Funds are included in the Consolidation. American
Spectrum also expects to make additional investments. Your investment will also
change from being an interest in a static finite-life entity to an investment in
a growing operating company which will have a perpetual term. 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 American Spectrum anticipated. Upon consummation of the Consolidation, we
will have greater leverage than your Funds. In addition, in order to make future
acquisitions of properties, we intend to incur substantial indebtedness that we
may be unable to repay. Also, certain properties acquired in the Consolidation
by American Spectrum may not be as profitable as others. While diversification
of assets may reduce certain risks of investment attributable to a single
property type or location, it also may subject an investment in American
Spectrum to additional risks. In addition, there can be no assurance as to the
value or performance of American Spectrum's securities and portfolio of
properties as compared to the value of your Units and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of your Fund's property. Continuation of your Fund would, on the other
hand, permit you eventually to receive liquidation proceeds, if any, from the
sale of the Fund's properties, and your share of these sale proceeds could be
higher than the amount realized from the sale of your American Spectrum Shares
or from the payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund made
no distributions to you per limited partnership unit. We believe that
distributions by American Spectrum will be higher than distributions you
received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an
S-6
<PAGE> 696
independent representative, either collectively or on an individual basis, it
would have resulted in significantly higher fees and expenses of Consolidation.
Your Fund did not give its 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. 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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 1,785 Units or 4.89% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming 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.
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
S-7
<PAGE> 697
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Fund and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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.
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, could increase American Spectrum's risk of
default on its obligations and adversely affect American Spectrum's
S-8
<PAGE> 698
funds from operations and its ability to make required distributions to its
stockholders. Unlike American Spectrum, your Fund has no debt and your Fund does
not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
S-9
<PAGE> 699
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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 .
In addition, 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. Until American Spectrum elects the REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
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
except to the extent liabilities assumed by American Spectrum exceed the basis
of the assets contributed to American Spectrum. See "Certain Funds 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, and you will be allocated
your share of the gain.
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 their 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 liability is set forth
in "Tax Considerations--Taxable Gain or Loss Estimates Per $1,000 Original
Limited Partner Investment" in the Summary to the Consent Solicitation
Statement/Proxy.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code,
S-10
<PAGE> 700
owned 50% or more of the American Spectrum Shares. 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-11
<PAGE> 701
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF AMERICAN EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
SPECTRUM SHARES ALLOCATED SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT (1)
------------------------- -------------------------- ----------------------------
<S> <C> <C>
28,655 $429,832 $47.08
</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.
S-12
<PAGE> 702
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/Consent
Solicitation Statement.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF TOTAL
OF TOTAL AMERICAN SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE SHARE ALLOCATION SHARES ISSUED(1)
-------------- -------------- ---------------- -----------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)................... 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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> 703
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
S-14
<PAGE> 704
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund has purchased primarily office and
office/warehouse properties. American Spectrum's properties also include
apartment and shopping center properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
S-15
<PAGE> 705
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 one percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-16
<PAGE> 706
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET EXCHANGE
ESTIMATED LIQUIDATION VALUE PRICES PER $1,000 VALUE PER
ESTIMATED GOING CONCERN VALUE PER $1,000 ORIGINAL INVESTMENT (15 MONTHS $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT INVESTMENT ENDED MARCH 31, 2000)(1) INVESTMENT(2)
------------------------------ --------------------------- ------------------------- ---------------
<S> <C> <C> <C>
$27.80 - $30.08 $44.56 (3) $47.08
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-17
<PAGE> 707
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.
(2) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
(3) No reported sales.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
($39.04) and the Exchange Value allocated to the Fund per $1,000 original
investment was $46.61.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-18
<PAGE> 708
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
CLOSING TRANSACTION COSTS
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $13,294*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio
S-19
<PAGE> 709
of your Fund's total assets as of December 31, 1999 to the total assets of
all of the Funds and the CGS Affiliates, including the CGS Management
Company, as of December 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1995........................................................ 0
1996........................................................ 0
1997........................................................ 0
1998........................................................ 0
1999........................................................ 0
Three months ended March 31, 2000........................... $0
==
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $75,530
1998........................................................ $ 0
1999........................................................ $ 0
Three Months Ended March 31, 2000........................... $ 0
-------
</TABLE>
S-20
<PAGE> 710
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $243,136
1998........................................................ $ 0
1999........................................................ $ 0
Three Months Ended March 31, 2000........................... $ 0
--------
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $6,575 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-21
<PAGE> 711
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement and the
accompanying materials in their entirety.
AMENDMENTS TO THE PARTNERSHIP AGREEMENT
An amendments 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 Prospectus/Consent Solicitation Statement, 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.
S-22
<PAGE> 712
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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-23
<PAGE> 713
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-24
<PAGE> 714
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
consistent with Proposed Treasury Regulation Section 1.708-1 (F.R. January 11,
2000) 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
regulation, 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 PR 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
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 Funds will not
recognize gain upon the transfer of assets to American Spectrum except to the
extent the liabilities assumed by American Spectrum exceed the basis of the
transferor Fund in the assets contributed. If the liabilities of your Fund
assumed by American Spectrum exceed the bases of the assets contributed, your
Fund will recognize gain. Such gain will be equal to the amount by which the
liabilities assumed exceed the bases of the assets transferred, and you will be
allocated your share of the gain. 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. PR 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 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 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 your 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.
FINANCIAL 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. In addition, pro
forma financial information for American Spectrum is set forth on page F- of
the Consent Solicitation Statement.
S-25
<PAGE> 715
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 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, for the
purpose of enabling you to evaluate the proposed consolidation of your Fund into
American Spectrum Realty, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the Acquisition that are unique to
you and the other limited partners of your Fund (collectively, the "Limited
Partners"). This Supplement does not purport to provide an overall summary of
the Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. S-P Properties, Inc. is the managing
general partner of your Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- 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, office/warehouse,
apartment and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas. While this
diversification of assets may reduce certain risks of investment
attributable to a single type of property or location, it also may
subject an investment in American Spectrum to additional risks.
<PAGE> 716
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-12
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-13
FAIRNESS OF THE CONSOLIDATION............................... S-14
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-22
VOTING PROCEDURES........................................... S-22
CONFLICTS OF INTEREST....................................... S-24
FEDERAL INCOME TAX CONSIDERATIONS........................... S-25
FINANCIAL INFORMATION....................................... S-27
</TABLE>
i
<PAGE> 717
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
S-2
<PAGE> 718
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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 1523 Units
or 4.95% of the outstanding Units and intend to vote these Units in favor of the
Consolidation.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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.
S-3
<PAGE> 719
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we refer to as
the "Notes." The value of the Notes will be based on the estimated liquidation
value of your Fund. The liquidation value will be lower than the aggregate
exchange value of the American Spectrum Shares offered to your Fund in the
Consolidation. The Notes will bear interest at a fixed rate equal to %. The
interest rate was determined based on 120% of the applicable federal rate on
, 2000. Please note that you may only receive the Notes if you
vote "Against" the Consolidation and you elect to receive the Notes on your
consent form. You will receive American Spectrum Shares if your Fund elects to
be acquired in the Consolidation and you vote "For" the Consolidation, or you
vote "Against" the Consolidation and do not affirmatively select the Notes on
your consent form. The Notes will not be listed on any exchange or automated
quotation system, and a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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. 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. 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.
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.
S-4
<PAGE> 720
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, the
CGS Affiliates and the other Funds consolidated with by American Spectrum.
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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent
Solicitation Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
S-5
<PAGE> 721
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has an interest in an office property located in California. You
participate in the profits from the rental of your Fund's properties. After the
Consolidation, you will hold common stock of American Spectrum, an operating
company, that will own 35 Properties of various types and locations, assuming
all the Funds are included in the Consolidation. American Spectrum also expects
to make additional investments. Your investment will also change from being an
interest in a static finite-life entity to an investment in a growing operating
company which will have a perpetual term. 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 American
Spectrum anticipated. Upon consummation of the Consolidation, we will have
greater leverage than your Funds. In addition, in order to make future
acquisitions of properties, we intend to incur substantial indebtedness that we
may be unable to repay. Also, certain properties acquired in the Consolidation
by American Spectrum may not be as profitable as others. While diversification
of assets may reduce certain risks of investment attributable to a single
property type or location, it also may subject an investment in American
Spectrum to additional risks. In addition, there can be no assurance as to the
value or performance of American Spectrum's securities and portfolio of
properties as compared to the value of your Units and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of your Fund's property. Continuation of your Fund would, on the other
hand, permit you eventually to receive liquidation proceeds, if any, from the
sale of your Fund's property, and your share of these sale proceeds could be
higher than the amount realized from the sale of your American Spectrum Shares
or from the payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund made
no distributions to you per limited partnership unit. We believe that
distributions by American Spectrum will be higher than distributions you
received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
S-6
<PAGE> 722
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 1523 Units or 4.95% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming 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.
S-7
<PAGE> 723
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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-8
<PAGE> 724
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund has no debt and your Fund does not plan to
borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
S-9
<PAGE> 725
American Spectrum's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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 .
In addition, 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
S-10
<PAGE> 726
amount of the built-in gains at the time American Spectrum becomes a REIT. Until
American Spectrum elects the REIT status it will be subject to Federal income
tax at regular corporate rates. In addition, it may be subject to the federal
alternative minimum tax and various state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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-11
<PAGE> 727
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
EXCHANGE VALUE OF SPECTRUM SHARES PER
NUMBER OF AMERICAN SPECTRUM AMERICAN SPECTRUM SHARES $1,000 ORIGINAL LIMITED
SHARES ALLOCATED TO FUND (AFTER ACQUISITION EXPENSE)(1) PARTNER INVESTMENT (1)
--------------------------- ------------------------------ ---------------------------
<S> <C> <C>
328,037 $4,920,557 $639.51
</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.
S-12
<PAGE> 728
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/ Consent Solicitation
Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
-----------------------------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL
PERCENTAGE OF TOTAL AMERICAN SPECTRUM
EXCHANGE VALUE EXCHANGE VALUE SHARE ALLOCATION SHARES ISSUED(1)
-------------- ------------------- ---------------- -------------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)................. 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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> 729
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
S-14
<PAGE> 730
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund owns and interest in an office property.
American Spectrum's properties also include apartment and shopping center
properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
S-15
<PAGE> 731
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-16
<PAGE> 732
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET
PRICES PER $1, 000 EXCHANGE
ESTIMATED LIQUIDATION VALUE INVESTMENT (15 MONTHS VALUE PER
ESTIMATED GOING CONCERN VALUE PER $1,000 ENDED MARCH 31, $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT ORIGINAL INVESTMENT 2000)(1)(2) INVESTMENT(3)
------------------------------- --------------------------- ------------------------- ---------------
<S> <C> <C> <C>
$436.00 - $516.00 $620.00 $100.00 - $240.00 $639.51
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-17
<PAGE> 733
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.
(2) Does not include 58 units purchased by affiliates of the general partner in
1999 at a weighted average price of $61.03 per unit ($244.12 per $1,000
investment) and 269 units purchased by affiliates of the general partner in
2000 at a weighted average price $61.14 per unit ($124.56 per $1,000
investment).
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund was $261.55 per $1,000 original
investment and the Exchange Value allocated to the Fund per $1,000 original
investment was $639.51.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-18
<PAGE> 734
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
CLOSING TRANSACTION COSTS
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $152,182
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of your Fund's total assets
as of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
S-19
<PAGE> 735
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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 Unit 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
Three months ended March 31, 2000........................... $0
==
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $69,720
1998........................................................ $77,844
1999........................................................ $89,275
Three Months Ended March 31, 2000........................... $21,263
-------
</TABLE>
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $ 77,806
1998........................................................ $146,934
1999........................................................ $ 69,072
Three Months Ended March 31, 2000........................... $ 18,957
--------
</TABLE>
S-20
<PAGE> 736
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $85,767 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
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<PAGE> 737
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 Prospectus/Consent Solicitation Statement, 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.
S-22
<PAGE> 738
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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-23
<PAGE> 739
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
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<PAGE> 740
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
consistent with Proposed Treasury Regulation Section 1.708-1 (F.R. January 11,
2000) 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
regulation, 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 PR that, following the
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<PAGE> 741
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
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 Funds 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. PR 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."
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<PAGE> 742
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 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.
FINANCIAL 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. 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> 743
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, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying Prospectus/
Consent Solicitation Statement, which includes detailed discussions regarding
American Spectrum and the other Funds and assets being consolidated with
American Spectrum. Accordingly, the discussions in this Supplement are qualified
by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. S-P Properties, Inc. is the managing
general partner of your Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns offices and office/warehouse properties
located in a Arizona and California, American Spectrum will own a large
portfolio of properties of various types. These properties include
office, office/ warehouse, apartment and shopping center properties
located primarily in the midwestern and western United States, Texas and
the Carolinas. While this diversification of assets may reduce certain
risks of investment attributable to a single type of property or
location, it also may subject an investment in American Spectrum to
additional risks.
<PAGE> 744
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-3
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-13
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-14
FAIRNESS OF THE CONSOLIDATION............................... S-15
EXPENSES OF THE CONSOLIDATION............................... S-20
REQUIRED VOTE............................................... S-23
VOTING PROCEDURES........................................... S-23
CONFLICTS OF INTEREST....................................... S-25
FEDERAL INCOME TAX CONSIDERATIONS........................... S-26
FINANCIAL INFORMATION....................................... S-28
</TABLE>
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<PAGE> 745
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
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<PAGE> 746
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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 18,138
Units or 23.55% of the outstanding Units and intend to vote these Units in favor
of the Consolidation.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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 amendments
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<PAGE> 747
must be approved by greater than 50% of the outstanding Units. To vote "For" the
Consolidation, you must also vote "For" the amendment.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we refer to as
the "Notes." The value of the Notes will be based on the estimated liquidation
value of your Fund. The liquidation value will be lower than the aggregate
exchange value of the American Spectrum Shares offered to your Fund in the
Consolidation. The Notes will bear interest at a fixed rate equal to %. The
interest rate was determined based on 120% of the applicable federal rate on
, 2000. Please note that you may only receive the Notes if you
vote "Against" the Consolidation and you elect to receive the Notes on your
consent form. You will receive American Spectrum Shares if your Fund elects to
be acquired in the Consolidation and you vote "For" the Consolidation, or you
vote "Against" the Consolidation and do not affirmatively select the Notes on
your consent form. The Notes will not be listed on any exchange or automated
quotation system, and a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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 the 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. 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.
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.
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<PAGE> 748
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, with the
CGS Affiliates and the other Funds consolidated with by American Spectrum.
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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
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<PAGE> 749
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has a fixed portfolio of office and office/ warehouse properties
located in California and Arizona. You participate in the profits from the
rental of your Fund's properties. After the Consolidation, you will hold common
stock of American Spectrum, an operating company, that will own 35 Properties of
various types and locations, assuming all the Funds are included in the
Consolidation. American Spectrum also expects to make additional investments.
Your investment will also change from being an interest in a static finite-life
entity to an investment in a growing operating company which will have a
perpetual term. 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 American Spectrum anticipated. Upon
consummation of the Consolidation, we will have greater leverage than your
Funds. In addition, in order to make future acquisitions of properties, we
intend to incur substantial indebtedness that we may be unable to repay. Also,
certain properties acquired in the Consolidation by American Spectrum may not be
as profitable as others. While diversification of assets may reduce certain
risks of investment attributable to a single property type or location, it also
may subject an investment in American Spectrum to additional risks. In addition,
there can be no assurance as to the value or performance of American Spectrum's
securities and portfolio of properties as compared to the value of your Units
and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of properties. Continuation of your Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Fund's properties, and your share of these sale proceeds could be higher than
the amount realized from the sale of your American Spectrum Shares or from the
payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In the year the period ended December 31, 1997 your Fund distributed $2.60
per $1000 investment. Your Fund made no distributions in 1998 and 1999. While no
distributions were made during 1998 or 1999, your Fund had cash flow during the
period. The managing general partner determined to retain this cash for future
requirements. We believe that distributions by American Spectrum will be higher
than distributions you
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<PAGE> 750
received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 18,138 Units or 23.55% of the outstanding Units and intend
to vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming there is an active trading market
S-7
<PAGE> 751
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.
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
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<PAGE> 752
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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.
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 13% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
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<PAGE> 753
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's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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
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<PAGE> 754
requirements discussed in more detail under the heading "Federal Income Tax
Considerations -- Taxation of American Spectrum" beginning on page .
In addition, 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. Until American Spectrum elects the REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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.
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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.
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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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
AMERICAN SPECTRUM SHARES SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
ALLOCATED TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT(1)
------------------------ -------------------------- ---------------------------
<S> <C> <C>
1,212,465 $18,186,978 $944.78
</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.
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ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/ Consent Solicitation
Statement.
ALLOCATION
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
<TABLE>
<CAPTION>
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
------------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
PERCENTAGE AMERICAN
OF TOTAL SPECTRUM
EXCHANGE SHARE SHARES
EXCHANGE VALUE VALUE ALLOCATION ISSUED(1)
-------------- ---------- ---------- ---------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)....................... 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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-14
<PAGE> 758
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
S-15
<PAGE> 759
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund has purchased primarily office and
office/warehouse properties. American Spectrum's properties also include
apartment and shopping center properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
S-16
<PAGE> 760
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 two percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Property portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-17
<PAGE> 761
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET
PRICES PER $1, 000 EXCHANGE
ESTIMATED LIQUIDATION VALUE INVESTMENT (15 MONTHS VALUE PER
ESTIMATED GOING CONCERN VALUE PER $1,000 ORIGINAL ENDED MARCH 31, $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT INVESTMENT 2000)(1)(2) INVESTMENT(3)
------------------------------ --------------------------- ------------------------- ---------------
<S> <C> <C> <C>
$808.00-$900.00 $920.00 $275.00-$600.00 $944.78
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-18
<PAGE> 762
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.
(2) Does not include Units purchased from Bond Purchase, L.L.C. and Everest
Trust. As part of the settlement of certain law suits and other disputes
between CGS, Bond Purchase, L.L.C. (a former limited partner in your Fund
and other limited partnerships controlled by CGS) 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 privately-held limited partnership, on November 9, 1999, CGS
purchased from Bond Purchase, L.L.C.: (i) fifty-nine (59) Units in Nooney
Income Fund, Ltd. II, L.P. ("NIFII") at a price per Unit of $450, (ii) 1,802
units in Nooney Income Fund Ltd., L.P. ("NIF") at $600 per unit, (iii) 199
units in Nooney Real Property Investors-Two, L.P. ("NRPI") at $360 per unit
and (iv) 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: (i) 1,062 Units in NIFII at a price per Unit of
$450, (ii) 260 units in NIF at $600 per unit and (iii) 449 units in NRPI at
$360 per unit. The prices paid by CGS for the Units set forth above were
negotiated in the context of an over-all settlement of claims between the
parties and are not necessarily representative of the market value of the
Units purchased. Each unit in your Fund represents an original investment of
$250. Also does not include 1117 units purchased by an affiliate of the
general partner in 1999 after a weighted average price of $124.18 per unit
($496.72 per $1000 investment) and 315 units purchased by an affiliate of
the general partner at a weighted average price of $117.98 per unit ($471.92
per $1000 investment).
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
$484.37 and the Exchange Value allocated to the Fund per $1,000 original
investment was $936.59.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-19
<PAGE> 763
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $562,484*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio
S-20
<PAGE> 764
of your Fund's total assets as of December 31, 1999 to the total assets of
all of the Funds and the CGS Affiliates, including the CGS Management
Company, as of December 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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(1)
1999........................................................ 0(1)
Three months ended March 31, 2000........................... $ 0(1)
=====
</TABLE>
---------------
(1) The Fund did not make any distribution during 1998, 1999 or the first three
months of 2000. The managing general partner determined to retain the cash
flow during this period for future requirements.
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $186,938
1998........................................................ $149,939
1999........................................................ $177,244
Three Months Ended March 31, 2000........................... $ 40,956
--------
</TABLE>
S-21
<PAGE> 765
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $132,672
1998........................................................ $141,987
1999........................................................ $126,142
Three Months Ended March 31, 2000........................... $ 25,360
--------
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $298,312 for the year
ended December 31, 1999 on a pro forma basis. American Spectrum will operate as
an internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-22
<PAGE> 766
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 Prospectus/Consent Solicitation Statement, 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.
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<PAGE> 767
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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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.
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<PAGE> 768
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-25
<PAGE> 769
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
consistent with Proposed Treasury Regulation Section 1.708-I (F.R. January 11,
2000) 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
regulation, 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 (iii) 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 PR 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
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
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 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 Funds
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. PR 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
form 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.
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<PAGE> 770
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 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
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<PAGE> 771
(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.
FINANCIAL 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. 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> 772
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 INCOME FUND LTD., L.P.
This Supplement is being furnished to you, as a Limited Partner of Nooney
Income Fund Ltd., L.P., which we refer to as the Fund, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into
American Spectrum Realty, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the Acquisition that are unique to
you and the other limited partners of your Fund (collectively, the "Limited
Partners"). This Supplement does not purport to provide an overall summary of
the Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. Nooney Income Investments, Inc. is the
managing general partner of your Fund. Mr. John J. Nooney is a special general
partner of the Fund and, as such, does not exercise control over the affairs of
the Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns one office and one office/warehouse property
located in a centralized location (primarily, the midwestern United
States), American Spectrum will own a large portfolio of properties of
various types. These properties include office, office/warehouse,
apartment and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas. While this
diversification of assets may reduce certain risks of investment
attributable to a single type of property or location, it also may
subject an investment in American Spectrum to additional risks.
<PAGE> 773
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-12
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-13
FAIRNESS OF THE CONSOLIDATION............................... S-14
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-22
VOTING PROCEDURES........................................... S-23
CONFLICTS OF INTEREST....................................... S-24
FEDERAL INCOME TAX CONSIDERATIONS........................... S-25
FINANCIAL INFORMATION....................................... S-27
</TABLE>
i
<PAGE> 774
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse
and apartment properties. In addition, we plan to expand our business by
acquiring additional properties, primarily in the western and midwestern
markets. Upon completion of the Consolidation, American Spectrum expects to own
and operate a diversified portfolio of real property comprised of 35 properties
(the "Properties") in nine states. The Properties consist of 12 office
properties, 12 office/warehouse properties, five apartment properties, five
shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
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<PAGE> 775
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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
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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.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we refer to as the
"Notes." The value of the Notes will be based on the estimated liquidation value
of your Fund. The liquidation value will be lower than the aggregate exchange
value of the American Spectrum Shares offered to your Fund in the Consolidation.
The Notes will bear interest at a fixed rate equal to %. The interest rate
was determined based on 120% of the applicable federal rate on ,
2000. Please note that you may only receive the Notes if you vote "Against" the
Consolidation and you elect to receive the Notes on your consent form. You will
receive American Spectrum Shares if your Fund elects to be acquired in the
Consolidation and you vote "For" the Consolidation, or you vote "Against" the
Consolidation and do not affirmatively select the Notes on your consent form.
The Notes will not be listed on any exchange or automated quotation system, and
a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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.
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. 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.
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.
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RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, the CGS
Affiliates and the other Funds consolidated with by American Spectrum. 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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
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American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has a fixed portfolio of office and office/warehouse properties
located in the midwestern United States. You participate in the profits from the
rental of your Fund's properties. After the Consolidation, you will hold common
stock of American Spectrum, an operating company, that will own 35 Properties of
various types and locations, assuming all the Funds are included in the
Consolidation. American Spectrum also expects to make additional investments.
Your investment will also change from being an interest in a static finite-life
entity to an investment in a growing operating company which will have a
perpetual term. 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 American Spectrum anticipated. Upon
consummation of the Consolidation, we will have greater leverage than your
Funds. In addition, in order to make future acquisitions of properties, we
intend to incur substantial indebtedness that we may be unable to repay. Also,
certain properties acquired in the Consolidation by American Spectrum may not be
as profitable as others. While diversification of assets may reduce certain
risks of investment attributable to a single property type or location, it also
may subject an investment in American Spectrum to additional risks. In addition,
there can be no assurance as to the value or performance of American Spectrum's
securities and portfolio of properties as compared to the value of your Units
and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of properties. Continuation of your Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Fund's properties, and your share of these sale proceeds could be higher than
the amount realized from the sale of your American Spectrum Shares or from the
payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund
distributed $18.75, $25.00 and $0 respectively, to you per $1000 investment.
While no distributions were made during 1999, your Fund had cash flow during
1999. The managing general partner determined to retain this cash for future
requirements. We believe that distributions by American Spectrum will be higher
than distributions you received from your
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Fund. We cannot be sure that American Spectrum will be able to maintain this
level of distributions in the future.
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 2,064 Units or 13.60% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming there is an active trading market
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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.
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Fund and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
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Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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.
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 16% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
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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's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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
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requirements discussed in more detail under the heading "Federal Income Tax
Considerations -- Taxation of American Spectrum" beginning on page .
In addition, 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. Until American Spectrum elects the REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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.
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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.
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF AMERICAN EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
SPECTRUM SHARES ALLOCATED SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT(1)
------------------------- -------------------------- ---------------------------
<S> <C> <C>
683,383 $10,250,749 $675.28
</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.
S-12
<PAGE> 785
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and
among the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange
Value of all of the Funds and the CGS Affiliates, including the CGS
Management Company. Your managing general partner believes that the
Exchange Values of the Funds, the CGS Affiliates 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 March 31,
2000, and constitute a reasonable basis for allocating the American
Spectrum Shares between the Funds and the CGS Affiliates, including the
CGS Management Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/ Consent Solicitation
Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
PERCENTAGE PERCENTAGE OF
OF TOTAL TOTAL AMERICAN
EXCHANGE EXCHANGE SHARE SPECTRUM
VALUE VALUE ALLOCATION SHARES ISSUED(1)
------------ ---------- ---------- -----------------
<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 0.39% 28,655 0.39%
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 Affiliates(2).................... 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% 7,501,707 100.00%
============ ====== ========== ======
</TABLE>
---------------
(1) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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> 786
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are
S-14
<PAGE> 787
fair to such limited partners. Your Fund has retained Stanger to render an
opinion as to the fairness to Limited Partners, from a financial point of view,
of the allocation of the American Spectrum Shares (i) between the Funds and the
CGS Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund has purchased primarily office and
office/warehouse properties. American Spectrum's properties also include
apartment and shopping center properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying degrees of leverage.
S-15
<PAGE> 788
3. Market Value. To the extent that there is trading in the Units, such
trading takes place in an informal secondary market. The Units do not trade in
any orderly, active market. The Exchange Value assigned to your Fund in
connection with the Consolidation is greater than the range of trading prices of
your Fund's units as reflected by the reported secondary sales prices of the
Units. See "Prices for Fund Units" on page of the Prospectus/Consent
Solicitation Statement for the limited information available with respect to
secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the Prospectus/Consent
Solicitation Statement 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 11% of all the outstanding Units in
your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
S-16
<PAGE> 789
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET
PRICES PER $1,000 EXCHANGE VALUE
ESTIMATED LIQUIDATION VALUE INVESTMENT (15 MONTHS PER $1,000
ESTIMATED GOING CONCERN VALUE PER $1,000 ORIGINAL ENDED MARCH 31, ORIGINAL
PER $1,000 ORIGINAL INVESTMENT INVESTMENT 2000)(1)(2) INVESTMENT(3)
------------------------------ --------------------------- ------------------------- --------------
<S> <C> <C> <C>
$520.00 - $585.00 $661.00 $210.00 - 344.70 $675.28
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does not maintain
comprehensive information regarding the activities of all
S-17
<PAGE> 790
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.
(2) Does not include Units purchased from Bond Purchase, L.L.C. and Everest
Trust. As part of the settlement of certain law suits and other disputes
between CGS, Bond Purchase, L.L.C. (a former limited partner in your Fund
and other limited partnerships controlled by CGS) 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 privately-held limited partnership, on November 9, 1999, CGS
purchased from Bond Purchase, L.L.C.: (i) fifty-nine (59) Units in Nooney
Income Fund, Ltd. II, L.P. ("NIFII") at a price per Unit of $450, (ii) 1,802
units in Nooney Income Fund Ltd., L.P. ("NIF") at $600 per unit, (iii) 199
units in Nooney Real Property Investors-Two, L.P. ("NRPI") at $360 per unit
and (iv) 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: (i) 1,062 Units in NIFII at a price per Unit of
$450, (ii) 260 units in NIF at $600 per unit and (iii) 449 units in NRPI at
$360 per unit. The prices paid by CGS for the Units set forth above were
negotiated in the context of an over-all settlement of claims between the
parties and are not necessarily representative of the market value of the
Units purchased. Each unit in your Fund represents an original investment of
$1,000.
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
$359.84 and the Exchange Value allocated to the Fund per $1,000 original
investment was $675.28.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-18
<PAGE> 791
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total............................................. $317,033*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of your Fund's total assets
as of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
S-19
<PAGE> 792
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1995........................................................ $12.50
1996........................................................ 18.75
1997........................................................ 18.75
1998........................................................ 25.00
1999........................................................ 0(1)
Three months ended March 31, 2000........................... $ 0(1)
======
</TABLE>
---------------
(1) The Fund did not make any distribution during 1999 or the first three months
of 2000. The managing general partner determined to retain the cash flow
during this period for future requirements.
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $56,665
1998........................................................ $67,193
1999........................................................ $25,000
Three Months Ended March 31, 2000........................... $ 6,250
=======
</TABLE>
S-20
<PAGE> 793
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $107,130
1998........................................................ $111,606
1999........................................................ $125,314
Three Months Ended March 31, 2000........................... $ 30,949
========
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $166,766 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-21
<PAGE> 794
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 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.
S-22
<PAGE> 795
VOTING PROCEDURES
The Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-23
<PAGE> 796
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-24
<PAGE> 797
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
consistent with Proposed Treasury Regulation Section 1.708-I (F.R. January 11,
2000) 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
regulation, 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 (iii) 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 PR 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
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
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 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 Funds
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. PR 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
form 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.
S-25
<PAGE> 798
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 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
S-26
<PAGE> 799
(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.
FINANCIAL 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. In addition, pro
forma financial information for American Spectrum is set forth on page F- of
the Consent Solicitation Statement.
S-27
<PAGE> 800
n
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 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, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. Nooney Income Investments Two, Inc. is
the managing general partner of your Fund. Mr. John J. Nooney is a special
general partner of the Fund and, as such, does not exercise control over the
affairs of the Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum
Shares could trade at a price below the $15 exchange value that was
assigned by American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the
Operating Partnership in exchange for properties and assets transferred
to American Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns offices and office/warehouse properties
located in a centralized location (primarily, the midwestern United
States), American Spectrum will own a large portfolio of properties of
various types. These properties include office, office/warehouse,
apartment and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas. While this
diversification of assets may reduce certain risks of investment
attributable to a single type of property or location, it also may
subject an investment in American Spectrum to additional risks.
<PAGE> 801
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-13
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-14
FAIRNESS OF THE CONSOLIDATION............................... S-15
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-23
VOTING PROCEDURES........................................... S-24
CONFLICTS OF INTEREST....................................... S-25
FEDERAL INCOME TAX CONSIDERATIONS........................... S-26
FINANCIAL INFORMATION....................................... S-28
</TABLE>
i
<PAGE> 802
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
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certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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
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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.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we refer to as the
"Notes." The value of the Notes will be based on the estimated liquidation value
of your Fund. The liquidation value will be lower than the aggregate exchange
value of the American Spectrum Shares offered to your Fund in the Consolidation.
The Notes will bear interest at a fixed rate equal to %. The interest rate
was determined based on 120% of the applicable federal rate on ,
2000. Please note that you may only receive the Notes if you vote "Against" the
Consolidation and you elect to receive the Notes on your consent form. You will
receive American Spectrum Shares if your Fund elects to be acquired in the
Consolidation and you vote "For" the Consolidation, or you vote "Against" the
Consolidation and do not affirmatively select the Notes on your consent form.
The Notes will not be listed on any exchange or automated quotation system, and
a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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. 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. 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.
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.
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RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum with the
CGS Affiliates and the other Funds consolidated with by American Spectrum.
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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
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American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has a fixed portfolio of office and office/ warehouse properties
located in the midwestern United States. You participate in the profits from the
rental of your Fund's properties. After the Consolidation, you will hold common
stock of American Spectrum, an operating company, that will own 35 Properties of
various types and locations, assuming all the Funds are included in the
Consolidation. American Spectrum also expects to make additional investments.
Your investment will also change from being an interest in a static finite-life
entity to an investment in a growing operating company which will have a
perpetual term. 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 American Spectrum anticipated. Upon
consummation of the Consolidation, we will have greater leverage than your
Funds. In addition, in order to make future acquisitions of properties, we
intend to incur substantial indebtedness that we may be unable to repay. Also,
certain properties acquired in the Consolidation by American Spectrum may not be
as profitable as others. While diversification of assets may reduce certain
risks of investment attributable to a single property type or location, it also
may subject an investment in American Spectrum to additional risks. In addition,
there can be no assurance as to the value or performance of American Spectrum's
securities and portfolio of properties as compared to the value of your Units
and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of properties. Continuation of your Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Fund's properties, and your share of these sale proceeds could be higher than
the amount realized from the sale of your American Spectrum Shares or from the
payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund
distributed $12.50, $18.75 and $0 respectively, to you per $1000 investment.
While no distributions were made during 1999, your Fund had cash flow during
1999. The managing general partner determined to retain this cash for future
requirements. We believe that distributions by American Spectrum will be higher
than distributions you received from your
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Fund. We cannot be sure that American Spectrum will be able to maintain this
level of distributions in the future.
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 1135 Units or 5.90% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming there is an active trading market
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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.
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
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Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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.
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 43% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
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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's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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
S-10
<PAGE> 811
requirements discussed in more detail under the heading "Federal Income Tax
Considerations -- Taxation of American Spectrum" beginning on page .
In addition, 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. Until American Spectrum elects the REIT
status it will be subject to Federal income tax at regular corporate rates. In
addition, it may be subject to the federal alternative minimum tax and various
state income taxes.
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.
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.
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.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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-11
<PAGE> 812
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-12
<PAGE> 813
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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 AMERICAN
NUMBER OF AMERICAN EXCHANGE VALUE OF AMERICAN SPECTRUM SHARES PER
SPECTRUM SHARES ALLOCATED SPECTRUM SHARES (AFTER $1,000 ORIGINAL LIMITED
TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT (1)
------------------------- -------------------------- ---------------------------
<S> <C> <C>
1,021,040 $15,315,594 $796.82
</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.
S-13
<PAGE> 814
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
(the "Exchange Value") of each of the Funds, the CGS Affiliates and the
CGS Management Company relative to the aggregate estimated Exchange Value
of all of the Funds and the CGS Affiliates, including the CGS Management
Company. Your managing general partner believes that the Exchange Values
of the Funds, the CGS Affiliates 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 March 31, 2000, and
constitute a reasonable basis for allocating the American Spectrum Shares
between the Funds and the CGS Affiliates, including the CGS Management
Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/Consent
Solicitation Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
------------------------------------------------------------------------------------------------------
PERCENTAGE
PERCENTAGE OF TOTAL
OF TOTAL AMERICAN
EXCHANGE SHARE SPECTRUM SHARES
EXCHANGE VALUE VALUE ALLOCATION ISSUED(1)
-------------- ---------- ---------- ---------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)...................... 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) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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-14
<PAGE> 815
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
S-15
<PAGE> 816
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund has purchased primarily office and
office/warehouse properties. American Spectrum's properties also include
apartment and shopping center properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
S-16
<PAGE> 817
assigned to your Funds in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 six percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates' Property portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-17
<PAGE> 818
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY
MARKET PRICES PER $1,000 EXCHANGE VALUE PER
ESTIMATED GOING CONCERN VALUE ESTIMATED LIQUIDATION VALUE PER INVESTMENT (15 MONTHS ENDED $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT $1,000 ORIGINAL INVESTMENT MARCH 31, 2000)(1)(2) INVESTMENT(3)
------------------------------ ---------------------------------- --------------------------- ------------------
<S> <C> <C> <C>
$663.00 - $758.00 $764.00 $200.00 - 471.00 $796.82
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-18
<PAGE> 819
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.
(2) Does not include Units purchased from Bond Purchase, L.L.C. and Everest
Trust. As part of the settlement of certain law suits and other disputes
between CGS, Bond Purchase, L.L.C. (a former limited partner in your Fund
and other limited partnerships controlled by CGS) 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 privately-held limited partnership, on November 9, 1999, CGS
purchased from Bond Purchase, L.L.C.: (i) fifty-nine (59) Units in Nooney
Income Fund, Ltd. II, L.P. ("NIFII") at a price per Unit of $450, (ii) 1,802
units in Nooney Income Fund Ltd., L.P. (NIF") at $600 per unit, (iii) 199
units in Nooney Real Property Investors-Two, L.P. ("NRPI") at $360 per unit
and (iv) 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: (i) 1,062 Units in NIFII at a price per Unit of
$450, (ii) 260 units in NIF at $600 per unit and (iii) 449 units in NRPI at
$360 per unit. The prices paid by CGS for the Units set forth above were
negotiated in the context of an over-all settlement of claims between the
parties and are not necessarily representative of the market value of the
Units purchased. Each unit in your Fund represents an original investment of
$1,000.
In addition, an affiliate of CGS purchased 14 Units in NIFII for $424 in May
2000.
(3) 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 substantially 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 the American Spectrum Shares. The
price may be either lower or higher than those in the range of estimated
values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
$437.48 and the Exchange Value allocated to the Fund per $1,000 original
investment was $796.82.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
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
S-19
<PAGE> 820
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal.......................................... $
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.......................................... $
Total....................................................... $473,678*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio of your Fund's total assets
as of December 31, 1999 to the total assets of all of the Funds and the CGS
Affiliates, including the CGS Management Company, as of December 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined
S-20
<PAGE> 821
based on the ratio of the value of Fund's portfolio value to the total real
estate portfolio values of the Funds and the CGS Affiliates, based on
appraisal prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1995........................................................ 12.50
1996........................................................ 12.50
1997........................................................ 12.50
1998........................................................ 18.75
1999........................................................ 0(1)
Three months ended March 31, 2000........................... $ 0(1)
======
</TABLE>
---------------
(1) The Fund did not make any distribution during 1999 or the first three months
of 2000. The managing general partner determined to retain the cash flow
during this period for future requirements.
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $54,704
1998........................................................ $62,046
1999........................................................ $40,000
Three Months Ended March 31, 2000........................... $10,000
-------
</TABLE>
S-21
<PAGE> 822
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $201,992
1998........................................................ $215,198
1999........................................................ $216,862
Three Months Ended March 31, 2000........................... $ 56,451
--------
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $251,305 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-22
<PAGE> 823
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 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.
S-23
<PAGE> 824
VOTING PROCEDURES
The Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-24
<PAGE> 825
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates" Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-25
<PAGE> 826
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 consistent with Proposed Treasury Regulation Section 1.708-1 (F.R.
January 11, 2000) 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 regulation, 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 PR 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
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 Funds 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. PR is not opining as to whether gain will be recognized by your or any
other Fund in the Consolidation.
S-26
<PAGE> 827
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
"nonrecpatured 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 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 to you, your basis in the American Spectrum Shares will equal the
adjusted basis of your partnership interest in your Fund.
S-27
<PAGE> 828
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) (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.
FINANCIAL 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. In addition, pro
forma financial information for American Spectrum is set forth on page F- of
the Consent Solicitation Statement (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-28
<PAGE> 829
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 Real
Property Investors Two, L.P., which we refer to as the Fund, for the purpose of
enabling you to evaluate the proposed consolidation of your Fund into American
Spectrum Realty, Inc., a Maryland corporation, which is a real estate investment
trust. This Supplement is designed to summarize only the risks, effects,
fairness and other considerations of the Acquisition that are unique to you and
the other limited partners of your Fund (collectively, the "Limited Partners").
This Supplement does not purport to provide an overall summary of the
Acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding American Spectrum and the other Funds and assets being consolidated
with American Spectrum. Accordingly, the discussions in this Supplement are
qualified by the more expanded treatment of these matters appearing in the
Prospectus/Consent Solicitation Statement. Unless otherwise indicated, the terms
"we," "us," "our," "ourselves" and "American Spectrum" when used herein refer to
American Spectrum Realty, Inc. and our subsidiaries, including American Spectrum
Operating Partnership, L.P., which we refer to herein as the Operating
Partnership. The Operating Partnership is a limited partnership through which
American Spectrum conducts its business. Nooney Investors, Inc. is the managing
general partner of your Fund. Mr. John J. Nooney is a special general partner of
the Fund and, as such, does not exercise control over the affairs of the Fund.
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, 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 material risks and potential disadvantages associated with the
Consolidation that you should consider in determining whether to vote "For" or
"Against" the Consolidation. These material risks include:
- We determined the number of American Spectrum Shares to be allocated per
unit of limited partnership interest of the Fund (collectively, the
"Units") without any arm's-length negotiations. Accordingly, the number
and exchange value of American Spectrum Shares allocated per Unit may not
reflect the fair market value of your Units.
- We are uncertain as to the value at which American Spectrum Shares will
trade following listing on the . The American Spectrum Shares
could trade at a price below the $15 exchange value that was assigned by
American Spectrum for purposes of the Consolidation.
- Your managing general partner is a subsidiary of ours and therefore has
substantial conflicts of interest with respect to the Consolidation. Your
managing general partner's affiliates will receive 2,628,655 American
Spectrum Shares and units of limited partnership interest in the Operating
Partnership in exchange for properties and assets transferred to American
Spectrum as part of the Consolidation.
- Limited Partners may incur taxes in connection with the Consolidation.
- The Consolidation involves a fundamental change in your investment.
- Unlike your Fund, American Spectrum's policy is to reinvest proceeds from
the sale of its properties or refinancing of its indebtedness.
- American Spectrum may change its investment, acquisition or financing
policies without a vote of its securityholders.
- Unlike your Fund which owns office/warehouse and shopping center
properties located in a centralized location (primarily, the midwestern
United States), American Spectrum will own a large portfolio of properties
of various types. These properties include office, office/warehouse,
apartment and shopping center properties located primarily in the
midwestern and western United States, Texas and the Carolinas. While this
diversification of assets may reduce certain risks of investment
attributable to a single type of property or location, it also may subject
an investment in American Spectrum to additional risks.
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
OVERVIEW.................................................... S-2
RISK FACTORS................................................ S-5
AMERICAN SPECTRUM SHARES TO BE ALLOCATED TO THE FUND........ S-12
ALLOCATION OF AMERICAN SPECTRUM SHARES...................... S-13
FAIRNESS OF THE CONSOLIDATION............................... S-14
EXPENSES OF THE CONSOLIDATION............................... S-19
REQUIRED VOTE............................................... S-22
VOTING PROCEDURES........................................... S-23
CONFLICTS OF INTEREST....................................... S-24
FEDERAL INCOME TAX CONSIDERATIONS........................... S-25
FINANCIAL INFORMATION....................................... S-27
</TABLE>
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<PAGE> 831
OVERVIEW
This Overview highlights some of the information in this Supplement and the
accompanying Prospectus/ Consent Solicitation Statement and may not address all
of the information regarding the Consolidation that is important to you. To
understand the terms and risks of the Consolidation, you should carefully read
this Supplement and the Prospectus/Consent Solicitation Statement in their
entirety.
WHAT IS AMERICAN SPECTRUM?
We are a full-service real estate company, originally formed in 1989 as a
Texas corporation under the name CGS Real Estate Company, Inc. (together with
its affiliates, "CGS"). In , 2000, we merged with a newly organized
Maryland corporation and assumed the name American Spectrum Realty, Inc. Through
the Consolidation, we intend to combine the properties of the Funds and
properties owned by CGS and its Affiliates (the "Affiliates' Properties"). We
intend to qualify as a real estate investment trust and to elect to be treated
as a real estate investment trust (a REIT) beginning in 2002. The primary
business of American Spectrum will be the ownership of office, office/warehouse,
apartment and shopping center properties. In addition, we plan to expand our
business by acquiring additional properties, primarily in the western and
midwestern markets. Upon completion of the Consolidation, American Spectrum
expects to own and operate a diversified portfolio of real property comprised of
35 properties (the "Properties") in nine states. The Properties consist of 12
office properties, 12 office/warehouse properties, five apartment properties,
five shopping centers, and one parcel of development land. If American Spectrum
acquires all of the Funds, the properties held by affiliates of CGS and the
portion of CGS's property management business which manages the properties of
affiliated entities (the "CGS Management Company") in the Consolidation,
American Spectrum expects to have total assets having an appraised value of
approximately $283 million at the time the Consolidation is consummated. This
includes approximately $177,000,000 of real estate assets that will be
contributed by the CGS Affiliates. We refer to CGS and its affiliates as the CGS
Affiliates and we refer to the properties owned by CGS or to be acquired by
merger from the CGS Affiliates as the "Affiliates' Properties".
American Spectrum's principal executive offices are located at 1800 East
Deere Avenue, Santa Ana, California 92705. Our telephone number is (949)
585-7600.
WHY ARE WE PROPOSING THE CONSOLIDATION?
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. The American Spectrum Shares will be listed for trading
on . There is no active trading market for the limited
partnership Units in the Funds. In addition, Limited Partners will participate
in future growth of American Spectrum.
HOW MANY AMERICAN SPECTRUM SHARES WILL I RECEIVE IF MY FUND IS ACQUIRED BY
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 a value of $15 per
share for each American Spectrum Share.
WHAT IS THE VALUE OF AN AMERICAN SPECTRUM SHARE?
We do not know the fair value of an American Spectrum Share. American
Spectrum has assigned a value of $15 per share. This is an arbitrary amount
chosen for the sole purpose of allocating American Spectrum Shares. We
determined the number of American Shares allocated to each Fund by dividing the
Exchange Value for each Fund by $15. We determined the Exchange Value based in
part on appraisals by Robert A. Stanger & Co., Inc., an independent financial
advisor ("Stanger"). After careful consideration, American Spectrum concluded
that the Exchange Value would be used to allocate the American Spectrum Share
consideration between the eight Funds and the CGS Affiliates, including the CGS
Management Company. However, the Exchange Value does not necessarily represent
the fair value of an American Spectrum Share. Furthermore, since the American
Spectrum Shares are not listed on the at this time, we are not
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<PAGE> 832
certain of the value at which an American Spectrum Share may trade. Once listed,
it is possible that the American Spectrum Shares will trade at prices below the
Exchange Value.
WHAT IS THE REQUIRED VOTE NECESSARY TO APPROVE THE CONSOLIDATION OF MY FUND?
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.
DID YOU RECEIVE A FAIRNESS OPINION IN CONNECTION WITH THE CONSOLIDATION OF MY
FUND WITH AMERICAN SPECTRUM?
Yes. Stanger, an independent financial advisor, rendered an opinion that
the allocation of American Spectrum Shares (i) between the Funds, as a group,
and CGS and its affiliates (the "CGS Affiliates"), including the CGS Management
Company and (ii) among the Funds, is fair to the Limited Partners of your Fund
from a financial point of view.
DID YOU RECEIVE AN APPRAISAL IN CONNECTION WITH THE CONSOLIDATION OF MY FUND
WITH AMERICAN SPECTRUM?
Yes. To assist us in our determination of the number of American Spectrum
Shares to be issued to each Fund and in your managing general partner's
evaluation of the Consolidation, your managing general partner engaged Stanger
to appraise the portfolio of properties owned by your Fund, the other Funds and
the Affiliates' Properties portfolio.
WILL I RECEIVE FUTURE DISTRIBUTIONS WITH RESPECT TO THE AMERICAN SPECTRUM SHARES
I RECEIVE IN THE CONSOLIDATION?
Yes. American Spectrum expects to make quarterly distributions to its
stockholders. American Spectrum expects to elect to qualify as a REIT beginning
in 2002. If American Spectrum makes the REIT election, it must always distribute
at least 90% of its taxable income to its stockholders on an annual basis in
order to maintain its status as a REIT. American Spectrum is not required to
make the REIT election. However, American Spectrum intends to make quarterly
distributions whether or not it makes the REIT election.
As an American Spectrum stockholder, you will also have the ability to
participate in any appreciation in value of American Spectrum Shares. American
Spectrum Shares will be listed for trading on the . Going
forward, we believe that, unlike your Fund, American Spectrum's assets will
grow, resulting in an increase of its earnings and its funds from operations. As
a result, the price of American Spectrum Shares on the may
increase due to such growth. However, we cannot assure you that any growth will
be achieved.
DOES THE MANAGING GENERAL PARTNER OF MY FUND RECOMMEND THAT I VOTE "FOR" THE
PROPOSED TRANSACTION?
Yes. Your managing general partner has recommended that you vote "For" the
Consolidation. Your managing general partner believes that the Consolidation is
the best means to maximize the value of your investment in your Fund. It
believes that the Consolidation is better than the alternatives of liquidating
your Fund's portfolio or continuing unchanged the investment in your Fund. You
should note that your managing general partner is an affiliate of CGS and
American Spectrum.
WHY ARE AMENDMENTS TO YOUR FUND'S PARTNERSHIP AGREEMENT BEING PROPOSED?
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
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<PAGE> 833
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.
HOW DO I VOTE?
Simply indicate on the enclosed consent form, how you want to vote, and
sign and mail it in the enclosed postage-paid return envelope as soon as
possible so that your Units may be voted "For" or "Against" the consolidation of
your Fund with American Spectrum. If you sign and send in your consent form and
do not indicate how you want to vote, your consent form will be counted as a
vote "For" the Consolidation and the amendments to the Partnership Agreement. If
you do not vote or you indicate on your consent form that you abstain, it will
count as a vote "Against" the Consolidation and the amendments.
IN THE EVENT THAT MY FUND IS CONSOLIDATED WITH AMERICAN SPECTRUM, MAY I CHOOSE
TO RECEIVE SOMETHING OTHER THAN AMERICAN SPECTRUM SHARES?
Yes, subject to the limitations described in the accompanying
Prospectus/Consent Solicitation Statement. If you vote "Against" the
Consolidation, but your Fund is nevertheless acquired by American Spectrum, you
may elect to receive notes due , , which we refer
to as the "Notes." The value of the Notes will be based on the estimated
liquidation value of your Fund. The liquidation value will be lower than the
aggregate exchange value of the American Spectrum Shares offered to your Fund in
the Consolidation. The Notes will bear interest at a fixed rate equal to %.
The interest rate was determined based on 120% of the applicable federal rate on
, 2000. Please note that you may only receive the Notes if you
vote "Against" the Consolidation and you elect to receive the Notes on your
consent form. You will receive American Spectrum Shares if your Fund elects to
be acquired in the Consolidation and you vote "For" the Consolidation, or you
vote "Against" the Consolidation and do not affirmatively select the Notes on
your consent form. The Notes will not be listed on any exchange or automated
quotation system, and a market for the Notes is not likely to develop.
WHAT ARE THE TAX CONSEQUENCES OF THE CONSOLIDATION TO ME?
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 except to the extent the liabilities of
your Fund assumed by American Spectrum exceed the bases of the assets that your
Fund contributed to American Spectrum. The liabilities of your Fund assumed by
American Spectrum exceed the bases of the assets contributed. Accordingly, your
Fund will recognize gain equal to the amount by which the liabilities assumed
exceed the bases of the assets transferred, and you will be allocated your share
of the gain. The estimate of your tax liability is set forth in "Tax
Considerations -- Taxable Gain or Loss Estimates Per $1,000 Original Limited
Partner Investment" in the Summary to the Consent Solicitation Statement/Proxy.
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 in addition to that set forth above. 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. 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.
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.
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<PAGE> 834
RISK FACTORS
As a result of the Consolidation of your Fund with American Spectrum, you
will assume the risks associated with the assets of American Spectrum, with the
CGS Affiliates and the other Funds consolidated with by American Spectrum.
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 to which you are presently exposed.
The following is a description of the most significant potential
disadvantages, adverse consequences and risks of the Consolidation that are
applicable to your Fund. You should carefully consider the following risks when
reviewing the potential benefits of American Spectrum's offer set forth in
"Background and Reasons for the Offer -- Expected Benefits of the Offer." In
addition, you should review the other risks of investing in American Spectrum
Shares discussed on page of our accompanying Prospectus/Consent Solicitation
Statement.
INVESTMENT RISKS
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.
There is currently no market for the American Spectrum Shares, and it is
possible that the American Spectrum Shares will trade at prices below the
Exchange Value or the per share book value of American Spectrum. The investment
of any limited partners of the Funds who become American Spectrum stockholders
will change into freely tradable American Spectrum Shares. Consequently, some of
these stockholders may choose to sell their American Spectrum Shares upon
listing at a time when demand for American Spectrum Shares may be relatively
low. The market price of the American Spectrum Shares may be volatile after the
Consolidation, and the American Spectrum Shares could trade at prices less than
the Exchange Value. This could result from increased selling activity following
the issuance of the American Spectrum Shares, the interest level of investors in
purchasing the American Spectrum Shares after the Consolidation and the amount
of distributions to be paid by American Spectrum. REIT stocks have
underperformed in the broader equity market in 1998 and 1999. The market
conditions for REIT stocks generally could adversely affect the market price of
the American Spectrum Shares.
American Spectrum will have more indebtedness and will have a lower
capitalization than many REIT's. This could affect the market price of the
American Spectrum Shares.
American Spectrum will have a higher ratio of indebtedness to assets than
many REIT's. This ratio is frequently referred to as leverage. 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.
American Spectrum has a history of losses. We cannot assure you that we will
become profitable in the future.
The American Spectrum Predecessor incurred losses for 1997, 1998 and 1999
and the three months ending March 31, 2000. Additionally, we incurred losses on
a pro forma basis for 1999 and the first three months of 2000. We believe that
the losses resulted primarily from our investing in turnaround properties. We
expected that we would initially spend more on these properties than the rental
income. We expect that the rent from these properties will increase and that
they will increase in value. However, 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. In addition, although American Spectrum
had pro forma losses during 1999 and the first three months of 2000, it had
positive pro forma cash flow. The losses resulted from non-cash expenses, such
as depreciation.
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<PAGE> 835
American Spectrum is Responsible for Liabilities of Entities included in
Consolidation. This could require American Spectrum to make additional payments
and reduce our available cash.
American Spectrum will own interests in the CGS Affiliates. These companies
are engaged in the business of serving as general partners of limited
partnerships and investing in real properties. These entities will merge into
American Spectrum. In addition, American Spectrum engages in these businesses.
As a result, American Spectrum is responsible for liabilities arising out of the
prior operations of these entities. The liabilities may include unknown
contingent liabilities. These liabilities could 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.
The Consolidation will result in a fundamental change in the nature of your
investment.
The Consolidation of your Fund involves a fundamental change in the nature
of your investment. Your investment currently consists of an interest in your
Fund, which has a fixed portfolio of office/warehouse and shopping centers
properties located in the midwestern United States. You participate in the
profits from the rental of your Fund's properties. After the Consolidation, you
will hold common stock of American Spectrum, an operating company, that will own
35 Properties of various types and locations, assuming all the Funds are
included in the Consolidation. American Spectrum also expects to make additional
investments. Your investment will also change from being an interest in a static
finite-life entity to an investment in a growing operating company which will
have a perpetual term. 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 American Spectrum anticipated. Upon
consummation of the Consolidation, we will have greater leverage than your
Funds. In addition, in order to make future acquisitions of properties, we
intend to incur substantial indebtedness that we may be unable to repay. Also,
certain properties acquired in the Consolidation by American Spectrum may not be
as profitable as others. While diversification of assets may reduce certain
risks of investment attributable to a single property type or location, it also
may subject an investment in American Spectrum to additional risks. In addition,
there can be no assurance as to the value or performance of American Spectrum's
securities and portfolio of properties as compared to the value of your Units
and your Fund's properties.
Also, 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 your Fund's assets to an investment in an entity in which you may realize the
value of your investment only through dividends from American Spectrum and the
sale of your American Spectrum Shares, not from liquidation proceeds from the
sale of properties. Continuation of your Fund would, on the other hand, permit
you eventually to receive liquidation proceeds, if any, from the sale of the
Fund's properties, and your share of these sale proceeds could be higher than
the amount realized from the sale of your American Spectrum Shares or from the
payments on any Notes you may elect to receive.
Market Prices for American Spectrum's Shares May Fluctuate.
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. REIT stocks have underperformed
the broaden equity market over the last few years and the market conditions for
REIT stocks could affect the market prices for the American Spectrum Shares.
Your distributions may decrease.
In each of the years ended December 31, 1997, 1998 and 1999, your Fund made
no distributions to you per limited partnership unit. The managing general
partner determined to retain this cash for future requirements. We believe that
distributions by American Spectrum will be higher than distributions you
received from your Fund. We cannot be sure that American Spectrum will be able
to maintain this level of distributions in the future.
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<PAGE> 836
There have been No Arm's-Length Negotiation.
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.
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 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, including the
consideration which you will receive, of the Consolidation. If your Fund had
retained an independent representative, either collectively or on an individual
basis, it would have resulted in significantly higher fees and expenses of
Consolidation. Your Fund did not give its 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.
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 Consolidation of your Fund with American Spectrum. We engaged
legal counsel to assist with the preparation of the documentation for the
Consolidation, including the consent solicitation and this Supplement, and such
legal counsel did not serve, or purport to serve, as legal counsel for the Fund
or the Limited Partners. If your managing general partner had retained an
independent representative for the Fund, it could have resulted in different
terms of Consolidation which may have benefitted the Limited Partners.
A majority vote of Limited Partners of Your Fund binds all Limited Partners.
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 648 Units or 5.40% of the outstanding Units and intend to
vote these Units in favor of the Consolidation.
Partners have no cash appraisal rights.
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. We based the
amount of Notes you receive upon the estimated proceeds you would receive, in an
orderly liquidation of your Fund, in accordance with the terms of your Fund's
partnership agreement. We determined the liquidation value based, in part, upon
an appraisal of your Fund's real estate portfolio 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 following property sales or refinancings.
An increase in interest rates could adversely affect 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 property portfolios themselves. As a result, interest rate fluctuations and
capital market conditions can affect the value of your American Spectrum Shares,
assuming 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.
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<PAGE> 837
American Spectrum's officers and directors have more limited liability than do
your Fund's general partners.
As a stockholder of American Spectrum, you will have different rights and
remedies against American Spectrum, its officers and directors than you have
against the General Partners of your Fund. The Amended and Restated Articles of
Incorporation (the Articles of Incorporation) and Bylaws of American Spectrum
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 Amended and Restated Bylaws, American
Spectrum is obligated to indemnify its officers and directors against specified
liabilities that may be incurred in connection with their service to American
Spectrum. This indemnification could limit the legal remedies available to
American Spectrum, to you and to other stockholders of American Spectrum after
the Consolidation against any officers or directors of American Spectrum.
The fiduciary duties owed to you as Limited Partners by the general partners of
your Fund may be greater than the fiduciary duties of directors of American
Spectrum to you once you become an American Spectrum stockholder.
The general partners of the Funds are accountable as fiduciaries to the
Funds, owe each of 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 Funds' affairs. American Spectrum will be managed by a Board of
Directors whose members have a duty to perform their job 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 in a like position.
Generally, directors of American Spectrum who act in such a manner will not be
liable to American Spectrum for monetary damages arising from their activities.
Some courts have suggested that the duties of a general partner to the limited
partners in a limited partnership are greater than the fiduciary duties owed by
a director of a corporation to a stockholder. If this is the case, it is
possible that the standard of care to which the directors of American Spectrum
are held will be lower than the standard of care to which they have been held as
the general partners of the Fund.
The managing general partner of your Fund will receive benefits from the
Consolidation and will have material conflicts of interest.
The general partners of your Fund have material conflicts of interest with
regard to the Consolidation of your Fund. Nooney Income Investments Two, Inc.,
the managing general partner, is an entity whose sole stockholder is an
affiliate of CGS and American Spectrum. If your Fund is consolidated, affiliates
of your managing general partner will receive substantial interests in American
Spectrum in exchange for their interests in the CGS Affiliates, including CGS
Management Company. These benefits may exceed the benefits that they would
derive if the Consolidation did not take place. Also, American Spectrum and its
subsidiaries will employ some of the officers and employees of CGS and its
affiliates.
Stanger's Fairness Opinion Relied on Information We Provided; Fairness Opinion
Will Not Be Updated.
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 managing general partners of the Funds and the CGS Affiliates,
including the CGS Management Company. CGS controls the managing general partners
and the CGS Affiliates, including the CGS Management Company. In addition,
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.
Litigation Associated with the Consolidation.
There is a risk that third parties will assert claims 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-8
<PAGE> 838
REAL ESTATE/BUSINESS RISKS
American Spectrum's increased leverage increases our risk of default which
could, in turn, adversely affect our results of operations and our ability to
make distributions.
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 its properties on a
longer-term basis. At the time of the consummation of the Consolidation, as a
general policy, American Spectrum's Board of Directors allow American Spectrum
to borrow funds only when the ratio of debt-to-total assets of American Spectrum
is 70% or less. American Spectrum's organizational documents, however, do not
contain any limitation on the amount or percentage of indebtedness that American
Spectrum may incur in the future. Accordingly, subject to the terms of the Note,
American Spectrum's Board of Directors could modify the current policy at any
time after the Consolidation. If this policy were changed, American Spectrum
could become more highly leveraged, resulting in an increase in the amounts of
debt repayment. This, in turn, 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.
Unlike American Spectrum, your Fund's ratio of debt-to-total assets is 99% and
your Fund does not plan to borrow to fund new acquisitions.
American Spectrum's ability to incur additional secured debt may reduce the
value of the Notes held by former Limited Partners of the Fund.
American Spectrum may increase its level of secured 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.
Real property investments entail risk.
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.
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. This 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 wastes 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.
S-9
<PAGE> 839
American Spectrum's plan to grow through the Consolidation and development of
new properties could be adversely affected by trends in the real estate and
financing businesses.
American Spectrum's growth strategy is substantially based on the
Consolidation and development of additional properties. We cannot assure you
that our acquisition and development strategies will be successful, in part
because we 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 we have not invested before, we 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.
The inability of tenants to make lease payments could have an adverse effect on
American Spectrum.
American Spectrum's business depends on its tenants' ability to pay their
obligations to American Spectrum with respect to American Spectrum's real estate
leases. The ability of tenants to pay their obligations to American Spectrum in
a timely manner will depend on a number of factors, including the successful
operation of their businesses. Various factors, many of which are beyond the
control of a tenant, may adversely affect the economic viability of the tenant's
business, including but not limited to:
- national, regional and local economic conditions such as industry
slowdowns, employer relocations and prevailing employment conditions,
which may reduce consumer demand for the products offered by American
Spectrum's tenants;
- changes or weaknesses in specific industry segments;
- the ability to obtain and retain capable management; and
- increases in operating expenses.
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's management believes that it will operate in a manner
that will enable American Spectrum to meet the requirements for qualification as
a REIT for federal income tax purposes commencing with the taxable year ending
December 31, 2002. Generally, for taxable years beginning after December 31,
2000, a REIT is not subject to federal taxes at the corporate level on income it
distributes to its stockholders, as long as it distributes at least 90% of its
taxable income to its stockholders annually. In addition, a REIT must meet
certain asset tests at the end of each calendar quarter. 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 (or, PR), that it will meet the requirements
for qualification as a REIT. PR'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, PR'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 .
In addition, 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
S-10
<PAGE> 840
amount of the built-in gains at the time American Spectrum becomes a REIT. Until
American Spectrum elects the REIT status it will be subject to Federal income
tax at regular corporate rates. In addition, it may be subject to the federal
alternative minimum tax and various state income taxes.
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.
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.
Transfer of assets to American Spectrum may fail to qualify as a transaction
where no gain is recognized to the transfer.
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
except to the extent liabilities assumed by American Spectrum exceed the basis
of the assets contributed to American Spectrum. See "Certain Funds 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, and you will
be allocated your share of the gain.
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 their 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 liability is set forth
in "Tax Considerations--Taxable Gain or Loss Estimates Per $1,000 Original
Limited Partner Investment" in the Summary to the Consent Solicitation
Statement/Proxy.
Limitations on Share Ownership
In order to protect its REIT status, American Spectrum's Amended and
Restated Articles of Incorporation limits the ownership by any single
stockholder of any class of American Spectrum capital stock, including American
Spectrum Shares, to 5% of the outstanding shares of such class. This limitation
does not apply to existing holders of more than 5% of American Spectrum's
outstanding Common Stock. The Amended and Restated Articles also prohibit anyone
from buying shares if the purchase would cause American Spectrum to lose its
REIT status. For example, American Spectrum would lose its REIT status if it had
fewer than 100 different stockholders or if five or fewer stockholders, applying
certain broad attribution rules of the Code, owned 50% or more of the American
Spectrum Shares. 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-11
<PAGE> 841
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 in accordance with its own valuation
methodologies regarding each of the Funds. 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 and CGS engaged
Stanger to provide your Fund with an opinion that the allocation of the American
Spectrum Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company and (ii) among the Funds, is fair from a financial point of
view to the limited partners of the Fund.
The following table sets forth the consideration, based on the Exchange
Value, to be allocated to your Fund in the Consolidation. The American Spectrum
Shares allocated to your Fund will not change if American Spectrum acquires
fewer than all of the Funds 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
EXCHANGE VALUE OF AMERICAN SPECTRUM
NUMBER OF AMERICAN AMERICAN SPECTRUM SHARES PER $1,000
SPECTRUM SHARES SHARES (AFTER ORIGINAL LIMITED
ALLOCATED TO FUND ACQUISITION EXPENSE)(1) PARTNER INVESTMENT(1)
------------------ ----------------------- ---------------------
<S> <C> <C>
545,451 $8,181,768 $681.81
</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.
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<PAGE> 842
ALLOCATION OF AMERICAN SPECTRUM SHARES
American Spectrum Shares issued in the Consolidation will be allocated as
follows:
- American Spectrum Shares will be allocated between the Funds as a group
and the CGS Affiliates (including, the CGS Management Company), and among
the Funds, based upon the estimated net asset value, computed as
described in the accompanying Prospectus/Consent Solicitation Statement
below (the "Exchange Value") of each of the Funds, the CGS Affiliates and
the CGS Management Company relative to the aggregate estimated Exchange
Value of all of the Funds and the CGS Affiliates, including the CGS
Management Company. Your managing general partner believes that the
Exchange Values of the Funds, the CGS Affiliates 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 March 31,
2000, and constitute a reasonable basis for allocating the American
Spectrum Shares between the Funds and the CGS Affiliates, including the
CGS Management Company, and among all the Funds.
The following tables summarize the allocation of American Spectrum Shares.
For a detailed explanation of the manner in which the allocations are made, see
"Allocation of Shares" on page of the Prospectus/ Consent Solicitation
Statement.
ALLOCATION
<TABLE>
<CAPTION>
ALLOCATION OF AMERICAN SPECTRUM SHARES AMONG
THE FUNDS, THE CGS AFFILIATES AND THE CGS MANAGEMENT COMPANY
---------------------------------------------------------------------------------------------------------
PERCENTAGE
OF TOTAL
AMERICAN
PERCENTAGE OF TOTAL SHARE SPECTRUM SHARES
EXCHANGE VALUE EXCHANGE VALUE ALLOCATION ISSUED(1)
-------------- ------------------- ---------- ---------------
<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 0.39% 28,655 0.39%
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 Affiliates(2)................ 31,748,046 28.73% 2,116,536 28.73%
CGS Management Company........... 3,020,122 2.73% 201,341 2.73%
7,501,707
Totals........................... $110,518,379 100.00% 7,367,890 100.00%
============ ====== ========= ======
</TABLE>
---------------
(1) Includes OP Partnership Units.
(2) Includes the Affiliates' Properties, including property owned by CGS.
Excludes the CGS Management Company.
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> 843
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.
Based upon its analysis of the Consolidation, your managing general partner
believes that:
- the terms of the Consolidation are fair to you and the other Limited
Partners;
- the American Spectrum Shares offered to the Limited Partners were
allocated fairly and constitute fair consideration for their Units; and
- 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.
Your managing general partner's beliefs are based upon its 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 and your Fund and the terms of
critical agreements, such as the Fund's partnership agreement.
Your managing general partner also believes that the Consolidation is
procedurally fair for several reasons. First, the Consolidation requires the
approval of Limited Partners holding greater than 50% of the outstanding Units
of your Fund and is subject to certain closing conditions.
Second, if your Fund is consolidated with American Spectrum all Limited
Partners of your Fund who vote "Against" the Consolidation will be given the
option of receiving American Spectrum Shares or Notes.
Third, the general partners of the Funds 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 Funds' property portfolios and the
Affiliates' Properties by the same appraisal firm, Stanger, thereby maximizing
consistency among the appraisal of the property portfolios.
Fourth, Stanger, a recognized independent investment banking firm, has
determined that, subject to the assumptions, limitations and qualifications
contained in its opinion, that the American Spectrum Shares allocated to your
Fund in the Consolidation is fair to the Limited Partners of the Fund from a
financial point of view.
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 Prospectus/Consent Solicitation Statement.
POSITION OF THE MANAGING GENERAL PARTNER WITH RESPECT TO THE CONSOLIDATION
The managing general partner of the Fund is an indirectly held subsidiary
of CGS, and CGS controls American Spectrum. However, for all of the reasons
discussed herein, your managing general partner believes that the Consolidation
and the consideration offered is fair to you and the Limited Partners of your
Fund. The general partners of the other Funds also believe that the similar
offers to the limited partners of the other Funds are fair to such limited
partners. Your Fund has retained Stanger to render an opinion as to
S-14
<PAGE> 844
the fairness to Limited Partners, from a financial point of view, of the
allocation of the American Spectrum Shares (i) between the Funds and the CGS
Affiliates including the CGS Management Company, and (ii) among the Funds.
Stanger is not affiliated with any of the Funds, or the CGS Affiliates. Stanger
is one of the leaders in the field of analyzing and evaluating complex real
estate transactions. However, your managing general partner provided much of the
information used by Stanger in forming its fairness opinion. Your managing
general partner believes the information provided to Stanger is accurate in all
material respects. See "Stanger Analysis." You should make your decision on
whether to approve the Consolidation of your Fund based on a number of factors,
including your financial needs, other financial opportunities available to you
and your tax position.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying your
managing general partner's belief that the terms of the Consolidation are fair
as a whole to you and the other Limited Partners of your Fund and maximize the
value of your investment.
1. Consideration Allocated. Your managing 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 Fund or OP
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. Your managing general partner
believes that the form and amount allocated to the Fund 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 Affiliated Properties. 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, your managing general partner believes that the Exchange
Values adequately takes into account the relative values of each of the Funds
and the CGS Affiliates including the CGS Management Company. In addition, your
managing general partner 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. Your managing general partner does 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 in your Fund.
Substantially all of the assets of the Funds are office, office/warehouse or
shopping center 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 fairly compare the value
of the Funds relative to each other and to fairly allocate the American Spectrum
Shares among the Funds and among the Limited Partners and the General Partners.
The primary differences among the Funds are:
- Date of Formation. The Funds were formed at different times. As a
result, the Funds formed earlier have already sold some properties.
- 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.
- Size and Diversity. Some of the Funds have purchased fewer properties
and are less diverse with respect to the number of tenants and the
geographic location and types of properties.
- Types of Properties. Your Fund owns office/warehouse and shopping center
properties. American Spectrum's properties also include apartment
properties.
- Indebtedness. One of the Funds has no debt and the other Funds have
varying 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. The Units do not trade in
any orderly, active market. The Exchange Value
S-15
<PAGE> 845
assigned to your Fund in connection with the Consolidation is greater than the
range of trading prices of your Fund's units as reflected by the reported
secondary sales prices of the Units. See "Prices for Fund Units" on page of
the Prospectus/Consent Solicitation Statement for the limited information
available with respect to secondary market sales of the Units. 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 "Determination of Exchange Values" on page of the
Prospectus/Consent Solicitation Statement 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 four percent of all the
outstanding Units in your Fund traded in the secondary market.
4. Limited Partners' 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
managing general partners are attempting to accommodate the possibly different
investment objectives of the Limited Partners with the Notes providing relative
security of principal, a certainty as to maturity date, and regular interest
payments, and the American Spectrum Shares representing 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, and 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 your
managing general partner 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. Your managing general partner 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. Your
managing general partner does 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. Your managing general partner
believes that the engagement of Stanger to provide the appraisal of each Fund's
property portfolio and the Affiliates Properties portfolio and to provide the
fairness opinion assisted it in the fulfillment of its fiduciary duties to the
Funds and the Limited Partners, notwithstanding that Stanger received fees for
its services.
In rendering its opinion with respect to the fairness to the Funds, from a
financial point of view, with respect to the allocation of the American Spectrum
Shares (i) between the Funds and the CGS Affiliates, including the CGS
Management Company, and (ii) among the Funds, Stanger did not address or render
any opinion with respect to, any other aspect of the Consolidation, including:
- the value or fairness of the Notes Option;
- 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;
- the tax consequences of any aspect of the Consolidation;
- the fairness of any terms of the Consolidation (other than the allocation
of the American Spectrum Shares for all of the Funds (the Maximum
Participation) and for participation of the minimum number
S-16
<PAGE> 846
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);
- the allocation of American Spectrum shares among the Limited and General
Partners of the Funds;
- the fairness of the amounts or allocation of Consolidation costs or the
amounts of Consolidation costs allocated to the Limited Partners;
- alternatives to the Consolidation; or
- 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 interests in the Funds or their 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 Share consideration or the Notes Option.
6. Valuation of Alternatives. Based in part on the appraisal of each
Fund's property portfolio prepared by Stanger, your managing general partner
estimated the value of the Funds as going concerns and if liquidated. On the
basis of these calculations, your managing general partner believes 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 Acquisition. Your
managing general partner believes the Consolidation will be accomplished without
materially decreasing the aggregate cash available from operations otherwise
payable to you and the other Limited Partners. In addition to the receipt of
cash available for distribution, you and the other Limited Partners 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. Comparative Valuation Analysis. In assessing the fairness of the
Consolidation, your managing general partner relied on the appraisal prepared
by Stanger in connection with its engagement described herein. Based on such
information and other historical data of the Fund, your managing general partner
prepared a comparative valuation analysis, which supported its determination
that the Consolidation is in the best interest of the Limited Partners of your
Fund.
The following table summarizes the results of your managing general
partner's comparative valuation analysis:
<TABLE>
<CAPTION>
RANGE OF SECONDARY MARKET
PRICES PER $1,000 EXCHANGE
ESTIMATED LIQUIDATION INVESTMENT (15 MONTHS VALUE PER
ESTIMATED GOING CONCERN VALUE VALUE PER $1,000 ENDED MARCH 31, $1,000 ORIGINAL
PER $1,000 ORIGINAL INVESTMENT ORIGINAL INVESTMENT 2000)(1)(2) INVESTMENT(3)
------------------------------ -------------------------- ------------------------- ---------------
<S> <C> <C> <C>
$566.00-$624.00 $638.00 $194.00-390.10 $681.81
</TABLE>
---------------
(1) 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 your managing general partner. 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 partner does 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
S-17
<PAGE> 847
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.
(2) Does not include Units purchased from Bond Purchase, L.L.C. and Everest
Trust. As part of the settlement of certain law suits and other disputes
between CGS, Bond Purchase, L.L.C. (a former limited partner in your Fund
and other limited partnerships controlled by CGS) 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 privately-held limited partnership, on November 9, 1999, CGS
purchased from Bond Purchase, L.L.C.: (i) fifty-nine (59) Units in Nooney
Income Fund, Ltd. II, L.P. ("NIFII") at a price per Unit of $450, (ii) 1,802
units in Nooney Income Fund Ltd., L.P. ("NIF") at $600 per unit, (iii) 199
units in Nooney Real Property Investors-Two, L.P. ("NRPI") at $360 per unit
and (iv) 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: (i) 1,062 Units in NIFII at a price per Unit of
$450, (ii) 260 units in NIF at $600 per unit and (iii) 449 units in NRPI at
$360 per unit. The prices paid by CGS for the Units set forth above were
negotiated in the context of an over-all settlement of claims between the
parties and are not necessarily representative of the market value of the
Units purchased. Each unit in your Fund represents an original investment of
$1,000.
In addition, an affiliate of CGS purchased 14 Units in NIFII for $424 in May
2000.
(3) 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 substantially 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 the American Spectrum
Shares. The price may be either lower or higher than those in the range of
estimated values.
Your managing general partner believes that the comparative valuation
analysis, when considered together with the anticipated effect of the
Consolidation and with all the other differences between continued ownership of
Units as compared with the receipt of American Spectrum Shares, supports its
recommendation in favor of the Consolidation.
9. Net Book Value of the Funds. Your managing general partner calculated
the book value of each of the Funds under generally accepted accounting
principles, or GAAP, as of March 31, 2000 per $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, is not indicative of true fair market
value of the Funds. This figure was compared to the Exchange Value per $1,000
investment. The book value of the Fund per $1,000 original investment was
$(35.73) and the Exchange Value allocated to the Fund per $1,000 original
investment was $681.81.
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 General Partners or (iii) the analysis
of the fairness of the Consolidation.
S-18
<PAGE> 848
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 estimated Consolidation expenses of
consolidating with your Fund:
PRE-CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Legal Fees(1)............................................... $
Appraisals and Valuation(2).................................
Fairness Opinions(3)........................................
Solicitation Fees(4)........................................
Printing and Mailing(5).....................................
Accounting Fees(6)..........................................
Subtotal..................................... $
</TABLE>
CLOSING TRANSACTION COSTS
<TABLE>
<S> <C>
Title, Transfer Tax and Recording Fees(7)................... $
Legal Closing Fees(8).......................................
Subtotal.................................................... $
Total........................................ $253,044*
</TABLE>
---------------
* Estimated
(1) Aggregate legal fees to be incurred by all of the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of the value of the
American Spectrum Share consideration payable to your Fund, based on the
Exchange Value, to the total value of the American Spectrum Share
consideration payable to all of the Funds, and the CGS Affiliates, including
the CGS Management Company based on the Exchange Value.
(2) Aggregate appraisal and valuation fees to be incurred by all of the Funds in
connection with the Consolidation were $ . 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 $ .
(4) Aggregate solicitation fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . 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 by the Funds in
connection with the Consolidation are estimated to be $ . 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 by the Funds in connection with the
Consolidation are estimated to be $ . Your Fund's pro rata portion
of these fees was determined based on the ratio
S-19
<PAGE> 849
of your Fund's total assets as of December 31, 1999 to the total assets of
all of the Funds and the CGS Affiliates, including the CGS Management
Company, as of December 31, 1999.
(7) Aggregate title, transfer tax and recording fees to be incurred by all of
the Funds in connection with the Consolidation are estimated to be
$ . Your Fund's pro rata portion of these fees was determined based
on the ratio of the value of Fund's portfolio value to the total real estate
portfolio values of the Funds and the CGS Affiliates, based on appraisal
prepared by Stanger.
(8) Aggregate legal closing fees to be incurred by the Funds in connection with
the Consolidation are estimated to be $ . Your Fund's pro rata
portion of these fees was determined based on the ratio of your Fund's total
assets as of December 31, 1999 to the total assets of all of the Funds and
the CGS Affiliates, including the CGS Management Company, as of December 31,
1999.
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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1995........................................................ 0
1996........................................................ 0
1997........................................................ 0
1998........................................................ 0
1999........................................................ 0
Three months ended March 31, 2000........................... $0
==
</TABLE>
DISTRIBUTIONS AND COMPENSATION PAID TO THE GENERAL PARTNERS AND THEIR AFFILIATES
Your managing general partner received total distributions and compensation
(which includes distributions and monies paid to it as reimbursements for
expenses) in respect of its capacity as general partner of your partnership as
described in the following table:
<TABLE>
<CAPTION>
DISTRIBUTION AND
YEAR OR PERIOD COMPENSATION
-------------- ----------------
<S> <C>
1997........................................................ $30,000
1998........................................................ $30,000
1999........................................................ $30,000
Three Months Ended March 31, 2000........................... $ 7,500
=======
</TABLE>
S-20
<PAGE> 850
In addition, a majority-owned subsidiary of CGS manages the property of
your partnership. Your partnership has historically paid the property management
fees as described in the following table:
<TABLE>
<CAPTION>
YEAR OR PERIOD FEES
-------------- --------
<S> <C>
1997........................................................ $121,111
1998........................................................ $122,128
1999........................................................ $105,322
Three Months Ended March 31, 2000........................... $ 31,747
========
</TABLE>
Your managing general partner and its affiliates will receive distributions
and compensation from American Spectrum relating to the Fund including dividends
on American Spectrum shares issuable in respect of the CGS Management Company
(allocated in proportion to Exchange Value) and salaries and other compensation
payable to affiliates of CGS who serve as officers of American Spectrum
(allocated in proportion to Exchange Value) equal to $134,124 for the year ended
December 31, 1999 on a pro forma basis. American Spectrum will operate as an
internally managed REIT. As part of the Consolidation, American Spectrum will
bear costs of managing the combined portfolio. Prior to the Consolidation, a
portion of these expenses were borne by the managing general partners and their
affiliates and paid out of the fees received from the Fund.
S-21
<PAGE> 851
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 Prospectus/Consent Solicitation Statement 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
Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation Statement 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 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.
S-22
<PAGE> 852
VOTING PROCEDURES
The Prospectus/Consent Solicitation Statement, 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 Prospectus/Consent Solicitation
Statement. 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.
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 Acquisition of 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-23
<PAGE> 853
CONFLICTS OF INTEREST
AFFILIATED MANAGING GENERAL PARTNER
Your managing general partner has an independent obligation to assess
whether the terms of the Consolidation are fair and equitable to the Limited
Partners of your Fund without regard to whether the Consolidation is fair and
equitable to any of the other participants (including the Limited Partners in
other Funds). Your managing general partner is an affiliate of American
Spectrum. While your managing general partner has sought faithfully to discharge
its 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 OF THE CONSOLIDATION TO YOUR MANAGING GENERAL PARTNER AND
ITS AFFILIATES
As a result of the Consolidation (assuming all of the Funds are acquired),
your managing general partner and its affiliates, including CGS, expect to
receive certain benefits. These benefits include:
- If the Consolidation is consummated, affiliates of your managing general
partner are expected to receive approximately 2,628,655 American Spectrum
Shares and units in the Operating Partnership in exchange for the
contribution of the CGS Affiliates, including the Affiliates' Properties
and the CGS Management Company. The managing general partner will not
receive any American Spectrum Shares in respect of its interest in the
Fund. Affiliates of the managing general partner will receive 201,341
American Spectrum Shares in respect of the CGS Management Company, a
portion of which are based on revenues from management of the Fund.
- Certain of the officers and directors of your managing general partner
will also serve as officers and directors of American Spectrum with
William J. Carden serving as Chief Executive Officer of American
Spectrum, Harry A. Mizrahi, Paul E. Perkins and Thomas N. Thurber serving
as Senior Vice Presidents and Patricia A. Nooney serving as Vice
President. Furthermore, they will be entitled to receive
performance-based incentives, including stock options under American
Spectrum's 2000 Performance Incentive Plan or any other such plan
approved by its stockholders. The benefits that may be realized by them
are likely to exceed the benefits that they would expect to derive from
the Fund if the Consolidation does not occur.
- The CGS Affiliates include entities which are obligated to make payments
to one or more of the Funds. These payments include approximately
$6,956,000 payable by one of the CGS Affiliates to Sierra Pacific
Development Fund Ltd. II, L.P. and guaranteed by John Galardi, a
principal shareholder of American Spectrum. In addition, the CGS
Affiliates have $2.35 million of debt other than mortgage debt. A
substantial portion of this debt is guaranteed by Messrs. Carden and
Galardi. If the Consolidation is consummated, the CGS Affiliates 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 Affiliates.
- Messrs. Carden and Galardi have guaranteed indebtedness of the CGS
Affiliates. As a result of the Consolidation, the likelihood that they
will be required to make payments on the guarantees could be reduced.
- The CGS Affiliates 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.
S-24
<PAGE> 854
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
consistent with Proposed Treasury Regulation Section 1.708-1 (F.R. January 11,
2000) 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
regulation, 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 PR that, following the
S-25
<PAGE> 855
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
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 Funds will not
recognize gain upon the transfer of assets to American Spectrum except to the
extent the liabilities assumed by American Spectrum exceed the basis of the
transferor Fund in the assets contributed. If the liabilities of your Fund
assumed by American Spectrum exceed the bases of the assets contributed, your
Fund will recognize gain. Such gain will be equal to the amount by which the
liabilities assumed exceed the bases of the assets transferred, and you will be
allocated your share of the gain. 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. PR 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 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."
S-26
<PAGE> 856
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 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.
FINANCIAL 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. In addition, pro
forma financial information for American Spectrum is set forth on page F- of
the Consent Solicitation Statement.
S-27
<PAGE> 857
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 Prospectus, 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> 858
(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 Form of Agreement and Plan of Merger of Sierra Pacific Development Fund
II
2.3 Form of Agreement and Plan of Merger of Sierra Pacific Development Fund
III
2.4 Form of Agreement and Plan of Merger of Sierra Pacific Institutional
Properties V
2.5 Form of Agreement and Plan of Merger of Sierra Pacific Pension
Investors '84
2.6 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd., L.P.
2.7 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd. II,
L.P.
2.8 Form of Agreement and Plan of Merger of Nooney Real Property Investors
-Two, L.P.
3.1 Form of Amended and Restated Articles of Incorporation of American
Spectrum Realty, Inc.
3.2 Bylaws of American Spectrum Realty, Inc.
4.1 Form of Stock Certificate (1)
5.1 Opinion of Maryland Counsel, Ballard, Sphahr, Andrews and Ingersoll LLP
(1)
8.1 Opinion of Proskauer Rose LLP as to Certain Tax Matters (1)
10.1 2000 Stock Incentive Plan (1)
II-2
<PAGE> 859
10.2 Employment Agreement of William J. Carden (1)
10.3 Employment Agreement of Harry A. Mizrahi(1)
10.4 Employment Agreement of Thomas N. Thurber(1)
10.5 Employment Agreement of Paul E. Perkins (1)
10.6 Employment Agreement of Patricia A. Nooney. (1)
10.7 Agreement of Limited Partnership of American Spectrum Realty Operating
Partnership, L.P.(1)
10.8 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and CGS Properties (Mkt./Col.), L.P.
10.9 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and Creekside/Riverside, L.L.C.
10.10 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and McDonnell Associates, L.L.C.
10.11 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and Pacific Spectrum.
10.12 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and Pasadena Autumn Ridge LP.
10.13 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and Seventy Seven L.L.C.
10.14 Agreement and Plan of Merger, dated August 8, 2000 between American
Spectrum and Villa Redondo.
10.15 Agreement and Plan of Merger, dated August 8, 2000, between American
Spectrum and Third Coast LLC.
10.16 Contribution Agreement, dated August 8, 2000 between American Spectrum
and No-So, Inc.
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Deloitte and Touche, LLP (Houston, Texas)
23.3 Consent of Deloitte and Touche, LLP (St. Louis, Missouri)
23.4 Consent of Wolfe, Nilges, Nahorski, P.C.
23.5 Consent to Proskauer Rose LLP (included in Exhibit 5.1)(1)
27.1 Financial Data Schedule
II-3
<PAGE> 860
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 (1)
99.4 Amendment to the Amended Agreement of Limited Partnership of Sierra
Pacific Development Fund (1)
99.5 Amendment to the Amended Agreement of Limited Partnership of Sierra
Pacific Development Fund II (1)
99.6 Amendment to the Amended Agreement of Limited Partnership of Sierra
Pacific Development Fund III (1)
99.7 Amendment to the Amended Agreement of Limited Partnership of Sierra
Pacific Institutional Properties V (1)
99.8 Amendment to the Amended Agreement of Limited Partnership of Sierra
Pacific Pension Investors '84 (1)
99.9 Amendment to the Amended Agreement of Limited Partnership of Nooney
Income Fund Ltd., L.P. (1)
99.10 Amendment to the Amended Agreement of Limited Partnership of Nooney
Income Fund Ltd. II, L.P. (1)
99.11 Amendment to the Amended Agreement of Limited Partnership of Nooney
Real Property Investors -Two, L.P. (1)
(1) To be filed by amendment
II-4
<PAGE> 861
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 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 11th day of
August, 2000.
AMERICAN SPECTRUM REALTY, INC.
By: /s/ William J. Carden
----------------------------
William J. Carden, Chairman
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints William J. Carden, Harry A. Mizrahi and Thomas
N. Thurber, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto, and any other
documents in connection therewith, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C> <C>
William J. Carden Chairman of the Board and /s/ William J. Carden August 11, 2000
Chief Executive Officer -------------------------
(Principal Executive
Officer)
Timothy R. Brown Director /s/ Timothy R. Brown August 11, 2000
-------------------------
William Geary Director /s/ William Geary August 11, 2000
-------------------------
Lawrence E. Fiedler Director /s/ Lawrence E. Fiedler August 11, 2000
-------------------------
Harry A. Mizrahi Director and Chief /s/ Harry A. Mizrahi August 11, 2000
Operating Officer -------------------------
Thomas N. Thurber Chief Financial Officer /s/ Thomas N. Thurber August 11, 2000
(Principal Financial and -------------------------
Accounting Officer)
</TABLE>
II-5
<PAGE> 862
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
------------- --------------------------------------------------------------
<S> <C>
2.1 Form of Agreement and Plan of Merger of Sierra Pacific Development Fund
2.2 Form of Agreement and Plan of Merger of Sierra Pacific Development Fund II
2.3 Form of Agreement and Plan of Merger of Sierra Pacific Development Fund III
2.4 Form of Agreement and Plan of Merger of Sierra Pacific Institutional Properties V
2.5 Form of Agreement and Plan of Merger of Sierra Pacific Pension Investors '84
2.6 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd., L.P.
2.7 Form of Agreement and Plan of Merger of Nooney Income Fund Ltd. II, L.P.
2.8 Form of Agreement and Plan of Merger of Nooney Real Property Investors-Two, L.P.
3.1 Form of Amended and Restated Articles of Incorporation of American Spectrum Realty,
Inc.
3.2 Bylaws of American Spectrum Realty, Inc.
10.8 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
CGS Properties (Mkt./Col.), L.P.
10.9 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Creekside/Riverside, L.L.C.
10.10 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
McDonnell Associates, L.L.C.
10.11 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Pacific Spectrum.
10.12 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Pasadena Autumn Ridge LP.
10.13 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Seventy Seven L.L.C.
10.14 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Villa Redondo.
10.15 Agreement and Plan of Merger, dated August 8, 2000 between American Spectrum and
Third Coast LLC.
10.16 Contribution Agreement, dated August 8, 2000 between American Spectrum and No-So,
Inc.
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Deloitte and Touche, LLP (Houston, Texas)
23.3 Consent of Deloitte and Touche, LLP (St. Louis, Missouri)
23.4 Consent of Wolfe, Nilges, Nahorski, P.C.
23.5 Consent to Proskauer Rose LLP (included in Exhibit 5.1)(1)
27.1 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
99.12 Report of Independent Public Accountants for American Spectrum Predecessor, Schedule III
99.13 Schedule III -- Real Estate and Accumulated Depreciation for American Spectrum Predecessor
99.14 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Nooney Income Fund Ltd., LP
99.15 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Nooney Income Fund Ltd., II LP
99.16 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Nooney Real Property Investors --
Two LP
99.17 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Sierra Pacific Development Fund
99.18 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Sierra Pacific Development Fund II
99.19 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Sierra Pacific Development Fund III
99.20 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Sierra Pacific Institutional
Properties V
99.21 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Sierra Pacific Pension Investors '84
99.22 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Nooney -- Hazelwood Associates LP
99.23 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Nooney Rider Trail, LLC
99.24 Supplemental Schedule -- Calculation of Ratio of Earnings to Fixed Charges -- Meadow Wood Village Apartments,
Ltd. LP
99.25 Supplemental Schedule -- Calculation of Ratio of Pro forma Earnings to Fixed Charges -- Consolidated Funds
Maximum Participation
99.26 Supplemental Schedule -- Calculation of Ratio of Pro forma Earnings to Fixed Charges -- Consolidated Funds
Minimum Participation
99.27 Supplemental Schedule -- Calculation of Ratio of Pro forma Earnings to Fixed Charges -- American Spectrum
Predecessor
99.28 Supplemental Schedule -- Calculation of Ratio of Pro forma Earnings to Fixed Charges -- Pro forma Combined
American Spectrum
99.29 Supplemental Schedule -- Calculation of Pro forma Ratio of Earnings to Fixed Charges -- Other Affiliates --
Combined
</TABLE>
