UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-16785

 

American Spectrum Realty, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

(713) 706-6200

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

 

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

 

As of November 9, 2004 1,569,890 shares of Common Stock ($.01 par value) were outstanding.

 

 

 

TABLE OF CONTENTS

 

 

PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2004 and December 31, 2003
	Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 and for the nine months ended September 30, 2004 and 2003
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2004
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
	Notes to Consolidated Financial Statements
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures about Market Risk
Item 4	Controls and Procedures
PART II	OTHER INFORMATION
Item 1	Legal Proceedings
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6	Exhibits and Reports on Form 8-K

 

 

2

 

PART I.  FINANCIAL INFORMATION

 

                ITEM 1.  FINANCIAL STATEMENTS

 

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

ASSETS		September 30, 2004				December 31, 2003
		(Unaudited)
Real estate held for investment		$		192,193		$	186,208
Accumulated depreciation		25,055				17,668
Real estate held for investment, net		167,138				168,540
Real estate held for sale		—				14,574
Cash and cash equivalents		2,007				2,937
Tenant and other receivables, net of allowance for doubtful accounts of $202 and $352, respectively (including $244 and $271, respectively, from related party)		466				420
Mortgage loan receivable, net of discount of $83 at December 31, 2003		—				1,667
Deferred rents receivable		1,488				1,045
Insurance proceeds receivable — litigation settlement		—				6,500
Deposit held in escrow		1,365				—
Investment in management company		4,000				4,000
Prepaid and other assets, net		10,453				8,320
Total Assets		$		186,917		$	208,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Notes payable, net of premiums of $2,603 and $3,089, respectively		$	146,784			$	143,742
Notes payable, litigation settlement		9,750				9,750
Liabilities related to real estate held for sale		—				8,018
Accounts payable		2,345				2,048
Deferred tax liability		4,316				4,316
Litigation settlement payable		—				6,500
Accrued and other liabilities (including $437 and $579, respectively, to related parties)		6,810				5,885
Total Liabilities		170,005				180,259
Minority Interest		5,527				7,009
Commitments and Contingencies:
Redeemable Common Stock		300				300
Stockholders’ Equity:
Preferred stock, $.01 par value; authorized, 25,000,000 shares, none issued and outstanding		—				—
Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 1,592,710 and 1,578,224 shares, respectively		16				16
Additional paid-in capital		45,905				45,742
Accumulated deficit		(33,232			)	(23,516		)
Receivable from principal stockholders		(1,071			)	(1,191		)
Deferred compensation		(73			)	(195		)
Treasury stock, at cost, 24,032 and 22,782 share, respectively		(460			)	(421		)
Total Stockholders’ Equity		11,085				20,435
Total Liabilities and Stockholders’ Equity		$	186,917			$	208,003

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

3

 

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
REVENUES:
Rental revenue		$	6,520		$	5,734		$	20,006		$	17,475
Interest and other income		49			34			211			77
Total revenues		6,569			5,768			20,217			17,552
EXPENSES:
Property operating expense		2,758			2,578			7,851			7,054
General and administrative		1,243			1,650			3,551			4,952
Depreciation and amortization		2,606			2,212			7,735			6,397
Interest expense		3,139			2,452			8,998			7,456
Total expenses		9,746			8,892			28,135			25,859
OTHER LOSS:
Loss on extinguishment of debt		(214		)	—			(827		)	—
Total other loss		(214		)	—			(827		)	—
Net loss before minority interest and discontinued operations		(3,391		)	(3,124		)	(8,745		)	(8,307		)
Minority interest		704			930			1,390			1,845
Net loss before discontinued operations		(2,687		)	(2,194		)	(7,355		)	(6,462		)
Discontinued operations:
Income (loss) from discontinued operations		25			(443		)	(63		)	(1,074		)
(Loss) gain on sale of discontinued operations		(2,298		)	51			(2,298		)	2,279
Impairment of real estate assets held for sale		—			(3,500		)	—			(7,500		)
Loss from discontinued operations		(2,273		)	(3,892		)	(2,361		)	(6,295		)
Net loss		$	(4,960	)	$	(6,086	)	$	(9,716	)	$	(12,757	)
Basic and diluted per share data:
Net loss before discontinued operations		$	(1.72	)	$	(1.43	)	$	(4.72	)	$	(4.41	)
Loss from discontinued operations		(1.45		)	(2.54		)	(1.51		)	(4.29		)
Net loss		$	(3.17	)	$	(3.98	)	$	(6.23	)	$	(8.70	)
Basic weighted average shares used		1,564,885			1,529,702			1,558,859			1,465,849

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

4

 

AMERICAN SPECTRUM REALTY INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 (Dollars in thousands)

(Unaudited)

 

		Common Stock				Additional Paid-In Capital				Accumulated Deficit			Deferred Compensation			Treasury Stock				Receivable from Principal Stockholders				Total Equity
Balance, December 31, 2003		$	16			$		45,742		$	(23,516)		$	(195)		$	(421)			$	(1,191)			$	20,435
Issuance of common stock		—				71				—			—			—				—				71
Conversion of operating partnership units to common stock		—				92				—			—			—				—				92
Restricted stock forfeited		—				—				—			39			(39			)	—				—
Amortization of deferred compensation		—				—				—			83			—				—				83
Payment on receivable from principal stockholders		—				—				—			—			—				120				120
Net loss		—				—				(9,716		)	—			—				—				(9,716		)
Balance, September 30, 2004		$		16		$	45,905			$	(33,232	)	$	(73	)	$		(460	)	$		(1,071	)	$	11,085

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

5

 

AMERICAN SPECTRUM REALTY, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(9,716	)	$	(12,757	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss from discontinued operations		2,361			6,295
Depreciation and amortization		7,735			6,397
Deferred rental income		(447		)	(305		)
Minority interest		(1,390		)	(1,845		)
Deferred compensation expense		83			233
Mark to market adjustments on interest rate protection agreements		(65		)	202
Loss on extinguishment of debt		827			—
Interest on receivable from principal stockholders		(50		)	(39		)
Amortization of note payable premiums, included in interest expense		(411		)	(384		)
Amortization of note receivable discount, included in interest income		(58		)	—
Changes in operating assets and liabilities:
(Increase) decrease in tenant and other receivables		(129		)	64
Decrease (increase) in accounts payable		297			(62		)
Increase in prepaid and other assets		(2,692		)	(1,820		)
Increase (decrease) in accrued and other liabilities		1,379			(305		)
Net cash used in operating activities:		(2,276		)	(4,326		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds received from sales of real estate assets		9,992			32,283
Capital improvements to real estate assets		(3,929		)	(2,824		)
Collections on mortgage loan receivable		28			—
Real estate acquisitions		(138		)	(281		)
Net cash provided by investing activities:		5,953			29,178
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings — refinances		18,750			1,340
Proceeds from borrowings — other		458			758
Issuance of common stock		—			250
Repurchase of common stock		—			(69		)
Note payments on litigation settlement		—			(250		)
Acquisition of minority interest in operating partnership		—			(223		)
Repayment of borrowings — property sales		(7,041		)	(20,947		)
Repayment of borrowings — refinances		(14,620		)	(1,300		)
Repayment of borrowings — scheduled payments		(2,063		)	(3,198		)
Net cash used in financing activities:		(4,516		)	(23,639		)
Cash from discontinued operations		(91		)	1,463
(Decrease) increase in cash		(930		)	2,676
Cash, beginning of period		2,937			788
Cash, end of period		$	2,007		$	3,464
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	8,788		$	10,114
Cash paid for income taxes		25			17
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assumptions of mortgage loans in acquisition of real estate assets		$	—		$	6,077
Note receivable settled through acquisition of real estate asset		1,722			—
Deposit held in escrow for acquisition of real estate asset		1,365			—
Financing settled through divestitures		—			16,885
Conversion of debt to related parties into common stock		—			2,131
Conversion of operating partnership units into common stock		92			232
Issuance of common stock in acquisition of real estate asset		71			—
Issuance of operating partnership units in acquisition of real estate assets		—			1,010
Receivable from related party regarding certain issues asserted by principal shareholder		—			270

 

The accompanying notes are an integral part of these consolidated financial statements

 

 

6

 

AMERICAN SPECTRUM REALTY, INC.

Notes to Consolidated Financial Statements

 

NOTE 1.  DESCRIPTION OF BUSINESS

 

American Spectrum Realty, Inc. (“ASR” or the “Company”) is a Maryland corporation established on August 8, 2000.  The Company is a full-service real estate corporation, which owns, manages and operates income-producing properties.  Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of September 30, 2004, held the sole general partner interest of .87% and a limited partnership interest totaling 86.83%.  As of September 30, 2004, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 24 properties, which consisted of 17 office buildings, four industrial properties, two shopping centers and one apartment complex.  The 24 properties are located in seven states.  In October 2004, the Company acquired an additional office building located in Houston, Texas consisting of 81,587 rentable square feet.

 

During the nine months ended September 30, 2004, the Company sold three properties, which consisted of one office building, one industrial property and a parcel of undeveloped land, and acquired one office building in Houston, Texas.  During 2003, the Company sold eleven properties, which consisted of two apartment complexes, two office buildings, six industrial properties and one shopping center, and acquired four office buildings in Houston, Texas.  During 2002, the Company sold two shopping center properties and one apartment property, and purchased three office properties in the Houston area.  The property sales are part of the Company’s strategy to sell its non-core property types — apartment and shopping center properties — and to sell its properties located in the Midwest and Carolina’s, its non-core markets.  The Company intends to focus primarily on office and industrial properties located in Texas, California and Arizona.

 

The Company is the sole general partner of the Operating Partnership.  As the sole general partner of the Operating Partnership, the Company generally has the exclusive power to manage and conduct the business of the Operating Partnership under its partnership agreement.  The Company’s interest as a limited partner in the Operating Partnership entitles it to share in any cash distributions from, and in profits and losses of, the Operating Partnership.  If the Company receives any distributions from the Operating Partnership, it intends, in turn, pay dividends to its common stockholders so that the amount of dividends paid on each share of common stock equals four times the amount of distributions paid on each limited partnership unit in the Operating Partnership (“OP Unit”).  Most of the properties are owned by the Operating Partnership through subsidiary limited partnerships or limited liability companies.

 

Holders of the OP Units have the option to redeem their units and to receive, at the option of the Company, in exchange for each four OP Units (i) one share of Common Stock of the Company, or (ii) cash equal to the market value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

 

Management continues to consider whether it is in the best interest of the Company to elect to be treated as a real estate investment trust (or REIT), as defined under the Internal Revenue Code of 1986, as amended.  The Company currently operates in a manner that will permit it to elect REIT status; however, the Company may enter into transactions which will preclude it from electing REIT status in the future.  In general, a REIT is a company that owns or provides financing for real estate and pays annual distributions to investors of at least 90% of its taxable income.  A REIT typically is not subject to federal income taxation on its net income, provided applicable income tax requirements are satisfied.   For the tax year 2003, the Company was taxed as a C corporation.  It is anticipated that the Company will be taxed as a C corporation for the 2004 tax year.

 

 

7

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  In the opinion of the Company, the accompanying interim unaudited consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments necessary to present fairly the financial condition, the results of operations and changes in cash flows of the Company and its subsidiaries for interim periods.

 

The results for such interim periods are not necessarily indicative of results for a full year.  It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements for the year ended December 31, 2003 and the related notes thereto included in the Company’s 2003 Annual Report on Form 10-K filed with the SEC.

 

All significant intercompany transactions, receivables and payables have been eliminated in consolidation.

 

RECLASSIFICATIONS

 

Certain prior year balances have been reclassified to conform with the current year presentation.   In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, real estate designated as held for sale are accounted for in accordance with the provisions of SFAS No. 144 and the results of operations of these properties are included in income from discontinued operations.  Prior periods have been reclassified for comparability, as required.

 

Pursuant to a one-for-four reverse stock split of the Company’s Common Stock, every four shares of Common Stock outstanding as of the close of business on March 1, 2004 became one share of new post-split Common Stock.  Share and per share data (except par value) in the consolidated financial statements and notes for all periods presented have been adjusted to reflect the reverse stock split.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 results of operations during the reporting period. Actual results could materially differ from those estimates.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“FAS 150”).  FAS 150 specifies that certain financial instruments within its scope constitute obligations of the issuer and that, therefore, the issuer must classify them as liabilities.  Such financial instruments include mandatorily redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets, and certain obligations to issue a variable number of shares.  SFAS No. 150 is effective immediately for all financial instruments entered into or modified after May 31, 2003.  For all other instruments, FAS 150 is effective at the beginning of the third quarter of 2003.  The adoption of FAS 150 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In April 2003, FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”).  FAS 149 amends and clarifies certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  FAS 149 is effective for certain contracts entered into or modified by the Company after June 30, 2003.  The adoption of FAS 149 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

 

8

 

REAL ESTATE

 

Rental properties are stated at cost, net of accumulated depreciation, unless circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in which case the carrying value of the property is reduced to estimated fair value.  Estimated fair value (i) is based upon the Company’s plans for the continued operation of each property and (ii) is computed using estimated sales price, as determined by prevailing market values for comparable properties and/or the use of capitalization rates multiplied by annualized net operating income based upon the age, construction and use of the building.  The fulfillment of the Company’s plans related to each of its properties is dependent upon, among other things, the presence of economic conditions which will enable the Company to continue to hold and operate the properties prior to their eventual sale.  Due to uncertainties inherent in the valuation process and in the economy, actual results of operating and disposing of the Company’s properties could be materially different from current expectations.

 

Depreciation is provided using the straight-line method over the useful lives of the respective assets. The useful lives are as follows:

 

 

CASH EQUIVALENTS

 

Cash equivalents include all highly liquid investments with a maturity of three months or less at the date of purchase.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financial instruments consist of cash and cash equivalents, an escrow deposit, tenant and other receivables, notes payable, accounts payable and accrued expenses.  Management believes that the carrying value of the Company’s financial instruments approximate their respective fair market values at September 30, 2004 and December 31, 2003.

 

DERIVATIVE FINANCIAL INSTRUMENTS

 

The Company follows Statement of Financial Accounting Standard No. 133, as amended, which establishes accounting and reporting standards for derivative financial instruments, including certain derivative instruments embedded in other contracts and hedging activities.  All derivatives, whether designed as hedging relationships or not, are required to be recorded on the balance sheet at fair value.  If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings.  If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.

 

As of December 31, 2003, the Company had interest rate swap contracts in notional amounts of approximately $9,600,000.  The interest rate swap contracts were reflected at fair value on the Company’s balance sheet at December 31, 2003 in accrued and other liabilities and the changes in the fair value of the hedge were recognized as adjustments to interest expense.  The Company had no swap contacts at September 30, 2004.  During the nine months ended September 30, 2004 and 2003, the Company recorded a benefit of $65,000 and a charge of $202,000, respectively, attributable to changes in the fair value of its derivatives financial instruments.

 

DEFERRED FINANCING AND OTHER FEES

 

Fees paid in connection with the financing and leasing of the Company’s properties are amortized over the term of the related note payable or lease and are included in other assets.

 

 

9

 

STOCK-BASED COMPENSATION

 

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

 

The Company has in effect its Omnibus Stock Incentive Plan (the “Plan”), which is described more fully in its Form 10-K filed with the Securities and Exchange Commission.  The Company has elected, as permitted by FAS 123, to use the intrinsic value based method of accounting for stock options consistent with Accounting Principles Board Opinions No. 25, “Accounting for Stock Issued to Employees”.  The intrinsic value method measures compensation cost for stock options as the excess, if any, of the quoted market price of the Company’s stock at the measurement date over the exercise price.  No stock-based employee compensation cost is reflected in net income related to stock options, as all options granted under the Plan had an exercise price equal to the average of the high and low sales prices of the underlying common stock on the date of grant.

 

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

 

		Three Months Ended							Nine Months Ended
		September 30,							September 30,
		2004			2003				2004			2003
Net loss, as reported		$	(4,960	)	$	(6,086		)	$	(9,716	)	$	(12,757	)
Deduct: Employee compensation expense for stock option grants under fair value method, net of related tax effects		(44		)	(68			)	(141		)	(212		)
Pro forma net loss		$	(5,004	)	$		(6,154	)	$	(9,857	)	$	(12,969	)
Per share data:
Basic and diluted, as reported		$	(3.17	)	$		(3.98	)	$	(6.23	)	$	(8.70	)
Basic and diluted, proforma		$	(3.20	)	$		(4.02	)	$	(6.32	)	$	(8.85	)

 

MINORITY INTEREST

 

Unit holders in the Operating Partnership (other than the Company) held a 12.30% and 12.61% limited partnership interest in the Operating Partnership at September 30, 2004 and December 31, 2003, respectively.  Each of the holders of the interests in the Operating Partnership (other than the Company) has the option (exercisable after the first anniversary of the issuance of the OP Units) to redeem its OP Units and to receive, at the option of the Company, in exchange for each four OP Units, either (i) one share of Common Stock of the Company, or (ii) cash equal to the value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

 

RENTAL REVENUE

 

Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease.  The Company records rental income for the full term of each lease on a straight-line basis.  Accordingly, a receivable is recorded from tenants equal to the excess

 

 

10

 

of the amount that would have been collected on a straight-line basis over the amount collected and currently due (Deferred Rent Receivable).  When a property is acquired, the term of existing leases is considered to commence as of the acquisition date for purposes of this calculation.

 

The Company’s portfolio of leases turns over continuously, with the number and value of expiring leases varying from year to year.  The Company’s ability to re-lease the space to existing or new tenants at rates equal to or greater than those realized historically is impacted by, among other things, the economic conditions of the market in which a property is located, the availability of competing space, and the level of improvements which may be required at the property.  No assurance can be given that the rental rates that the Company will obtain in the future will be equal to or greater than those obtained under existing contractual commitments.

 

NET LOSS PER SHARE

 

Net loss per share is calculated based on the weighted average number of common shares outstanding.  Stock options outstanding of 46,125 at September 30, 2004 and OP Units (other than those held by the Company) outstanding of 880,794 (convertible into approximately 220,198 shares of common stock) at September 30, 2004 have not been included in the net loss per share calculation since their effect would be antidilutive.  See “Minority Interests” paragraph above.

 

INCOME TAXES

 

In preparing the Company’s consolidated financial statements, management estimates the income tax in each of the jurisdictions in which the Company operates.  This process includes an assessment of current tax expense, the results of tax examinations, and the effects of temporary differences resulting from the different treatment of transactions for tax and financial accounting purposes.  These differences may result in deferred tax assets or liabilities which are included in the consolidated balance sheet.  The realization of deferred tax assets as a result of future taxable income must be assessed and to the extent that the realization is doubtful, a valuation allowance is established.  The Company’s income tax provision is based on calculations and assumptions that will be subject to examination by the taxing authorities in the jurisdictions in which the Company operates.  Should the actual results differ from the Company’s estimates, the Company would have to adjust the income tax provision in the period in which the facts and circumstances that give rise to the revision become known.  Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.

 

NOTE 3.  REAL ESTATE

 

ACQUISITIONS

 

2004.

 

On August 2, 2004, the Company acquired a 42,860 square foot office property in Houston, Texas, which is adjacent to an office property owned by the Company.  The Company owned the promissory note secured by the property, representing the debt from the owner.  Acquisition costs of approximately $2,084,000 included the settlement of the note, the issuance of 10,000 shares of restricted Common Stock (valued for this purpose at $7.50 per share) and cash.

 

2003.

 

During 2003, the Company acquired four office properties, three of which were from an affiliated entity.  The properties are located in Houston, Texas and consist of approximately 250,437 rentable square feet.  Acquisition costs of approximately $16,088,000 included assumed or new mortgage indebtedness of $13,465,000, the issuance of 382,537 OP Units (valued for this purpose at $4.11 per unit), proceeds from a tax deferred exchange of $543,000, deferred payments of $191,000 with the remainder in cash.

 

Rental revenue and related expenses from the acquired properties was included in the Company’s results since their respective dates of acquisition.  Therefore, the results of operations for the three and nine months ended September 30, 2004 include results from all of the above acquisitions, whereas, the results of

 

 

11

 

operations for the three and nine months ended September 30, 2003 contain limited results related to these acquisitions.

 

DISPOSITIONS

 

2004.

 

On September 30, 2004, the Company sold Van Buren, a 16.65 acre parcel of undeveloped land located in Phoenix, Arizona, for $3,111,000.

 

On August 24, 2004, the Company sold Parkade Center, a 220,684 square foot office property located in Columbia, Missouri, for $4,127,000.

 

On July 30, 2004, the Company sold Westlakes, a 95,370 square foot industrial property located in San Antonio, Texas, for $4,975,000.

 

The three properties sold during the nine months ended September 30, 2004 produced net proceeds of approximately $4,316,000 of which $1,365,000 was held in escrow at September 30, 2004 as a source to facilitate the funding of a future acquisition in a tax-deferred exchange.  A net loss of $2,298,000 was incurred in connection with the transactions, which is reflected as discontinued operations in the consolidated statements of operations.

 

2003.

 

During 2003, the Company sold eleven properties for an aggregate sales price of $61,162,000.  The properties, which totaled 1,477,833 square feet, consisted of six industrial properties, two office buildings, two apartment complexes and one shopping center property.  Reference is made to the Company’s Annual Report on Form 10-K for 2003 for more information with respect to the 2003 property dispositions.

 

In the accompanying consolidated statement of operations for the three and nine months ended September 30, 2004 and 2003, the results of operations for properties mentioned above are shown in the section “Discontinued operations” through their respective sale date.

 

INTANGIBLE ASSETS PURCHASED

 

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with Statement of Financial Accounting Standards No. 141), and allocates the purchase price to the acquired assets and assumed liabilities.  The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases.

 

The Company evaluates acquired “above and below” market leases at their fair value (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.  Based on its acquisitions to date, the Company’s allocation to intangible assets for assets purchased has been immaterial.

 

NOTE 4.  DISCONTINUED OPERATIONS

 

Real estate assets held for sale.

 

As of December 31, 2003, three properties were classified as “Real estate held for sale”.  These three properties were sold during the third quarter of 2004.  The properties consisted of a 220,684 square foot office property located in Columbia, Missouri, a 95,370 square foot industrial property located in San Antonio, Texas and a 16.65 acre parcel of undeveloped land located in Phoenix, Arizona.  The sales

 

 

12

 

produced net proceeds of approximately $4,316,000 of which $1,365,000 was held in escrow at September 30, 2004 as a source to facilitate the funding of a future acquisition in a tax-deferred exchange.

 

 

Condensed Consolidated Balance Sheet		December 31, 2003
Real estate		$	14,250
Other		324
Real estate assets held for sale		$	14,574
Notes payable, net		$	7,309
Accounts payable		204
Accrued and other liabilities		505
Liabilities related to real estate held for sale		$	8,018

 

All real estate assets held by the Company on September 30, 2004 are considered held for investment.  No real estate was classified as held for sale by the Company at September 30, 2004.

 

Net loss from discontinued operations.

 

Net loss from discontinued operations for the three and nine months ended September 30, 2004 includes the results of operations of the three properties sold during the third quarter of 2004.   A net loss on sale of discontinued operations totaling $2,298,000 was incurred in connection with the transactions.

 

The condensed consolidated statements of operations of discontinued operations for the three and nine months ended September 30, 2004 are summarized below (dollars in thousands):

 

Condensed Consolidated Statements of Operations		Three Months Ended			Nine Months Ended
		September 30, 2004			September 30, 2004
Rental revenue		$	305		$	1,311
Total expenses		280			1,374
Net income (loss) from discontinued operations before loss on sale		25			(63		)
Loss on sale of discontinued operations		(2,298		)	(2,298		)
Net loss from discontinued operations		$	(2,273	)	$	(2,361	)

 

Net loss from discontinued operations for the three and nine months ended September 30, 2003 includes the results of operations of eleven properties sold in 2003 and three properties sold in 2004.   Seven of the eleven properties, which were sold during the third quarter of 2003, generated a net gain on sale of discontinued operations of $51,000.   The net loss from discontinued operations for the quarter ended September 30, 2003 included an impairment charge of $3,500,000 related to an office property subsequently sold in the fourth quarter of 2003.  Nine of the eleven properties, which were sold during the nine months ended September 30, 2003, generated a net gain on sale of discontinued operations of $2,279,000.  The net gain recognized for the nine months was after taking into consideration an impairment charge totaling $4,000,000 recorded in the second quarter of 2003 related to three of the nine properties.  Impairment charges for the nine months ended September 30, 2003, which totaled $7,500,000, were related to four properties sold during 2003.  The impairments were based on the anticipated sales price less cost to sell as compared to the carrying value of the assets.

 

The condensed consolidated statements of operations of discontinued operations for the three and nine months ended September 30, 2003 are summarized below (dollars in thousands):

 

Condensed Consolidated Statements of Operations		Three Months Ended			Nine Months Ended
		September 30, 2003			September 30, 2003
Rental revenue		$	1,790		$	7,964
Total expenses		2,233			9,038
Net loss from discontinued operations before gain on sale and impairment		(443		)	(1,074		)
Gain on sale of discontinued operations		51			2,279
Impairment of real estate assets held for sale		(3,500		)	(7,500		)
Net loss from discontinued operations		$	(3,892	)	$	(6,295	)

 

 

13

 

NOTE 5. MORTGAGE LOAN RECEIVABLE

 

On October 27, 2003, the Company acquired a note secured by a property adjacent to an office property owned by the Company.  The property consists of 42,860 square feet and is located in Houston, Texas.  The purchase of this note was funded with a new loan to the Company from the lender that owned the note.  Loan costs of approximately $41,000 were incurred in connection with the transaction.  The note bore interest at 7.5% per annum.  The receivable balance of the note at December 31, 2003 was $1,666,504, net of discount of $83,253.  On August 2, 2004 the Company acquired the property.  Acquisition costs of approximately $2,084,000 included the settlement of the note, the issuance of 10,000 shares of restricted Common Stock (valued for this purpose at $7.50 per share) and cash.

 

NOTE 6.  NOTES PAYABLE, NET OF PREMIUMS

 

The Company had the following notes payable outstanding as of September 30, 2004 and December 31, 2003 (dollars in thousands):

 

		2004			2003
Secured loans with various lenders, net of unamortized premiums of $2,603 at September 30, 2004 and $3,089 at December 31, 2003, bearing interest at fixed rates between 5.00% and 10.50% at September 30, 2004 and December 31, 2003, with monthly principal and interest payments ranging between $3 and $269 at September 30, 2004 and December 31, 2003, and maturing at various dates through August 1, 2014.		$	130,264		$	121,391
Secured loans with various banks bearing interest at variable rates ranging between 5.61% and 7.00% at September 30, 2004, and 5.14% and 6.50% December 31, 2003, and maturing at various dates through May 1, 2008.		3,988			9,534
Secured Series A & B Bonds with a fixed interest rate of 6.39%, monthly principal and interest payments of $74, maturing September 30, 2031.		11,416			11,532
Secured Series C Bonds with a fixed interest rate of 9.50%, semi-annual principal and interest payments of $97, maturing November 1, 2006.		400			475
Unsecured loans with various lenders, bearing interest at fixed rates between 5.45% and 20.00% at September 30, 2004 and between 4.99% and 20.00% at December 31, 2003, and maturing at various dates through February 19, 2005.		716			810
Total		$	146,784		$	143,742

 

Debt premiums are amortized into interest expense over the terms of the related mortgages using the effective interest method.  As of September 30, 2004 and December 31, 2003, the unamortized debt premiums included in the above schedule were $2,603,000 and $3,089,000 respectively.

 

In August 2004, the Company refinanced a $5,350,000 loan on San Felipe, one of its office properties with a new loan agreement in the amount of $5,500,000.  The new loan bears interest at a fixed rate of 5.65% per annum and matures in August 2014.   The Company funded closing costs of approximately $178,000 and escrowed $327,000 for future capital expenditures, real estate taxes and insurance related to the August 2004 refinance.  Net proceeds of $2,059,000 were received in December 2003 related to the December 2003 refinance of the original $3,000,000 loan on the property.

 

In August 2004, Company financed costs of $8,750 related to the acquisition of an office property in Houston, Texas.  The note bears interest at 10% per annum and matures in November 2004.

 

In July 2004, the Company refinanced a $5,330,000 loan on Northwest Corporate Center, one of its office properties, with a new loan agreement in the amount of $5,750,000.  The new loan bears interest at a fixed rate of 6.26% per annum and matures in August 2014.  No proceeds were received directly as a result of the

 

 

14

 

refinance, however $350,000 is being held in escrow by the lender to assist the funding of future capital expenditures at the property.

 

In May 2004, the Company refinanced a $3,132,000 loan on Mira Mesa, one of its office properties, with a new one-year loan agreement in the amount of $7,500,000.  The new loan, which contains two six-month extension options, bears interest at a fixed rate of 7.95% per annum.  Net proceeds of $3,440,000 were received as a result of the refinance.

 

In May 2004, the Company financed insurance premiums of $373,000 on its properties and agreed to pay a service fee of $85,000 over one year.

 

In November 2003, in connection with the acquisition of an office property in Houston, Texas, the Company obtained a loan in the amount of $4,574,000.  The loan, which was due to mature in November 2004, bore interest at a fixed rate of 5% per annum.  In October 2004, the maturity date of the loan was extended to November 2005.  The loan will bear interest at a fixed rate of 8% under the terms of the extension.

 

In October 2003, the Company entered into a $4,100,000 loan agreement in connection with the acquisition of an office property in Houston, Texas and the acquisition of a note secured by another office property in Houston.  The loan, of which $3,700,000 had been funded as of September 30, 2004, matures in November 2005 and bears interest at a fixed rate of 6% per annum.

 

In September 2003, a note payable in the amount of $510,000 was repaid with the proceeds from the sale of Emerald Pointe.  The note bore interest at prime plus 1%.

 

In August 2003, the Company refinanced a $1,300,000 loan secured by Van Buren, a parcel of undeveloped land, and entered into a two-year loan agreement in the amount of $1,340,000.  The loan bore interest at a fixed rate of 12% per annum and matured August 1, 2005.  In September 2004, the loan was paid in connection with the sale of the property.

 

In July 2003, in connection with the acquisition of an office property in Houston, Texas, the Company assumed a loan in the amount of $1,723,000.  The loan bears interest at a fixed rate of 7.41% per annum and matures in May 2005.  The Company also entered into an agreement that provided for seller financing of $710,000, bearing interest at a fixed rate of 7.41% per annum and maturing in July 2005.

 

In May 2003, in connection with the acquisition of an office property in Houston, Texas, the Company assumed a loan in the amount of $3,180,000.  The loan bears interest at a fixed rate of 6.80% per annum and matures in August 2012.  The Company also entered into an agreement that provided for seller financing of $464,000, bearing interest at a fixed rate of 6.80% per annum and maturing in May 2005.

 

In May 2003, the successor of Brown Parker and Leahy, LLP cancelled its $199,180 note, plus $45,891 of accrued interest thereon, in exchange for 14,943 shares of the Company’s common stock.

 

In May 2003, John N. Galardi cancelled his $1,600,000 note, plus $286,036 of accrued interest thereon, in exchange for 115,002 shares of the Company’s common stock.

 

In May 2003, the Company financed insurance premiums of $643,000 on its properties and agreed to pay a service fee of $85,000 over one year.  The insurance premium note was paid in full in February 2004.  The Company financed an additional insurance premium during 2003 of $130,000, which was paid in full in June 2004.

 

In July 2002, the lender under a loan agreement related to the South Carolina shopping center properties notified the Company it was technically in default under its loan agreement for non-compliance with certain covenants, including covenants requiring improvements to shopping center properties.  Thereafter, the lender notified the Company that it was in default for failure to pay a matured portion of the loan, which matured in November 2002.  In early 2003, the lender sold the loan to the major tenant in two of the shopping centers.  In December 2003, the Company sold one of the shopping center properties and repaid $3,935,000, which included the pay-off of the matured portion of the loan.  As of September 30, 2004, the

 

 

15

 

remaining balance of the loan was approximately $2,756,000.   The Company continues to discuss the non-compliance matter with the new lender.  The new lender has not accelerated the loan.

 

NOTE 7.  NOTES PAYABLE, LITIGATION SETTLEMENT

 

As the result of the settlement of the Teachout litigation, which was documented in the third quarter of 2003, the Company reaffirmed its previously announced obligation to pay the former limited partners of Sierra Pacific Development Fund II (“Fund II”) as of the date of the Company’s 2001 consolidation transaction (the “Consolidation”), or their assignees or transferees, the loans which were made and called by the former general partner of Fund II as part of the Consolidation.  Pursuant to the settlement, the Company established a repayment plan and secured the debt with a second deed of trust on an office property owned by the Company.  This repayment plan consists of a promissory note in the amount of $8,800,000, which bears interest at 6% per annum and matures in March 2006.  Interest-only payments, which are payable quarterly, commenced June 2, 2003.  The note may be prepaid in whole or in part at any time without penalty.

 

As part of the settlement, the Company agreed to pay legal fees totaling $1,200,000 to the plaintiff’s counsel.  The Company made a scheduled payment of $250,000 in the third quarter of 2003 with the remaining $950,000 consisting of two promissory notes.  The first note, in the amount of $700,000, bears interest at 6% per annum and matures in March 2006.  Interest-only payments, which are payable quarterly, commenced June 2, 2003.   The second promissory note, in the amount of $250,000, bears no interest and matures in March 2006.  The notes, which are secured by a second deed of trust on an office property owned by the Company, may be prepaid in whole or in part at any time without penalty.

 

In connection with the agreement, William J. Carden and John N. Galardi acknowledged that they owe the Company the sum of $1,187,695 as indemnification against a portion of the Company’s settlement obligation.  Mr. Carden is the Chief Executive Officer, a director and a principal stockholder of the Company.  Mr. Galardi is a director and principal stockholder of the Company.  Mr. Galardi and certain affiliates of Mr. Carden and/or Mr. Galardi are beneficiaries, in part, of the settlement of the Teachout litigation and are owed an amount in excess of this obligation pursuant to that settlement.  Mr. Galardi and Mr. Carden have agreed to pay the Company the principal sum of this obligation, plus interest thereon at the annual rate of 6% from March 15, 2003, in the form of an assignment to the Company of their right to receive $1,187,695 of principal payments on the notes payable to them and their affiliates by reason of the settlement of the Teachout litigation, plus all interest payable on such principal amount of notes.  The receivable of $1,187,695 and accrued interest are reflected as a component of equity in the Company’s consolidated financial statements.  In March, the interest due for all of 2004 and $116,875 in principal was paid.  The payment was made with certain funds owed to Mr. Carden and Mr. Galardi by the Company related to a guarantee fee.  See Note 12 — Related Party Transactions.

 

NOTE 8.  LOSS ON EARLY EXTINGUISHMENT OF DEBT

 

In August 2004, in connection with the refinance of San Felipe, the Company recorded a loss on early extinguishment of debt of $214,000 due to a prepayment penalty of $120,000 and the write-off of unamortized loan costs of $94,000.

 

In May 2004, in connection with the refinance of Mira Mesa, the Company recorded a loss on early extinguishment of debt of $613,000 due to a prepayment penalty of $687,000, which was offset in part by the write-off of an unamortized loan premium of $74,000.

 

The loss on early extinguishment of debt is included in other loss in the consolidated statements of operations.

 

NOTE 9.  MINORITY INTEREST

 

Unit holders in the Operating Partnership (other than the Company) held a 12.30% and 12.61% limited partnership interest in the Operating Partnership at September 30, 2004 and December 31, 2003, respectively.  Each of the holders of the interests in the Operating Partnership (other than the Company) has the option (exercisable after the first anniversary of the issuance of the OP Units) to redeem its OP Units

 

 

16

 

and to receive, at the option of the Company, in exchange for each four OP Units, either (i) one share of Common Stock of the Company, or (ii) cash equal to the value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

 

During the nine months ended September 30, 2004, a total of 17,963 OP Units were exchanged for 4,486 shares of Common Stock.

 

In July 2003, the Company purchased 7,329 OP Units from Nooney Development Partners, L.P. for $223,000 pursuant to an agreement entered into at the time of the Consolidation.

 

During the year ended December 31, 2003, the Company issued a total of 382,537 OP Units to an affiliated entity in connection with the acquisition of three office properties in Houston, Texas.

 

During the year ended December 31, 2003, a total of 202,056 OP Units were exchanged for 50,514 shares of Common Stock.

 

NOTE 10.  REDEEMABLE COMMON STOCK

 

On October 23, 2001, the Company issued 5,000 shares of its Common Stock, $.01 par value per share, with the holder’s right to compel the sale of the stock back to the Company (the “Put”) at a fixed price of $60.00 per share during the period from October 31, 2002 to November 30, 2002.  In November 2002, the Company and holder agreed to extend the put exercise period to May 30, 2003 through June 30, 2003.  In May 2003, the Company received notice that the holder exercised its right to sell the Common Stock back to the Company for $60.00 per share or a total of $300,000 and subsequently agreed to a payment schedule.  In January 2004, the Company and holder agreed to extend the put exercise period to November 30, 2004 through December 31, 2004.

 

NOTE 11.  REPURCHASE OF COMMON STOCK

 

In October 2004, the Company announced that it will go forward with an odd lot buy back program previously postponed.  The Company has offered to purchase up to 250,000 shares and intends to offer $8.25 per share to holders of fewer than 100 shares.

 

In September 2004, in conjunction with a resignation agreement, an employee relinquished 1,250 shares of restricted common stock.

 

In May 2003, the Company’s Board of Directors authorized the repurchase of up to 75,000 shares of its common stock from the proceeds of property sales.  Such purchases would be made from time to time in open market transactions.

 

During 2003, the Company repurchased a total of 16,174 shares at an average price of $14.04 per share in open market transactions.  The total cost of the stock repurchases amounted to $234,268.

 

Pursuant to the settlement of the Teachout litigation, the Company repurchased 45 shares from a former limited partner of Fund II for $2,457, or $54.00 per share, during the third quarter of 2003.

 

In December 2003, the Company repurchased 6,563 shares of restricted stock from an employee for cash of $59,750 and the reversal of deferred compensation of $124,605.

 

NOTE 12.  RELATED PARTY TRANSACTIONS

 

In March 2004, the Company paid a total of $224,520 (“Guarantee Fee”) to William J. Carden, John N. Galardi and CGS Real Estate Company, Inc. (“the Guarantors”) in consideration for their guarantees of certain obligations of the Company as of December 31, 2003.  The payment was made in the form of an offset against certain sums owed to the Company by the Guarantors.  The Company has agreed to pay the Guarantors an annual guarantee fee equal to between .25% and .75% (depending on the nature of the guaranty) of the outstanding balance as of December 31 of the guaranteed obligations.  The guaranty fee is to be paid for a maximum of 3 years on any particular obligation.  The charge for this guaranty was accrued

 

 

17

 

in 2003 and is included in interest expense on the results of operations.  For the first nine months ended September 30, 2004, the Company has accrued $171,000 related to the guarantee fee payable for the 2004 year.

 

During 2003, the Company made payments totaling $1,000,000, on its indebtedness to an affiliated entity, reducing the balance due to $251,321.  The Company has a balance due of $14,800 to an affiliated entity as of September 30, 2004.

 

During 2003, the Company acquired three office properties from an affiliated entity.  The properties are located in Houston, Texas and consist of approximately 160,742 rentable square feet.  Acquisition costs of approximately $10,703,000 included assumed or new mortgage indebtedness, the issuance of 382,537 OP Units, deferred payments of $190,469 and cash.

 

In May 2003, the successor of Brown Parker and Leahy, LLP cancelled its $199,180 note, plus $45,891 of accrued interest thereon, in exchange for 14,943 shares of the Company’s common stock.  Timothy Brown, a director of the Company, was a partner of Brown Parker Leahy, LLP.

 

In May 2003, Mr. Galardi cancelled his $1,600,000 note, plus $286,036 of accrued interest thereon, in exchange for 115,002 shares of the Company’s common stock.

 

In May 2003, Mr. Galardi purchased a total of 15,243 shares of the Company’s common stock for $16.40 per share.

 

In February 2003, the Company reached an agreement with CGS Real Estate Company, Inc. whereby CGS acknowledged that it owed the Company a net amount of $270,375 which related to several issues asserted by William J. Carden that were owed by CGS to the Company and by the Company to CGS.    This amount is payable on March 15, 2006 with interest accruing from March 15, 2003 at an annual rate of 6% and payable quarterly commencing on June 15, 2003.  An affiliate of Mr. Carden is a principal stockholder of CGS.  Mr. Carden is an officer and a director of CGS, and an affiliate of Mr. Galardi is a principal stockholder of CGS.  Mr. Carden and Mr. Galardi have agreed to guarantee this obligation of CGS, and they have secured this guarantee with an assignment to the Company of their right to receive $270,375 of principal payments on the notes payable to them and their affiliates by reason of the settlement of the Teachout litigation, plus all interest payable on such principal amount of notes. In March 2004, as part of the payment of the Guarantee Fee, interest due on this obligation for 2004 was paid in advance and $26,606 was applied to the principal due on this obligation.  The principal balance due as of September 30, 2004 is $243,858.

 

In connection with the settlement of the Teachout litigation, Mr. Galardi and Mr. Carden acknowledged that they owe the Company the sum of $1,187,695 as indemnification against a portion of the Company’s settlement obligation.  Mr. Galardi and certain affiliates of Mr. Carden and/or Mr. Galardi are beneficiaries, in part, of the settlement of the Teachout litigation and are owed an amount in excess of this obligation pursuant to that settlement.  Mr. Galardi and Mr. Carden have agreed to pay the Company the principal sum of this obligation, plus interest thereon at the annual rate of 6% from March 15, 2003, in the form of an assignment to the Company of their right to receive $1,187,695 of principal payments on the notes payable to them and their affiliates by reason of the settlement of the Teachout litigation, plus all interest payable on such principal amount of notes.  The receivable of $1,187,695 and accrued interest are reflected as a component of equity in the Company’s consolidated financial statements.  In March 2004, as part of the payment of the Guarantee Fee, interest due on this obligation for 2004 was paid in advance and $116,875 was applied to the principal due on this obligation.  The balance due as of September 30, 2004 is $1,070,820.

 

During 2003, the Company’s obligation to ASJ, Ltd., which is owned by Mr. Carden, his wife and a trust for his children, was reduced by $111,321 to offset certain amounts which became payable from the related party.  In January 2004, the Company paid the remaining balance due of $88,679.

 

During the nine months ended September 30, 2004, the Company paid $158,237 for real estate related services to a firm in which Patricia A. Nooney, an executive officer of the Company, holds an ownership interest.  For the year ended December 31, 2003, the Company paid $98,763 to this firm.

 

 

18

 

In September 2004, the Company began managing an apartment complex owned by an affiliated entity of Mr. Carden.  During the nine months ended September 30, 2004, the Company received management fees of $8,000 from this entity.

 

NOTE 13.  SEGMENT INFORMATION

 

As of September 30, 2004, the Company owned a portfolio of properties comprising office, industrial, shopping center properties, and an apartment property.  Each of these property types represents a reportable segment with distinct uses and tenant types and requires the Company to employ different management strategies.  The properties contained in the segments are located in various regions and markets within the United States.  The office portfolio consists primarily of suburban office buildings.  The industrial portfolio consists of properties designed for warehouse, distribution and light manufacturing for single-tenant or multi-tenant use.  The shopping center portfolio consists of community shopping centers located in South Carolina.  The Company’s sole remaining apartment property is located in Missouri and is rented to residential tenants on either a month-by-month basis or for terms generally of one year or less.

 

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.  The Company evaluates performance of its property types based on net operating income derived by subtracting property operating expenses from rental revenue.  Significant information used by the Company for its reportable segments as of and for the three months and nine months ended September 30, 2004 and 2003 is as follows (dollars in thousands):

 

Three Months Ended September 30,		Office					Industrial				Shopping Center				Apartment				Other			Property Total
2004
Rental revenue		$			4,846		$	748			$	222			$	704			—			$	6,520
Property operating expenses		2,099					141				45				473				—			2,758
Net operating income (NOI)		$		2,747			$	607			$		177		$		231		$	—		$	3,762
Real estate held for investment, net		$		131,280			$	17,160			$		5,153		$		13,482		$	63		$	167,138
2003
Rental revenue		$		4,127			$	708			$		221		$		671		$	7		$	5,734
Property operating expenses		1,939					166				70				403				—			2,578
Net operating income (NOI)		$		2,188			$	542			$		151		$		268		$	7		$	3,156
Real estate held for investment, net		$	123,852				$		27,477		$		5,549		$		14,050		$	116		$	161,044

 

Nine Months Ended September 30,		Office			Industrial			Shopping Center			Apartment				Other			Property Total
2004
Rental revenue		$	15,263		$	1,962		$	749		$	2,032			—			$	20,006
Property operating expenses		5,912			468			184			1,262				$	25		7,851
Net operating income (NOI)		$	9,351		$	1,494		$	565		$		770		$	(25	)	$	12,155
Real estate held for investment, net		$	131,280		$	17,160		$	5,153		$		13,482		$	63		$	167,138
2003
Rental revenue		$	12,785		$	1,866		$	705		$		2,062		$	57		$	17,475
Property operating expenses		5,129			584			224			1,055				62			7,054
Net operating income (NOI)		$	7,656		$	1,282		$	481		$		1,007		$	(5	)	$	10,421
Real estate held for investment, net		$	123,852		$	17,477		$	5,549		$		14,050		$	116		$	161,044

 

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

 

		Three Months Ended September 30,							Nine Months Ended September 30,
		2004				2003			2004				2003
REVENUES
Total revenues for reportable segments		$		6,520		$	5,734		$		20,006		$	17,475
Other revenues		49				34			211				77
Total consolidated revenues		$		6,569		$	5,768		$		20,217		$	17,552
NET (LOSS) INCOME
NOI for reportable segments		$		3,762		$	3,156		$		12,155		$	10,421
Unallocated amounts:
Interest and other income		49				34			211				77
General and administrative expenses		(1,243			)	(1,650		)	(3,551			)	(4,952		)
Depreciation and amortization		(2,606			)	(2,212		)	(7,735			)	(6,397		)
Interest expense		(3,139			)	(2,452		)	(8,998			)	(7,456		)
Loss on extinguishment of debt		(214			)	—			(827			)	—
Net loss before minority interest and discontinued operations		$	(3,391		)	$	(3,124	)	$	(8,745		)	$	(8,307	)

 

 

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