##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 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.
  State of Maryland
    
    52-2258674(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)5850 San Felipe, Suite 450Houston, Texas 77057
    
    77057(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART I FINANCIAL INFORMATIONItem 1 Financial StatementsConsolidated Condensed Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005Consolidated Condensed Statements of Operations for the three months ended March 31, 2006 and 2005 (unaudited)Consolidated Condensed Statement of Stockholders Equity for the three months ended March 31, 2006 (unaudited)Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (unaudited)Notes to Consolidated Condensed Financial StatementsItem 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3 Quantitative and Qualitative Disclosures about Market RiskItem 4 Controls and ProceduresPART II OTHER INFORMATIONItem 1 Legal ProceedingsItem 1A Risk FactorsItem 6 Exhibits and Reports on Form 8-KArticles of Amendment of the CompanyCertification pursuant to Section 302Certification pursuant to 18 U.S.C. Section 1350
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  March 31, 2006
    
    
    December 31, 2005(Unaudited)ASSETSReal estate held for investment
    
    $
    192,573
    
    
    $
    154,826Accumulated depreciation
    
    
    (30,437
    )
    
    
    (28,115
    )Real estate held for investment, net
    
    
    162,136
    
    
    
    126,711Real estate held for sale
    
    
    
    
    
    
    22,272Cash and cash equivalents
    
    
    1,215
    
    
    
    300Tenant and other receivables, net of allowance for doubtful accounts of
$193 and $135, respectively
    
    
    598
    
    
    
    455Deferred rents receivable
    
    
    1,234
    
    
    
    1,245Deferred tax asset
    
    
    53
    
    
    
    53Deposits held in escrow for tax-deferred exchanges
    
    
    4,533
    
    
    
    5,210Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    9,487
    
    
    
    8,939Total Assets
    
    $
    183,256
    
    
    $
    169,185LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable, including premiums of $1,791 and $1,900, respectively
    
    $
    141,812
    
    
    $
    114,543Notes payable, litigation settlement
    
    
    
    
    
    
    4,877Liabilities related to real estate held for sale
    
    
    
    
    
    
    27,953Accounts payable
    
    
    1,481
    
    
    
    2,194Accrued and other liabilities (including $334 and $331, respectively,
to related parties)
    
    
    5,900
    
    
    
    5,468Total Liabilities
    
    
    149,193
    
    
    
    155,035Minority interest
    
    
    7,783
    
    
    
    5,136Stockholders 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, 1,601,427 and 1,598,615 shares, respectively; outstanding,
1,393,026 and 1,390,214 shares, respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    46,407
    
    
    
    46,367Accumulated deficit
    
    
    (17,663
    )
    
    
    (34,889
    )Treasury
stock, at cost, 208,401 shares, respectively
    
    
    (2,480
    )
    
    
    (2,480
    )Total Stockholders Equity
    
    
    26,280
    
    
    
    9,014Total Liabilities and Stockholders Equity
    
    $
    183,256
    
    
    $
    169,185
  3




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AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
   Three Months Ended March 31,2006
    
    
    2005REVENUES:Rental revenue
    
    $
    5,577
    
    
    $
    4,967Interest and other income
    
    
    74
    
    
    
    49Total revenues
    
    
    5,651
    
    
    
    5,016EXPENSES:Property operating expense
    
    
    2,496
    
    
    
    1,962General and administrative
    
    
    920
    
    
    
    920Depreciation and amortization
    
    
    2,461
    
    
    
    2,032Interest expense
    
    
    2,185
    
    
    
    2,248Total expenses
    
    
    8,062
    
    
    
    7,162Net loss before minority interest
    
    
    (2,411
    )
    
    
    (2,146
    )Minority interest (share from continuing operations)
    
    
    321
    
    
    
    268Net loss from continuing operations
    
    
    (2,090
    )
    
    
    (1,878
    )Discontinued operations:Loss from operations
    
    
    (65
    )
    
    
    (542
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    2,460Minority interest
    
    
    (2,968
    )
    
    
    (239
    )Income from discontinued operations
    
    
    19,316
    
    
    
    1,679Net income (loss)
    
    $
    17,226
    
    
    $
    (199
    )Basic and diluted per share data:Net loss from continuing operations
    
    $
    (1.50
    )
    
    $
    (1.25
    )Income from discontinued operations
    
    
    13.87
    
    
    
    1.12Net income (loss)
    
    $
    12.37
    
    
    $
    (0.13
    )Basic weighted average shares used
    
    
    1,392,089
    
    
    
    1,499,419
  4




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AMERICAN SPECTRUM REALTY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
   AdditionalCommon
    
    
    Common
    
    
    Paid-In
    
    
    
    
    
    
    TreasuryShares
    
    
    Stock
    
    
    Capital
    
    
    Accumulated Deficit
    
    
    Stock
    
    
    Total EquityBalance, January 1, 2006
    
    
    1,598,615
    
    
    $
    16
    
    
    $
    46,367
    
    
    $
    (34,889
    )
    
    $
    (2,480
    )
    
    $
    9,014Exercise of stock options
    
    
    2,812
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    32Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,226
    
    
    
    
    
    
    
    17,226Balance, March 31, 2006
    
    
    1,601,427
    
    
    $
    16
    
    
    $
    46,407
    
    
    $
    (17,663
    )
    
    $
    (2,480
    )
    
    $
    26,280
  5




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AMERICAN SPECTRUM REALTY, INC
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   Three Months Ended March 31,2006
    
    
    2005(Revised)(See Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    17,226
    
    
    $
    (199
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,536
    
    
    
    2,792Deferred rental expense (income)
    
    
    11
    
    
    
    (50
    )Minority interest
    
    
    2,647
    
    
    
    (29
    )Net gain on sales of real estate assets
    
    
    (22,349
    )
    
    
    (2,460
    )Deferred compensation expense
    
    
    
    
    
    
    19Stock-based compensation expense
    
    
    8
    
    
    
    Interest on receivable from principal stockholders
    
    
    
    
    
    
    (13
    )Amortization of note payable premiums, included in interest expense
    
    
    (109
    )
    
    
    (119
    )Changes in operating assets and liabilities:Decrease in tenant and other receivables
    
    
    96
    
    
    
    18Decrease in accounts payable
    
    
    (930
    )
    
    
    (55
    )Decrease in prepaid and other assets
    
    
    397
    
    
    
    208Increase (decrease) in accrued and other liabilities
    
    
    123
    
    
    
    (396
    )Net cash used in operating activities
    
    
    (344
    )
    
    
    (284
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds received from sales of real estate assets
    
    
    33,583
    
    
    
    4,921Capital improvements to real estate assets
    
    
    (916
    )
    
    
    (1,175
    )Net cash provided by investing activities:
    
    
    32,667
    
    
    
    3,746CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    
    
    
    
    2,350Repayment of borrowings  property sales
    
    
    (26,165
    )
    
    
    (1,574
    )Repayment of borrowings  refinances
    
    
    
    
    
    
    (2,385
    )Repayment of borrowings  scheduled payments
    
    
    (398
    )
    
    
    (693
    )Note payments, litigation settlement
    
    
    (4,877
    )
    
    
    Repurchase of common stock
    
    
    
    
    
    
    (22
    )Proceeds from exercise of stock options
    
    
    32
    
    
    
    Net cash used in financing activities:
    
    
    (31,408
    )
    
    
    (2,324
    )Increase in cash
    
    
    915
    
    
    
    1,138Cash and cash equivalents, beginning of period
    
    
    300
    
    
    
    589Cash and cash equivalents, end of period
    
    $
    1,215
    
    
    $
    1,727SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    2,309
    
    
    $
    2,850Cash paid for income taxes
    
    
    10
    
    
    
    24SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of operating partnership units into common stock
    
    $
    
    
    
    $
    12Debt assumed in connection with acquisitions of real estate assets
    
    
    11,302
    
    
    
    Borrowings in connection with acquisitions of real estate assets
    
    
    16,452
    
    
    
    
  6




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AMERICAN SPECTRUM REALTY, INC.
 
 Notes to Consolidated Condensed Financial Statements
 NOTE 1. DESCRIPTION OF BUSINESS
     NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
   7




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RECLASSIFICATIONS AND REVISIONS
  STOCK-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 MINORITY INTEREST
  NET INCOME (LOSS) PER SHARE
 Earnings Per Share,
 INCOME TAXES
   8




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NOTE 3. REAL ESTATE
 ACQUISITIONS
 2006.
     2005.
  DISPOSITIONS
 2006.
  2005.
  9




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NOTE 4. DISCONTINUED OPERATIONS
 Real estate assets held for sale
   Condensed Consolidated Balance Sheet
    
    December 31, 2005Real estate
    
    $
    19,984Other
    
    
    2,288Real estate assets held for sale
    
    $
    22,272Note payable, net
    
    $
    26,186Accounts payable
    
    
    755Accrued and other liabilities
    
    
    1,012Liabilities related to real estate held for sale
    
    $
    27,953
 Net income from discontinued operations.
    Condensed Consolidated Statements of Operations
    
    Three Months Ended March 31,2006
    
    
    2005Rental revenue
    
    $
    381
    
    
    $
    1,891Total expenses
    
    
    446
    
    
    
    2,433Net loss from discontinued operations before gain on sale
    
    
    (65
    )
    
    
    (542
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    2,460Minority interest from discontinued operations
    
    
    (2,968
    )
    
    
    (239
    )Net gain from discontinued operations
    
    $
    19,316
    
    
    $
    1,679
 10




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NOTE 5. NOTES PAYABLE, NET OF PREMIUMS
  March 31, 2006
    
    
    December 31, 2005Maturity
    
    Principal
    
    
    Interest
    
    
    Principal
    
    
    InterestProperty (unless otherwise noted)
    
    Date
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateFixed RateColumbia (1)
    
    7/1/2006
    
    
    2,756
    
    
    
    10.50
    %
    
    
    2,756
    
    
    
    10.50
    %2470 Gray Falls (2)
    
    12/29/2006
    
    
    2,076
    
    
    
    5.00
    %
    
    
    
    
    
    
    12000 Westheimer
    
    5/7/2007
    
    
    450
    
    
    
    6.80
    %
    
    
    452
    
    
    
    6.80
    %Pacific Spectrum
    
    6/10/2009
    
    
    5,552
    
    
    
    8.02
    %
    
    
    5,571
    
    
    
    8.02
    %Morenci Professional Park
    
    12/1/2009
    
    
    1,766
    
    
    
    6.60
    %
    
    
    1,786
    
    
    
    6.60
    %7700 Building
    
    7/10/2010
    
    
    33,404
    
    
    
    8.50
    %
    
    
    33,498
    
    
    
    8.50
    %Bristol Bay
    
    8/1/2011
    
    
    7,254
    
    
    
    7.58
    %
    
    
    7,276
    
    
    
    7.58
    %Technology
    
    8/1/2011
    
    
    7,509
    
    
    
    7.44
    %
    
    
    7,533
    
    
    
    7.44
    %Creekside
    
    12/1/2011
    
    
    6,129
    
    
    
    7.17
    %
    
    
    6,149
    
    
    
    7.17
    %16350 Park Ten Place
    
    5/11/2012
    
    
    4,680
    
    
    
    7.45
    %
    
    
    4,694
    
    
    
    7.45
    %16360 Park Ten Place
    
    5/11/2012
    
    
    3,667
    
    
    
    7.45
    %
    
    
    3,678
    
    
    
    7.45
    %2855 Mangum (2)
    
    5/11/2012
    
    
    2,702
    
    
    
    7.45
    %
    
    
    
    
    
    
    2855 Mangum (2)
    
    5/11/2012
    
    
    1,627
    
    
    
    6.00
    %
    
    
    
    
    
    
    Southwest Pointe
    
    6/1/2012
    
    
    2,846
    
    
    
    7.33
    %
    
    
    2,855
    
    
    
    7.33
    %12000 Westheimer
    
    8/11/2012
    
    
    3,080
    
    
    
    6.80
    %
    
    
    3,090
    
    
    
    6.80
    %16350 Park Ten Place
    
    8/11/2012
    
    
    517
    
    
    
    7.45
    %
    
    
    518
    
    
    
    7.45
    %16360 Park Ten Place
    
    8/11/2012
    
    
    405
    
    
    
    7.45
    %
    
    
    406
    
    
    
    7.45
    %11500 Northwest Freeway
    
    6/1/2014
    
    
    4,308
    
    
    
    5.93
    %
    
    
    4,323
    
    
    
    5.93
    %11500 Northwest Freeway
    
    6/1/2014
    
    
    311
    
    
    
    5.93
    %
    
    
    312
    
    
    
    5.93
    %5850 San Felipe
    
    8/1/2014
    
    
    5,396
    
    
    
    5.65
    %
    
    
    5,415
    
    
    
    5.65
    %Northwest Corporate Center
    
    8/1/2014
    
    
    5,649
    
    
    
    6.26
    %
    
    
    5,667
    
    
    
    6.26
    %6677 North Gessner Road (2)
    
    9/1/2014
    
    
    8,600
    
    
    
    5.32
    %
    
    
    
    
    
    
    8100 Washington
    
    2/22/2015
    
    
    2,321
    
    
    
    5.59
    %
    
    
    2,329
    
    
    
    5.59
    %8300 Bissonnet
    
    5/1/2015
    
    
    4,758
    
    
    
    5.51
    %
    
    
    4,758
    
    
    
    5.51
    %5450 Northwest Central
    
    9/1/2015
    
    
    2,781
    
    
    
    5.38
    %
    
    
    2,791
    
    
    
    5.38
    %800/888 Sam Houston Parkway
    
    12/29/2015
    
    
    4,386
    
    
    
    6.25
    %
    
    
    4,400
    
    
    
    6.25
    %2401 Fountainview (2)
    
    3/1/2016
    
    
    12,750
    
    
    
    5.82
    %
    
    
    
    
    
    
    Corporate  Secured
    
    10/1/2008
    
    
    2,000
    
    
    
    6.83
    %
    
    
    2,000
    
    
    
    6.83
    %Corporate  Unsecured
    
    9/30/2006
    
    
    34
    
    
    
    7.15
    %
    
    
    60
    
    
    
    7.15
    %Subtotal
    
    $
    139,714
    
    
    
    
    
    
    $
    112,317Variable RateColumbia (1)
    
    5/15/2006
    
    $
    12
    
    
    
    10.25
    %
    
    $
    31
    
    
    
    9.50
    %Corporate  Unsecured
    
    7/27/2006
    
    
    95
    
    
    
    8.75
    %
    
    
    95
    
    
    
    8.25
    %Corporate  Unsecured
    
    5/31/2008
    
    
    200
    
    
    
    8.75
    %
    
    
    200
    
    
    
    8.25
    %Subtotal
    
    $
    307
    
    
    
    
    
    
    $
    326Loan Premiums
    
    
    
    
    1,791
    
    
    
    
    
    
    
    1,900Total
    
    $
    141,812
    
    
    
    
    
    
    $
    114,543
 
 (1)
    
    Loans were paid in May 2006.(2)
    
    Represents loans encumbering the Companys properties acquired during the first quarter of 2006.    11




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12




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NOTE 6. NOTES PAYABLE, LITIGATION SETTLEMENT
       NOTE 7. MINORITY INTEREST
   13




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NOTE 8. REPURCHASE OF COMMON STOCK
       NOTE 9. STOCK-BASED COMPENSATION
    14




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Pro Forma Information under SFAS No. 123
  March 31, 2005Net loss, as reported
    
    $
    (199
    )Deduct: Employee compensation expense for stock option
grants under fair value method, net of related tax
effects
    
    
    (19
    )Pro forma net loss
    
    $
    (218
    )Per share data:Basic and diluted, as reported
    
    $
    (0.13
    )Basic and diluted, pro-forma
    
    $
    (0.14
    )
 Stock Options
     WeightedShares
    
    
    Average
    
    
    AverageUnder
    
    
    Exercise
    
    
    IntrinsicOption
    
    
    Price
    
    
    ValueOutstanding on January 1, 2003
    
    
    47,375
    
    
    $
    41.68Granted (1)
    
    
    8,750
    
    
    $
    12.20Outstanding on December 31, 2003
    
    
    56,125
    
    
    $
    37.08Granted (1)
    
    
    6,250
    
    
    $
    11.16Forfeited
    
    
    (28,750
    )
    
    $
    43.54Outstanding on December 31, 2004
    
    
    33,625
    
    
    $
    26.76Granted (1)
    
    
    6,250
    
    
    $
    8.10Outstanding on December 31, 2005
    
    
    39,875
    
    
    $
    23.84Exercised
    
    
    2,812
    
    
    $
    11.51
    
    
    $
    21,051Outstanding on March 31, 2006
    
    
    37,063
    
    
    $
    24.77
    
    
    $
    155,574Exercisable as of March 31, 2006
    
    
    27,063
    
    
    $
    30.25
    
    
    $
    65,105
 
 (1)
    
    The exercise price of the stock options granted was equal to the fair market value on the date of grant.  15




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Weighted Average
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    AverageExercise
    
    Number
    
    Contractual
    
    ExercisePrice
    
    Outstanding
    
    Life
    
    Price$8.10 - $12.20
    
    
    18,438
    
    
    7.7 years
    
    $
    10.56$20.12 - $27.16
    
    
    11,188
    
    
    6.2 years
    
    $
    24.77$60.00 - $60.00
    
    
    7,437
    
    
    5.6 years
    
    $
    60.00
  WeightedRange of
    
    
    
    
    
    AverageExercise
    
    Number
    
    ExercisePrice
    
    Exercisable
    
    Price$8.10-$12.20
    
    
    8,438
    
    
    $
    11.28$20.12-$27.16
    
    
    11,188
    
    
    $
    24.77$60.00-$60.00
    
    
    7,437
    
    
    $
    60.00
  Weighted AverageGrant DateNonvested Shares
    
    Shares
    
    
    Fair ValueNonvested at January 1, 2006
    
    
    10,000
    
    
    $
    10.69Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested at March 31, 2006
    
    
    10,000
    
    
    $
    10.69
  Restricted Stock
  NOTE 10. RELATED PARTY TRANSACTIONS
    16




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NOTE 11. SEGMENT INFORMATION
  17




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Shopping
    
    
    
    
    
    
    PropertyOffice
    
    
    Industrial
    
    
    Center
    
    
    Other
    
    
    TotalThree Months Ended March 31,2006Rental revenue
    
    $
    5,034
    
    
    $
    469
    
    
    $
    71
    
    
    $
    3
    
    
    $
    5,577Property operating expenses
    
    
    2,313
    
    
    
    154
    
    
    
    26
    
    
    
    3
    
    
    
    2,496Net operating income (NOI)
    
    $
    2,721
    
    
    $
    315
    
    
    $
    45
    
    
    $
    
    
    
    $
    3,081Real estate held for investment, net
    
    $
    147,084
    
    
    $
    13,417
    
    
    $
    1,599
    
    
    $
    36
    
    
    $
    162,1362005Rental revenue
    
    $
    4,325
    
    
    $
    577
    
    
    $
    65
    
    
    
    
    
    
    $
    4,967Property operating expenses
    
    
    1,765
    
    
    
    183
    
    
    
    7
    
    
    
    7
    
    
    
    1,962Net operating income (NOI)
    
    $
    2,560
    
    
    $
    394
    
    
    $
    58
    
    
    $
    (7
    )
    
    $
    3,005Real estate held for investment, net
    
    $
    113,912
    
    
    $
    14,197
    
    
    $
    1,671
    
    
    $
    41
    
    
    $
    129,821
  Three Months Ended March 31,2006
    
    
    2005REVENUESTotal revenues for reportable segments
    
    $
    5,577
    
    
    $
    4,967Other revenues
    
    
    74
    
    
    
    49Total consolidated revenues
    
    $
    5,651
    
    
    $
    5,016NET LOSSNOI for reportable segments
    
    $
    3,081
    
    
    $
    3,005Unallocated amounts:Interest and other income
    
    
    74
    
    
    
    49General and administrative expenses
    
    
    (920
    )
    
    
    (920
    )Depreciation and amortization
    
    
    (2,461
    )
    
    
    (2,032
    )Interest expense
    
    
    (2,185
    )
    
    
    (2,248
    )Net loss before minority interest and
discontinued operations
    
    $
    (2,411
    )
    
    $
    (2,146
    )
 March 31,2006
    
    
    2005ASSETSTotal assets for reportable segments
    
    $
    162,136
    
    
    $
    129,821Real estate held for sale
    
    
    
    
    
    
    39,847Cash and cash equivalents
    
    
    1,215
    
    
    
    1,727Tenant and other receivables, net
    
    
    598
    
    
    
    563Deferred rent receivable
    
    
    1,234
    
    
    
    1,158Deferred tax asset
    
    
    53
    
    
    
    Deposits held in escrow for tax-deferred exchanges
    
    
    4,533
    
    
    
    Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    9,487
    
    
    
    7,178Total consolidated assets
    
    $
    183,256
    
    
    $
    184,294
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##### Table of Contents



NOTE 12. COMMITMENTS AND CONTINGENCIES
     19




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
     CRITICAL ACCOUNTING POLICIES
   
    
    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, if deemed collectible, is recorded from tenants equal to the excess 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.
    
    Many of the Companys leases provide for Common Area Maintenance (CAM)/Escalations
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##### Table of Contents



(ESC) as the additional tenant revenue amounts due to the Company in addition to base
rent. CAM/ESC represents increases in certain property operating expenses (as defined in
each respective lease agreement) over the actual operating expense of the property in the
base year. The base year is stated in the lease agreement; typically, the year in which
the lease commenced. Generally, each tenant is responsible for his prorated share of
increases in operating expenses. Tenants are billed an estimated CAM/ESC charge based on
the budgeted operating expenses for the year. Within 90 days after the end of each fiscal
year, a reconciliation and true up billing of CAM/ESC charges is performed based on actual
operating expenses.
    
    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, the actual
results of operating and disposing of the Companys properties could be materially
different than current expectations.
    
    Gains on property sales are accounted for in accordance with the provisions of SFAS No.
66, Accounting for Sales of Real Estate. Gains are recognized in full when real estate is
sold, provided (i) the gain is determinable, that is, the collectibility of the sales
price is reasonably assured or the amount that will not be collectible can be estimated,
and (ii) the earnings process is virtually complete, that is, the Company is not obligated
to perform significant activities after the sale to earn the gain. Losses on property
sales are recognized immediately.
 RESULTS OF OPERATIONS
 Discussion of the three months ended March 31, 2006 and 2005.
  Variance2006
    
    
    2005
    
    
    $
    
    
    %Rental revenue
    
    $
    5,577,000
    
    
    $
    4,967,000
    
    
    
    610,000
    
    
    
    12.3
    %Operating expenses:Property operating expenses
    
    
    2,496,000
    
    
    
    1,962,000
    
    
    
    534,000
    
    
    
    27.2
    %General and administrative
    
    
    920,000
    
    
    
    920,000
    
    
    
    
    
    
    
    0.0
    %Depreciation and amortization
    
    
    2,461,000
    
    
    
    2,032,000
    
    
    
    429,000
    
    
    
    21.1
    %Interest expense
    
    
    2,185,000
    
    
    
    2,248,000
    
    
    
    (63,000
    )
    
    
    (2.8
    %)
 Rental revenue
 Property operating expenses
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##### Table of Contents



General and administrative
 Depreciation and amortization
 Interest expense
 Minority interest from continuing operations.
 Discontinued operations
 Gain on sale of discontinued operations
 Minority interest from discontinued operations.
  Condensed Consolidated Statements of Operations
    
    Three Months Ended
    
    
    Three Months EndedMarch 31, 2006
    
    
    March 31, 2005Rental revenue
    
    $
    381
    
    
    $
    1,891Total expenses
    
    
    446
    
    
    
    2,433Net loss from discontinued operations before gain on sale
and share of minority interest
    
    
    (65
    )
    
    
    (542
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    2,460Minority interest from discontinued operations
    
    
    (2,968
    )
    
    
    (239
    )Net income from discontinued operations
    
    $
    19,316
    
    
    $
    1,679
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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
   Three Months EndedMarch 31,2006
    
    
    2005Non-Cash Charges:Depreciation and amortization from real estate held for investment
    
    $
    2,536
    
    
    $
    2,792Minority interest
    
    
    2,647
    
    
    
    Deferred rental expense
    
    
    11
    
    
    
    Stock-based compensation expense
    
    
    8
    
    
    
    Deferred compensation expense
    
    
    
    
    
    
    19Non-Cash Items:Amortization of loan premiums
    
    
    (109
    )
    
    
    (119
    )Deferred rental income
    
    
    
    
    
    
    (50
    )Minority interest
    
    
    
    
    
    
    (29
    )Interest on receivable from principal stockholders
    
    
    
    
    
    
    (13
    )
      23




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt (1) (2)
    
    $
    140,021
    
    
    $
    4,973
    
    
    $
    2,650
    
    
    $
    40,722
    
    
    $
    91,676Capital expenditures (3)
    
    
    1,136
    
    
    
    1,136
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    141,157
    
    
    $
    6,109
    
    
    $
    2,650
    
    
    $
    40,722
    
    
    $
    91,676
 
 (1)
    
    See Note 8  Notes Payable. These amounts do not include interest associated with the debt.(2)
    
    Includes debt of $2,756,000 due to mature July 1, 2006 which was paid May 1, 2006.(3)
    
    Represents estimated cost of commitments for tenant improvements and lease commissions related to the leasing of space to new or renewing tenants. INFLATION
  FORWARD-LOOKING STATEMENTS
  24




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 INTEREST RATES
     
 ITEM 4. CONTROLS AND PROCEDURES
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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
    
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
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##### Table of Contents



SIGNATURES
  AMERICAN SPECTRUM REALTY, INC.
 Date: May 9, 2006
    
    By:
    
    /s/ William J. CardenWilliam J. CardenChairman of the Board, President,Chief Executive Officer and ActingChief Financial OfficerDate: May 9, 2006
    
    By:
    
    /s/ G. Anthony EppolitoG. Anthony EppolitoVice President, Treasurer and Secretary(Principal Accounting Officer)
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title3.1
    
    Form of Amended and Restated Articles of Incorporation of the Company incorporated
by reference to the Companys Registration Statement on Form S-4 (Registration No.
333-43686), which became effective August 8, 20013.2
    
    Articles of Amendment of the Company incorporated by reference to the Companys
Annual Report on Form 10-K for the year ended December 31, 20033.3
    
    Articles of Amendment of the Company31
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 28