##### 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 June 30, 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
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)5850 San Felipe, Suite 450Houston, Texas 77057
    
    77057(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
 
  þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    
    3Consolidated Condensed Balance Sheets at June 30, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2006 and 2005 (unaudited)
    
    
    4Consolidated Condensed Statement of Stockholders Equity for the three and six months ended June 30, 2006 (unaudited)
    
    
    5Consolidated Condensed Statements of Cash Flows for the three and six months ended June 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4
    
    Controls and Procedures
    
    
    30PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    31Item 1A
    
    Risk Factors
    
    
    31Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    31Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    32Certification Pursuant to Section 302Certification Pursuant to Section 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  June 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSReal estate held for investment
    
    $
    208,355
    
    
    $
    154,826Accumulated depreciation
    
    
    (33,064
    )
    
    
    (28,115
    )Real estate held for investment, net
    
    
    175,291
    
    
    
    126,711Real estate held for sale
    
    
    
    
    
    
    22,272Cash and cash equivalents
    
    
    1,712
    
    
    
    300Tenant and other receivables, net of allowance for doubtful accounts of
$257 and $135, respectively
    
    
    357
    
    
    
    455Deferred rents receivable
    
    
    1,226
    
    
    
    1,245Deferred tax asset
    
    
    
    
    
    
    53Deposits held in escrow for tax-deferred exchanges
    
    
    1,780
    
    
    
    5,210Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    9,670
    
    
    
    8,939Total Assets
    
    $
    194,036
    
    
    $
    169,185LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable, including premiums of $1,680 and $1,900, respectively
    
    $
    153,705
    
    
    $
    114,543Notes payable, litigation settlement
    
    
    
    
    
    
    4,877Liabilities related to real estate held for sale
    
    
    
    
    
    
    27,953Accounts payable
    
    
    2,627
    
    
    
    2,194Deferred tax liability
    
    
    6,925
    
    
    
    Accrued and other liabilities (including $561 and $331, respectively,
to related parties)
    
    
    4,743
    
    
    
    5,468Total Liabilities
    
    
    168,000
    
    
    
    155,035Minority interest
    
    
    6,709
    
    
    
    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, 1,604,724 and 1,598,615 shares, respectively; outstanding,
1,387,641 and 1,390,214 shares, respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    46,484
    
    
    
    46,367Accumulated deficit
    
    
    (24,516
    )
    
    
    (34,889
    )Treasury stock, at cost, 217,083 and 208,401 shares, respectively
    
    
    (2,657
    )
    
    
    (2,480
    )Total Stockholders Equity
    
    
    19,327
    
    
    
    9,014Total Liabilities and Stockholders Equity
    
    $
    194,036
    
    
    $
    169,185
  3




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##### Table of Contents



AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUES:Rental revenue
    
    $
    6,140
    
    
    $
    4,910
    
    
    $
    11,717
    
    
    $
    9,877Interest and other income
    
    
    74
    
    
    
    208
    
    
    
    148
    
    
    
    257Total revenues
    
    
    6,214
    
    
    
    5,118
    
    
    
    11,865
    
    
    
    10,134EXPENSES:Property operating expense
    
    
    2,854
    
    
    
    2,041
    
    
    
    5,350
    
    
    
    4,003Corporate general and administrative
    
    
    1,004
    
    
    
    924
    
    
    
    1,924
    
    
    
    1,844Depreciation and amortization
    
    
    2,766
    
    
    
    2,078
    
    
    
    5,227
    
    
    
    4,110Interest expense
    
    
    2,369
    
    
    
    2,183
    
    
    
    4,554
    
    
    
    4,431Total expenses
    
    
    8,993
    
    
    
    7,226
    
    
    
    17,055
    
    
    
    14,388OTHER INCOME:Gain on extinguishment of debt
    
    
    1,849
    
    
    
    
    
    
    
    1,849
    
    
    
    Total other income
    
    
    1,849
    
    
    
    
    
    
    
    1,849
    
    
    
    Net loss from continuing operations before deferred income tax
benefit and minority interest
    
    
    (930
    )
    
    
    (2,108
    )
    
    
    (3,341
    )
    
    
    (4,254
    )Deferred income tax benefit
    
    
    1,218
    
    
    
    
    
    
    
    1,218
    
    
    
    Net income (loss) from continuing operations before minority interest
    
    
    288
    
    
    
    (2,108
    )
    
    
    (2,123
    )
    
    
    (4,254
    )Minority interest (share from continuing operations)
    
    
    (38
    )
    
    
    267
    
    
    
    283
    
    
    
    535Net income (loss) from continuing operations
    
    
    250
    
    
    
    (1,841
    )
    
    
    (1,840
    )
    
    
    (3,719
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (494
    )
    
    
    (65
    )
    
    
    (1,036
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    22,349
    
    
    
    2,460Deferred income tax expense
    
    
    (8,196
    )
    
    
    
    
    
    
    (8,196
    )
    
    
    Minority interest
    
    
    1,093
    
    
    
    62
    
    
    
    (1,875
    )
    
    
    (177
    )(Loss) income from discontinued operations
    
    
    (7,103
    )
    
    
    (432
    )
    
    
    12,213
    
    
    
    1,247Net (loss) income
    
    $
    (6,853
    )
    
    $
    (2,273
    )
    
    $
    10,373
    
    
    $
    (2,472
    )Basic and diluted per share data:Net income (loss) from continuing operations
    
    $
    0.18
    
    
    $
    (1.25
    )
    
    $
    (1.32
    )
    
    $
    (2.50
    )(Loss) income from discontinued operations
    
    
    (5.11
    )
    
    
    (0.29
    )
    
    
    8.78
    
    
    
    0.84Net (loss) income
    
    $
    (4.93
    )
    
    $
    (1.54
    )
    
    $
    7.46
    
    
    $
    (1.66
    )Basic weighted average shares used
    
    
    1,390,488
    
    
    
    1,476,363
    
    
    
    1,391,289
    
    
    
    1,487,891
  4




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AMERICAN SPECTRUM REALTY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
  AdditionalCommon
    
    
    Common
    
    
    Paid-In
    
    
    Accumulated
    
    
    TreasuryShares
    
    
    Stock
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    Total EquityBalance, January 1, 2006
    
    
    1,598,615
    
    
    $
    16
    
    
    $
    46,367
    
    
    $
    (34,889
    )
    
    $
    (2,480
    )
    
    $
    9,014Exercise of stock options (unaudited)
    
    
    5,624
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    63Common stock repurchase (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )
    
    
    (177
    )Stock-based compensation (unaudited)
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    35Conversion of operating partnership
units
to common stock (unaudited)
    
    
    485
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,373
    
    
    
    
    
    
    
    10,373Balance, June 30, 2006 (unaudited)
    
    
    1,604,724
    
    
    $
    16
    
    
    $
    46,484
    
    
    $
    (24,516
    )
    
    $
    (2,657
    )
    
    $
    19,327
  5




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AMERICAN SPECTRUM REALTY, INC
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   Six Months Ended June 30,2006
    
    
    2005(Revised)(See Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    10,373
    
    
    $
    (2,472
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    5,302
    
    
    
    5,604Deferred rental expense (income)
    
    
    19
    
    
    
    (111
    )Minority interest
    
    
    1,592
    
    
    
    (358
    )Deferred income tax expense
    
    
    6,978
    
    
    
    Gain on sales of real estate assets
    
    
    (22,349
    )
    
    
    (2,460
    )Gain on extinguishment of debt
    
    
    (1,849
    )
    
    
    Stock-based compensation expense
    
    
    35
    
    
    
    37Interest on receivable from principal stockholders
    
    
    
    
    
    
    (26
    )Amortization of note payable premiums, included in interest expense
    
    
    (220
    )
    
    
    (233
    )Changes in operating assets and liabilities:Decrease in tenant and other receivables
    
    
    269
    
    
    
    139Increase (decrease) in accounts payable
    
    
    216
    
    
    
    (64
    )Increase in prepaid and other assets
    
    
    (423
    )
    
    
    (696
    )Increase (decrease) in accrued and other liabilities
    
    
    317
    
    
    
    (156
    )Net cash provided by (used in) operating activities
    
    
    260
    
    
    
    (796
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds received from sales of real estate assets
    
    
    34,383
    
    
    
    4,921Capital improvements to real estate assets
    
    
    (1,932
    )
    
    
    (1,827
    )Net cash provided by investing activities:
    
    
    32,451
    
    
    
    3,094CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    2,250
    
    
    
    16,168Repayment of borrowings  property sales
    
    
    (26,165
    )
    
    
    (1,574
    )Repayment of borrowings  refinances
    
    
    (1,500
    )
    
    
    (14,459
    )Repayment of borrowings  scheduled payments
    
    
    (893
    )
    
    
    (1,235
    )Repayment of borrowing from principal stockholder and director
    
    
    
    
    
    
    (532
    )Note payments, litigation settlement
    
    
    (4,877
    )
    
    
    Repurchase of common stock
    
    
    (177
    )
    
    
    (400
    )Proceeds from exercise of stock options
    
    
    63
    
    
    
    Net cash used in financing activities:
    
    
    (31,299
    )
    
    
    (2,032
    )Increase in cash
    
    
    1,412
    
    
    
    266Cash and cash equivalents, beginning of period
    
    
    300
    
    
    
    589Cash and cash equivalents, end of period
    
    $
    1,712
    
    
    $
    855SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    4,725
    
    
    $
    5,681Cash paid for income taxes
    
    
    71
    
    
    
    88SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of operating partnership units into common stock
    
    $
    19
    
    
    $
    12Debt assumed in connection with acquisitions of real estate assets
    
    
    16,914
    
    
    
    Borrowings in connection with acquisitions of real estate assets
    
    
    16,452
    
    
    
    
  6




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##### Table of Contents



AMERICAN SPECTRUM REALTY, INC.
 
 Notes to Consolidated Condensed Financial Statements
 NOTE 1. DESCRIPTION OF BUSINESS
       7




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##### Table of Contents



NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
   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,
 8




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##### Table of Contents



INCOME TAXES
     NOTE 3. REAL ESTATE
 ACQUISITIONS
 2006.
   9




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##### Table of Contents



2005.
  DISPOSITIONS
 2006.
  2005.
    NOTE 4. DISCONTINUED OPERATIONS
 Real estate assets held for sale
  10




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##### Table of Contents



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 (loss) from discontinued operations.
    Three Months Ended June 30,Condensed Consolidated Statements of Operations
    
    2006
    
    
    2005Rental revenue
    
    $
    
    
    
    $
    1,798Total expenses
    
    
    
    
    
    
    2,292Net loss from discontinued operations
    
    
    
    
    
    
    (494
    )Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    1,093
    
    
    
    62Net loss from discontinued operations
    
    $
    (7,103
    )
    
    $
    (432
    )
 Six Months Ended June 30,Condensed Consolidated Statements of Operations
    
    2006
    
    
    2005Rental revenue
    
    $
    381
    
    
    $
    3,689Total expenses
    
    
    446
    
    
    
    4,725Net loss from discontinued operations before gain on sale
    
    
    (65
    )
    
    
    (1,036
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    2,460Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    (1,875
    )
    
    
    (177
    )Net income from discontinued operations
    
    $
    12,213
    
    
    $
    1,247
 11




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NOTE 5. NOTES PAYABLE, NET OF PREMIUMS
  June 30, 2006
    
    
    December 31, 2005Property (unless otherwise noted)
    
    Maturity Date
    
    
    Principal Balance
    
    
    Interest Rate
    
    
    Principal Balance
    
    
    Interest RateFixed Rate2470 Gray Falls
    
    
    12/29/2006
    
    
    
    2,076
    
    
    
    5.00
    %
    
    
    
    
    
    
    12000 Westheimer
    
    
    5/7/2007
    
    
    
    449
    
    
    
    6.80
    %
    
    
    452
    
    
    
    6.80
    %Pacific Spectrum
    
    
    6/10/2009
    
    
    
    5,536
    
    
    
    8.02
    %
    
    
    5,571
    
    
    
    8.02
    %1501 Mockingbird
    
    
    6/30/2009
    
    
    
    310
    
    
    
    6.00
    %
    
    
    
    
    
    
    6430 Richmond Atrium
    
    
    6/30/2009
    
    
    
    741
    
    
    
    5.50
    %
    
    
    
    
    
    
    6420 Richmond Atrium
    
    
    7/1/2009
    
    
    
    6,342
    
    
    
    5.50
    %
    
    
    
    
    
    
    Morenci Professional Park
    
    
    12/1/2009
    
    
    
    1,746
    
    
    
    6.60
    %
    
    
    1,786
    
    
    
    6.60
    %7700 Building
    
    
    7/10/2010
    
    
    
    33,323
    
    
    
    8.50
    %
    
    
    33,498
    
    
    
    8.50
    %Columbia
    
    
    7/1/2011
    
    
    
    2,250
    
    
    
    7.15
    %
    
    
    2,787
    
    
    
    10.50
    %Bristol Bay
    
    
    8/1/2011
    
    
    
    7,234
    
    
    
    7.58
    %
    
    
    7,276
    
    
    
    7.58
    %Technology
    
    
    8/1/2011
    
    
    
    7,488
    
    
    
    7.44
    %
    
    
    7,533
    
    
    
    7.44
    %Creekside
    
    
    12/1/2011
    
    
    
    6,112
    
    
    
    7.17
    %
    
    
    6,149
    
    
    
    7.17
    %16350 Park Ten Place
    
    
    5/11/2012
    
    
    
    4,668
    
    
    
    7.45
    %
    
    
    4,694
    
    
    
    7.45
    %16360 Park Ten Place
    
    
    5/11/2012
    
    
    
    3,657
    
    
    
    7.45
    %
    
    
    3,678
    
    
    
    7.45
    %2855 Mangum
    
    
    5/11/2012
    
    
    
    2,695
    
    
    
    7.45
    %
    
    
    
    
    
    
    2855 Mangum
    
    
    5/11/2012
    
    
    
    1,612
    
    
    
    6.00
    %
    
    
    
    
    
    
    6430 Richmond Atrium
    
    
    5/11/2012
    
    
    
    2,262
    
    
    
    7.45
    %
    
    
    
    
    
    
    Southwest Pointe
    
    
    6/1/2012
    
    
    
    2,838
    
    
    
    7.33
    %
    
    
    2,855
    
    
    
    7.33
    %12000 Westheimer
    
    
    8/11/2012
    
    
    
    3,071
    
    
    
    6.80
    %
    
    
    3,090
    
    
    
    6.80
    %16350 Park Ten Place
    
    
    8/11/2012
    
    
    
    515
    
    
    
    7.45
    %
    
    
    518
    
    
    
    7.45
    %16360 Park Ten Place
    
    
    8/11/2012
    
    
    
    404
    
    
    
    7.45
    %
    
    
    406
    
    
    
    7.45
    %11500 Northwest Freeway
    
    
    6/1/2014
    
    
    
    4,295
    
    
    
    5.93
    %
    
    
    4,323
    
    
    
    5.93
    %11500 Northwest Freeway
    
    
    6/1/2014
    
    
    
    310
    
    
    
    5.93
    %
    
    
    312
    
    
    
    5.93
    %5850 San Felipe
    
    
    8/1/2014
    
    
    
    5,378
    
    
    
    5.65
    %
    
    
    5,415
    
    
    
    5.65
    %Northwest Corporate Center
    
    
    8/1/2014
    
    
    
    5,633
    
    
    
    6.26
    %
    
    
    5,667
    
    
    
    6.26
    %6677 North Gessner Road
    
    
    9/1/2014
    
    
    
    8,600
    
    
    
    5.32
    %
    
    
    
    
    
    
    8100 Washington
    
    
    2/22/2015
    
    
    
    2,313
    
    
    
    5.59
    %
    
    
    2,329
    
    
    
    5.59
    %8300 Bissonnet
    
    
    5/1/2015
    
    
    
    4,753
    
    
    
    5.51
    %
    
    
    4,758
    
    
    
    5.51
    %1501 Mockingbird
    
    
    7/1/2015
    
    
    
    3,350
    
    
    
    5.28
    %
    
    
    
    
    
    
    5450 Northwest Central
    
    
    9/1/2015
    
    
    
    2,772
    
    
    
    5.38
    %
    
    
    2,791
    
    
    
    5.38
    %800/888 Sam Houston Parkway
    
    
    12/29/2015
    
    
    
    4,368
    
    
    
    6.25
    %
    
    
    4,400
    
    
    
    6.25
    %2401 Fountainview
    
    
    3/1/2016
    
    
    
    12,715
    
    
    
    5.82
    %
    
    
    
    
    
    
    Corporate  Secured
    
    
    10/1/2008
    
    
    
    2,000
    
    
    
    6.83
    %
    
    
    2,000
    
    
    
    6.83
    %Corporate  Unsecured
    
    
    9/30/2006
    
    
    
    9
    
    
    
    7.15
    %
    
    
    60
    
    
    
    7.15
    %Subtotal
    
    $
    151,825
    
    
    
    
    
    
    $
    112,348Variable RateCorporate  Unsecured
    
    
    7/27/2006
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    8.25
    %Corporate  Unsecured
    
    
    5/31/2008
    
    
    
    200
    
    
    
    8.75
    %
    
    
    200
    
    
    
    8.25
    %Subtotal
    
    $
    200
    
    
    
    
    
    
    $
    295Loan Premiums
    
    
    
    
    
    
    1,680
    
    
    
    
    
    
    
    1,900Total
    
    $
    153,705
    
    
    
    
    
    
    $
    114,543
    12




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13




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NOTE 6. NOTES PAYABLE, LITIGATION SETTLEMENT
     14




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NOTE 7. GAIN ON EXTINGUISHMENT OF DEBT
  NOTE 8. MINORITY INTEREST
   NOTE 9. REPURCHASE OF COMMON STOCK
        15




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##### Table of Contents



NOTE 10. STOCK-BASED COMPENSATION
    Pro Forma Information under SFAS No. 123
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (2,273
    )
    
    $
    (2,472
    )Deduct: Employee compensation
expense for stock option grants
under fair value method, net of
related tax effects
    
    
    (23
    )
    
    
    (42
    )Pro forma net loss
    
    $
    (2,296
    )
    
    $
    (2,514
    )Per share data:Basic and diluted, as reported
    
    $
    (1.54
    )
    
    $
    (1.66
    )Basic and diluted, pro-forma
    
    $
    (1.56
    )
    
    $
    (1.69
    )
 Stock Options
   16




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##### Table of Contents



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
    
    
    $
    23.84Granted (1)
    
    
    7,500
    
    
    $
    18.25Forfeited
    
    
    (1,125
    )
    
    $
    43.54Exercised
    
    
    (5,624
    )
    
    $
    11.23
    
    
    $
    58,479Outstanding on June 30, 2006
    
    
    40,626
    
    
    $
    24.01
    
    
    $
    245,440Exercisable as of June 30, 2006
    
    
    30,314
    
    
    $
    27.38
    
    
    $
    159,503
 
 (1)
    
    The exercise price of the stock options granted was equal to the fair market value on the date
of grant.  Weighted Average
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    AverageExercise
    
    Number
    
    Contractual
    
    ExercisePrice
    
    Outstanding
    
    Life
    
    Price$8.10 - $12.20
    
    
    15,626
    
    
    7.5 years
    
    $
    10.49$18.25 - $27.16
    
    
    18,125
    
    
    6.6 years
    
    $
    22.00$60.00 - $60.00
    
    
    6,875
    
    
    5.3 years
    
    $
    60.00
  WeightedRange of
    
    
    
    
    
    AverageExercise
    
    Number
    
    ExercisePrice
    
    Exercisable
    
    Price$8.10 - $12.20
    
    
    10,938
    
    
    $
    11.08$18.25 - $27.16
    
    
    12,500
    
    
    $
    23.69$60.00 - $60.00
    
    
    6,875
    
    
    $
    60.00
 17




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##### Table of Contents



Weighted AverageGrant DateNonvested Shares
    
    Shares
    
    Fair ValueNonvested at January 1, 2006
    
    
    10,000
    
    
    $
    10.69Granted
    
    
    7,500
    
    
    
    10.10Vested
    
    
    (7,188
    )
    
    
    7.49Forfeited
    
    
    
    
    
    
    Nonvested at June 30, 2006
    
    
    10,312
    
    
    $
    8.33
  Restricted Stock
  NOTE 11. RELATED PARTY TRANSACTIONS
      18




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NOTE 12. SEGMENT INFORMATION
   19




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##### Table of Contents



Shopping
    
    
    
    
    
    PropertyThree Months Ended June 30,
    
    Office
    
    Industrial
    
    Center
    
    Other
    
    Total2006Rental revenue
    
    $
    5,538
    
    
    $
    500
    
    
    $
    92
    
    
    $
    10
    
    
    $
    6,140Property operating expenses
    
    
    2,658
    
    
    
    176
    
    
    
    19
    
    
    
    1
    
    
    
    2,854Net operating income (NOI)
    
    $
    2,880
    
    
    $
    324
    
    
    $
    73
    
    
    $
    9
    
    
    $
    3,286Real estate held for investment, net
    
    $
    160,454
    
    
    $
    13,239
    
    
    $
    1,564
    
    
    $
    34
    
    
    $
    175,2912005Rental revenue
    
    $
    4,265
    
    
    $
    573
    
    
    $
    72
    
    
    
    
    
    
    $
    4,910Property operating expenses
    
    
    1,873
    
    
    
    149
    
    
    
    11
    
    
    
    8
    
    
    
    2,041Net operating income (NOI)
    
    $
    2,392
    
    
    $
    424
    
    
    $
    61
    
    
    $
    (8
    )
    
    $
    2,869Real estate held for investment, net
    
    $
    112,520
    
    
    $
    14,221
    
    
    $
    1,598
    
    
    $
    37
    
    
    $
    128,376
 Shopping
    
    
    
    
    
    PropertySix Months Ended June 30,
    
    Office
    
    Industrial
    
    Center
    
    Other
    
    Total2006Rental revenue
    
    $
    10,572
    
    
    $
    969
    
    
    $
    163
    
    
    $
    13
    
    
    $
    11,717Property operating expenses
    
    
    4,971
    
    
    
    330
    
    
    
    45
    
    
    
    4
    
    
    
    5,350Net operating income (NOI)
    
    $
    5,601
    
    
    $
    639
    
    
    $
    118
    
    
    $
    (9
    )
    
    $
    6,367Real estate held for investment, net
    
    $
    160,454
    
    
    $
    13,239
    
    
    $
    1,564
    
    
    $
    34
    
    
    $
    175,2912005Rental revenue
    
    $
    8,590
    
    
    $
    1,150
    
    
    $
    137
    
    
    
    
    
    
    $
    9,877Property operating expenses
    
    
    3,638
    
    
    
    332
    
    
    
    18
    
    
    
    15
    
    
    
    4,003Net operating income (NOI)
    
    $
    4,952
    
    
    $
    818
    
    
    $
    119
    
    
    $
    (15
    )
    
    $
    5,874Real estate held for investment, net
    
    $
    112,520
    
    
    $
    14,221
    
    
    $
    1,598
    
    
    $
    37
    
    
    $
    128,376
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESTotal revenues for reportable segments
    
    $
    6,140
    
    
    $
    4,910
    
    
    $
    11,717
    
    
    $
    9,877Other revenues
    
    
    74
    
    
    
    208
    
    
    
    148
    
    
    
    257Total consolidated revenues
    
    $
    6,214
    
    
    $
    5,118
    
    
    $
    11,865
    
    
    $
    10,134NET LOSSNOI for reportable segments
    
    $
    3,286
    
    
    $
    2,869
    
    
    $
    6,367
    
    
    $
    5,874Unallocated amounts:Interest and other income
    
    
    74
    
    
    
    208
    
    
    
    148
    
    
    
    257Corporate general and administrative expenses
    
    
    (1,004
    )
    
    
    (924
    )
    
    
    (1,924
    )
    
    
    (1,844
    )Depreciation and amortization
    
    
    (2,766
    )
    
    
    (2,078
    )
    
    
    (5,227
    )
    
    
    (4,110
    )Interest expense
    
    
    (2,369
    )
    
    
    (2,183
    )
    
    
    (4,554
    )
    
    
    (4,431
    )Gain on extinguishment of debt
    
    
    1,849
    
    
    
    
    
    
    
    1,849
    
    
    
    Net loss from
continuing
operations before
deferred income
taxes and minority
interest
    
    $
    (930
    )
    
    $
    (2,108
    )
    
    $
    (3,341
    )
    
    $
    (4,254
    )
 June 30,2006
    
    
    2005ASSETSTotal assets for reportable segments
    
    $
    175,291
    
    
    $
    128,376Real estate held for sale
    
    
    
    
    
    
    39,430Cash and cash equivalents
    
    
    1,712
    
    
    
    855Tenant and other receivables, net
    
    
    357
    
    
    
    508Deferred rent receivable
    
    
    1,226
    
    
    
    1,200Deposits held in escrow
    
    
    1,780
    
    
    
    Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    9,670
    
    
    
    7,735Total consolidated assets
    
    $
    194,036
    
    
    $
    182,104
 NOTE 13. COMMITMENTS AND CONTINGENCIES
   20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
     CRITICAL ACCOUNTING POLICIES
   
    
    The Board of Directors has concluded that it is not in the best interests 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.In May 2006, the Companys stockholders approved an amendment to the Companys Articles of
Incorporation, which removed a provision restricting the ability of stockholders to acquire shares in excess of certain ownership limitations. This provision has been included in the
Articles to preserve the Companys ability to elect to be taxed as a REIT in the future,
since one of the requirements of REIT status is that not more than 50% of a REITs equity
securities may be held
 22




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##### Table of Contents



by 5 or fewer stockholders. The removal of this restriction effectively precludes the
Company from making an election to be taxed as a REIT. (A REIT typically is not subject to
federal income taxation of its net income, provided applicable income tax requirements are
satisfied). Since its inception, the Company has been taxed as a C corporation.The Companys income tax expense and benefit recognized during the three months ended June
30, 2006 was based on operating results for the six months ended June 30, 2006. Due to the
uncertainty of whether the Company would elect REIT status and due to the uncertainly of
gains and losses that would be recognized on property sales, no tax provision was recorded
during the three months ended March 31, 2006 and interim periods in prior years. (Factors
which contributed to the uncertainty of gains and losses that would be recognized on
property sales included the number of properties the Company would eventually sale during
the year, the sales price to be obtained on each sale, the timing of when the sale would
occur, and whether such sale would be part of a tax-deferred exchange or an outright sale
with full gain or loss recognition). With the removal in May 2006 of the uncertainty
relating to the Companys ability to elect REIT status, the Company determined that the tax
provision should be recorded during the second quarter.
    
    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
(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 and is 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.
 
 23




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##### Table of Contents



RESULTS OF OPERATIONS
 Discussion of the three months ended June 30, 2006 and 2005.
  Variance2006
    
    2005
    
    $
    
    %Rental revenue
    
    $
    6,140,000
    
    
    $
    4,910,000
    
    
    
    1,230,000
    
    
    
    25.1
    %Operating expenses:Property operating expenses
    
    
    2,854,000
    
    
    
    2,041,000
    
    
    
    813,000
    
    
    
    39.8
    %General and administrative
    
    
    1,004,000
    
    
    
    924,000
    
    
    
    80,000
    
    
    
    8.7
    %Depreciation and amortization
    
    
    2,766,000
    
    
    
    2,078,000
    
    
    
    688,000
    
    
    
    33.1
    %Interest expense
    
    
    2,369,000
    
    
    
    2,183,000
    
    
    
    186,000
    
    
    
    8.5
    %
 Rental revenue
 Property operating expenses
 General and administrative
 Depreciation and amortization
 Interest expense
 Deferred income taxes.
 24




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##### Table of Contents



Minority interest.
 Gain on extinguishment of debt.
 Discontinued operations
  Three Months Ended
    
    
    Three Months EndedCondensed Consolidated Statements of Operations
    
    June 30, 2006
    
    
    June 30, 2005Rental revenue
    
    $
    
    
    
    $
    1,798Total expenses
    
    
    
    
    
    
    2,292Net loss from discontinued operations before minority interest
    
    
    
    
    
    
    (494
    )Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    1,093
    
    
    
    62Net loss from discontinued operations
    
    $
    (7,103
    )
    
    $
    (432
    )
 Discussion of the six months ended June 30, 2006 and 2005.
  Variance2006
    
    2005
    
    $
    
    %Rental revenue
    
    $
    11,717,000
    
    
    $
    9,877,000
    
    
    
    1,840,000
    
    
    
    18.6
    %Operating expenses:Property operating expenses
    
    
    5,350,000
    
    
    
    4,003,000
    
    
    
    1,347,000
    
    
    
    33.7
    %General and administrative
    
    
    1,924,000
    
    
    
    1,844,000
    
    
    
    80,000
    
    
    
    4.3
    %Depreciation and amortization
    
    
    5,227,000
    
    
    
    4,110,000
    
    
    
    1,117,000
    
    
    
    27.2
    %Interest expense
    
    
    4,554,000
    
    
    
    4,431,000
    
    
    
    123,000
    
    
    
    2.8
    %
 Rental revenue
 Property operating expenses
 25




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##### Table of Contents



General and administrative
 Depreciation and amortization
 Interest expense
 Deferred income taxes.
 Minority interest.
 Gain on extinguishment of debt.
 Discontinued operations
 26




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##### Table of Contents



Six Months Ended
    
    Six Months EndedCondensed Consolidated Statements of Operations
    
    June 30, 2006
    
    June 30, 2005Rental revenue
    
    $
    381
    
    
    $
    3,689Total expenses
    
    
    446
    
    
    
    4,725Net loss from discontinued operations before gain
on sale, income tax expense and minority interest
    
    
    (65
    )
    
    
    (1,036
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    2,460Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    (1,875
    )
    
    
    (177
    )Net income from discontinued operations
    
    $
    12,213
    
    
    $
    1,247
 LIQUIDITY AND CAPITAL RESOURCES
   Six Months EndedJune 30,2006
    
    
    2005Non-Cash Charges:Depreciation and amortization
    
    $
    5,302
    
    
    $
    5,604Minority interest
    
    
    1,592
    
    
    
    Deferred rental expense
    
    
    19
    
    
    
    Net deferred income tax expense
    
    
    6,978
    
    
    
    Stock-based compensation expense
    
    
    35
    
    
    
    37Non-Cash Items:Amortization of loan premiums
    
    
    (220
    )
    
    
    (233
    )Deferred rental income
    
    
    
    
    
    
    (111
    )Minority interest
    
    
    
    
    
    
    (358
    )Interest on receivable from principal stockholders
    
    
    
    
    
    
    (26
    )
    27




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CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Less than
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-term debt (1)
    
    $
    152,025
    
    
    $
    2,533
    
    
    $
    8,786
    
    
    $
    41,411
    
    
    $
    99,295Capital expenditures (2)
    
    
    1,187
    
    
    
    1,187
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    153,212
    
    
    $
    3,720
    
    
    $
    8,786
    
    
    $
    41,411
    
    
    $
    99,295
 
   INFLATION
  FORWARD-LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 INTEREST RATES
     29




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ITEM 4. CONTROLS AND PROCEDURES
   30




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 Form 10-K.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Company Purchases of Equity Securities
 Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetPart of Publicly
    
    
    Be Purchased Under(1) Total Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsApril 1-30, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    May 1-31, 2006
    
    
    2,713
    
    
    
    18.78
    
    
    
    
    
    
    
    June 1-30, 2006
    
    
    5,969
    
    
    
    20.58
    
    
    
    
    
    
    
    Total
    
    
    8,682
    
    
    $
    20.02
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents shares purchased in open market transactions. Company Sales of Equity Securities
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Name of
    
    Number of
    
    Number ofNominee
    
    Votes For
    
    Votes WithheldTimothy R. Brown
    
    
    1,162,286
    
    
    
    6,995William J. Carden
    
    
    1,160,755
    
    
    
    8,525John N. Galardi
    
    
    1,161,844
    
    
    
    7,437William W. Geary, Jr.
    
    
    1,163,188
    
    
    
    6,092John F. Itzel
    
    
    1,161,291
    
    
    
    5,989Presley E. Werlein, III
    
    
    1,163,014
    
    
    
    6,266
 31




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##### Table of Contents



Number of
    
    Number of
    
    Number ofVotes For
    
    Votes Against
    
    Votes Abstaining1,161,606
    
    
    2,617
    
    
    
    5,055
  Number of
    
    Number of
    
    Number ofVotes For
    
    Votes Against
    
    Votes Abstaining937,724
    
    
    13,532
    
    
    
    8,506
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
 32




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##### Table of Contents



SIGNATURES
  AMERICAN SPECTRUM REALTY, INC.
 Date: August 8, 2006
    By:
    /s/ William J. CardenWilliam J. CardenChairman of the Board, President,

Chief Executive Officer and Acting

Chief Financial Officer Date: August 8, 2006
    By:
    /s/ G. Anthony EppolitoG. Anthony EppolitoVice President, Treasurer and Secretary

(Principal Accounting Officer) 33




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title31
    
    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
 34