UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q/A


Amendment No. 1





(Mark One)


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF


THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2010


OR


 ̈ 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)





State of Maryland

52-2258674(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)2401 Fountain View, Suite 510

Houston, Texas 77057

77057(Address of principal executive offices)

(Zip Code)


(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 x No  ̈





Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 Regulation 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files.  Yes  ̈ No  ̈





Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer”, “large accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):





Large accelerated filer  ̈  Accelerated filer  ̈   Non-accelerated filer  ̈   Smaller reporting company x





Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).  ̈ Yes   x No





As of August 6, 2010, 2,934,294 shares of Common Stock ($.01 par value) were outstanding.







EXPLANATORY NOTE





This Amendment No. 1 to the Quarterly Report on Form 10-Q of American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) for the three and six months ended June 30, 2010 and June 30, 2009 is being filed to account for the Company’s January 2010 Evergreen transaction as the acquisition of a business and to consolidate several variable interest entities (“VIE”) in which the Company is the primary beneficiary.





As discussed in Note 14, “Restatement,” of the notes to the accompanying Consolidated Condensed Financial Statements in this Form 10-Q/A, the correction of this error from previously reported information for the three and six months ended June 30, 2010 has resulted in a change in the Company’s Consolidated Condensed Financial Statements and related notes along with the related Management’s Discussion and Analysis of Financial Condition and Results of Operations discussion.





This amended Quarterly Report on Form 10-Q/A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission (the “SEC”).  In addition, in accordance with applicable SEC rules, this amended Quarterly Report on Form 10-Q/A includes updated certificates from our chief executive officer and chief financial officer as Exhibits 31.1, 31.2, 32.1 and 32.2.





TABLE OF CONTENTS





Page No.PART I
FINANCIAL INFORMATIONItem 1
Financial Statements

3Consolidated Condensed Balance Sheets at June 30, 2010 (unaudited) and December 31, 2009 (unaudited)

3Consolidated Condensed Statements of Operations for the three and six months ended June 30, 2010 and 2009 (unaudited)

4Consolidated Statement of Equity (Deficit) for the six months ended June 30, 2010 (unaudited)

5Consolidated Condensed Statements of Cash Flows for the three and six months ended June 30, 2010 and 2009 (unaudited)

6Notes to Consolidated Condensed Financial Statements

7Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations

26Item 4T
Controls and Procedures

35PART II
OTHER INFORMATIONItem 1
Legal Proceedings

35Item 2
Unregistered Sales of Equity Securities and Use of Proceeds

35Item 5
Exhibits

35




2


PART I.  FINANCIAL INFORMATION





ITEM 1.  FINANCIAL STATEMENTS




AMERICAN SPECTRUM REALTY, INC.


CONSOLIDATED CONDENSED BALANCE SHEETS


(Dollars in thousands, except share amounts)


(Unaudited)


June 30, 2010

(Restated)


December 31,

2009ASSETSReal estate held for investment (includes $322,049 from consolidated VIE’s at June 30, 2010)

$
585,556


$
251,336Accumulated depreciation (includes $208 from consolidated VIE’s at June 30, 2010)


(79,456
)


(72,404
)Real estate held for investment, net (includes $321,841 from consolidated VIE’s at June 30, 2010)


506,100



178,932Real estate held for sale


-



6,364Cash and cash equivalents


984



462Restricted cash (includes $3,371 from consolidated VIE’s at June 30, 2010)


4,363



992Deposits held in escrow for debt assumption


947



-Tenant and other receivables, net of allowance for doubtful accounts of $859 and $701, respectively (includes $262 from consolidated VIE’s at June 30, 2010)


1,576



891Deferred rents receivable


2,004



1,883Deferred tax asset


10,321



8,813Purchased intangibles subject to amortization


13,006



-Goodwill


4,003Investment in management company


4,000



4,000Investments in unconsolidated real estate assets from related parties


1,527



-Notes receivable from related parties


1,400



-Interest receivable from related parties


267



-Accounts receivable from related parties


2,090



-Account receivable from Evergreen


413



-Prepaid and other assets, net (includes $4,673 from consolidated VIE’s at June 30, 2010)


16,476



12,749Total Assets

$
569,477


$
215,086LIABILITIESLiabilities:Notes payable (includes $226,725 from consolidated VIE’s at June 30, 2010)

$
441,388


$
193,920Liabilities related to real estate held for sale


-



6,091Accounts payable (includes $3,227 from consolidated VIE’s at June 30, 2010)


9,352



5,070Liabilities related to insurance claims


1,367



1,474Accrued and other liabilities (includes $1,565 from consolidated VIE’s at June 30, 2010)


10,697



9,520Total Liabilities


462,804



216,075Commitments and Contingencies (Note 13):Non-controlling interest classified as temporary equity


-



3,962Equity (Deficit):American Spectrum Realty, Inc. stockholders’ (deficit) equity:Preferred stock, $.01 par value; authorized, 25,000,000 shares;  issued and outstanding, 55,172 and 55,172 shares, respectively


1



1Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 3,405,706 and 3,291,310 shares, respectively; outstanding, 2,934,294 and 2,819,898 shares, respectively


34



33Additional paid-in capital


49,058



48,546Accumulated deficit


(54,228
)


(52,472
)Treasury stock, at cost, 471,412 shares, respectively


(3,095
)


(3,095
)Total American Spectrum Realty, Inc. stockholders’ (deficit) equity


(8,230
)


(6,987
)Non-controlling interests


114,903



2,036Total Equity (Deficit)


106,673



(4,951
)Total Liabilities and Equity (Deficit)

$
569,477


$
215,086





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




3


AMERICAN SPECTRUM REALTY, INC.


CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


(Dollars in thousands, except for share and per share amounts)


(Unaudited)




Three Months Ended

June 30,


Six Months Ended

June 30,2010

(Restated)


2009


2010

(Restated)


2009REVENUES:Rental revenue

$
8,092


$
7,995


$
16,275


$
16,435Third party management and leasing revenue


1,202



24



2,166



41Interest and other income


13



19



77



27Total revenues


9,307



8,038



18,518



16,503EXPENSES:Property operating expense


3,910



3,979



7,535



7,872Corporate general and administrative


2,516



1,024



4,138



1,894Depreciation and amortization


4,075



3,698



7,836



7,295Interest expense


3,738



3,312



7,138



6,607Total expenses


14,239



12,013



26,647



23,668Loss from continuing operations before deferred income tax benefit


(4,932
)


(3,975
)


(8,129
)


(7,165
)Deferred income tax benefit


1,867



1,428



3,071



2,538Loss from continuing operations


(3,065
)


(2,547
)


(5,058
)


(4,627
)Discontinued operations:Income from operations


-



98



173



143Gain on sale of discontinued operations


-



-



4,315



-Income tax expense


-



(36
)


(1,641
)


(52
)Income from discontinued operations


-



62



2,847



91Net loss, including noncontrolling interests

$
(3,065
)

$
(2,485
)

$
(2,211
)

$
(4,536
)Plus: Net loss attributable to noncontrolling interests


889



292



455



542Net loss attributable to American Spectrum Realty, Inc.


(2,176
)


(2,193
)


(1,756
)


(3,994
)Preferred stock dividend


(60
)


(60
)


(120
)


(120
)Net loss attributable to American Spectrum Realty, Inc. common stockholders

$
(2,236
)

$
(2,253
)

$
(1,876
)

$
(4,114
)Basic and diluted per share data:Loss from continuing operations attributable to American Spectrum Realty, Inc. common stockholders

$
(0.74
)

$
(0.80
)

$
(1.30
)

$
(1.45
)Income from discontinued operations attributable to American Spectrum Realty, Inc. common stockholders


-



0.02



0.71



0.03Net loss attributable to American Spectrum Realty, Inc. common stockholders

$
(0.74
)

$
(0.78
)

$
(0.59
)

$
(1.42
)Basic and diluted weighted average shares used


2,930,461



2,814,064



2,892,329



2,804,698Amounts attributable to American Spectrum Realty, Inc. common stockholders:Loss from continuing operations

$
(2,176
)

$
(2,248
)

$
(3,767
)

$
(4,075
)Income from discontinuing operations

$
-


$
55


$
2,011


$
81Net loss

$
(2,236
)

$
(2,253
)

$
(1,876
)

$
(4,114
)





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




4


AMERICAN SPECTRUM REALTY INC.


CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)


(In thousands, except share amounts)





Preferred

Shares


Common

Shares


Non-

controlling

Interests


Pre-

ferred

Stock


Common

Stock


Additional

Paid-In

Capital


Accum-

ulated

Deficit


Treasury

Stock


Total

Equity

(Deficit)Balance, December 31, 2009 (audited)


55,172



1,645,655


$
2,036


$
1


$
16


$
48,563


$
(52,472
)

$
(3,095
)

$
(4,951
)Issuance of one-for-one stock split






1,645,655



-



-



18



(18
)


-



-



-Issuance of common stock






11,500



-



-



-



-



-



-



-Conversion of operating partnership units to common stock






102,896



(211
)


-



-



211



-



-



-Issuance of operating partnership units










12,315



-



-



-



-



-



12,315Consolidation of VIE’s










98,346



-



-



-



-



-



98,346Non-controlling interests in acquired properties










1,318



-



-



-



-



-



1,318Acquisition of non-controlling interest in the operating partnership










(20
)


-



-



-



-



-



(20
)Reclassification of non-controlling interest from temporary equity










3,962



-



-



-



-



-



3,962Reclassification of non-controlling interest to additional paid-in capital










(370
)


-



-



370



-



-



-Repurchase of non-controlling interest in Consolidated partnership










(1,785
)


-



-



-



-



-



(1,785
)Distributions to non-controlling interests










(233
)


-



-



-



-



-



(233
)Non-controlling interests share of loss










(455
)


-



-



-



-



-



(455
)Preferred stock dividends










-



-



-



(120
)


-



-



(120
)Stock-based compensation










-



-



-



52



-



-



52Net loss










-



-



-



-



(1,756
)


-



(1,756
)Balance, June 30, 2010 (unaudited)


55,172



3,405,706


$
114,903


$
1


$
34


$
49,058


$
(54,228
)

$
(3,095
)

$
106,673





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




5





AMERICAN SPECTRUM REALTY, INC


CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


(Dollars in thousands)





Six Months Ended June 30,2010

(Restated)


2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(2,211
)

$
(4,536
)Adjustments to reconcile net loss to net cash used in operatingactivities:Depreciation and amortization


7,836



7,519Gain on sale of real estate asset


(4,315
)


-Income tax benefit


(1,430
)


(2,486
)Deferred rental income


(119
)


(31
)Stock-based compensation expense


52



44Amortization of note payable premium, included in interest expense


-



(19
)Changes in operating assets and liabilities:Increase in tenant and other receivables


(100
)


(379
)Increase in related party receivables


(433
)


-Increase in accounts payable


956



569Decrease in prepaid and other assets


554



572Decrease in accrued and other liabilities


(1,063
)


(1,606
)Change in restricted cash


(98
)


-Net cash used in operating activities:


(371
)


(353
)CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds received from sale of real estate asset


10,166



-Capital improvements to real estate assets


(1,954
)


(1,500
)Real estate acquisition


(267
)


-Investments in unconsolidated real estate assets


(131
)


-Proceeds received related to insurance claims


-



2,700Payments for damages related to insurance claims


(107
)


(1,386
)Net cash provided by (used in) investing activities:


7,707



(186
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from borrowings


3,156



2,215Repayment of borrowings – property sales


(5,067
)


-Repayment of borrowings – refinances


-



(1,474
)Repayment of borrowings – other


(490
)


-Repayment of borrowings – scheduled payments


(2,027
)


(1,614
)Repurchase of preferred partnership interest


(1,785
)


-Acquisition of non-controlling interests in the operating partnership


(20
)


-Dividend payments to preferred stockholders


(182
)


(40
)Distributions to non-controlling interests


(399
)


-Net cash used in financing activities:


(6,814
)


(913
)Increase (decrease) in cash and cash equivalents


522



(1,452
)Cash and cash equivalents, beginning of period


462



2,092Cash and cash equivalents, end of period

$
984


$
640SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of operating partnership units to common stock

$
211


$
314Issuance of operating partnership units in connection with Evergreen acquisition


8,000



-Issuance of operating partnership units in connection with notes receivable and account receivable acquisition


2,081



-Issuance of operating partnership units in connection with real estate acquisitions


1,018



-Issuance of operating partnership units in connection with investment in unconsolidated real estate asset


1,266



-Debt assumed in connection with real estate acquisition


6,297



-Conversion of accounts payable to notes payable


426



-Financing in connection with investment in unconsolidated real estate asset


33



-Financing in connection with Evergreen acquisition


9,500



-SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest

$
7,997


$
6,797Cash paid for income taxes


257



60





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




6


AMERICAN SPECTRUM REALTY, INC.


Notes to Consolidated Condensed Financial Statements





NOTE 1.  DESCRIPTION OF BUSINESS





American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, 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 June 30, 2010, held an interest of 66.63% (consisting of the sole general partner interest and a limited partnership interest).  In January 2010, in connection with the Evergreen acquisition discussed below, the Operating Partnership issued 1,600,000 operating partnership units, which reduced the Company’s interest in the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January 31, 2010.  The number of operating partnership units issued in connection with the Evergreen acquisition is subject to adjustment as of December 31, 2010 (Also see Note 3).





In March 2010, the Company sold 5850 San Felipe, a 101,880 square foot office property located in Houston, Texas.  In June 2010, the Company acquired 2620-2630 Fountain View, a 125,000 square foot office property consisting of two buildings located in Houston, Texas, and a 55% partnership interest in Sabo Road, a 57,850 square foot self-storage property located in Houston, Texas.  The partnership interest acquired in Sabo Road consists of the sole general partnership interest and a limited partnership interest.  Also in June 2010, the Company acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot self-storage property located in San Antonio, Texas, which it has accounted for under the equity method of accounting as an unconsolidated investment.





As of June 30, 2010, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 31 properties, which consisted of 23 office buildings, five industrial properties, one retail property, one self-storage property and a parcel of land.  The 31 properties are located in five states.





American Spectrum Management Group, Inc., (“ASMG”) a wholly-owned subsidiary of the Operating Partnership, provides management and leasing services on the Company’s 31 properties.  ASMG also manages and leases 20 properties in Texas for third parties representing 846,592 square feet of office, retail and industrial space.





American Spectrum Realty Management, LLC, (“ASRM”) a wholly-owned subsidiary of the Operating Partnership, acquired the property management and asset management contracts held by Evergreen Realty Group, LLC and its affiliates in January 2010, which represent 80 separate assets.  The former Evergreen-managed properties, which consist of 5,051,240 square feet of office and industrial properties, 2,934 multi-family units, 12,098 self storage units consisting of 1,793,881 square feet, 3,206 student housing units consisting of 9,107 beds and nine assisting living facilities consisting of 776 beds, are all now under the management of ASRM.  This portfolio comprises properties located in 22 states – Alabama, Arizona, California, Florida, Georgia, Iowa, Idaho, Indiana, Kansas, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and Washington.  The acquisition of the management agreements from Evergreen gives the Company the ability to continue its expansion of its third-party management and leasing capabilities throughout the United States.  This acquisition has resulted in a significant change in the Company’s operations, including an increase in employees from 46 at December 31, 2009 to 258 at June 30, 2010.





The current credit crisis, related turmoil in the global financial system and the downturn in the United States economy has had an adverse impact on the Company’s liquidity and capital resources.  The credit crisis and the downturn in the economy has adversely affected the Company’s business in a number of ways, including effects on its ability to obtain new mortgages, to refinance current debt and to sell properties.




7


The Company expects to meet its short-term liquidity requirements for normal operating expenses from cash generated by operations and cash on hand.   The Company received net proceeds of approximately $5,200,000 from the March 2010 sale of 5850 San Felipe.  The proceeds were used to repurchase the preferred interest in the partnership that owned 5850 San Felipe, reduce accounts payable, debt and for other investments.   The Company anticipates generating proceeds from borrowing activities, additional property sales and/or equity offerings to provide additional funds for payments of accounts payables, consisting primarily of tenant improvements and capital improvements on properties.   As of June 30, 2010, accounts payable over 90 days totaled $5,233,165, of which $1,367,000 was related to Hurricane Ike expenses, the 2010 Evergreen acquisition and other business development costs.  Also, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed.  The Company anticipates meeting these obligations with the use of funds held in escrow by lenders, proceeds from borrowing activities, additional property sales and/or equity offerings.  There can be no assurance, however, that these activities will occur.  If these activities do not occur, the Company will not have sufficient cash to meet its obligations.





The Company has loans totaling $35,387,000, maturing over the next twelve months.  One of these loans, with a balance of $17,170,000, which matured in May 2010, contains two one-year extension options.  The extension options are contingent upon satisfaction of certain terms and conditions required by the lender.  The Company believes that it has met the extension criteria; however the lender has yet to approve the extension.  Most of the Company’s mortgage debt is not cross-collateralized.  The Company has four mortgage loans that are cross collateralized by a second property.   It is common for the Company to serve as a guarantor and/or indemnitor on its mortgage debt.  Because of uncertainties caused by the current credit crisis, the Company’s current debt level and the Company’s historical losses there can be no assurances as to the Company’s ability to obtain funds necessary for the refinancing of its maturing debts.  If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders.  If these refinancings or extensions do not occur, the Company will not have sufficient cash to meet its obligations.




NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





BASIS OF PRESENTATION





The accompanying consolidated condensed financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”).  Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.  The consolidated condensed financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods.  Such adjustments are considered to be of a normal recurring nature unless otherwise identified.  Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or for any future period.





The accompanying consolidated condensed financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.





The financial statements include the accounts of the Operating Partnership and all other subsidiaries of the Company.  All significant intercompany transactions, receivables and payables have been eliminated in consolidation.





The Company accounts for unconsolidated real estate investments using the equity method of accounting.  Accordingly, the Company’s share of earnings of these real estate investments is included in the consolidated results of operations.





For acquisitions of an interest in an entity, the Company evaluates the entity to determine if the entity is deemed a variable interest entity and, based on the variable interest, whether or not the Company is the primary beneficiary.




8


RECLASSIFICATIONS




Certain prior year balances have been reclassified to conform with the current year presentation.   Real estate designated as held for sale is presented as discontinued operations and the results of operations of these properties are included in income (loss) from discontinued operations.





In April 2010, the Company’s Board of Directors declared a stock split of one share of Common Stock for each share currently outstanding to shareholders of record at the close of business on April 30, 2010.  On May 7, 2010, each shareholder received one additional share of common stock for every outstanding share held.  Share and per share data and the operating partnership unit (“OP Unit”) exchange ratio in the consolidated financial statements and notes for all periods presented have been adjusted to reflect the stock split.





SEGMENT REPORTING





The Company operates as one business operating and reportable segment.





NEW ACCOUNTING PRONOUNCEMENTS





In August 2009, the Financial Accounting Standards Board (“FASB”) issued changes to fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. These changes became effective for the Company on October 1, 2009.  The adoption of these changes did not have a material impact on the Company’s consolidated results of operations and financial condition.





In June 2009, the FASB issued changes to the accounting for variable interest entities. These changes require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. These changes become effective for the Company on January 1, 2010.  The adoption of this guidance had an impact on the Company’s consolidated financial statements, see Note 4. “Variable Interest Entities” for details regarding the impact of adoption.





In May 2009, the FASB issued changes to accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued, otherwise known as “subsequent events.” Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these changes had no impact on the Company’s consolidated financial statements.  The Company has evaluated subsequent events through the date the accompanying financial statements were issued.




9


NOTES RECEIVABLE





The Company’s notes receivable are recorded at amortized cost, net of loan loss reserves (if any), and evaluated for impairment at each balance sheet date.  The amortized cost of a note receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan.  As of June 30, 2010, there was no loan loss reserve and the Company did not record any impairment losses related to notes receivable during the six months ended June 30, 2010.





STOCK-BASED COMPENSATION





Stock-based compensation expense beginning with the first quarter of 2006 included compensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the estimated grant date fair value. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the estimated grant-date fair value.  The Company is recognizing these compensation costs on a straight-line basis over the requisite service period of the award, which ranges from immediate vesting to vesting over a three-year period.





NON-CONTROLLING INTERESTS





Unit holders in the Operating Partnership (other than the Company) held a 33.37% and 11.61% partnership interest in the Operating Partnership, as limited partners, at June 30, 2010 and December 31, 2009, 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 two 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.





The Company also has three-single purpose limited partnerships, each of which owns an income-producing property, that are partially owned by third party investors.  The accounts of these partnerships are included in the accompanying consolidated financial statements of the Company.   The share of income or losses attributable to interests not owned by the Company is included as a component of non-controlling interest in the Company’s consolidated financial statements (Also see Note 9).





The Company also has variable interest entities (“VIE”) where it is the primary beneficiary for accounting purposes.  The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests.  See Note 4. “Variable Interest Entities”.





NET LOSS PER SHARE





Net loss per share is calculated based on the weighted average number of common shares outstanding.  The Company incurred net losses from continuing operations for the three and six months ended June 30, 2010 and June 30, 2009.  Stock options outstanding of 58,750 and 58,750 and OP Units (other than those held by the Company) outstanding of 2,967,281 and 744,982 (convertible into approximately 1,483,640 and 372,491 shares of common stock), at June 30, 2010 and June 30, 2009, respectively, have not been included in the Company’s net loss per share calculations for periods presented since their effect would be anti-dilutive.





INCOME TAXES





In May 2006, the State of Texas enacted a margin tax which became effective in 2008.  This margin tax required each of the Company’s limited partnerships and limited liability companies that operate in Texas to pay a tax of 1.0% on their “margin” as defined in the law, beginning in 2008 based on 2007 results.  The legislation revised the Texas franchise tax to create a new tax on virtually all Texas businesses.  The margin tax has not had a material effect on the Company’s income tax liability.




10


In June 2006, the FASB issued guidance regarding the uncertainty in income taxes recognized in an enterprise’s financial statements.  The guidance clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements.  There is a recognition threshold of more-likely–than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements.




As of June 30, 2010, the Company had unrecognized tax benefits of approximately $133,000, all of which would affect our effective tax rate if recognized.  The Company does not expect that the amounts of unrecognized tax benefits will change significantly within the next 12 months.  The Company’s policy is to recognize interest related to any unrecognized tax benefits as interest expense and penalties as operating expenses.  There are no significant penalties or interest accrued at June 30, 2010.  The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.  The Company’s federal and state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2006 through 2009.





BUSINESS COMBINATIONS




The Company applies the provisions of FASB ASC Topic 805 to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights. These provisions require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and require expensing of most transaction and restructuring costs. The Company determines whether acquisitions should be accounted for as a business combination.  This policy applies to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights.





The Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date.  We utilize third-party valuation companies to help us determine certain fair value estimates used for assets and liabilities.





Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships.  The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to below market lease values are included in accrued and other liabilities in the accompanying consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.





While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.




11




VARIABLE INTEREST ENTITIES




When we obtain an economic interest in an entity, we evaluate the entity to determine if it is deemed a VIE and, if so, whether we are deemed to be the primary beneficiary and are therefore required to consolidate the entity.  Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE under current authoritative accounting guidance, and to establish whether we have any variable interests in the VIE.  We then compare our variable interests, if any, to those of the other venture partners to identify the party that is exposed to the majority of the VIE’s expected losses, expected residual returns, or both.  We use this analysis to determine which VIE’s should be consolidated for financial accounting purposes.   The comparison uses both qualitative and quantitative analytical techniques that may involve the use of a number of assumptions about the amount and timing of future cash flows.




Upon de-consolidation of a VIE, we will disclose the following:




·
the amount of any gain or loss recognized as the result of removal of the VIE’s assets, liabilities, and equity from our balance sheet;


·
the portion of any gain or loss related to the re-measurement to fair value of any retained investment in the VIE being derecognized;


·
the financial statement line item where the gain or loss relating to de-consolidation of the VIE is de-consolidated;


·
the nature of our continued involvement (if any) with the former VIE or the entity acquiring the VIE after de-consolidation, and;


·
whether the de-consolidation transaction occurs with a related party or if the transaction will cause the VIE to be a related party after de-consolidation.




NOTE 3.  ACQUISITION AND DISPOSITION ACTIVITIES





Acquisition of Property Management and Asset Management Contracts





In January 2010, the Company acquired the property management and asset management contracts held by Evergreen Realty Group, LLC and affiliates ("Evergreen") for a total of approximately 80 separate properties, pending receipt of all required approvals for the acquisition; until such approvals are received, the Company is managing the properties and assets under subcontract from Evergreen.  The Company also acquired from Evergreen (i) Evergreen's interest as the manager of limited liability companies which have invested in 27 of the managed properties (in eight of which it has also acquired an equity interest); (ii) Evergreen's interest as the general partner of limited partnerships which have invested in four of the managed properties (in none of which it acquired an equity interest), and (iii) direct tenant-in-common interests in two properties.  The Evergreen-managed properties consist of 5,051,240 square feet of office and industrial properties, 2,934 multi-family units, 12,098 self storage units consisting of 1,793,881 square feet, 3,206 student housing units consisting of 9,107 beds and nine assisting living facilities consisting of 776 beds.  The purchase price is subject to adjustment after December 31, 2010, based on the revenues generated by the property management and asset management contracts during 2010 and certain costs incurred.  See Note 14. “Restatement” for additional information regarding the Evergreen acquisition.





The Company focuses on acquisition candidates that build upon its national property management portfolio.  The acquisition of the Evergreen property management and property management contracts significantly increased the Company’s third party management presence in the continental United States.  The allocation of the purchase price for these assets is as follows:




12





Remaining


FairAsset Class

Useful Life


Value(in thousands)Tangible Assets:Fractional Real Estate Interests

Various


$
375Furniture, fixtures and equipment

Various



148Total tangible assets acquired





523Intangible Assests:Property management contracts


12



13,474Goodwill, including assembled workforce


-



4,003Total intangible assets acquired






17,477Total purchase price





$
18,000




The goodwill identified as part of the acquisition relates to the value the Company believes it gained from the synergies of having a management presence in approximately 22 states.  The Company believes these synergies will afford it the opportunity to actively pursue its policy of growing its portfolio of owned properties through opportunistic investments in well-located properties where cost effective enhancements combined with effective leasing and management strategies, can improve the long term values and economic returns of those properties.  The Company also believes the goodwill acquired will allow it to expand its third party management and transaction revenues.  The Company expects the entire amount of goodwill to be deductible for tax purposes over the tax amortization period of 15 years.




The consideration paid for the acquisition of the Evergreen property management and asset management contracts is as follows:




FairConsideration

Value(in thousands)Promissory Note

$
9,500Issuance of 1.6 million operating partnership units


8,000Assumption of debt


500Total consideration

$
18,000




The Company completed the Evergreen acquisition by assuming $0.5 million of Evergreen payables, issuing 1.6 million OP units with redemption terms that are different from the Company's other OP Units (the "Evergreen OP Units") and issuing a $9.5 million promissory note.  The promissory note is an obligation of American Spectrum Realty Management, LLC, a subsidiary, which matures on December 31, 2019 and bears an annual interest rate of 5.0%.




The Evergreen purchase price was based on a multiple of the estimated revenues generated by the property management and asset management contracts during 2010 less certain costs incurred.  This purchase price is subject to a true-up adjustment based on actual results through December 31, 2010.  In addition, Evergreen has the option to exchange the Evergreen OP units for common stock or cash (at the election of the Company) at any time after June 30, 2011 at a rate that would convert the total proceeds to equal $8.0 million using the common stock price or the net asset value per share of the Company, whichever is higher, at December 31, 2010.




13




The following unaudited pro forma statement of operations for the three and six months ended June 30, 2010 has been prepared to give effect to the acquisition of assets and management contracts with the corresponding consolidation of VIE’s, as described in Note 4 - Variable Interest Entities, assuming that these events occurred on January 1, 2010. The pro forma statement of income is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been obtained had this transaction actually occurred at the beginning of the period presented, nor do they intend to be a projection of future results of operations. Reliable information to provide pro forma financial disclosure on the Evergreen acquisition for the three and six months ended June 30, 2009 is currently unavailable and impracticable to prepare.  Therefore, such pro forma financial information has not been included.




The pro forma information is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information, including without limitations, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of Evergreen’s tangible and intangible assets resulting from the acquisition plus consolidation of the VIE’s as if such consolidation had occurred as of January 1, 2010. The pro forma financial information does not include any synergies or operating cost reductions that may be achieved from the combined operations.





Pro forma statement of operations


(in thousands,unaudited)





Three Months Ended


Six Months EndedJune 30, 2010


June 30, 2010Total Revenue

$
17,242


$
27,079Total Expenses


(23,402
)


(36,493
)Net Income before Non-controlling Interest & Tax


(6,160
)


(9,414
)Discontinued Operations


-



2,847Deferred Tax Benefit


1,867



3,111Non-Controlling Interest


2,117



1,600Proforma net income

$
(2,176
)

$
(1,856
)





The accompanying financial statements include the operations of Evergreen and the consolidated VIE’s from the acquisition date and consolidation date in accordance with the Company’s business combination and VIE policies.  A summary of the effect on operations follows:





Evergreen component of the consolidated statement of operations


(in thousands, unaudited)





Three Months Ended


Six Months EndedJune 30, 2010


June 30, 2010Total Revenue

$
1,533


$
2,364Total Expenses


(2,140
)


(3,015
)Net Loss before Noncontrolling Interest & Tax


(607
)


(651
)Deferred Tax Benefit


240



256Non-Controlling Interest


89



98Evergreen component of net loss

$
(278
)

$
(297
)





Amortization expense for the three and six months ended June 30, 2010 was $0.3 and $0.5 million, respectively.  Amortization expense will be $1.2 million per year for the next five years ending December 31.




14


Property Acquisitions





On June 2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot self-storage property located in Houston, Texas.  The partnership interest acquired in Sabo Road consists of the sole general partnership interest and a limited partnership interest.  Also on June 2, 2010, the Company acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot self-storage property located in San Antonio, Texas, which it has accounted for under the equity method of accounting as an unconsolidated investment.  The acquisitions, which were acquired for a total purchase price of $1,681,670, were funded with the issuance of 300,949 OP Units and cash of $50,000.  Also see Note 11 – Related Party Transactions.





On June 30, 2010, the Company acquired 2620-2630 Fountain View, a 125,000 square foot office property, consisting of two adjacent buildings in Houston, Texas.  The acquisition was funded with the issuance of 102,834 OP Units, an equity contribution of $1,000,000 from a third party investor, the assumption of debt and cash.  The third party investor received a 49% interest in the single purpose consolidated limited partnership that owns the property in consideration for the equity contribution.





Property Dispositions





5850 San Felipe, a 101,880 square foot office property located in Houston, Texas was sold on March 31, 2010.  The sale generated proceeds of approximately $5,200,000.  The proceeds will be used to repurchase the preferred interest in the partnership that owned 5850 San Felipe, reduce debt, payables and for other investments.  The transaction generated a gain on sale before income tax expense of approximately $4,300,000.





See Note 4. “Variable Interest Entities” for additional information on the consolidated VIE’s.





NOTE 4.  VARIABLE INTEREST ENTITIES





The Company has identified multiple variable interest entities where it is the primary beneficiary for accounting purposes since (a) the Company has the power to direct the activities that most significantly impact the entity’s economic performance such as; sign and enter into leases; set, distribute and implement the capital budgets, or authority to refinance or sell the property within contractually defined limits, and (b) the ability to receive fees that are significant to the property and a track record of funding any deficit cash flows.  As a result, these entities were consolidated in the condensed consolidated financial statements, after eliminating intercompany transactions, and presenting the interests that are not owned by the Company as non-controlling interests in the condensed consolidated balance sheets.





During the first quarter of 2010, the Company consolidated one VIE in which it was determined to be the primary beneficiary.  The VIE owns a commercial property located in Ohio.





During the second quarter of 2010, the Company consolidated additional VIE’s, which own a total of 14 properties.





The entities being consolidated include one self storage property, two multifamily properties, three student living properties, and nine commercial properties.  The entities are generally self-financed through cash flows from property operations.





The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests.




15


The carrying amounts associated with these entities, after eliminating the effect of intercompany transactions, were as follows (in thousands):





VIE Amounts

June 30, 2010

(unaudited)AssetsRestricted Cash

$
3,371Receivables


262Fixed Assets, net of depreciation


321,841Other Assets


4,673Total assets

$
330,147LiabilitiesAccounts Payable

$
3,227Notes Payable


226,725Other Liabilities


1,565Total Liabilities

$
231,517VIE net carrying value

$
98,630




The carrying amounts associated with the additional VIE’s consolidated during the second quarter of 2010 after eliminating the effect of intercompany transactions were as follows (in thousands):





VIE Amounts

June 30, 2010

(unaudited)AssetsRestricted Cash

$
2,348Receivables


262Fixed Assets, net of depreciation


300,273Other Assets


3,705Total assets

$
306,588LiabilitiesAccounts Payable

$
3,147Notes Payable


211,559Other Liabilities


634Total Liabilities

$
215,340VIE net carrying value

$
91,248





At June 30, 2010, the liabilities in the above table are solely the obligations of the VIE’s and are not guaranteed by the Company. The Company does not have the ability to leverage the assets of the above identified VIE’s for the purpose of providing cash to the Company. The debt is solely secured by the properties of the VIE’s.





During the six months ended June 30, 2010, we did not provide to or receive loans from to the VIE’s that have been consolidated.  We do not believe we have significant exposure to losses related to the VIE’s.





See Note 3. “Acquisition and Disposition Activities” for additional information on the business combination.





NOTE 5.  INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ASSETS





In June 2010, the Company acquired 38.4% undivided interest in Loop 1604, a self-storage property located in San Antonio, Texas for a purchase price of $1,266,000, which consisting of OP Units and cash.   The property, which consists of 178,595 square feet, is secured by a mortgage loan with a balance of $4,367,000 at June 30, 2010.  The Company has accounted for the investment under the equity method of accounting.  Also see Note 11 – Related Party Transactions.





During 2010, the Company acquired ownership interests in American Spectrum REIT I, Inc. (“ASRI”) of $77,000 and fractional interests in other real estate assets of $184,000.




16


NOTE 6.  ACQUISITION OF NOTES RECEIVABLE AND ACCOUNT RECEIVABLE





In June 2010, the Company acquired two notes receivable and an account receivable with a total face amount of $2,080,883 from Evergreen Income and Growth REIT, LP (“EIGRLP”), whose general partner is Evergreen Income and Growth REIT, Inc. (“EIGRI”).  The acquisition was funded by the issuance of 428,680 OP Units.





The first note, in the amount of $1,000,000, bears interest at 12% per annum.  The note and accrued interest is payable on demand from Central Florida Self Storage Acquisitions, LLC.  The second note, in the amount of $400,000, bears interest at 10% per annum.  The note and accrued interest is payable on demand from ASRI.  Accrued and unpaid interest on the notes totaled $266,907 as of June 30, 2010.  The notes were acquired to ultimately acquire certain real estate assets in which the obligors on the notes have ownership interests.  The Company is not recognizing interest income on the notes.





The account receivable acquired, which totaled $413,877, is due from Evergreen.  The account receivable is related to organizational and offering costs paid in excess of the amounts established in EIGRI’s 2008 private placement agreement.  The Company anticipates the receivable from Evergreen will be offset against either its note payable to Evergreen or through a reduction in OP Units currently held by Evergreen in the first quarter of 2011.  Also see Note 11 – Related Party Transactions.





NOTE 7.  DISCONTINUED OPERATIONS





Real estate assets held for sale.





At December 31, 2009, 5850 San Felipe, a 101,882 square foot office property located in Houston, Texas, was classified as “Real estate held for sale.”  The property was sold on March 31, 2010.  No real estate assets were classified as held for sale by the Company at June 30, 2010.





The carrying amount of 5850 San Felipe at December 31, 2009 is summarized below (dollars in thousands):





Condensed Consolidated Balance Sheet

December 31,

2009Real estate

$
5,847Other


517Real estate assets held for sale

$
6,364Note payable

$
5,090Accounts payable


515Accrued and other liabilities


486Liabilities related to real estate held for sale

$
6,091





Net income from discontinued operations.





Income from discontinued operations of $2,847,000 for the six months ended June 30, 2010 includes the gain on sale of 5850 San Felipe and the property’s operating results through its disposition date of March 31, 2010.   Net income from discontinued operations of $62,000 and $91,000 for the three and six months ended June 30, 2009, respectively, represent the property’s operating results for the periods.





The condensed statements of operations of discontinued operations are summarized below (dollars in thousands):





Condensed Statements of Operations

Three Months Ended June 30,


Six Months Ended June 30,2010


2009


2010


2009Rental revenue

$
-


$
496


$
482


$
947Total expenses (1)


-



(398
)


(309
)


(804
)Income from discontinued operations before gain on sale and income tax expense


-



98



173



143Gain on sale of discontinued operations


-



-



4,315



-Income tax expense


-



(36
)


(1,641
)


(52
)Income from discontinued operations

$
-


$
62


$
2,847


$
91




17


(1) Includes interest expense of  $76 for the three months ended June 30, 2009 and interest expense of $75 and $152 for the six months ended June 30, 2010 and 2009, respectively.  Mortgage debt related to the property included in discontinued operations was individually secured.  As such, interest expense was based on the property’s respective debt.





NOTE 8.  NOTES PAYABLE, NET OF PREMIUM





The Company had the following notes payable outstanding as of June 30, 2010 and December 31, 2009 (dollars in thousands):





June 30, 2010


December 31, 2009Property (unless otherwise noted)

Maturity

Date

Principal

Balance


Interest Rate


Principal

Balance


Interest

RateFixed RatePacific Spectrum (1)

6/10/2010


5,205



8.02
%


5,248



8.02
%2620-2630 Fountain View (8)

7/31/2010


6,297



7.00
%


-



-Corporate – Secured

9/21/2010


890



8.75
%


890



8.75
%Northwest Spectrum

12/3/2010


750



8.75
%


750



8.75
%Corporate-Secured

12/4/2010


992



4.50
%


992



4.50
%Corporate-Unsecured (2)

2/19/2011


2,034



3.40
%


-



-Fountain View Place (3)

4/29/2011


1,099



10.00
%


1,423



10.00
%Corporate-Secured (4)

5/12/2011


950



8.75
%


-



-Sabo Road Self Storage

7/31/2011


1,999



7.42
%


-



-Bristol Bay

8/1/2011


6,851



7.58
%


6,899



7.58
%Technology

8/1/2011


7,091



7.44
%


7,131



7.44
%Creekside

12/1/2011


5,761



7.17
%


5,814



7.17
%Corporate-Unsecured (5)

5/1/2012


56



4.00
%


-



-16350 Park Ten Place

5/11/2012


4,431



7.45
%


4,466



7.45
%16360 Park Ten Place

5/11/2012


3,472



7.45
%


3,499



7.45
%2855 Mangum

5/11/2012


2,555



7.45
%


2,575



7.45
%2855 Mangum

5/11/2012


1,398



6.00
%


1,422



6.00
%6430 Richmond Atrium

5/11/2012


2,144



7.45
%


2,161



7.45
%Corporate-Unsecured (6)

5/31/2012


1,000



9.50
%


500



11.00
%Southwest Pointe

6/1/2012


2,688



7.33
%


2,710



7.33
%16350 Park Ten Place

8/11/2012


488



7.45
%


492



7.45
%16360 Park Ten Place

8/11/2012


383



7.45
%


386



7.45
%Corporate – Secured (9)

2/1/2013


1,950



5.50
%


1,950



7.50
%Corporate-Secured (4)

3/5/2013


946



8.75
%


-



-11500 Northwest Freeway

6/1/2014


4,049



5.93
%


4,079



5.93
%11500 Northwest Freeway

6/1/2014


292



5.93
%


295



5.93
%Morenci

7/1/2014


1,655



7.25
%


1,689



7.25
%Northwest Corporate Center

8/1/2014


5,326



6.26
%


5,370



6.26
%14741 Yorktown

9/1/2014


8,600



5.32
%


8,600



5.32
%8100 Washington

2/22/2015


2,180



5.59
%


2,196



5.59
%8300 Bissonnet

5/1/2015


4,496



5.51
%


4,527



5.51
%Corporate-Unsecured (5)

6/1/2015


302



5.00
%


-



-Corporate-Unsecured (5)

6/1/2015


59



5.00
%


-



-1501 Mockingbird

7/1/2015


3,217



5.28
%


3,239



5.28
%5450 Northwest Central

9/1/2015


2,608



5.38
%


2,631



5.38
%800/888 Sam Houston Parkway

12/29/2015


4,582



6.25
%


4,638



6.25
%2401 Fountain View

3/1/2016


12,045



5.82
%


12,139



5.82
%12000 Westheimer/2470 Gray Falls

1/1/2017


7,315



5.70
%


7,350



5.70
%6420 Richmond Atrium

6/5/2017


6,325



5.87
%


6,364



5.87
%7700 Irvine Center

8/1/2017


45,000



5.99
%


45,000



5.99
%Fountain View Place

4/29/2018


12,441



6.50
%


12,521



6.50
%Corporate-Secured (7)

12/31/2019


9,470



5.00
%


-



-Subtotal

$
191,392






$
169,946Variable RateBeltway Industrial (1)

5/9/2010


17,170



7.00
%


17,170



7.00
%Corporate – Unsecured (6)




-



-



500



6.00
%Northwest Spectrum

4/19/2012


2,908



2.90
%


3,013



2.90
%Windrose Plaza

4/19/2012


2,693



2.90
%


2,791



2.90
%Corporate – Unsecured

12/12/2013


500



6.00
%


500



6.00
%Subtotal

$
23,271






$
23,974ASR Notes Payable

Total

$
214,663






$
193,920VIE Notes Payable – See Note 4



$
226,725







-Balance Sheet Notes Payable

Total

$
441,388






$
193,920




18





(1)
The Company is currently negotiating extension terms with the lender.





(2)
In May 2010, the Company obtained financing for insurance premiums on its owned and managed properties.





(3)
In April 2010, the Company made a principal payment of $240,000 on the note and the lender extended the maturity date of the note to April 29, 2011.





(4)
Represents bank loans of $950,000 obtained in May 2010 and $1,000,000 obtained in March 2010.





(5)
Represents the conversion of accounts payables to promissory notes during the second quarter of 2010.





(6)
In May 2010, the Company refinanced two $500,000 notes which were due to mature on May 31, 2010 with a new loan in the amount of $1,000,000 with the same lender





(7)
Represents promissory note issued by the Company in January 2010 in connection with the Evergreen acquisition.





(8)
Represents mortgage debt the Company has agreed to assume from the seller of the property.  The Company is currently in the process of finalizing the loan documents with the lender, which is expected to include a five-year maturity extension and principal pay-down of $947,000, which was held in escrow at June 30, 2010.





(9)
In August 2010, the Company made a principal pay-down of $195,000 on the note and the lender extended the maturity date to February 1, 2013.





The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas.  The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement.  In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant.  If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.





NOTE 9.  NONCONTROLLING INTERESTS





Unit Holders in the Operating Partnership





In June 2010, 300,949 OP Units were issued in connection with the acquisition of a 55% interest in Sabo Road, a self storage property located in Houston, Texas and a 38.4% interest in Loop 1604, a self-storage property located in San Antonio, Texas.





In June 2010, 102,834 OP Units were issued in connection with the acquisition of 2620-2630 Fountain View, an office property located in Houston, Texas.





In June 2010, 428,680 OP Units were issued in connection with the acquisition of notes and account receivable totaling $2,080,883.





In March 2010, 102,896 shares of Common Stock were issued in exchange for OP Units.





In January 2010, the Company issued 1,600,000 OP Units in connection with the Evergreen acquisition.  Evergreen shall have the option to exchange the OP Units into common stock of the Company 90 days after December 31, 2010, at the rate of one share of common stock for each two OP Units, or if the Company so elects, cash in lieu of issuing common stock.  The number of OP Units issued was based on a common stock price of $10 per share (after effect of the one-for-one stock split), and is subject to adjustment on of December 31, 2010, based on the higher of the then-existing stock price of the Company’s shares or the Company’s net asset value per share.




19


During the six months ended June 30, 2010, 3,884 OP Units were redeemed for cash of approximately $20,000.





During 2009, 39,202 shares of Common Stock were issued in exchange for OP Units.





During 2009, 485 OP Units were redeemed for cash of approximately $2,000.





OP Units (other than those held by the Company) of 2,967,281 (exchangeable for approximately 1,483,640 shares of common stock) were outstanding as of June 30, 2010.  As of June 30, 2010, non-controlling interest in the Operating Partnership was $13,709,000.





Third Party Interests in Single Purpose Consolidated Limited Partnerships





On June 30 2010, a third party investor contributed $1,000,000 in return for a 49% limited partnership interest in the Company’s single purpose consolidated limited partnership that acquired 2620-2630 Fountain View.





On June 2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot self-storage property located in Houston, Texas.  The partnership interest acquired in Sabo Road consists of the sole general partnership interest and a limited partnership interest.   Non-controlling interest associated with the 45% interest not owned by the Company was $319,000 as of June 30, 2010.





On September 1, 2009, a third party purchased from the Company a 49% preferred interest in each of two single purpose limited partnerships for $4,000,000 (“Preferred Capital”).  Proceeds of $3,811,000, net of transaction costs, were received as a result of the sale.   Each of the limited partnerships owned an income-producing property in Houston, Texas.  These limited partnerships are required to distribute, monthly, an annual 12% cumulative, non-compounding return on the unredeemed Preferred Capital and a participation in the operating net cash flow of the limited partnerships.  The Company has a right to repurchase the preferred interests in each of the partnerships within five years for an amount equal to the remaining Preferred Capital plus a 15% annual internal rate of return.  On March 31, 2010, the Company sold 5850 San Felipe, one of the income-producing properties in which a preferred partnership interest was held by the third party.  In April 2010, the Company repurchased the preferred interest associated with 5850 San Felipe from the third party for $1,785,000.  Non-controlling interests related to the other consolidated partnership interest sold was $1,572,000 as of June 30, 2010.





Variable Interest Entities





The Company also has VIE’s where it is the primary beneficiary for accounting purposes.  The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests.  See Note 4. “Variable Interest Entities”.





The following represents the effects of changes in the Company’s equity related to non-controlling interests for the six months ended June 30, 2010 and 2009 (dollars in thousands):





Six Months Ended

June 30, 2010


Six Months Ended

June 30, 2009Net loss attributable to the Company

$
(1,546
)

$
(3,994
)Transfers from noncontrolling interestsIncrease in the Company’s paid-in capital on exchange of OP Units for shares of Common Stock

$
211


$
314Increase in the Company’s paid-in capital on reclassification of preferred interest from temporary equity

$
370



-Net transfers from noncontrolling interests

$
581


$
314Change from net loss attributable to the Company related to non-controlling interest transactions

$
(965
)

$
(3,680
)




20




There were no equity related changes to non-controlling interests for the three months ended June 30, 2010 and 2009.





NOTE 10.  STOCK-BASED COMPENSATION





The Company has in effect its Omnibus Stock Incentive Plan (the “Plan”), which is administered by the Board of Directors, and provides for the granting of incentive and non-qualified stock options, stock appreciation rights, restricted stock, performance units and performance shares.   The Board has reserved a total of 360,000 shares under the Plan.  As of June 30, 2010, 199,628 ASR shares were available for issuance to executive officers, directors or other key employees of the Company.





Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated on the grant date using the Black-Scholes option-pricing model.  The Company recognizes these compensation costs net of a forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award.





Total stock-based compensation expense recognized for the three months ended June 30, 2010 and 2009 amounted to $26,000, or $.01 per basic and diluted earnings per share and $23,000, or $.02 per basic and diluted earnings per share, respectively.  Total stock-based compensation expense recognized for the six months ended June 30, 2010 and 2009 amounted to $52,000, or $.02 per basic and diluted earnings per share and $44,000, or $.03 per basic and diluted earnings share, respectively.  Compensation expense is included in general and administrative expense in the Company’s consolidated condensed statement of operations for all periods presented.





Stock Options





No stock options have been granted since 2006.  All of the Company’s stock options are fully vested.  As of June 30, 2010, there was no unrecognized compensation cost related to stock options.  The Company has a policy of issuing new shares upon the exercise of stock options.  During the six months ended June 30, 2010, no options were exercised.





The following table summarizes activity and outstanding stock options under the plan:





Shares

Under Option


Weighted Average

Exercise Price


Aggregate

Intrinsic ValueOutstanding on January 1, 2010


58,750


$
11.97Granted


-



-Forfeited


-



-Exercised


-



-Outstanding on June 30, 2010


58,750


$
11.97


$
95,838Exercisable as of  June 30, 2010


58,750


$
11.97


$
95,838





The following table summarizes certain information for stock options, all of which are exercisable and outstanding on June 30, 2010:





Range of

Exercise

Price

Number

Exercisable

Weighted Average

Remaining

Contractual

Life

Weighted

Average

Exercise

Price$4.05 - $6.10


25,000

3.8 years

$
5.33$9.13 - $13.58


22,500

4.1 years

$
10.33$30.00 - $30.00


11,250

1.3 years

$
30.00




21


Restricted Stock





The Company issued a total of 11,500 shares of Common Stock to its officers, directors and certain key employees under the Plan during the six months ended June 30, 2010.  The restrictions on the shares issued lapse in three equal annual installments commencing on the first anniversary date of the issuance.  Compensation expense is recognized on a straight-line basis over the vesting period.





During the three months ended June 30, 2010 and 2009, compensation expense of $26,000 and $23,000, respectively, was recognized for restricted shares.  During the six months ended June 30, 2010 and 2009, compensation expense of $52,000 and $39,000, respectively, was recognized for restricted shares.  Recipients of restricted stock have the right to vote all shares, to receive and retain all cash dividends payable to holders of shares of record on or after the date of issuance and to exercise all other rights, powers and privileges of a holder of Company shares, with the exception that the recipient may not transfer the shares during the restriction period.





A summary of the status of the Company’s restricted stock awards as of January 1, 2010 and changes during the six months ended June 30, 2010 is presented below:





Restricted Stock Awards

Number of

Shares


Weighted Average Grant

Date Fair ValueNonvested at January 1, 2010


20,012


$
10.72Granted


11,500


$
11.55Vested


(8,500
)

$
11.50Forfeited


-



-Nonvested at June 30, 2010


23,012


$
10.84





As of June 30, 2010, there was $228,000 of unrecognized compensation cost related to unvested restricted stock awards, which are expected to be recognized over a remaining weighted-average restriction period of approximately 2.7 years.





NOTE 11.  RELATED PARTY TRANSACTIONS





The following transactions are related party transactions which may include amounts that were eliminated in the consolidation of VIE’s and controlled entities.





During the three and six months ended June 30, 2010, the Company recognized third party management fee revenues of $1,065,000 and $1,967,000, respectively, attributable to the former Evergreen managed properties.   The Company has a non-economic interest in many of the properties, held in most cases as the manager or general partner of entities which own tenant in common interests.





In June 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot self-storage property located in Houston, Texas.  The partnership interest acquired in Sabo Road consists of the sole general partnership interest and a limited partnership interest.  Also in June 2010, the Company acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot self-storage property located in San Antonio, Texas.  The acquisitions were acquired from ASRI for a total purchase price of $1,681,670, consisting of the 300,949 OP Units and cash of $50,000.  William J. Carden is a director and President of ASRI and Jonathan T. Brohard is a director and Vice President of ASRI.  Mr. Carden is Chief Executive Officer, Chairman of the Board, and a principal stockholder in the Company.  Mr. Brohard is President of ASRM.  The Company does not have any ownership interest in ASRI.





In June 2010, the Company acquired two notes receivable and an account receivable from EIGRLP with a total face amount of $2,080,883.  The acquisition was funded by the issuance of 428,680 OP Units.  Mr. Carden is a director and President of EIGRI, the general partner of EIGRLP. Mr. Brohard is a director and Vice President of EIGRI.   The Company does not have an ownership interest in EIRGI or EIGRLP


22





The first note, in the amount of $1,000,000, bears interest at 12% per annum.  The note and accrued interest is payable on demand from Central Florida Self Storage Acquisitions, LLC, an entity in which the Company has a non-economic tenant in common interest.  The second note, in the amount of $400,000, bears interest at 10% per annum.  The note and accrued interest is payable on demand from ASRI.  Accrued and unpaid interest on the notes totaled $266,907 as of June 30, 2010.  The notes were acquired to ultimately acquire certain real estate assets in which the obligors on the notes have ownership interests.  The Company is not recognizing interest income on the notes.





The account receivable acquired, which totaled $413,877, is due from Evergreen.  The account receivable is related to organizational and offering costs paid in excess of the amounts established in EIGRI’s 2008 private placement agreement.  The Company anticipates the receivable from Evergreen will be offset against either its note payable to Evergreen or through a reduction in OP Units currently held by Evergreen in the first quarter of 2011.





In May 2010, the Company obtained financing for insurance premiums on both its owned and third party managed properties of which $2,069,883 was attributable to the Evergreen property portfolio.   During the second quarter of 2010, the Company received $413,487 from these properties as payment on the premiums.  Unpaid amounts due to the Company from these properties were $1,656,396 as of June 30, 2010.





In March 2010, 160,266 OP Units were exchanged for 80,132 shares of Common Stock by the spouse of Mr. Carden and 45,529 OP Units were exchanged for 22,764 shares of Common Stock by an entity controlled by Mr. Carden.  In February 2009, Mr. Carden exchanged 78,406 OP Units for 39,202 shares of Common Stock.





On December 31, 2008, the Company issued a total of 55,172 shares of Series A Preferred Stock (“Preferred Stock”) to the following individuals: Mr. Carden, John N. Galardi, director and principal stockholder, and Timothy R. Brown, director.  Each share of Preferred Stock was sold for $29.00 and is entitled to annual dividends, payable quarterly, at an annual rate of 15%, and to a preference on liquidation equal to the following: (a) if on or prior to December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b) if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued and unpaid dividends or (y) the amount which would be paid on account of each share of common stock upon liquidation if each share of Preferred Stock had hypothetically been converted into one share of common stock.  The Preferred Stock is not required to be redeemed by the Company and the holders will have no right to require redemption. The Preferred Stock is redeemable at the option of the Company at any time after December 31, 2011. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.  At June 30, 2010, the Company had accrued and unpaid dividends on the Preferred Stock of $26,000.





The Company pays a guarantee fee to Mr. Carden, Mr. Galardi and CGS Real Estate Company, Inc., a company owned indirectly by Messrs. Carden and Galardi (“the Guarantors”), in consideration for their guarantees of certain obligations of the Company.  The Guarantors are paid an annual guarantee fee equal to between .25% and .75% (depending on the nature of the guarantee) of the outstanding balance as of December 31 of the guaranteed obligations (“Guarantee Fee”).  The Guarantee Fee is paid for a maximum of three years on any particular obligation.  The Guarantee fee paid for the 2009 year was $67,983.  The Company accrued $41,131 for the six months ended June 30, 2010 related to the Guarantee Fee for the 2010 year.





During 2009, the Company incurred professional fees of $184,800 to Thompson & Knight LLP, the law firm in which Mr. Brown is a partner.





During 2007, the Company entered into a lease agreement with Galardi Group for 15,297 square feet of office space at the Company’s 7700 Irvine Center property.  Mr. Galardi is a principal stockholder, director and officer of Galardi Group.  The lease commenced March 1, 2008 and has a five-year term.  The annual base rent due to the Company pursuant to the lease is $504,081 over the term of the lease.




23


NOTE 12.  PREFERRED STOCK





The Company is authorized to issue up to 25,000,000 shares of one or more classes or series of preferred stock with a par value of $.01 per share.





On December 30, 2008, the Company filed Articles Supplementary to its Articles of Incorporation, which authorized the issuance of 68,965 of Series A Preferred Stock (“Preferred Stock”).





On December 31, 2008, Company issued 55,172 shares of the Preferred Stock to Messrs. Carden, Galardi, and Brown (Also see Note 11 – Related Party Transactions).  Each share of Preferred Stock was sold for $29.00 and is entitled to annual dividends, payable quarterly, at an annual rate of 15%, and to a preference on liquidation equal to the following: (a) if on or prior to December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b) if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued and unpaid dividends or (y) the amount which would be paid on account of each share of common stock upon liquidation if each share of Preferred Stock had hypothetically been converted into one share of common stock.  The Preferred Stock is not required to be redeemed by the Company and the holders will have no right to require redemption. The Preferred Stock is redeemable at the option of the Company at any time after December 31, 2011. The shares were issued in a private transaction exempt from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.  At of June 30, 2010, the Company had accrued and unpaid dividends on the Preferred Stock of $26,000.





NOTE 13.  COMMITMENTS AND CONTINGENCIES





In February 2010, the Company filed a third party action against its prior insurance carrier, ACE American Insurance Company, in Harris County, Texas, seeking payment under its insurance policy for the damage to 20 buildings in Houston, caused by Hurricane Ike.  In March 2010, the insurance carrier filed a lawsuit against the Company in Pennsylvania seeking a declaratory judgment that it owed nothing under the policy.  The total claims by the Company for actual damages, business interruption, statutory bad faith damages, interest and attorneys fees exceed $50,000,000.  The Company can make no prediction as to the result of such litigation.





Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations.





NOTE 14. RESTATEMENT (UNAUDITED)





In connection with reviewing the January 2010 Evergreen transaction, the Company has determined that it should correct an error and account for the transaction as the acquisition of a business and several VIE’s in which the Company is the primarily beneficiary should have been consolidated as of, and for quarter ended June 30, 2010.  See Note 3. “Acquisition and Disposition Activities” for information on the Evergreen transaction and Note 4. “Variable Interest Entities” for information on the VIE’s.





The following tables summarize the impact of the restatement discussed above on the previously issued Consolidated Condensed Financial Statements as of, and for quarter ended June 30, 2010 (dollars in thousands except per share data):





As Previously

Reported


Adjustment


RestatedStatement of Operations for the Three Months Ended Jun 30, 2010Rental revenue

$
7,603


$
489


$
8,092Third party management and transaction revenue


1,221



(19
)


1,202Interest and other income


13



-



13Total revenues


8,837



470



9,307Property operating expense


3,913



(3
)


3,910Corporate and administrative


2,516



-



2,516Depreciation and amortization


3,579



496



4,075  24
  Interest expense


3,524



214



3,738Total expenses


13,532



707



14,239Loss before deferred income tax benefit


(4,695
)


(237
)


(4,932
)Deferred income tax benefit


1,762



105



1,867Net loss, including noncontrolling interests


(2,933
)


(132
)


(3,065
)Net loss attributable to non-controlling interests


878



11



889Net loss attributable to American Spectrum Realty, Inc.


(2,055
)


(121
)


(2,176
)Preferred stock dividend


(60
)


-



(60
)Net loss attributable to American Spectrum Realty, Inc. common Stockholders


(2,115
)


(121
)


(2,236
)Basic and diluted earnings per share attributable to American Spectrum Realty, Inc. common stockholders

$
(0.70
)

$
(0.04
)

$
(0.74
)Statement of Operations for the Six Months Ended Jun 30, 2010Rental revenue

$
15,786


$
489


$
16,275Third party management and transaction revenue


2,235



(19
)


2,216Interest and other income


27



-



27Total revenues


18,048



470



18,518Property operating expense


7,538



(3
)


7,535Corporate general and administrative


4,138



-



4,138Depreciation and amortization


7,149



687



7,836Interest expense


6,924



214



7,138Total expenses


25,749



898



26,647Loss from continuing operations before deferred tax benefit


(7,701
)


(428
)


(8,129
)Deferred income tax benefit


2,896



175



3,071Loss from continuing operations


(4,805
)


(253
)


(5,058
)Income from discontinued operations


2,847



-



2,847Net loss, including noncontrolling interests


(1,958
)


(253
)


(2,211
)Net loss attributable to non-controlling interests


412



43



455Net loss attributable to American Spectrum Realty, Inc.


(1,546
)


(210
)


(1,756
)Preferred stock dividend


(120
)


-



(120
)Net loss attributable to American Spectrum Realty, Inc. common Stockholders


(1,666
)


(210
)


(1,876
)Basic and diluted per share data:Loss from continuing operations attributable to American Spectrum Realty, Inc. common stockholders


(1.23
)


(0.07
)


(1.30
)Income from discontinued operations attributable to American Spectrum  Realty, Inc. common stockholders


.71



-



.71Net loss attributable to American Spectrum Realty, Inc. common stockholders

$
(.52
)

$
(.07
)

$
(.59
)Balance Sheet as of June 30, 2010Real estate held for investment

$
263,359


$
322,197


$
585,556Accumulated depreciation


(79,238
)


(218
)


(79,456
)  25
  Cash and cash equivalents


984



-



984Restricted cash


992



3,371



4,363Deposits held in escrow for debt assumption


947



-



947Tenant and other receivables, net of allowance for doubtful accounts


1,314



262



1,576Deferred rents receivable


2,004



-



2,004Deferred tax asset


10,146



175



10,321Investment in management company


4,000



-



4,000Investments in unconsolidated real estate assets from related parties


1,386



141



1,527Purchased intangibles subject to amortization


18,000



(4,994
)


13,006Goodwill


-



4,003



4,003Notes receivable from related party


1,400



-



1,400Interest receivable from related parties


267



-



267Accounts receivable from related parties


2,090



-



2,090Accounts receivable from Evergreen


413



-



413Prepaid and other assets, net


11,803



4,673



16,476Total Assets


239,867



329,610



569,477Notes payable


214,663



226,725



441,388Accounts payable


6,125



3,227



9,352Liabilities related to insurance claims


1,367



-



1,367Accrued and other liabilities


9,132



1,565



10,697Total Liabilities


231,287



231,517



462,804Equity:Preferred stock


1



-



1Common stock


34



-



34Additional paid-in capital


49,058



-



49,058Accumulated deficit


(54,018
)


(210
)


(54,228
)Treasury stock


(3,095
)


-



(3,095
)American Spectrum Realty, Inc. stockholders’ equity (deficit)


(8,020
)


(210
)


(8,230
)Non-controlling interests


16,600



98,303



114,903Total Equity (Deficit)


8,580



98,093



106,673Total Liabilities and Equity (Deficit)

$
239,867


$
329,610


$
569,477Statement of Cash Flows for the Six Months Ended June 30, 2010Net cash used in operating activities

$
(591
)

$
220


$
(371
)Net cash provided by investing activities


7,707



-



7,707Net cash used in financing activities


(6,594
)


(220
)


(6,814
)Increase in cash and cash equivalents


522



-



522Cash and cash equivalents, beginning of period


462



-



462Cash and cash equivalents, end of period


984



-



984





ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





OVERVIEW





American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, 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 June 30, 2010, held an interest of 66.63% (consisting of the sole general partner interest and a limited partnership interest).  In January 2010, in connection with the Evergreen acquisition discussed below, the Operating Partnership issued 1,600,000 operating partnership units, which reduced the Company’s interest in the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January 31, 2010.  The number of operating partnership units issued in connection with the Evergreen acquisition is subject to adjustment in the first quarter of 2011 (Also see Note 3 of the Company’s Accompanying Consolidated Financial Statements).


26




During the first quarter of 2010, the Company consolidated one VIE in which it was determined to be the primary beneficiary.  During the second quarter of 2010, the Company consolidated additional VIE’s, which own a total of 14 properties.   The entities being consolidated include one self storage property, two multifamily properties, three student living properties, and nine commercial properties.  The entities are generally self-financed through cash flows from property operations.   The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests. (Also see Note 4 of the Company’s Accompanying Consolidated Financial Statements).





On June 2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot self-storage property located in Houston, Texas.  The partnership interest acquired in Sabo Road consists of the sole general partnership interest and a limited partnership interest.  Also on June 2, 2010, the Company acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot self-storage property located in San Antonio, Texas, which it has accounted for under the equity method of accounting as an unconsolidated investment.  The acquisitions, which totaled $1,681,670, were funded with the issuance of 300,949 OP Units and cash of $50,000.





On June 30, 2010, the Company acquired 2620-2630 Fountain View, a 125,000 square foot office property, consisting of two adjacent buildings in Houston, Texas.  The acquisition was funded with the issuance of 102,834 OP Units, an equity contribution of $1,000,000 from a third party investor, the assumption of debt and cash.  The third party investor received a 49% interest in the single purpose consolidated limited partnership that owns the property in consideration for the equity contribution.





On March 31, 2010, the Company sold 5850 San Felipe, a 101,880 square foot office property located in Houston, Texas.  The sale generated proceeds of approximately $5,200,000.  The proceeds were used to repurchase the preferred interest in the partnership that owned 5850 San Felipe, reduce debt, payables and for other investments.  The transaction generated a gain on sale before income tax expense of approximately $4,300,000.





In the accompanying financial statements, the results of operations for 5850 San Felipe are shown in the section “Discontinued operations”. 5850 San Felipe was classified as “Real estate held for sale” at December 31, 2009.  The revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale.  The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements of the Company, including the notes thereto, included in Note 5.





The Company’s properties were 82% occupied at June 30, 2010 and 84% occupied at June 30, 2009. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.




American Spectrum Management Group, Inc., (“ASMG”) a wholly-owned subsidiary of the Operating Partnership, provides management and leasing services for the Company’s 31 properties.  ASMG also manages and leases 20 properties in Texas for third parties representing 846,592 square feet of office, retail and industrial space.





American Spectrum Realty Management, LLC, (“ASRM”) a wholly-owned subsidiary of the Operating Partnership, acquired the property management and asset management contracts held by Evergreen Realty Group, LLC and its affiliates (“Evergreen”) in January 2010, which represent 80 separate assets.  The former Evergreen-managed properties, which consist of 5,051,240 square feet of office and industrial properties, 2,934 multi-family units, 12,098 self storage units consisting of 1,793,881 square feet, 3,206 student housing units consisting of 9,107 beds and nine assisting living facilities consisting of 776 beds, are all now under the management of ASRM.  This portfolio comprises properties located in 22 states – Alabama, Arizona, California, Florida, Georgia, Iowa, Idaho, Indiana, Kansas, Minnesota, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and Washington.  The acquisition gives the Company the ability to continue its expansion of its third-party management and leasing capabilities throughout the United States.   This acquisition has resulted in a significant change in the Company’s operations, including an increase in employees from 46 at December 31, 2009 to 258 at June 30, 2010.


27




CRITICAL ACCOUNTING POLICIES





The major accounting policies followed by the Company are listed in Note 2 – Summary of Significant Accounting Policies – of the Notes to the Consolidated Condensed Financial Statements.  The consolidated condensed financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which 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 differ materially from those estimates.





The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated condensed financial statements:





Real Estate Assets





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.





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





Building and Improvements

5 to 40 yearsTenant Improvements

Term of the related leaseFurniture and Equipment

3 to 5 years




Allocation of Purchase Price of Acquired Assets





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), 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.





Sales of Real Estate Assets





Gains on property sales 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.


28




Impairment of Intangible Assets





The Company tests its intangible assets for impairment at each balance sheet date.  If the carrying amount of an intangible asset is determined to exceed its fair value, an impairment loss is recognized in an amount equal to that excess.  After an impairment loss is recognized, the adjusted carrying amount of the intangible asset would be its new accounting basis.  Subsequent reversal of a previously recognized impairment loss is prohibited.





Valuation of Deferred Tax Asset





The Company evaluates its deferred tax asset at each balance sheet date.   The Company expects to sell real estate assets in the future and has determined that it is more likely than not that future taxable income, primarily from gains on the sales of real estate assets will be sufficient to enable it to realize all of its deferred tax assets.




Business Combinations




The Company applies the provisions of FASB ASC Topic 805 to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights. These provisions require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and require expensing of most transaction and restructuring costs. The Company determines whether acquisitions should be accounted for as a business combination.  This policy applies to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights.





The Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date.  The Company utilizes third-party valuation companies to help determine certain fair value estimates used for assets and liabilities.





Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships.  The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to below market lease values are included in accrued and other liabilities in the accompanying consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.





While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.




Variable Interest Entity Accounting




The Company has relationships with many different types of entities; some of those entities are Variable Interest Entities (VIEs).  We consolidate any VIE for which we are the primary beneficiary.  We analyze our variable interests, including equity investments, guarantees, management agreements and advances, to determine if an entity in which we have a variable interest is a VIE. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the estimated future cash flows of the entity, and our qualitative analysis on the design of the entity, its organizational structure including decision-making ability and relevant financial agreements. All of these factors are highly subjective and require significant judgment on the part of management.




29




Upon de-consolidation of a VIE, we will disclose the following:




·
the amount of any gain or loss recognized as the result of removal of the VIE’s assets, liabilities, and equity from our balance sheet;


·
the portion of any gain or loss related to the re-measurement to fair value of any retained investment in the VIE being derecognized;


·
the financial statement line item where the gain or loss relating to de-consolidation of the VIE is de-consolidated;


·
the nature of our continued involvement (if any) with the former VIE or the entity acquiring the VIE after de-consolidation, and;


·
whether the de-consolidation transaction occurs with a related party or if the transaction will cause the VIE to be a related party after de-consolidation.





RESULTS OF OPERATIONS





Discussion of the three months ended June 30, 2010 and 2009.





The following table shows a comparison of rental revenues and certain expenses for the quarter ended:





June 30,


June 30,


Variance2010


2009


$



%(restated)Rental revenue

$
8,092,000


$
7,995,000


$
97,000



1.2
%Third party management and leasing revenue


1,202,000



24,000



1,178,000



4,908.3
%Operating expenses:Property operating expenses


3,910,000



3,979,000



(69,000
)


(1.7
)%General and administrative


2,516,000



1,024,000



1,492,000



145.7
%Depreciation and amortization


4,075,000



3,698,000



377,000



10.2
%Interest expense


3,738,000



3,312,000



426,000



12.9
%





Rental revenue. Rental revenue increased $97,000, or 1.2%, for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009.  The increase was attributable to the consolidation of VIE’s, which accounted for $489,000 of the increase.  Rental revenue for owned properties decreased $392,000.  The decrease in rental revenue for owned properties was primarily due to an increase in rent concessions.  The decrease was also attributable to a decrease in occupancy.  The weighted average occupancy of the Company’s owned properties decreased from 84% at June 30, 2009 to 82% at June 30, 2010.





Third party management and leasing revenue.Third party management and leasing revenue increased by $1,178,000 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009.  The increase was primarily due to revenues generated as a result of the January 2010 acquisition of property management and asset management contracts from Evergreen.  Third party management revenues attributable to the Evergreen acquisition amounted to $1,046,000 for the second quarter of 2010.   The increase was also due to an increase in third party management and leasing revenues attributable to the Company’s other third party management contracts.





Property operating expenses.  Property operating expenses decreased by $69,000, or 1.7%, for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009.  The decrease was primarily due to a decrease in property maintenance cost and due to a decrease in bad debt expense.  The decrease in property operating expenses was partially offset by an increase in property general and administrative costs incurred during the quarter.




30


Corporate general and administrative.  Corporate general and administrative costs increased by $1,492,000, or 145.7%, for the three months ended June 30, 2010 when compared to the three months ended June 30, 2009. The increase was primarily due to operating expenses associated with the property management and asset management contracts acquired from Evergreen in January 2010, which amounted to approximately $1,551,000.  The increase was in large part personnel related.  The increase was also due to due diligence costs associated with the second quarter acquisition of 2620-2630 Fountain View of $121,000.  The increase in corporate general and administrative expenses was partially offset by a decrease in legal and other professional fees incurred during the quarter.





Depreciation and amortization.  Depreciation and amortization expense increased $377,000, or 10.2%, for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009.  The increase was primarily attributable the consolidation of VIE’s which accounted an increase of $209,000.  The increase was also due to the amortization of intangibles acquired in the Evergreen transaction.





Interest expense.  Interest expense increased $426,000, or 12.9%, for the three months ended June 30, 2010 in comparison to the three months ended June 30, 2009.  The increase was in large part attributable to the consolidation of VIE’s which accounted for $214,000 of the increase.  The increase was also attributable to an increase in debt, including the $9,500,000 the new loan associated with the Evergreen acquisition.





Non-controlling interests.The share of loss attributable to non-controlling interests was $889,000 for the three months ended June 30, 2010, compared to $292,000 for the three months ended June 30, 2009.  The non-controlling interests represent (i) unit holders in the Operating Partnership (other than the Company) that held, as of June 30, 2010 and June 30, 2009, a respective 33% and 12% partnership interest in the Operating Partnership as limited partners, (ii) third party limited partnership interests in certain single purpose consolidated partnerships of the Company, and (iii) variable interest entities.





Discontinued operations.  The Company had no income or loss from discontinued operations for the three months ended June 30, 2010.  During the three months ended June 30, 2009, the Company recognized income of $62,000 from discontinued operations.  The income from discontinued operations for the three months ended June 30, 2009 represented the operating results for 5850 San Felipe for the quarter.





Discussion of the six months ended June 30, 2010 and 2009.





The following table shows a comparison of rental revenues and certain expenses for the six months ended:





June 30,


June 30,


Variance2010


2009


$


%(restated)Rental revenue

$
16,275,000


$
16,435,000


$
(160,000
)


(1.0
%)Third party management and leasing revenue


2,166,000



41,000



2,125,000



5,182.9
%Operating expenses:Property operating expenses


7,535,000



7,872,000



(337,000
)


(4.3
)%General and administrative


4,138,000



1,894,000



2,244,000



118.5
%Depreciation and amortization


7,836,000



7,295,000



541,000



7.4
%Interest expense


7,138,000



6,607,000



531,000



8.0
%





Rental revenue. Rental revenue decreased $160,000, or 1.09%, for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009.  Rental revenue for owned properties decreased $649,000.  The decrease in rental revenue for owned properties was large part due to an increase in rent concessions.  The decrease was also attributable to a decrease in common area maintenance fee revenue recognized during the period.  The decrease was partially offset by revenue recognized from a lease buy-out during the period.  The decrease in rental revenue was partially offset by an increase in rental revenue of $489,000 attributable to the consolidation of VIE’s for the six months ended June 30, 2010.  The weighted average occupancy of the Company’s owned properties was 82% at June 30, 2010 in comparison to 84% at June 30, 2009.




31


Third party management and leasing revenue.Third party management and leasing revenue increased by $2,125,000 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009.  The increase was primarily due to revenues generated as a result of the January 2010 acquisition of property management and asset management contracts from Evergreen.  Third party management revenues attributable to the Evergreen acquisition amounted to $1,948,000 for the six months ended June 30, 2010.   The increase was also due to an increase in third party management and leasing revenues attributable to the Company’s other third party management contracts.





Property operating expenses.  Property operating expenses decreased by $337,000, or 4.3%, for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009.  The decrease was primarily due to a decrease in property taxes attributable to a decrease in the assessed values of several of the Company’s properties.  The decrease was also due to lower property maintenance costs and bad debt expense incurred during the period.  The decrease in property operating expenses was partially offset by an increase in property general and administrative costs incurred during the six months ended June 30, 2010 when compared to the six months ended June 30, 2009.




Corporate general and administrative.  Corporate general and administrative costs increased by $2,244,000, or 118.5%, for the six months ended June 30, 2010 when compared to the six months ended June 30, 2009. The increase was primarily due to operating expenses associated with the property management and asset management contracts acquired from Evergreen in January 2010, which amounted to approximately $2,411,000.  The increase was in large part personnel related.  The increase was also due to due diligence costs associated with the second quarter acquisition of 2620-2630 Fountain View of $121,000. The increase in corporate general and administrative expenses was partially offset by a decrease in legal and other professional fees incurred during the quarter.





Depreciation and amortization.  Depreciation and amortization expense increased $541,000, or 7.4%, for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009.  The increase was primarily attributable the consolidation of VIE’s which accounted an increase of $209,000.  The increase was also due to the amortization of intangibles acquired in the Evergreen transaction.





Interest expense.  Interest expense increased $531,000, or 8.0%, for the six months ended June 30, 2010 in comparison to the six months ended June 30, 2009.  The increase was in large part attributable to the consolidation of VIE’s which accounted for $214,000 of the increase.  The increase was also attributable to an increase in debt, including the $9,500,000 the new loan associated with the Evergreen acquisition.





Non-controlling interests.The share of loss attributable to non-controlling interests was $455,000 for the six months ended June 30, 2010, compared to $542,000 for the six months ended June 30, 2009.  The non-controlling interests represent (i) unit holders in the Operating Partnership (other than the Company) that held, as of June 30, 2010 and June 30, 2009, a respective 33% and 12% partnership interest in the Operating Partnership as limited partners, (ii) third party limited partnership interests in certain single purpose consolidated partnerships of the Company and (iii) variable interest entities.





Discontinued operations.  The Company recorded income from discontinued operations of $2,847,000 for the six months ended June 30, 2010, compared to $91,000 for the six months ended June 30, 2009.   The income from discontinued operations for the six months ended June 30, 2010 includes the net gain on the sale of 5850 San Felipe and the property’s operating results through its disposition date of March 31, 2010.  The income from discontinued operations for the six months ended June 30, 2009 represents the property’s operating results for the quarter.





LIQUIDITY AND CAPITAL RESOURCES





During the first six months of 2010, the Company derived cash primarily from the collection of rents, net proceeds from the sale of 5850 San Felipe and borrowing activities.   Major uses of cash included payments for capital improvements to real estate assets, primarily for tenant improvements, the acquisition of 2620-2630 Fountain View, repayment of debt, scheduled principal and interest payments on debt, and payment of operational expenses.


32





Net cash used in operating activities amounted to $371,000 for the six months ended June 30, 2010, of which $591,000 was attributable to operating activities of the Company’s owned properties, partially offset by cash generated from operating activities of VIE’s of $220,000.  The net cash used in operating activities represented $187,000 used in property operations and a net change in operating assets and liabilities of $184,000.  Net cash used in operating activities amounted to $353,000 for the six months ended June 30, 2009.  The net cash represented $491,000 generated by property operations, offset by a change in net operating assets and liabilities of $844,000.





Net cash provided by investing activities amounted to $7,707,000 for the six months ended June 30, 2010.  This amount was primarily comprised of proceeds of $10,166,000 received from the sale of 5850 San Felipe, reduced by funds used for capital improvements, primarily tenant improvements, of $1,954,000 and funds used for the acquisition of 2620-2630 Fountain View of $267,000.  Net cash used in investing activities amounted to $186,000 for the six months ended June 30, 2009.  Cash of $1,500,000 was used for capital expenditures, primarily tenant improvements.  The Company received insurance proceeds of $2,700,000 related to its hurricane and fire claims and paid $1,386,000 for damages related to the hurricane and fire.





Net cash used in financing activities amounted to $6,814,000 for the six months ended June 30, 2010.  This amount was primarily comprised of debt repayment on the sale of 5850 San Felipe of $5,067,000, the repayment of borrowings of $490,000, scheduled principal payments on debt of $2,027,000, repurchase of preferred partnership interest of $1,785,000, dividend payments to preferred stockholders of $182,000 and distributions to non-controlling interests of $399,000.  This amount was partially offset by new borrowings of $3,156,000.  Cash used in financing activities amounted to $913,000 for the six months ended June 30, 2009, which included repayments of borrowings of $1,474,000 and scheduled principal payments on debt of $1,614,000.  This amount was partially offset by new borrowings of $2,215,000.





The current credit crisis, related turmoil in the global financial system and the downturn in the United States economy has had an adverse impact on the Company’s liquidity and capital resources.  The credit crisis and the downturn in the economy has adversely affected the Company’s business in a number of ways, including effects on its ability to obtain new mortgages, to refinance current debt and to sell properties.





The Company expects to meet its short-term liquidity requirements for normal operating expenses from cash generated by operations and cash on hand.   The Company received net proceeds of approximately $5,200,000 from the March 2010 sale of 5850 San Felipe.  The proceeds were used to repurchase the preferred interest in the partnership that owned 5850 San Felipe, reduce accounts payable, debt and for other investments.   The Company anticipates generating proceeds from borrowing activities, additional property sales and/or equity offerings to provide additional funds for payments of accounts payables, consisting primarily of tenant improvements and capital improvements on properties.   As of June 30, 2010, accounts payable over 90 days (excluding VIE’s) totaled $5,233,165, of which $1,367,000 was related to Hurricane Ike expenses, the 2010 Evergreen acquisition and other business development costs.  Also, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed.  The Company anticipates meeting these obligations with the use of funds held in escrow by lenders, proceeds from borrowing activities, additional property sales and/or equity offerings.  There can be no assurance, however, that these activities will occur.  If these activities do not occur, the Company will not have sufficient cash to meet its obligations.




The Company has loans totaling $35,387,000, maturing over the next twelve months.  One of these loans, with a balance of $17,170,000, which matured in May 2010, contains two one-year extension options.  The extension options are contingent upon satisfaction of certain terms and conditions required by the lender.  The Company believes that it has met the extension criteria; however the lender has yet to approve the extension.  Most of the Company’s mortgage debt is not cross-collateralized.  The Company has four mortgage loans that are cross collateralized by a second property.   It is common for the Company to serve as a guarantor and/or indemnitor on its mortgage debt.  Because of uncertainties caused by the current credit crisis, the Company’s current debt level and the Company’s historical losses there can be no assurances as to the Company’s ability to obtain funds necessary for the refinancing of its maturing debts.  If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from existing lenders.  If these refinancings or extensions do not occur, the Company will not have sufficient cash to meet its obligations.


33




The Company is not in compliance with a debt covenant on a mortgage loan secured by one of its office properties located in Houston, Texas.  The debt covenant requires the Company to maintain a minimum tangible book net worth as defined in the debt agreement.  In the event the lender elects to enforce the non-compliance matter, the Company will attempt to negotiate a revision to the loan covenant.  If a refinance of the loan becomes necessary, the Company believes it could obtain a new mortgage loan for an amount in excess of the current debt balance and prepayment costs associated with the current loan.





FUNDS FROM OPERATIONS





The Company believes that Funds From Operations (“FFO”) is a useful supplemental measure of its operating performance.  The Company computed FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002.  The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.  The Company believes that FFO is helpful to investors as a measure of performance of the Company because, along with cash flow from operating activities, FFO provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs.  FFO is a non-GAAP financial measure.  FFO does not represent net income or cash flows from operations, as defined by GAAP, and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's operating performance or as an alternative to cash flows from operating, investing and financing activities (determined in accordance with GAAP) as a measure of liquidity.  FFO does not necessarily indicate that cash flows will be sufficient to fund all of the Company's cash needs, including principal amortization, capital improvements and distributions to stockholders.  Further, FFO as disclosed by other companies may not be comparable to the Company's calculation of FFO.





The following table sets forth the Company’s calculation of FFO for the six months ended June 30, 2010 and 2009 (in thousands):





Six Months Ended

June 30, 2010

(restated)


Six Months Ended

June 30, 2009Net loss attributable to the Company

$
(1,756
)

$
(3,994
)Depreciation and amortization from discontinued operations


8



224Gain from sale of discontinued operations


(4,315
)


-Deferred income tax benefit


(1,430
)


(2,486
)Depreciation and amortization attributable to the Company’s owned properties


7,627



7,295FFO

$
134


$
1,039




The decrease in FFO for the six months ended September 30, 2010 compared to the six months ended September 30, 2009 was in large part attributable to the Evergreen acquisition, costs associated with the acquisition of 2620-2630 Fountain View and other business development costs.




INFLATION




Substantially all of the leases at the industrial and retail properties provide for pass-through to tenants of certain operating costs, including real estate taxes, common area maintenance expenses, and insurance.  Leases at the office properties typically provide for rent adjustment and pass-through of increases in operating expenses during the term of the lease.  All of these provisions may permit the Company to increase rental rates or other charges to tenants in response to rising prices and therefore, serve to reduce the Company's exposure to the adverse effects of inflation.




34


FORWARD-LOOKING STATEMENTS





This Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934.  These forward-looking statements are based on management’s beliefs and expectations, which may not be correct.  Important factors that could cause actual results to differ materially from the expectations reflected in these forward-looking statements include the following: the Company’s level of indebtedness and ability to refinance its debt; risks inherent in the Company’s acquisition and development of properties in the future, including risks associated with the Company’s strategy of investing in under-valued assets; general economic, business and market conditions, including the impact of the current global financial crisis and recent downturn in the United States economy; the potential delisting of the Company’s stock; changes in federal and local laws, and regulations; increased competitive pressures; and other factors, as well as factors set forth elsewhere in this Report on Form 10-Q.





ITEM 4T.  CONTROLS AND PROCEDURES





Management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report.  Based on, and as of the date of, that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.





There were no changes made in the Company’s internal controls over financial reporting during the second quarter of 2010 that materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.





PART II.  OTHER INFORMATION





ITEM 1.  LEGAL PROCEEDINGS





Certain claims and lawsuits have arisen against the Company in its normal course of business. The Company believes that such claims and lawsuits will not have a material adverse effect on the Company's financial position, cash flow or results of operations.





ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





In May 2010, the Company issued a total of 11,500 shares of Common Stock to its officers, directors and certain key employees pursuant to the Company’s Omnibus Stock Option Incentive Plan.  The issuance of Common Stock was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506 of Regulation D promulgated thereunder.





ITEM 5. EXHIBITS





The Exhibit Index attached hereto is hereby incorporated by reference this item.


35




SIGNATURES





Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





AMERICAN SPECTRUM REALTY, INC.





Date: May 23, 2011

/s/ William J. CardenBy:William J. CardenChairman of the Board, President and,Chief Executive Officer(Principal Executive Officer)Date: May 23, 2011

/s/ G. Anthony EppolitoBy:G. Anthony EppolitoVice President, Chief Financial Officer,(Principal Financial Officer and Accounting Officer),Treasurer and Secretary




36


EXHIBIT INDEX





Exhibit No.

Exhibit Title10.45

Letter Agreement to Purchase Agreement dated December 18, 2009 between the Company and Evergreen Parties (First Amendment to Purchase Agreement)10.46

Second Amendment to Purchase Agreement dated January 17, 2010 between the Company and Evergreen Parties31.1

Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




37