** **

###### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

| ý |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**  |
|--------|--------|----------------------------------------------------------|
|   |   | **THE SECURITIES EXCHANGE ACT OF 1934**                  |
|   |   |                                                     |
|   |   | **For  the quarterly period ended March 31, 2002**       |
|   |   | **OR**                                                   |
|   |   |                                                     |
| **o**  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF** |
|   |   | **THE SECURITIES EXCHANGE ACT OF 1934**                  |

 

**COMMISSIONFILE NUMBER 001-16785**

 

**AmericanSpectrum Realty, Inc.******(Exact name ofRegistrant as specified in its charter)

 
| **State of Maryland**                                             |   | **52-2258674**                          |
|-------------------------------------------------------------------|--------|-----------------------------------------|
| (State  or other jurisdiction of

incorporation  or organization) |   | (I.R.S.  Employer

Identification  No.) |
|                                                              |   |                                    |
| **7700 Irvine Center Drive, Suite 555  Irvine, California**       |   | **92618**                               |
| (Address  of principal executive offices)                         |   | (Zip  Code)                             |

 

**(949) 753-7111**

(Registrant’stelephone number, including area code)

 

Securities registeredunder Section 12(b) of the Act:

 
| ** **

**Title of each class** |   | **Name of Exchange on**

**which registered** |
|-------------------------------------|--------|-----------------------------------------------|
| Common  Stock, $.01 par value       |   | American  Stock Exchange                      |

 

 

**Securitiesregistered pursuant to Section 12(g) of the Act: None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes ý No o

 

As of May 8, 2002, 5,538,228 shares of Common Stock($.01 par value) were outstanding.

 

 

1

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**TABLE OFCONTENTS**

 

 
|    |                                                                                           |
|---------|------------------------------------------------------------------------------------------------|
| PART I  | FINANCIAL INFORMATION                                                                          |
|    |                                                                                           |
| Item 1  | Financial Statements                                                                           |
|    | Consolidated Balance  Sheets at March 31, 2002 and December 31, 2001                           |
|    | Consolidated  Statements of Operations for the three months ended March 31, 2002 and 2001      |
|    | Consolidated  Statement of Stockholders’ Equity for the three months ended March 31, 2002 |
|    | Consolidated  Statements of Cash Flows for the three months ended March 31, 2002 and 2001      |
|    | Notes to  Consolidated Financial Statements                                                    |
| Item  2 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    |
| Item  3 | Quantitative  and Qualitative Disclosure about Market Risk                                     |
|    |                                                                                           |
| PART II | OTHER INFORMATION                                                                              |
|    |                                                                                           |
| Item 1  | Legal Proceedings                                                                              |
| Item 6  | Exhibits and  Reports on Form 8-K                                                              |
|    |                                                                                           |
|    |                                                                                           |
|    |                                                                                           |
|    |                                                                                           |
|    |                                                                                           |
|    |                                                                                           |
|    |                                                                                           |

 

 

2

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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**AMERICANSPECTRUM REALTY, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                |   | **March 31, 2002** |    | **December 31, 2001** |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|-----------------------|--------|
|                                                                                                                                |   | **(Unaudited)**    |    |                  |   |
| **ASSETS**                                                                                                                          |   |               |    |                  |   |
| Real estate held for investment                                                                                                     |   | $                  | 255,681 |                  | $      | 254,679 |   |
| Accumulated depreciation and valuation allowance                                                                                    |   | 8,039              |    | 5,172                 |   |
| Real estate held for investment, net                                                                                                |   | 247,642            |    | 249,507               |   |
|                                                                                                                                |   |               |    |                  |   |
| Cash and cash equivalents                                                                                                           |   | 1,717              |    | 2,284                 |   |
| Tenant and other receivables, net of allowance for doubtful accounts  of $315 and $234, respectively                                |   | 1,267              |    | 1,378                 |   |
| Deferred rents receivable                                                                                                           |   | 286                |    | 149                   |   |
| Deposits held in escrow                                                                                                             |   | 1,687              |    | 1,956                 |   |
| Investment in management company                                                                                                    |   | 4,000              |    | 4,000                 |   |
| Prepaid and other assets, net                                                                                                       |   | 7,109              |    | 6,931                 |   |
|                                                                                                                                |   |               |    |                  |   |
| Total Assets                                                                                                                        |   | $                  | 263,708 |                  | $      | 266,205 |   |
|                                                                                                                                |   |               |    |                  |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                       |   |               |    |                  |   |
|                                                                                                                                |   |               |    |                  |   |
| Liabilities:                                                                                                                        |   |               |    |                  |   |
| Notes payable, net of premiums of $4,673 and $4,829, respectively  (including $2,799 and $2,802, respectively, to related parties)  |   | $                  | 179,307 |                  | $      | 176,915 |   |
| Notes payable to former limited partners                                                                                            |   | 1,138              |    | 2,292                 |   |
| Accounts payable                                                                                                                    |   | 2,546              |    | 3,203                 |   |
| Deferred gain on disposition of property                                                                                            |   | 232                |    | 232                   |   |
| Accrued and other liabilities (including $2,771 and $3,394,  respectively, to related parties)                                      |   | 17,532             |    | 18,510                |   |
|                                                                                                                                |   |               |    |                  |   |
| Total Liabilities                                                                                                                   |   | 200,755            |    | 201,152               |   |
|                                                                                                                                |   |               |    |                  |   |
| Minority Interests:                                                                                                                 |   |               |    |                  |   |
| Unit holders in the operating partnership                                                                                           |   | 10,341             |    | 10,616                |   |
| Partially owned property                                                                                                            |   | 1,038              |    | 1,033                 |   |
| Total minority interests                                                                                                            |   | 11,379             |    | 11,649                |   |
|                                                                                                                                |   |               |    |                  |   |
| Commitments and Contingencies:                                                                                                      |   |               |    |                  |   |
|                                                                                                                                |   |               |    |                  |   |
| Redeemable Common Stock                                                                                                             |   | 300                |    | 300                   |   |
|                                                                                                                                |   |               |    |                  |   |
| Stockholders’ equity:                                                                                                          |   |               |    |                  |   |
|                                                                                                                                |   |               |    |                  |   |
| Preferred stock, $.01 par value; authorized, 25,000,000 shares, none                                                                |   | —             |    | —                |   |
| issued and outstanding                                                                                                              |   |               |    |                  |   |
| Common stock, $.01 par value; authorized, 100,000,000 shares; issued  and outstanding, 5,529,031 and 5,529,190 shares, respectively |   | 55                 |    | 55                    |   |
| Additional paid-in capital                                                                                                          |   | 56,502             |    | 56,502                |   |
| Accumulated deficit                                                                                                                 |   | (4,139             | )       | (2,038                | )      |
| Deferred compensation                                                                                                               |   | (1,142             | )       | (1,415                | )      |
| Treasury stock, at cost (159 common shares at March 31, 2002)                                                                       |   | (2                 | )       | —                |   |
|                                                                                                                                |   |               |    |                  |   |
| Total stockholders’ equity                                                                                                     |   | 51,274             |    | 53,104                |   |
|                                                                                                                                |   |               |    |                  |   |
| Total Liabilities and Stockholders’ equity                                                                                     |   | $                  | 263,708 |                  | $      | 266,205 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

 

3

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**AMERICAN SPECTRUM REALTY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(Dollarsin thousands, except share and per share amounts)

(Unaudited)

 

** **
|                                                       |   | **Quarter Ended March 31,** |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
|                                                       |   | **2002**                    |   | **2001** |   |
| **REVENUES:**                                         |   |                        |   |   |   |
|                                                       |   |                        |   |   |   |
| Rental revenue                                             |   | $                           | 9,876  |   | $ | 165 |   |
| Interest and other income                                  |   | 79                          |   | 44 |   |
|                                                       |   |                        |   |   |   |
| Total revenues                                             |   | 9,955                       |   | 209 |   |
|                                                       |   |                        |   |   |   |
| **EXPENSES:**                                              |   |                        |   |   |   |
|                                                       |   |                        |   |   |   |
| Property operating expense                                 |   | 3,560                       |   | 59 |   |
| General and administrative                                 |   | 2,417                       |   | 95 |   |
| Depreciation and amortization                              |   | 2,982                       |   | 47 |   |
| Interest expense                                           |   | 3,337                       |   | 31 |   |
|                                                       |   |                        |   |   |   |
| Total expenses                                             |   | 12,296                      |   | 232 |   |
|                                                       |   |                        |   |   |   |
| **OTHER INCOME (LOSS):**                                   |   |                        |   |   |   |
|                                                       |   |                        |   |   |   |
| Loss from investment in unconsolidated  joint venture |   | —                      |   | (20 | ) |
|                                                       |   |                        |   |   |   |
| Total other income (loss)                                  |   | —                      |   | (20 | ) |
|                                                       |   |                        |   |   |   |
| Minority Interests:                                        |   |                        |   |   |   |
| Unit holders in the operating partnership                  |   | 276                         |   | — |   |
| Partially owned property                                   |   | (36                         | )      | — |   |
|                                                       |   |                        |   |   |   |
| Total minority interests                                   |   | 240                         |   | — |   |
|                                                       |   |                        |   |   |   |
| Net loss                                                   |   | $                           | (2,101 | ) | $ | (43 | ) |
|                                                       |   |                        |   |   |   |
| Basic per share data:                                      |   |                        |   |   |   |
| Net loss per basic share                                   |   | $                           | (.38   | ) | $ | — |   |
|                                                       |   |                        |   |   |   |
| Per unit data:                                             |   |                        |   |   |   |
| Limited partner loss per unit                              |   | $                           | N/A    |   | $ | (.55 | ) |
|                                                       |   |                        |   |   |   |
| Basic weighted average shares used                         |   | 5,529,058                   |   | — |   |
| Limited partnership units outstanding                      |   | N/A                         |   | 77,000 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

4

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**AMERICAN SPECTRUM REALTY, INC.**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

 (Dollars in thousands)

(Unaudited)

 
|                                  |   | **Common Stock** |   | **Additional Paid-In Capital** |   | **Accumulated Deficit** |   | **Deferred Compensation** |   | **Treasury Stock** |   | **Total Equity** |   |
|---------------------------------------|--------|------------------|--------|--------------------------------|--------|-------------------------|--------|---------------------------|--------|--------------------|--------|------------------|--------|
| Balance, December 31, 2001 (audited)  |   | $                | 55     |                           | $      | 56,502                  |   | $                         | (2,038 | )                  | $      | (1,415           | )      | — |   | $ | 53,104 |   |
| Amortization of deferred compensation |   | —           |   | —                         |   | —                  |   | 273                       |   | —             |   | 273              |   |
| Common stock repurchase               |   | —           |   | —                         |   | —                  |   | —                    |   | $                  | (2     | )                | (2     | ) |
| Net loss                              |   | —           |   | —                         |   | (2,101                  | )      | —                    |   | —             |   | (2,101           | )      |
|                                  |   |             |   |                           |   |                    |   |                      |   |               |   |             |   |
| Balance, March 31, 2002               |   | $                | 55     |                           | $      | 56,502                  |   | $                         | (4,139 | )                  | $      | (1,142           | )      | $ | (2 | ) | $ | 51,274 |   |

 

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

5

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**AMERICANSPECTRUM REALTY, INC**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(Dollars in thousands)

(Unaudited)

** **
|                                                                         |   | **Quarter Ended**   |   |
|------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                         |   | **March 31,  2002** |   | **March 31,  2001** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                    |   |                |   |   |   |
| Net loss                                                                     |   | $                   | (2,101 | ) | $ | (43 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                |   |   |   |
| Depreciation and amortization                                                |   | 2,982               |   | 47 |   |
| Loss from investment in unconsolidated joint venture                         |   | —              |   | 20 |   |
| Minority interest                                                            |   | (240                | )      | — |   |
| Deferred compensation expense                                                |   | 273                 |   | — |   |
| Deferred rental income                                                       |   | (137                | )      | (1 | ) |
| Amortization of loan premiums, included in interest expense                  |   | (156                | )      | — |   |
| Changes in operating assets and liabilities:                                 |   |                |   |   |   |
| Decrease in tenant and other receivables                                     |   | 372                 |   | 8 |   |
| Increase in prepaid and other assets                                         |   | (293                | )      | (36 | ) |
| Decrease in accounts payable                                                 |   | (657                | )      | (29 | ) |
| Decrease in accrued and other liabilities                                    |   | (978                | )      | (58 | ) |
|                                                                         |   |                |   |   |   |
| Net cash used in operating activities:                                       |   | (935                | )      | (92 | ) |
|                                                                         |   |                |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                    |   |                |   |   |   |
| Additions  to real estate assets                                             |   | (1,002              | )      | (21 | ) |
| Contributions to minority owner of partially owned property                  |   | (30                 | )      | — |   |
| Distributions  from unconsolidated joint venture                             |   | —              |   | 185 |   |
|                                                                         |   |                |   |   |   |
| Net cash (used in) provided by investing activities:                         |   | (1,032              | )      | 164 |   |
|                                                                         |   |                |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                    |   |                |   |   |   |
| Proceeds from borrowings                                                     |   | 10,650              |   | — |   |
| Repayment of borrowings                                                      |   | (8,102              | )      | (5 | ) |
| Note payments to former limited partners                                     |   | (1,154              | )      | — |   |
| Collection of advances to affiliate                                          |   | 8                   |   | — |   |
| Advances to affiliate                                                        |   | —              |   | (97 | ) |
| Repurchase of common stock                                                   |   | (2                  | )      | — |   |
|                                                                         |   |                |   |   |   |
| Net cash provided by (used in) financing activities:                         |   | 1,400               |   | (102 | ) |
|                                                                         |   |                |   |   |   |
| Decrease in cash                                                             |   | (567                | )      | (30 | ) |
|                                                                         |   |                |   |   |   |
| Cash, beginning of period                                                    |   | 2,284               |   | 34 |   |
|                                                                         |   |                |   |   |   |
| Cash, end of period                                                          |   | $                   | 1,717  |   | $ | 4 |   |
|                                                                         |   |                |   |   |   |
| **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**                       |   |                |   |   |   |
| Cash paid for interest                                                       |   | $                   | 3,314  |   | $ | 31 |   |

 

The accompanying notesare an integral part of these consolidated financial statements

 

 

6

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**AMERICANSPECTRUM REALTY, INC.**

### **Notesto Consolidated Financial Statements**

 

**NOTE 1.  DESCRIPTION OF BUSINESS**

 

# **GENERAL**

American SpectrumRealty, Inc. (“ASR” or the “Company”) is a Maryland corporation established onAugust 8, 2000.  The Company is afull-service real estate corporation, which owns, manages and operatesincome-producing properties.  As of March31, 2002, through its majority-owned subsidiary, American Spectrum Realty OperatingPartnership, L.P. (the “Operating Partnership”), the Company owned and operated33 properties which consisted of 12 office, 11 office/warehouse, five shoppingcenter, and four apartment properties, and one developmental land property. Theproperties are located in four geographic regions in nine states.  The Company plans to expand its business andnet assets by acquiring additional properties. The Company will focus primarily on office and office/warehouseproperties located in Texas, California, Arizona and the Midwest.

 

The structure ofthe Company is generally referred to as an “UPREIT” structure.  Substantially all of the Company’s assetsare held through the Operating Partnership. The Company is the sole generalpartner of the Operating Partnership. As the sole general partner of the Operating Partnership, the Companygenerally has the exclusive power under the Partnership Agreement to manage andconduct the business of the Operating Partnership. The Company’s interest inthe Operating Partnership entitles it to share in cash distributions from, andin profits and losses of, the Operating Partnership.  Holders of limited partnership units in the Operating Partnership(“OP Units”) have the same rights to distributions as holders of Common Stockin the Company.  Most of the propertieswill be owned by the Operating Partnership through subsidiary limitedpartnerships or limited liability companies.

 

At March 31, 2002, the Company held a 1% general partner interest andan 87.4% limited partner interest in the Operating Partnership.  Holders of the OP Units have the option toredeem their units and to receive, at the option of the Company, in exchangefor each OP Unit (i) one share of Common Stock of the Company, or (ii) cashequal to the fair market value of one share of Common Stock of the Company atthe date of conversion.  As of March 31,2002, the Operating Partnership, directly and through the subsidiaries in whichit and the Company own 100% of the ownership interests, controls a portfolio of33 real estate properties.

 

The Companyintends to qualify as a real estate investment trust, REIT, as defined underthe Internal Revenue Code of 1986, as amended, and to elect to be treated as aREIT beginning in 2003.  In general, aREIT is a company that owns or provides financing for real estate and paysannual distributions to investors of at least 90% of its taxable income.  A REIT typically is not subject to federalincome taxation on its net income, provided applicable income tax requirementsare satisfied.   Currently, the Companyis taxed as a C corporation.

 

## **CONSOLIDATIONTRANSACTION**

On October 19, 2001, the Company was thelegal acquirer and registrant in a consolidation transaction (the“Consolidation”).  Pursuant to theConsolidation, subsidiaries of the Company merged with eight public limitedpartnerships, acquired the assets and liabilities of two private entitiesmanaged by CGS Real Estate Company, Inc. (“CGS”) and its affiliates andacquired certain assets and liabilities of CGS and its majority-ownedaffiliates.  The accounting acquirer inthe Consolidation was Sierra Pacific Pension Investors `84 (“SPPI84”), one ofthe eight public limited partnerships. SPPI84’s activities have involved the ownership and operation of tworeal estate properties in Arizona: Sierra Spectrum in Phoenix, Arizona and Sierra Valencia in Tucson,Arizona.  Pursuant to the Consolidation,partners of the public partnerships received shares in the Company orpromissory notes in exchange for their partnership units and owners of existingrelated entities exchanged ownership interests in real estate for ASR shares orunits in the Operating Partnership, an entity formed for this purpose andinitially wholly owned by the Company.  Prior to October 19, 2001, the Company was a wholly owned subsidiary ofCGS.

 

 

7

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The condensed combined statement ofoperations and cash flows of CGS and its majority-owned affiliates for thethree months ended March 31, 2001 follows (dollars in thousands):

 

| **Condensed  Combined Statement of Operations** |   | **Quarter Ended**  |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **March 31, 2001** |   |
|                                            |   |               |   |
| Total revenues                                  |   | $                  | 6,141  |   |
| Operating expenses                              |   | 4,203              |   |
| Depreciation and amortization                   |   | 1,166              |   |
| Interest expense                                |   | 2,971              |   |
| Equity in loss of uncombined partnerships       |   | 7                  |   |
| Gain on sale of property                        |   | 100                |   |
| Minority interest                               |   | 14                 |   |
| Net loss                                        |   | $                  | (2,092 | ) |

 

 

| **Condensed  Combined Statement of Cash Flows** |   | **Quarter Ended**  |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **March 31, 2001** |   |
|                                            |   |               |   |
| Cash flows provided by (used in):               |   |               |   |
| Operating activities                            |   | $                  | (377   | ) |
| Investing activities                            |   | (236               | )      |
| Financing activities                            |   | 177                |   |
| Decrease in cash                                |   | (436               | )      |
| Cash, beginning of period                       |   | 1,787              |   |
| Cash, end of period                             |   | $                  | 1,351  |   |

 

It is suggested thatthese condensed combined financial statements be read in conjunction with thecombined financial statements for the period January 1 to October 19, 2001 andthe related notes thereto included in the Company’s 2001 Annual Report on Form10-K filed with the Securities and Exchange Commission (the “SEC”).

 

**NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**BASIS OF PRESENTATION**

The accompanying unaudited consolidated financialstatements have been prepared pursuant to the rules and regulations of theSEC.  In the opinion of the Company, theaccompanying interim unaudited consolidated financial statements contain allmaterial adjustments, consisting only of normal recurring adjustments necessaryto present fairly the financial condition, the results of operations andchanges in cash flows of the Company and its subsidiaries for interim periods.

 

The results for such interim periods are notnecessarily indicative of results for a full year.  It is suggested that these consolidated financial statements beread in conjunction with the consolidated financial statements for the yearended December 31, 2001 and the related notes thereto included in the Company’s2001 Annual Report on Form 10-K filed with the SEC.

 

As discussed in Note 1, theaccounting acquirer in the Consolidation was SPPI84.  As such, the consolidated statement of operations and cash flowsfor the three months ended March 31, 2001 reflects the results of operationsand cash flows of SPPI84.

 

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

 

**RECLASSIFICATION**

Certain prior year balances have been reclassified toconform with the current year presentation.

 

**USE OF ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reported 

 

8

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amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe results of operations during the reporting period.  Actual results could materially differ fromthose estimates.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

In June 2001, FASB issued SFAS No. 141, whichsupercedes APB 16, “Business Combinations”, which is effective for businesscombinations initiated after June 30, 2001. SFAS 141 requires all business combinations to be accounted for underthe purchase method and that the pooling-of-interest method is no longerallowed.  The Company accounted for theConsolidation under the purchase method.

 

In June 2001, FASB issued SFAS No. 142, “Goodwill andOther Intangible Assets”, which is effective for fiscal years beginning afterDecember 15, 2001.  SFAS 142 requires,among other things, that goodwill no longer be amortized to earnings, butinstead be reviewed for impairment.  Theadoption of SFAS No. 142 did not have a material impact on the Company’sconsolidated financial position or results of operations.

 

In June 2001, FASB issued SFAS No. 143, “Accountingfor Asset Retirement Obligations”.  SFAS143 addresses financial accounting and reporting obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  The provisions ofSFAS 143 are required to be applied starting with fiscal years beginning afterJune 15, 2002.  The Company believes theadoption of the provisions of SFAS 143 will not have a significant effect onits consolidated financial position or results of operations.

 

InAugust 2001, FASB issued SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, which addresses financial accounting andreporting for the impairment or disposal of long-lived assets.  SFAS 144 supersedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of”.  SFAS 144 will beeffective for the Company beginning January 1, 2002, the first day of its 2002fiscal year.  The adoption of SFAS No.144 did not have a material impact on the Company’s consolidated financialposition or results of operations.

## ** **

## **REAL ESTATE**

Rental properties are stated at cost, net ofaccumulated depreciation, unless circumstances indicate that cost, net ofaccumulated depreciation, cannot be recovered, in which case, the carryingvalue of the property is reduced to estimated fair value.  Estimated fair value: (i) is based upon theCompany’s plans for the continued operation of each property; and (ii) iscomputed using estimated sales price, as determined by prevailing market valuesfor comparable properties and/or the use of capitalization rates multiplied byannualized net operating income based upon the age, construction and use of thebuilding.  The fulfillment of theCompany’s plans related to each of its properties is dependent upon, amongother things, the presence of economic conditions which will enable the Companyto continue to hold and operate the properties prior to their eventualsale.  Due to uncertainties inherent inthe valuation process and in the economy, it is reasonably possible that theactual results of operating and disposing of the Company’s properties could bematerially different than current expectations.

 

Depreciation is provided using the straight-linemethod over the useful lives of the respective assets. The useful lives are asfollows:

 

| Building and Improvements |   | 10 to 40 years            |
|---------------------------|--------|---------------------------|
| Tenant Improvements       |   | Term of the related lease |
| Furniture and Equipment   |   | 3 to 5 years              |

 

**CASH EQUIVALENTS**

Cash equivalents are considered to be all highlyliquid investments with a maturity of three months or less at the date ofpurchase.

 

**FAIR VALUE OF FINANCIAL INSTRUMENTS**

The Company’s financial instruments consist of cashand cash equivalents, escrow deposits, tenant and other receivables, notespayable, accounts payable and accrued expenses.  The Company has entered into 

 

9

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interest rate swap agreements in notional amountstotaling $21,800,000 to manage its interest rate risk.  The agreements effectively fix the interestrate at 2.68% plus the applicable variable rate margin (5.68% at March 31,2002).  Management believes that thecarrying value of the Company’s financial instruments approximate theirrespective fair market values at March 31, 2002 and December 31, 2001.

 

**DERIVATIVE FINANCIAL INSTRUMENTS**

The Company followsStatement of Financial Accounting Standard No. 133, as amended, whichestablishes accounting and reporting standards for derivative financialinstruments, including certain derivative instruments embedded in othercontracts and hedging activities.  Allderivatives, whether designed in hedging relationships or not, are required tobe recorded on the balance sheet at fair value.  If the derivative is designated as a fair value hedge, thechanges in the fair value of the derivative and of the hedged item attributableto the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effectiveportions of changes in the fair value of the derivative are recorded in othercomprehensive income and ineffective portions of changes in the fair value ofcash flow hedges are recognized in earnings. The Company uses interest rate swaps to hedge against fluctuations ininterest rates on specific borrowings. Our objective is to minimize the risk of fluctuations using the mosteffective methods to eliminate or reduce the impact of this exposure.

 

**DEFERRED FINANCING AND OTHER FEES**

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

 

## **STOCK-BASEDCOMPENSATION**

The Financial Accounting Standards Board issued SFASNo. 123, “Accounting for Stock-Based Compensation” in October 1995.  This standard establishes a fair valueapproach to valuing stock options awarded to employees as compensation.  The Company has elected, as permitted by thestandard to use the intrinsic value based method of accounting for stockoptions consistent with Accounting Principles Board Opinions No. 25,“Accounting for Stock Issued to Employees”. The intrinsic value method measures compensation cost for stock optionsas the excess, if any, of the quoted market price of the Company’s stock at themeasurement date over the exercise price.

 

# **MINORITY INTERESTS**

*Unit holders in the OperatingPartnership.*  At March31, 2002 and December 31, 2001, unit holders in the Operating Partnership heldan 11.6% limited partnership interest in the Operating Partnership.  Each of the holders of the interests in theOperating Partnership has the option to redeem its OP Units and to receive, atthe option of the Company, in exchange for each OP Unit, either (i) one shareof Common Stock of the Company, or (ii) cash equal to the fair value of oneshare of Common Stock of the Company at the date of conversion.

 

*Partiallyowned property.*  On February28, 2001, a third party buyer (the “Buyer”) purchased a 49% undividedtenancy-in-common interest in the Company’s Creekside/Riverside property for$1,000,000.  In addition, the saleagreement stipulates income and expenses shall be allocated to the Company andthe Buyer based upon the respective ownership interests.

 

The Company has accounted for thistransaction as a partial interest in real property and as such, the purchaseprice is accounted for as minority interest on the accompanying balancesheet.  Further, income anddistributions allocable to the buyer are accounted for as an offset to theminority interest account.  In addition,to the extent that the accumulation of net income less distributions made to theBuyer does not cover the guaranteed return of $30,000 and simple interest of12% per annum, the Company records an accrual for any such difference in eachfiscal period until such obligation is paid in full.

 

**RENTAL REVENUE**

Certain leases provide for tenant occupancy duringperiods for which no rent is due or where minimum rent payments increase duringthe term of the lease.  The Companyrecords rental income for the full term of each lease on a straight-line basis.  Accordingly, a receivable is recorded fromtenants for the amount that is expected to be collected over the remaininglease term rather than currently (Deferred Rent Receivable).

 

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When a property is acquired, the term of existingleases is considered to commence as of the acquisition date for purposes ofthis calculation.

 

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

 

# **NET LOSS PER SHARE**

Netloss per share is calculated based on the weighted average number of commonshares outstanding.  Stock optionsoutstanding and OP Units have not been included in the net loss per sharecalculation since their effect would be antidilutive.

 

**INCOME TAXES**

The Company is currently taxed as a Ccorporation.  Until the Company electsto be taxed as a REIT, it will be subject to federal income tax on its taxableincome at regular corporate rates.  Anydistribution by the Company to its stockholders will be subject to tax as adividend at the stockholder’s respective federal income tax rates.  Beginning in 2003, the Company intends toelect to be taxed as a REIT for federal income tax purposes.  The Company believes that it is organizedand will operate so as to qualify as a REIT. The qualification and taxation of the Company as a REIT depends upon itsability to meet, through actual annual operating results, distribution levels,share ownership requirements and various qualifications imposed under theInternal Revenue Code of 1986, as amended. Accordingly, while the Company intends to qualify as a REIT and believesthat it will be able to do so, the Company cannot predict that the actualresults of its operations for any particular year will satisfy therequirements.

 

If the Company fails to qualify as a REIT in anytaxable year, it will be subject to federal income taxes on its taxable incomeat regular corporate tax rates.  Inaddition, a REIT is subject to an entity level tax on the sale of property itheld before electing REIT status. During the 10-year period following its qualification as a REIT, theCompany will be subject to an entity level tax on the income it recognizes uponthe sale of assets, including all the assets transferred to it as part of theconsolidation, it held before electing REIT status in an amount up to theamount of the built-in gains at the time the Company becomes a REIT.

 

The potential tax relatedto this built-in gain is approximately $12,943,000.  A deferred tax liability has not been recorded for this potentialtax because the tax law provides a means by which the assets can be recoveredtax-free. The Company expects that it will ultimately hold the propertiessubject to the built-in gains tax throughout the 10-year holding period or to disposeof properties utilizing only tax-deferred exchanges.  If the Company’s expectation changes and it disposes of anyproperty that would become subject to the built-in gains tax upon the Company’squalification for REIT status, the entire $12,943,000 deferred tax liabilitywill be recorded immediately on the books of the Company.

 

**NOTE 3.  INVESTMENT IN UNCONSOLIDATED JOINT VENTURE**

 

The Company currently has no investments in operatingjoint ventures.  Prior to theConsolidation, SPPI84 held an investment in Sierra Mira Mesa Partners (“SMMP”),which it accounted for using the equity method.

 

SMMP is a California general partnershipformed in 1985 between SPPI84 and Sierra-Pacific Development Fund II(“SPDFII”), an affiliate of SPPI84, to develop and operate the real propertyknown as Mira Mesa, a 89,560 square foot office building located in San Diego,California.   At March 31, 2001,SPPI84’s interest in SMMP was 80.32%; the remaining 19.68% interest was ownedby SPDFII.  During the three monthsended March 31, 2001, SPPI84 recorded a loss from investment in SMMP of$20,450.

 

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On October 19, 2001, SPPI84 and SPDFII merged into a respectivesubsidiary of the Company pursuant to the Consolidation.  As a result, the assets and liabilities ofMira Mesa are included in the consolidated balance sheets of the Company atMarch 31, 2002 and December 31, 2001.

 

**NOTE 4.  NOTES PAYABLE**

 

The Company had the following mortgage loans, banklines, and notes payable outstanding as of March 31, 2002 and December 31, 2001(dollars in thousands):

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **2002** |    | **2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Unsecured loans with various lenders, bearing  interest at fixed rates between 8.00% and 20.00% at March 31, 2002 and  December 31, 2001, and maturing at various dates through October 1, 2005.                                                                                                                                                                                                                                                                                                                                                                         |   | $        | 995     |     | $      | 1,279 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Unsecured loans with various lenders, bearing  interest at variable rates between 5.02% and 6.25% at March 31, 2002 and  5.17% and 6.25% at December 31, 2001, and maturing at various dates through  November 5, 2002.                                                                                                                                                                                                                                                                                                                                                  |   | 52       |    | 72       |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Unsecured loans with various parties, non-interest  bearing, and maturing at various dates through January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 158      |    | 399      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Secured loans with various  lenders, net of unamortized premiums of $4,673 at March 31, 2002 and $4,829  at December 31, 2001, bearing interest at fixed rates between 5.00% and  12.00%, with monthly principal and interest payments ranging between $8 and  $269 and maturing at various dates through March 1, 2012.                                                                                                                                                                                                                                                 |   | 126,661  |    | 116,445  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Secured loans with various banks bearing interest at  variable rates ranging between 4.88% and 9.00% at March 31, 2002 and 4.93%  and 9.00% at December 31, 2001, and maturing at various dates through May 1,  2008.                                                                                                                                                                                                                                                                                                                                                    |   | 36,094   |    | 43,337   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Secured Series A & B  Bonds with a fixed interest rate of 6.39%, monthly principal and interest  payments of $74, and a maturity date of September 30, 2031.                                                                                                                                                                                                                                                                                                                                                                                                         |   | 11,783   |    | 11,816   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Secured Series C Bonds  with a fixed interest rate of 9.50%, semi-annual principal and interest  payments that increase by $5 from the previous semi-annual payment ($70 at  March 31, 2002 and December 31, 2001), and a maturity date of November 1,  2006.                                                                                                                                                                                                                                                                                                            |   | 765      |    | 765      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Secured loan with IDM  Participating Mortgage Income Fund (“IDM PMIF”), a California limited  partnership.  Entities owned by  William J. Carden own a 5% limited partnership interest and a 1% general  partnership interest in IDM PMIF.  Mr.  Carden is Chairman of the Board of the Company and an over 5% stockholder of  the Company.  The loan bears interest  at the Federal Discount Rate plus 3%, with a minimum of 12.12% and a maximum  of 15.15% (12.12% at March 31, 2002 and December 31, 2001), maturing on  November 30, 2002. |   | 1,000    |    | 1,000    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Unsecured loan with Brown  Parker and Leahy, LLP, a law firm in which Timothy R. Brown, a director of  the Company, is a partner.  The loan  bears interest at prime (4.75% at March 31, 2002 and 5.00% at December 31,  2001) and is payable on demand.                                                                                                                                                                                                                                                                                                            |   | 199      |    | 202      |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Unsecured loan with John N.  Galardi, a principal stockholder, with a fixed interest rate of 8.00%,  payable on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 1,600    |    | 1,600    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |     |    |     |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $        | 179,307 |     | $      | 176,915 |   |

 

Debt premiums are amortized into interestexpense over the terms of the related mortgages using the effective interestmethod.  As of March 31, 2002 andDecember 31, 2001, the unamortized debt premiums were $4,673,000 and$4,829,000, respectively.

 

## **REFINANCINGS**

In January 2002, the Company refinanced $4,500,000 ona loan partially secured by North Creek Office Park and entered into a new loanagreement in the amount of $5,625,000. The new loan bears interest at a 

 

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fixed rate of 7.58% per annum and matures in February2012.  Net proceeds of $639,000 were receivedas a result of the refinancing.

 

In March 2002, the Company refinanced $2,750,000 on aloan partially secured by Countryside Office Park and entered into a new loanagreement in the amount of $5,025,000. The new loan bears interest at a fixed rate of 7.38% per annum andmatures in March 2012.  Net proceeds of$1,887,000 were received as a result of the refinancing.

 

# **NOTES PAYABLE TO FORMER LIMITED PARTNERS**

Limited partners of the eight public limitedpartnerships who voted against the Consolidation had the option of electing toreceive notes instead of ASR shares. The notes, which totaled $2,291,671, bear interest at 5.92% per annumand mature in October 2009.  Interest ispayable semi-annually in arrears on each June 15 and December 15, commencingJune 15, 2002.  The notes may beredeemed at any time at the option of the Company, in whole or from time totime in part, at a redemption price equal to the sum of the principal amount ofthe notes being redeemed plus accrued interest thereon to the redemptiondate.  On March 18, 2002, $1,153,862 ofthe notes, plus accrued interest, were paid. Additional payments of $4,971 and $705,161, plus accrued interest, werepaid on April 1, 2002 and April 25, 2002, respectively.  These payments reduced the principal balanceof the notes to $427,677 as of April 25, 2002.

 

## **NOTE 5.  RELATED PARTY TRANSACTIONS**

 

Effective January 1, 2002, the Companyassumed, from a related party, operations of an executive suite in an officebuilding owned by the Company.  The noteand receivables due the Company for rent from the executive suite businessthrough the date of acquisition of $177,000 has been offset by reducing apayable owed by the Company to an entity owned by the related party.  No gain or loss was recorded as a result ofthe assumption.

 

Duringthe first quarter of 2002, the Company made payments totaling $521,808 on itsobligation to ASJ, Ltd., which is owned by Mr. Carden, his wife, and in a trustfor his children.  These paymentsreduced the balance due to ASJ, Ltd. to $200,000 as of March 31, 2002.

 

**NOTE 6.  SEGMENT INFORMATION**

 

As of March 31, 2002, the Company owned a diverseportfolio of properties comprising of office, office/warehouse, shoppingcenter, apartment, and developmental land. Each of these property typesrepresents a reportable segment with distinct uses and tenant types, whichrequire the Company to employ different management strategies. Each segmentcontains properties located in various regions and markets within the UnitedStates. The office portfolio consists primarily of suburban office buildings.The office/warehouse portfolio consists of properties designed for warehouse,distribution and light manufacturing for single-tenant or multi-tenant use. Theshopping center portfolio consists primarily of community shopping centers. Theproperties in the apartment portfolio are apartment buildings with units rentedto residential tenants on either a month-by-month basis or for terms of oneyear or less.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies. TheCompany evaluates performance of its property types based on net operatingincome derived by subtracting rental expenses and real estate taxes (operatingexpenses) from rental revenue. Significant information used by the Company forits reportable segments as of and for the quarters ended March 31, 2002, and2001 is as follows (dollars in thousands):

 

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|                        |   | **Office** |    | **Office/ Warehouse** |   | **Shopping Center** |   | **Apartment** |   | **Land Held for Development and Other** |   | **Property Total** |   |
|-----------------------------|--------|------------|---------|-----------------------|--------|---------------------|--------|---------------|--------|-----------------------------------------|--------|--------------------|--------|
| **2002**                    |   |       |    |                  |   |                |   |          |   |                                    |   |               |   |
| Rental revenue              |   | $          | 5,489   |                  | $      | 1,861               |   | $             | 551    |                                    | $      | 1,975              |   | — |   | $ | 9,876 |   |
| Property operating expenses |   | 1,855      |    | 569                   |   | 233                 |   | 889           |   | $                                       | 14     |               | 3,560  |   |
| Net operating income (NOI)  |   | $          | 3,634   |                  | $      | 1,292               |   | $             | 318    |                                    | $      | 1,086              |   | $ | (14 | ) | $ | 6,316 |   |
| Real estate assets, net     |   | $          | 131,719 |                  | $      | 47,073              |   | $             | 17,526 |                                    | $      | 47,281             |   | $ | 4,043 |   | $ | 247,642 |   |
|                        |   |       |    |                  |   |                |   |          |   |                                    |   |               |   |
| **2001**                    |   |       |    |                  |   |                |   |          |   |                                    |   |               |   |
| Rental revenue              |   | —     |    | $                     | 165    |                | — |          | — |                                    | — |               | $      | 165 |   |
| Property operating expenses |   | —     |    | 59                    |   | —              |   | —        |   | —                                  |   | 59                 |   |
| Net operating income (NOI)  |   | —     |    | $                     | 106    |                | — |          | — |                                    | — |               | $      | 106 |   |
| Real estate assets, net     |   | —     |    | $                     | 1,198  |                | — |          | — |                                    | — |               | $      | 1,198 |   |

 

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

 

|                                                 |   | **Quarter Ended March 31,** |   |
|------------------------------------------------------|--------|-----------------------------|--------|
|                                                 |   | **2002**                    |   | **2001** |   |
| **REVENUES**                                         |   |                        |   |   |   |
| Total revenues for reportable segments               |   | $                           | 9,876  |   | $ | 165 |   |
| Other revenues                                       |   | 79                          |   | 44 |   |
| Total consolidated revenues                          |   | $                           | 9,955  |   | $ | 209 |   |
|                                                 |   |                        |   |   |   |
| **NET INCOME**                                       |   |                        |   |   |   |
| NOI for reportable segments                          |   | $                           | 6,316  |   | $ | 106 |   |
| Unallocated amounts:                                 |   |                        |   |   |   |
| Interest and other income                            |   | 79                          |   | 44 |   |
| General and administrative expenses                  |   | (2,417                      | )      | (95 | ) |
| Depreciation and amortization                        |   | (2,982                      | )      | (47 | ) |
| Interest expense                                     |   | (3,337                      | )      | (31 | ) |
| Loss from investment in unconsolidated joint venture |   | –                      |   | (20 | ) |
| Loss from operations before minority interests       |   | (2,341                      | )      | (43 | ) |
| Minority interests                                   |   | 240                         |   | — |   |
| Net loss                                             |   | $                           | (2,101 | ) | $ | (43 | ) |

 

|                                       |   | **Quarter Ended March 31,** |    |
|--------------------------------------------|--------|-----------------------------|---------|
|                                       |   | **2002**                    |    | **2001** |   |
| **ASSETS**                                 |   |                        |    |   |   |
| Total assets for reportable segments       |   | $                           | 247,642 |   | $ | 1,198 |   |
| Cash and cash equivalents                  |   | 1,717                       |    | 4 |   |
| Tenant and other receivables, net          |   | 1,267                       |    | 61 |   |
| Deferred rent receivable                   |   | 286                         |    | 50 |   |
| Note receivable from affiliate, net        |   | —                      |    | 1,618 |   |
| Accounts receivable from affiliate         |   | —                      |    | 1,034 |   |
| Investment in management company           |   | 4,000                       |    | — |   |
| Deposits held in escrow                    |   | 1,687                       |    | — |   |
| Investment in unconsolidated joint venture |   | —                      |    | 6,857 |   |
| Prepaid and other assets, net              |   | 7,109                       |    | 253 |   |
| Total consolidated assets                  |   | $                           | 263,708 |   | $ | 11,075 |   |

 

**NOTE 7.  SUBSEQUENT EVENTS**

 

On April 8, 2002, the Company refinanced $3,650,000 ona loan secured by Oak Grove Commons, an office/warehouse property, and enteredinto a new loan agreement in the amount of $4,313,700.  The new 

 

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loan bears interest at a fixed rate of 7.61% per annumand matures in May 2012.  Net proceedsof $383,000 were received as a result of the refinancing. The Companyrecognized a loss on early extinguishment of debt of $72,000 due to thewrite-off of unamortized deferred loan costs associated with the original loan.

 

On April 16, 2002, the Company’s Board of Directorsdeclared a first quarter cash dividend in the amount of $.20 per commonshare.  The dividend will be paid onJune 3, 2002 to common stockholders of record on April 30, 2002.

 

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

 

**OVERVIEW**

 

American SpectrumRealty, Inc. is a full-service real estate corporation which owns, manages andoperates various income-producing properties. As of March 31, 2002, through the Operating Partnership, the Companyowned and operated 33 properties which consisted of 12 office, 11office/warehouse, five shopping center, four apartment properties, and onedevelopmental land property.  Theproperties are located in four geographic regions in nine states.  The Company plans to expand its business andnet assets by acquiring additional properties. The Company will focus primarily on office and office/warehouseproperties located in Texas, California, Arizona and the Midwest.  The Company intends to qualify as a realestate investment trust as defined under the Internal Revenue Code of 1986, asamended, and to elect to be treated as a REIT beginning in 2003.

 

On October 19, 2001, the Company was thelegal acquirer and registrant in the Consolidation.  Pursuant to the Consolidation, subsidiaries of the Company mergedwith eight public limited partnerships, acquired the assets and liabilities oftwo private entities managed by CGS and acquired certain assets and liabilitiesof CGS and the majority owned affiliates of CGS.  The accounting acquirer in the Consolidation was SPPI84, one ofthe eight public limited partnerships. Pursuant to the Consolidation, partners of the public partnershipsreceived shares in the Company or promissory notes in exchange for theirpartnership units and owners of existing related entities exchanged ownershipinterests in real estate for ASR shares or units in the Operating Partnership,an entity formed for this purpose and initially wholly owned by theCompany.   Prior to October 19, 2001,the Company was a wholly owned subsidiary of CGS.

 

The following discussion and analysis of thefinancial condition and results of operations of the Company should be read inconjunction with the accompanying consolidated financial statements of theCompany, including the notes thereto, included in Item 1.

 

The major accountingpolicies followed by the Company are listed in Note 2. — Summary of SignificantAccounting Policies. — in the Notes to the Consolidated FinancialStatements.  The consolidated financialstatements of the Company are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the results of operations during the reportingperiod. Actual results could differ materially from those estimates.

 

The Companybelieves the following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements:

 

•                  Certain leasesprovide for tenant occupancy during periods for which no rent is due or whereminimum rent payments increase during the term of the lease.  The Company records rental income for thefull term of each lease on a straight-line basis.  Accordingly, a receivable is recorded from tenants for the amountthat is expected to be collected over the remaining lease term rather thancurrently (Deferred Rent Receivable). When a property is acquired, the term of existing leases is consideredto commence as of the acquisition date for purposes of this calculation.

 

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•                  Rental properties are stated at cost, netof accumulated depreciation, unless circumstances indicate that cost, net ofaccumulated depreciation, cannot be recovered, in which case, the carryingvalue 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 eachproperty; and (ii) is computed using estimated sales price, as determined byprevailing market values for comparable properties and/or the use ofcapitalization rates multiplied by annualized net operating income based uponthe age, construction and use of the building. The fulfillment of the Company’s plans related to each of its propertiesis dependent upon, among other things, the presence of economic conditionswhich will enable the Company to continue to hold and operate the propertiesprior to their eventual sale. Due to uncertainties inherent in the valuationprocess and in the economy, it is reasonably possible that the actual resultsof operating and disposing of the Company’s properties could be materiallydifferent than current expectations.

 

•                  The Company is currently taxed as a Ccorporation.  Until the Company electsto be taxed as a REIT, it will be subject to federal income tax on its taxableincome at regular corporate rates.  Anydistribution by the Company to its stockholders will be subject to tax as adividend at the stockholder’s respective federal income tax rates.  Beginning in 2003, the Company intends toelect to be taxed as a REIT for federal income tax purposes.  The Company believes that it is organized andwill operate so as to qualify as a REIT. The qualification and taxation of the Company as a REIT depends upon itsability to meet, through actual annual operating results, distribution levels,share ownership requirements and various qualifications imposed under theInternal Revenue Code of 1986, as amended. Accordingly, while the Company intends to qualify as a REIT and believesthat it will be able to do so, the Company cannot predict that the actualresults of its operations for any particular year will satisfy therequirements.

 

# **RESULTS OF OPERATIONS**

 

## ***Comparison of the three months endedMarch 31, 2002 to the three months ended March 31, 2001.***

The statement of operations for the three months endedMarch 31, 2001 solely reflects the operating results of SPPI84, the accountingacquirer in the Consolidation. Therefore, a discussion of operating results for the quarters endedMarch 31, 2002 and 2001 is not a true comparison.

 

The Company recorded rental revenue of $9,876,000 andexpenses of $12,296,000 for the three months ended March 31, 2002, whichreflect the operations of the Company’s 33 properties.  The weighted average occupancy of theproperties at March 31, 2002 was 87%. Expenses not anticipated to be recurring totaled approximately $250,000due to professional fees associated with the Consolidation.  Rental revenue of $165,000 and operatingexpenses of $232,000 generated in the corresponding period in the prior yearreflected the operations SPPI84’s sole wholly owned property, Sierra Valencia.

 

SPPI84 recorded a $20,000 loss from investment in its unconsolidatedjoint venture partner, SMMP, during the three months ended March 31, 2001.  This represents SPPI84’s share of lossesgenerated by SMMP and SMMP’s joint venture partners.  The Company had no investments in unconsolidated joint venturesfor the quarter ended March 31, 2002.

 

Holders of OP Units share ofthe loss for the three months ended March 31, 2002 was $276,000, whichrepresented the 11.6% limited partner interest in the Operating Partnership notheld by the Company at March 31, 2002. In addition, minority interest expense of $36,000 was recognized as aresult of income generated on a partially owned property.  SPPI84 had no minority interests in thecorresponding period of the prior year.

 

# **LIQUIDITY AND CAPITAL RESOURCES**

 

The Company used net cash in operatingactivities of $935,000 during the three months ended March 31, 2002.   This amount was comprised of (i) net lossof $2,101,000 adjusted for non-cash items of $2,722,000, which includeddepreciation and amortization of $2,982,000, and ii) the net decrease inoperating assets 

 

16

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and liabilities of $1,556,000.  The net decrease in operating assets andliabilities was primarily due to the pay-down of payables associated with theConsolidation.

 

Cash used in investing activities of$1,032,000 for the three months ended March 31, 2002 was comprised of (i)$1,002,000 paid for capital expenditures, which in large part were related torenovations on an apartment property, and (ii) $30,000 in distributions to theminority owner of the Company’s Creekside/Riverside property.

 

Net cash provided by financing activitiesamounted to $1,400,000 during the three months ended March 31, 2002.  Proceeds received from borrowings totaled$10,650,000 as detailed below. Repayment of borrowings, which consisted of $7,250,000 from refinancesand $852,000 in scheduled principal payments, totaled $8,102,000.  Note payments to former limited partnerstotaling $1,154,000 were also made during the period.

 

In January 2002, the Company refinanced $4,500,000 ona loan partially secured by North Creek Office Park and entered into a new loanagreement in the amount of $5,625,000. The new loan bears interest at a fixed rate of 7.58% per annum andmatures in February 2012.

 

In March 2002, the Company refinanced $2,750,000 on aloan partially secured by Countryside Office Park and entered into a new loanagreement in the amount of $5,025,000. The new loan bears interest at a fixed rate of 7.38% per annum andmatures in March 2012.

 

The Company expects to meet its short-termliquidity requirements from cash generated by operations and refinancings.  The Company believes that its cash generatedby operations and refinancings will be adequate to meet normal operatingexpenses.

 

The Company is projecting the need forsubstantial cash to fund obligations other than normal operating expenses in2002.  These obligations include capitalcosts related to re-leasing space, improvements to properties, repayment ofnotes issued in the Consolidation, and payment of other liabilities arisingfrom a litigation settlement agreement that was subsequently declaredvoid.  The Company is in the process ofrefinancing several properties to generate the cash necessary to fund thenon-operating capital costs.

 

The Company will considerissuance of stock or OP Units in order to acquire additional properties.  There can be no assurance that the Companywill be successful in doing so.

 

The Company intends to qualify as a REITbeginning in 2003.  If the Companybecomes a REIT, it must pay distributions to investors of at least 90% of itstaxable net income.  The Company anticipatescash generated by operations will be sufficient to meet distributionrequirements.

 

**FUNDS FROM OPERATIONS**

In October 1999, the Board of Governors of NAREITissued `White Paper on FFO-October 1999’ to clarify its definition of Fundsfrom Operations (FFO).  Theclarification was effective January 1, 2000 and requires restatement for allperiods presented in financial statements or tables. FFO, as clarified byNAREIT, represents “net income excluding gains (or losses) from sales ofproperty, plus depreciation and amortization, and after adjustments forunconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventureswill be calculated to reflect funds from operations on the same basis.”  In 2002, NAREIT clarified that FFO relatedto assets held for sale, sold or otherwise transferred and included in resultsof discontinued operations should continue to be included in FFO.  This clarification was effective January 1,2002 and requires restatement for all periods presented financial statements ortables.   The Company computes FFO in accordancewith the clarified definition except that we eliminate straight-line rent fromthe calculation, which may not be comparable to FFO reported by REITs thatinterpret the clarified definition differently than we do.  The Company believes that FFO is helpful toinvestors as a measure of performance of an equity REIT because, along withcash flow from operating activities, FFO provides investors with an indicationof our ability in incur and service debt, to make capital expenditures and tofund other cash needs.  FFO does notrepresent net income or cash flows from operations as defined by GAAP, andshould not be considered as an alternative to net income 

 

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(determined in accordance with GAAP) as an indicatorof the Company’s operating performance or as an alternative to cash flows fromoperating, investing and financing activities (determined in accordance withGAAP) as a measure of liquidity.  FFOdoes not necessarily indicate that cash flows will be sufficient to fund all ofthe Company’s cash needs including principal amortization, capital improvementsand distributions to stockholders. Further, FFO as disclosed by other companies may not be comparable to theCompany’s calculation of FFO.

 

The following table setsforth the Company’s calculation of FFO for the three months ended March 31,2002 (in thousands except weighted average shares and per share amounts):  FFO for the three months ended March 31,2001 is not presented as it is not comparable or meaningful.

** **
|                                           |   | **March 31, 2002** |   |
|------------------------------------------------|--------|--------------------|--------|
| Loss from operations before minority interests |   | $                  | (2,341 | ) |
| Depreciation and amortization                  |   | 2,982              |   |
| Adjustment for straight-line rents             |   | (137               | )      |
| FFO                                            |   | 504                |   |
|                                           |   |               |   |
| Basic weighted average shares                  |   | 5,529,058          |   |
| FFO per share                                  |   | $                  | .09    |   |

 

**INFLATION**

Substantially all of the leases at the industrial andretail properties provide for pass-through to tenants of certain operatingcosts, including real estate taxes, common area maintenance expenses, andinsurance. Leases at the multifamily properties generally provide for aninitial term of one month to one year and allow for rent adjustments at thetime of renewal. Leases at the office properties typically provide for rentadjustment and pass-through of increases in operating expenses during the termof the lease. All of these provisions may permit the Company to increase rentalrates 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.

 

**FORWARD-LOOKING STATEMENTS**

ThisReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the Securities andExchange Act of 1934.  Theseforward-looking statements are based on Management beliefs and expectations,which may not be correct.  Importantfactors that could cause actual results to differ materially from theexpectations reflected in these forward-looking statements include the following:ASR’s level of indebtedness and ability to refinance its debt; the fact thatASR’s predecessors have had a history of losses in the past; unforeseenliabilities which could arise as a result of the prior operations of companiesacquired in the Consolidation; risks inherent in the Company’s acquisition anddevelopment of properties in the future, including risks associated with ASR’sstrategy of investing in under-valued assets; general economic, business andmarket conditions; changes in federal and local laws, and regulations; increasedcompetitive pressures; and other factors, including the factors set forthbelow, as well as factors set forth elsewhere in this Report on Form 10-Q.

 

**RISK FACTORS**

Stockholders or potential stockholders should read the“Risk Factors” section of the Company’s latest annual report on Form 10-K filedwith the Securities and Exchange Commission in conjunction with this quarterlyreport on Form 10-Q to better understand the factors affecting the Company’sresults of operations and the Company’s common stock share price.

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

**INTEREST RATES**

The Company’s primary market risk exposure is tochanges in interest rates obtainable on its secured and unsecured borrowings.

 

It is the Company’s policy to manage its exposure tofluctuations in market interest rates for its borrowings through the use offixed rate debt instruments to the extent that reasonably favorable rates areobtainable 

 

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with such arrangements. In order to maximize financialflexibility when selling properties and minimize potential prepayment penaltieson fixed rate loans, the Company has also entered into variable rate debtarrangements.

 

The Company has entered into interest rate swap agreementsto manage its interest rate risk.  Theagreements, in nominal amounts totaling $21,800,000, effectively fix theinterest rate at 2.68% plus the applicable variable rate margin (5.68% at March31, 2002).

 

At March 31, 2002, the Company’s total indebtednessincluded fixed-rate debt of $143,099,946 and floating-rate indebtedness of$37,345,011.  The Company continuallyreviews the portfolio’s interest rate exposure in an effort to minimize therisk of interest rate fluctuations.  TheCompany does not have any other material market-sensitive financialinstruments.

 

A change of 1.00% in the index rate to which theCompany’s variable rate debt is tied would change the annual interest incurredby the Company by $373,450, based upon the balances outstanding on variablerate instruments at March 31, 2002.

 

 

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**PARTII.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

The following is information concerningmaterial, pending legal proceedings to which the Company or its subsidiaries isa party or of which any of their property is subject in which there werematerial developments during the quarter:

 

Lewis-Madison Matter

On or about September 27, 2001, Robert L.Lewis, Madison Liquidity Investors 103 LLC and Madison Liquidity Investors 112LLC (“Plaintiffs”), purporting to represent themselves and all others similarlysituated, initiated an action (the “Action”) against the Company, CGS, WilliamJ. Carden, John N. Galardi and S-P Properties, Inc. in the Orange CountySuperior Court, Case No. 01 CC 000394 (“Defendants”) (hereinafter refer to as“Plaintiffs’ Compliant”).

 

Plaintiffs’ Complaint in the Action allegesclaims against the Company and others for breach of fiduciary duty and breachof contract.  Plaintiffs’ Complaintchallenges the Consolidation, although the Consolidation was disclosed in aProspectus/Consent Solicitation filed with the Securities and ExchangeCommission and was approved by a majority vote of the limited partners of thepartnerships. Plaintiffs allege that the approval was invalid and that theConsolidation constitutes a breach of fiduciary duty by each of theDefendants.  Plaintiffs further allegethat the Consolidation constitutes a breach of partnership agreements governingthe partnerships.

 

Plaintiffs’ prayer for relief seeks thefollowing: 1) an injunction prohibiting the Defendants from commingling; 2)imposition of a constructive trust providing for liquidation of the assets ofthe partnerships and a distribution of the assets to the former limitedpartners therein; 3) a judicial declaration that the Action may be maintainedas a class action; 4) monetary/compensatory damages; 5) Plaintiffs’ costs ofsuit, including attorneys’, accountants’ and expert fees; and 6) a judicialorder of dissolution of the partnerships and appointment of a liquidatingtrustee.

 

The Company intends to vigorously defend against theclaims asserted in the action.  OnFebruary 13, 2002, the Company filed a Demurrer to Plaintiff Complaintcontending Plaintiffs lack standing to assert some of the claims alleged, thatPlaintiffs’ Complaint fails to state a cause of action for breach of fiduciaryduty against the Company and that the Plaintiffs’ Complaint fails to state acause of action for breach of contract against the Company.  On March 15, 2002, the Orange CountySuperior Court sustained the Company’s Demurrer on the ground that Plaintiffs’Complaint fails to state a cause of action for either breach of fiduciary dutyor breach of contract against the Company, and overruled the Company’s Demurreron the ground of standing.  The Courtgave the Plaintiffs’ twenty days leave to amend their Complaint, which amendedcompliant was received by the Company on April 3, 2002.  On May 8, 2002, the Company responded to theamended complaint by Dumurrer.  TheCourt set a hearing for June 14, 2002.

 

Other Matters

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

 

 

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**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)  Exhibits:

 

The Exhibit Index attached hereto is herby incorporatedby reference to this item.

 

(b)  Reports onForm 8-K:

 

On February 15, 2002, a report on Form 8-K was filedwith respect to a change in certifying accountants

On February 27, 2002, a report on Form 8-K was filedwith respect to a change in certifying accountants

 

 

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**SIGNATURES**

 

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

 

**AMERICANSPECTRUM REALTY INC**

 

By: American SpectrumRealty Inc.,

 
| *Date: May 10, 2002*                                                                /s/ William J. Carden
*                                                                               *                                                            

*                                                                               *William J. Carden

                                                                                Chairman of the Board,  President

                                                                                and Chief Executive Officer

 
*Date: May 10, 2002*                                                                /s/ Thomas N. Thurber
*                                                                               *                                                            

*                                                                               *Thomas N. Thurber
*                                                                                Chief Financial Officer and*
                                                                                Senior Vice President

 
*Date: May 10, 2002*                                                                /s/ Patricia A. Nooney
*                                                                                 *                                                           

*                                                                                 *Patricia  A. Nooney

                                                                                 Principal Accounting Officer

                                                                                 Senior Vice President

 

 

 

  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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

 

 

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**EXHIBIT INDEX**

 

**Exhibit No.****            Exhibit Title**

 

10.01                                                           EmploymentAgreement dated October 15, 2001 between the Company and Harry A. Mizrahi

 

10.02                                                                     EmploymentAgreement dated April 3, 2002 between the Company and Paul E. Perkins

 

10.03                                                                     EmploymentAgreement dated April 16, 2002 between the Company and Patricia A. Nooney

 

 

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