##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 COMMISSION FILE NUMBER 001-16785
 American Spectrum Realty, Inc.
  State of Maryland
    
    52-2258674(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)5850 San Felipe, Suite 450Houston, Texas 77057
    
    77057(Address of principal executive offices)
    
    (Zip Code)
 
  
  þ o
 o þ
 o þ




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TABLE OF CONTENTS
  
 Page No.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    
    3Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31, 2004
    
    
    3Consolidated Statements of Operations for the three and
nine months ended September 30, 2005 and 2004 (unaudited)
    
    
    4Consolidated Statement of Stockholders Equity for the
nine months ended September 30, 2005 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the nine months
ended September 30, 2005 and 2004 (unaudited)
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    23Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4
    
    Controls and Procedures
    
    
    31PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    32Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    32Certification pursuant to Section 302Certification pursuant to Section 1350
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED BALANCE SHEETS
  September 30, 2005
    
    
    December 31, 2004(Unaudited)ASSETSReal estate held for investment
    
    $
    179,265
    
    
    $
    176,401Accumulated depreciation
    
    
    31,921
    
    
    
    24,576Real estate held for investment, net
    
    
    147,344
    
    
    
    151,825Real estate held for sale
    
    
    13,453
    
    
    
    19,861Cash and cash equivalents
    
    
    848
    
    
    
    589Tenant and other receivables, net of allowance for doubtful accounts of $32 and $174,
respectively (including $244 from related party)
    
    
    718
    
    
    
    619Deferred rents receivable
    
    
    1,688
    
    
    
    1,550Deposit held in escrow
    
    
    552
    
    
    
    Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    10,234
    
    
    
    9,101Total Assets
    
    $
    178,837
    
    
    $
    187,545LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable, net of premiums of $2,011 and $2,355, respectively
    
    $
    134,835
    
    
    $
    134,059Notes payable, litigation settlement
    
    
    9,512
    
    
    
    9,512Liabilities related to real estate held for sale
    
    
    11,969
    
    
    
    17,483Accounts payable
    
    
    2,734
    
    
    
    2,321Deferred tax liability
    
    
    1,109
    
    
    
    1,109Accrued and other liabilities (including $329 and $185, respectively,
to related parties)
    
    
    6,764
    
    
    
    6,142Total Liabilities
    
    
    166,923
    
    
    
    170,626Minority Interest
    
    
    4,913
    
    
    
    5,492Commitments and Contingencies:Stockholders Equity:Preferred stock, $.01 par value; authorized, 25,000,000 shares, none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 1,598,130
and 1,597,160 shares, respectively; outstanding, 1,432,635 and 1,509,801 shares,
respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    46,055
    
    
    
    46,031Accumulated deficit
    
    
    (36,428
    )
    
    
    (32,623
    )Receivable from principal stockholders
    
    
    (950
    )
    
    
    (950
    )Deferred compensation
    
    
    
    
    
    
    (55
    )Treasury stock, at cost, 165,495 and 87,359 shares, respectively
    
    
    (1,692
    )
    
    
    (992
    )Total Stockholders Equity
    
    
    7,001
    
    
    
    11,427Total Liabilities and Stockholders Equity
    
    $
    178,837
    
    
    $
    187,545
  3




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AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUES:Rental revenue
    
    $
    6,036
    
    
    $
    5,535
    
    
    $
    17,955
    
    
    $
    17,329Interest and other income
    
    
    79
    
    
    
    49
    
    
    
    334
    
    
    
    209Total revenues
    
    
    6,115
    
    
    
    5,584
    
    
    
    18,289
    
    
    
    17,538EXPENSES:Property operating expense
    
    
    2,927
    
    
    
    2,255
    
    
    
    7,791
    
    
    
    6,465Corporate general and administrative
    
    
    901
    
    
    
    1,243
    
    
    
    2,745
    
    
    
    3,551Depreciation and amortization
    
    
    2,641
    
    
    
    2,358
    
    
    
    7,791
    
    
    
    6,995Interest expense
    
    
    2,640
    
    
    
    2,862
    
    
    
    8,004
    
    
    
    8,173Total expenses
    
    
    9,109
    
    
    
    8,718
    
    
    
    26,331
    
    
    
    25,184OTHER LOSS:Loss on extinguishment of debt
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (827
    )Total other loss
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (827
    )Net loss before minority interest and discontinued operations
    
    
    (2,994
    )
    
    
    (3,348
    )
    
    
    (8,042
    )
    
    
    (8,473
    )Minority interest
    
    
    197
    
    
    
    704
    
    
    
    555
    
    
    
    1,390Net loss before discontinued operations
    
    
    (2,797
    )
    
    
    (2,644
    )
    
    
    (7,487
    )
    
    
    (7,083
    )Discontinued operations:Loss from discontinued operations
    
    
    (71
    )
    
    
    (18
    )
    
    
    (313
    )
    
    
    (335
    )Gain (loss) on sale of discontinued operations
    
    
    1,535
    
    
    
    (2,298
    )
    
    
    3,995
    
    
    
    (2,298
    )Income (loss) from discontinued operations
    
    
    1,464
    
    
    
    (2,316
    )
    
    
    3,682
    
    
    
    (2,633
    )Net loss
    
    $
    (1,333
    )
    
    $
    (4,960
    )
    
    $
    (3,805
    )
    
    $
    (9,716
    )Basic and diluted per share data:Net loss before discontinued operations
    
    $
    (1.94
    )
    
    $
    (1.69
    )
    
    $
    (5.08
    )
    
    $
    (4.54
    )Income (loss) from discontinued operations
    
    
    1.02
    
    
    
    (1.48
    )
    
    
    2.50
    
    
    
    (1.69
    )Net loss
    
    $
    (0.92
    )
    
    $
    (3.17
    )
    
    $
    (2.58
    )
    
    $
    (6.23
    )Basic weighted average shares used
    
    
    1,441,866
    
    
    
    1,564,885
    
    
    
    1,472,549
    
    
    
    1,558,859
  4




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AMERICAN SPECTRUM REALTY INC.
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
  ReceivableAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    fromCommon
    
    Paid-In
    
    Accumulated
    
    Deferred
    
    Treasury
    
    Principal
    
    TotalStock
    
    Capital
    
    Deficit
    
    Compensation
    
    Stock
    
    Stockholders
    
    EquityBalance, December 31, 2004
    
    $
    16
    
    
    $
    46,031
    
    
    $
    (32,623
    )
    
    $
    (55
    )
    
    $
    (992
    )
    
    $
    (950
    )
    
    $
    11,427Conversion of operating
partnership
units to common stock
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )
    
    
    
    
    
    
    (700
    )Amortization of
deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    55Net loss
    
    
    
    
    
    
    
    
    
    
    (3,805
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,805
    )Balance, September 30, 2005
    
    $
    16
    
    
    $
    46,055
    
    
    $
    (36,428
    )
    
    $
    
    
    
    $
    (1,692
    )
    
    $
    (950
    )
    
    $
    7,001
  5




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AMERICAN SPECTRUM REALTY, INC
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine months Ended September 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,805
    )
    
    $
    (9,716
    )Adjustments to reconcile net loss to net cash used in operating activities:(Income) loss from discontinued operations
    
    
    (3,682
    )
    
    
    2,633Depreciation and amortization
    
    
    7,791
    
    
    
    6,995Deferred rental income
    
    
    (154
    )
    
    
    (441
    )Minority interest
    
    
    (555
    )
    
    
    (1,390
    )Deferred compensation expense
    
    
    55
    
    
    
    83Mark to market adjustments on interest rate protection agreements
    
    
    
    
    
    
    (65
    )Interest on receivable from principal stockholders
    
    
    (39
    )
    
    
    (50
    )Loss on extinguishment of debt
    
    
    
    
    
    
    827Amortization of note payable premiums, included in interest expense
    
    
    (344
    )
    
    
    (391
    )Amortization of note receivable discount, included in interest income
    
    
    
    
    
    
    (58
    )Changes in operating assets and liabilities:Increase in tenant and other receivables
    
    
    (110
    )
    
    
    (86
    )Increase in accounts payable
    
    
    413
    
    
    
    201Increase in prepaid and other assets
    
    
    (1,796
    )
    
    
    (2,362
    )Increase in accrued and other liabilities
    
    
    803
    
    
    
    1,124Net cash used in operating activities  continuing operations:
    
    
    (1,423
    )
    
    
    (2,696
    )Net cash provided by operating activities  discontinued operations:
    
    
    724
    
    
    
    329CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds received from sales of real estate asset
    
    
    9,072
    
    
    
    9,992Capital improvements to real estate assets
    
    
    (2,916
    )
    
    
    (3,929
    )Real estate acquisition
    
    
    
    
    
    
    (138
    )Collections on mortgage loan receivable
    
    
    
    
    
    
    28Net cash provided by investing activities:
    
    
    6,156
    
    
    
    5,953CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings  refinances
    
    
    20,228
    
    
    
    18,750Proceeds from borrowings  other
    
    
    
    
    
    
    458Repayment of borrowings  property sale
    
    
    (5,325
    )
    
    
    (7,041
    )Repayment of borrowings  refinances
    
    
    (17,302
    )
    
    
    (14,620
    )Repayment of borrowings  scheduled payments
    
    
    (1,652
    )
    
    
    (2,063
    )Repayment of borrowing from principal stockholder and director
    
    
    (532
    )
    
    
    Repurchase of common stock
    
    
    (615
    )
    
    
    Net cash used in financing activities:
    
    
    (5,198
    )
    
    
    (4,516
    )Increase (decrease) in cash
    
    
    259
    
    
    
    (930
    )Cash, beginning of period
    
    
    589
    
    
    
    2,937Cash, end of period
    
    $
    848
    
    
    $
    2,007SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    8,502
    
    
    $
    8,788Cash paid for income taxes
    
    
    88
    
    
    
    25
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Nine months Ended September 30,2005
    
    
    2004SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Note receivable settled through acquisition of real estate asset
    
    $
    
    
    
    $
    1,722Deposits held in escrow for acquisition of real estate assets
    
    
    552
    
    
    
    1,365Conversion of operating partnership units into common stock
    
    
    24
    
    
    
    92Financing in connection with repurchase of common stock
    
    
    85
    
    
    
    Financing in connection with cancellation of participating profit agreement
    
    
    10
    
    
    
    Issuance of common stock in acquisition of real estate asset
    
    
    
    
    
    
    71Payable to principal shareholders offset against receivable from principal shareholders
    
    
    
    
    
    
    120
  7




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AMERICAN SPECTRUM REALTY, INC.
 
 Notes to Consolidated Financial Statements
 NOTE 1. DESCRIPTION OF BUSINESS
       8




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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
    RECLASSIFICATIONS
   USE OF ESTIMATES
  NEW ACCOUNTING PRONOUNCEMENTS
 Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in
Interim Financial Statement.
 9




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Exchanges of Nonmonetary Assets  an amendment of
APB Opinion No. 29,
 ShareBased Payment
 REAL ESTATE
   Building and Improvements
    
    5 to 40 yearsTenant Improvements
    
    Term of the related leaseFurniture and Equipment
    
    3 to 5 years
 CASH EQUIVALENTS
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  10




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DERIVATIVE FINANCIAL INSTRUMENTS
   DEFERRED FINANCING AND OTHER FEES
  STOCK-BASED COMPENSATION
    11




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Three Months Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (1,333
    )
    
    $
    (4,960
    )
    
    $
    (3,805
    )
    
    $
    (9,716
    )Deduct: Employee compensation
expense for stock option
grants under fair value
method, net of related tax
effects
    
    
    (13
    )
    
    
    (44
    )
    
    
    (55
    )
    
    
    (141
    )Pro forma net loss
    
    $
    (1,346
    )
    
    $
    (5,004
    )
    
    $
    (3,860
    )
    
    $
    (9,857
    )Per share data:Basic and diluted, as reported
    
    $
    (.92
    )
    
    $
    (3.17
    )
    
    $
    (2.58
    )
    
    $
    (6.23
    )Basic and diluted, proforma
    
    $
    (.93
    )
    
    $
    (3.20
    )
    
    $
    (2.62
    )
    
    $
    (6.32
    )
 MINORITY INTEREST
  RENTAL REVENUE
    NET LOSS PER SHARE
  12




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INCOME TAXES
   SEGMENTS
  ALLOWANCE FOR DOUBTFUL ACCOUNTS
  NOTE 3. REAL ESTATE
 ACQUISITIONS
 2005.
  2004.
  13




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DISPOSITIONS
 2005.
   2004.
   INTANGIBLE ASSETS PURCHASED
   14




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NOTE 4. DISCONTINUED OPERATIONS
    Condensed Consolidated Balance Sheet
    
    September 30, 2005
    
    
    December 31, 2004Real estate
    
    $
    12,906
    
    
    $
    19,127Other
    
    
    547
    
    
    
    734Real estate assets held for sale
    
    $
    13,453
    
    
    $
    19,861Note payable, net
    
    $
    11,498
    
    
    $
    17,224Accounts payable
    
    
    95
    
    
    
    14Accrued and other liabilities
    
    
    376
    
    
    
    245Liabilities related to real estate held for sale
    
    $
    11,969
    
    
    $
    17,483
 Net income (loss) from discontinued operations.
    Three Months Ended
    
    
    Nine Months EndedCondensed Consolidated Statements of Operations
    
    September 30, 2005
    
    
    September 30, 2005Rental revenue
    
    $
    884
    
    
    $
    2,533Total expenses
    
    
    955
    
    
    
    2,846Net loss from discontinued operations before gain on sale
    
    
    (71
    )
    
    
    (313
    )Gain on sale of discontinued operations
    
    
    1,535
    
    
    
    3,995Net gain from discontinued operations
    
    $
    1,464
    
    
    $
    3,682
 Three Months Ended
    
    
    Nine Months EndedCondensed Consolidated Statements of Operations
    
    September 30, 2004
    
    

September 30, 2005Rental revenue
    
    $
    1,290
    
    
    $
    3,990Total expenses
    
    
    1,308
    
    
    
    4,325Net loss from discontinued operations before gain on sale
    
    
    (18
    )
    
    
    (335
    )Gain on sale of discontinued operations
    
    
    (2,298
    )
    
    
    (2,298
    )Net loss from discontinued operations
    
    $
    (2,316
    )
    
    $
    (2,633
    )
 NOTE 5. MORTGAGE LOAN RECEIVABLE
 15




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NOTE 6. NOTES PAYABLE, NET OF PREMIUMS
  2005
    
    
    2004Secured loans with various lenders, net of unamortized premiums of $2,011 at
September 30, 2005 and $2,355 at December 31, 2004, bearing interest at fixed rates
between 5.38% and 10.50% at September 30, 2005 and between 5.65% and 10.50% at
December 31, 2004, with monthly principal and interest payments ranging between $2
and $269 at September 30, 2005 and December 31, 2004, and maturing at various dates
through September 1, 2015.
    
    $
    123,228
    
    
    $
    131,653Secured loans with various banks bearing interest at variable rates ranging between
7.75% and 9.25% at September 30, 2005, and 5.50% and 7.50% at December 31, 2004,
and maturing at various dates through November 1, 2006.
    
    
    11,298
    
    
    
    1,337Secured loan bearing interest at prime plus 1% maturing July 27, 2006
    
    
    95
    
    
    
    Unsecured loans bearing interest at prime plus 1% maturing May 31, 2008
    
    
    200
    
    
    
    300Unsecured loan bearing interest at a fixed rate of 8.00% maturing December 15, 2005
    
    
    14
    
    
    
    59Unsecured loans with various lenders, bearing interest at fixed rates between 5.45%
and 7.27% at December 31, 2004. The loans were paid in 2005
    
    
    
    
    
    
    178Unsecured loan from John N. Galardi, a director and principal stockholder, with a
fixed interest rate of 12.00%, due December 14, 2005. The loan was paid in April
2005
    
    
    
    
    
    
    532Total
    
    $
    134,835
    
    
    $
    134,059
      16




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NOTE 7. NOTES PAYABLE, LITIGATION SETTLEMENT
  17




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NOTE 8. LOSS ON EARLY EXTINGUISHMENT OF DEBT
   NOTE 9. MINORITY INTEREST
    NOTE 10. REDEEMABLE COMMON STOCK
  18




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NOTE 11. REPURCHASE OF COMMON STOCK
      NOTE 12. RELATED PARTY TRANSACTIONS
     19




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NOTE 13. SEGMENT INFORMATION
   20




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Shopping
    
    
    
    
    
    PropertyThree Months Ended September 30,
    
    Office
    
    Industrial
    
    Center
    
    Other
    
    Total2005Rental revenue
    
    $
    5,419
    
    
    $
    556
    
    
    $
    61
    
    
    $
    
    
    
    $
    6,036Property operating expenses
    
    
    2,662
    
    
    
    220
    
    
    
    37
    
    
    
    8
    
    
    
    2,927Net operating income (NOI)
    
    $
    2,757
    
    
    $
    336
    
    
    $
    24
    
    
    $
    (8
    )
    
    $
    3,109Real estate held for investment, net
    
    $
    131,612
    
    
    $
    14,074
    
    
    $
    1,626
    
    
    $
    32
    
    
    $
    147,3442004Rental revenue
    
    $
    4,845
    
    
    $
    636
    
    
    $
    54
    
    
    $
    
    
    
    $
    5,535Property operating expenses
    
    
    2,116
    
    
    
    115
    
    
    
    24
    
    
    
    
    
    
    
    2,255Net operating income (NOI)
    
    $
    2,729
    
    
    $
    521
    
    
    $
    30
    
    
    $
    
    
    
    $
    3,280Real estate held for investment, net
    
    $
    131,280
    
    
    $
    14,707
    
    
    $
    1,716
    
    
    $
    63
    
    
    $
    147,766
 Shopping
    
    
    
    
    
    PropertyNine Months Ended September 30,
    
    Office
    
    Industrial
    
    Center
    
    Other
    
    Total2005Rental revenue
    
    $
    16,051
    
    
    $
    1,706
    
    
    $
    198
    
    
    $
    
    
    
    $
    17,955Property operating expenses
    
    
    7,167
    
    
    
    552
    
    
    
    49
    
    
    
    23
    
    
    
    7,791Net operating income (NOI)
    
    $
    8,884
    
    
    $
    1,154
    
    
    $
    149
    
    
    $
    (23
    )
    
    $
    10,164Real estate held for investment, net
    
    $
    131,612
    
    
    $
    14,074
    
    
    $
    1,626
    
    
    $
    32
    
    
    $
    147,3442004Rental revenue
    
    $
    15,264
    
    
    $
    1,850
    
    
    $
    215
    
    
    $
    
    
    
    $
    17,329Property operating expenses
    
    
    5,978
    
    
    
    402
    
    
    
    60
    
    
    
    25
    
    
    
    6,465Net operating income (NOI)
    
    $
    9,286
    
    
    $
    1,448
    
    
    $
    155
    
    
    $
    (25
    )
    
    $
    10,864Real estate held for investment, net
    
    $
    131,280
    
    
    $
    14,707
    
    
    $
    1,716
    
    
    $
    63
    
    
    $
    147,766
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUESTotal revenues for reportable segments
    
    $
    6,036
    
    
    $
    5,535
    
    
    $
    17,955
    
    
    $
    17,329Other revenues
    
    
    79
    
    
    
    49
    
    
    
    334
    
    
    
    209Total consolidated revenues
    
    $
    6,115
    
    
    $
    5,584
    
    
    $
    18,289
    
    
    $
    17,538NET LOSSNOI for reportable segments
    
    $
    3,109
    
    
    $
    3,280
    
    
    $
    10,164
    
    
    $
    10,864Unallocated amounts:Interest and other income
    
    
    79
    
    
    
    49
    
    
    
    334
    
    
    
    209Corporate general and administrative expenses
    
    
    (901
    )
    
    
    (1,243
    )
    
    
    (2,745
    )
    
    
    (3,551
    )Depreciation and amortization
    
    
    (2,641
    )
    
    
    (2,358
    )
    
    
    (7,791
    )
    
    
    (6,995
    )Interest expense
    
    
    (2,640
    )
    
    
    (2,862
    )
    
    
    (8,004
    )
    
    
    (8,173
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (827
    )Net loss before minority interest and
discontinued operations
    
    $
    (2,994
    )
    
    $
    (3,348
    )
    
    $
    (8,042
    )
    
    $
    (8,473
    )
 September 30,2005
    
    
    2004ASSETSTotal assets for reportable segments
    
    $
    147,344
    
    
    $
    147,766Real estate held for sale
    
    
    13,453
    
    
    
    20,337Cash and cash equivalents
    
    
    848
    
    
    
    2,007Tenant and other receivables, net
    
    
    718
    
    
    
    422Deferred rent receivable
    
    
    1,688
    
    
    
    1,482Deposits held in escrow
    
    
    552
    
    
    
    1,365Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    10,234
    
    
    
    9,538Total consolidated assets
    
    $
    178,837
    
    
    $
    186,917
 21




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##### Table of Contents



NOTE 14. COMMITMENTS AND CONTINGENCIES
     NOTE 15. SUBSEQUENT EVENTS
    22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
     CRITICAL ACCOUNTING POLICIES
   
    
    Certain leases provide for tenant occupancy during periods for which no rent is due or
where minimum rent payments increase during the term of the lease. The Company records
rental income for the full term of each lease on a straight-line basis. Accordingly, a
receivable, if deemed collectible, is recorded from tenants equal to the excess of the
amount that would have been collected on a straight-line basis over the amount collected
and currently due (Deferred Rent Receivable). When a property is acquired, the term of
existing leases is considered to commence as of the acquisition date for purposes of this
calculation.
    
    Many of the Companys leases provide for Common Area Maintenance (CAM)/Escalations
(ESC) as additional tenant revenue amounts due to the Company in addition to base rent.
CAM/ESC represents increases in certain property operating expenses (as defined in each
 23




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##### Table of Contents



respective lease agreement) over the actual operating expense of the property in the base
year. The base year is stated in the lease agreement; typically, the year in which the
lease commenced. Generally, each tenant is responsible for his prorated share of increases
in operating expenses. Tenants are billed an estimated CAM/ESC charge based on the budgeted
operating expenses for the year. Within 90 days after the end of each fiscal year, a
reconciliation and true up billing of CAM/ESC charges is performed based on actual
operating expenses.
    
    Rental properties are stated at cost, net of accumulated depreciation, unless
circumstances indicate that cost, net of accumulated depreciation, cannot be recovered, in
which case the carrying value of the property is reduced to estimated fair value.
Estimated fair value (i) is based upon the Companys plans for the continued operation of
each property and (ii) is computed using estimated sales price, as determined by
prevailing market values for comparable properties and/or the use of capitalization rates
multiplied by annualized net operating income based upon the age, construction and use of
the building. The fulfillment of the Companys plans related to each of its properties is
dependent upon, among other things, the presence of economic conditions which will enable
the Company to continue to hold and operate the properties prior to their eventual sale.
Due to uncertainties inherent in the valuation process and in the economy, the actual
results of operating and disposing of the Companys properties could be materially
different than current expectations.
    
    Gains on property sales are accounted for in accordance with the provisions of SFAS No.
66, Accounting for Sales of Real Estate. Gains are recognized in full when real estate
is sold, provided (i) the gain is determinable, that is, the collectibility of the sales
price is reasonably assured or the amount that will not be collectible can be estimated,
and (ii) the earnings process is virtually complete, that is, the Company is not obligated
to perform significant activities after the sale to earn the gain. Losses on property
sales are recognized immediately.
    
    Management continues to consider whether it is in the best interest of the Company to
elect to be treated as a real estate investment trust (or REIT), as defined under the
Internal Revenue Code of 1986, as amended. The Company currently operates in a manner
that will permit it to elect REIT status; however, the Company may enter into transactions
which could preclude it from electing REIT status in the future. In general, a REIT is a
company that owns or provides financing for real estate and pays annual distributions to
investors of at least 90% of its taxable income. A REIT typically is not subject to
federal income taxation on its net income, provided applicable income tax requirements are
satisfied. For the tax year 2004, the Company was taxed as a C corporation. It is
anticipated that the Company will be taxed as a C corporation for the 2005 tax year.
 RESULTS OF OPERATIONS
  Discussion of the three months ended September 30, 2005 and 2004.
  Variance2005
    
    2004
    
    $
    
    %Rental revenue
    
    $
    6,036,000
    
    
    $
    5,535,000
    
    
    
    501,000
    
    
    
    9.1
    %Operating expenses:Property operating expenses
    
    
    2,927,000
    
    
    
    2,255,000
    
    
    
    672,000
    
    
    
    29.8
    %Corporate general and administrative
    
    
    901,000
    
    
    
    1,243,000
    
    
    
    (342,000
    )
    
    
    (27.5
    )%
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##### Table of Contents



Variance2005
    
    2004
    
    $
    
    %Depreciation and amortization
    
    
    2,641,000
    
    
    
    2,358,000
    
    
    
    283,000
    
    
    
    12.0
    %Interest expense
    
    
    2,640,000
    
    
    
    2,862,000
    
    
    
    (222,000
    )
    
    
    (7.8
    )%
 Rental revenue
 Property operating expenses
 Corporate general and administrative
 Depreciation and amortization
 Interest expense
  Loss on extinguishment of debt
 Discontinued operations
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##### Table of Contents



Three Months Ended
    
    Three Months EndedCondensed Consolidated Statements of Operations
    
    September 30, 2005
    
    September 30, 2004Total revenue
    
    $
    884
    
    
    $
    1,290Total expenses
    
    
    955
    
    
    
    1,308Net loss from discontinued operations
    
    $
    (71
    )
    
    $
    (18
    )
 Gain (loss) on sale of discontinued operations
 Discussion of the nine months ended September 30, 2005 and 2004.
  Variance2005
    
    2004
    
    $
    
    %Rental revenue
    
    $
    17,955,000
    
    
    $
    17,329,000
    
    
    
    626,000
    
    
    
    3.6
    %Operating expenses:Property operating expenses
    
    
    7,791,000
    
    
    
    6,465,000
    
    
    
    1,326,000
    
    
    
    20.5
    %Corporate general and administrative
    
    
    2,745,000
    
    
    
    3,551,000
    
    
    
    (806,000
    )
    
    
    (22.7
    )%Depreciation and amortization
    
    
    7,791,000
    
    
    
    6,995,000
    
    
    
    796,000
    
    
    
    11.4
    %Interest expense
    
    
    8,004,000
    
    
    
    8,173,000
    
    
    
    (169,000
    )
    
    
    (2.1
    )%
 Rental revenue
 Property operating expenses
 Corporate general and administrative
 Depreciation and amortization
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##### Table of Contents



Interest expense
  Loss on extinguishment of debt
 Discontinued operations
  Nine months Ended
    
    Nine months EndedCondensed Consolidated Statements of Operations
    
    September 30, 2005
    
    September 30, 2004Total revenue
    
    $
    2,533
    
    
    $
    3,990Total expenses
    
    
    2,846
    
    
    
    4,325Net loss from discontinued operations
    
    $
    (313
    )
    
    $
    (335
    )
 Gain (loss) on sale of discontinued operations
 LIQUIDITY AND CAPITAL RESOURCES
   27




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Nine Months EndedSeptember 30,2005
    
    2004Non-Cash Charges:Depreciation and amortization from real estate held for investment
    
    $
    7,791
    
    
    $
    6,995Deferred compensation expense
    
    
    55
    
    
    
    83Loss on extinguishment of debt
    
    
    
    
    
    
    827Non-Cash Items:Deferred rental income
    
    
    (154
    )
    
    
    (441
    )Minority interest
    
    
    (555
    )
    
    
    (1,390
    )Interest on receivable from principal stockholders
    
    
    (39
    )
    
    
    (50
    )Amortization of loan premiums
    
    
    (344
    )
    
    
    (391
    )Amortization of note receivable discount
    
    
    
    
    
    
    (58
    )Mark-to-market adjustments on interest rate protection agreements
    
    
    
    
    
    
    (65
    )
        28




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##### Table of Contents



29




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter
    
    TotalLong-term debt (1)
    
    $
    544
    
    
    $
    8,686
    
    
    $
    1,551
    
    
    $
    1,846
    
    
    $
    8,489
    
    
    $
    111,708
    
    
    $
    132,824Litigation settlement (2)
    
    
    
    
    
    
    9,512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,512Capital lease expenditures (3)
    
    
    1,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,898Employee
obligations (4)
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Total
    
    $
    2,459
    
    
    $
    18,198
    
    
    $
    1,551
    
    
    $
    1,846
    
    
    $
    8,489
    
    
    $
    111,708
    
    
    $
    144,251
 
 (1)
    
    See Note 6  Notes Payable  in the accompanying consolidated financial statements of the
Company. The Company refinanced or extended substantially all debt coming due in 2005, with
the exception of recurring scheduled monthly principal payments due on mortgages. During the
nine months ended September 30, 2005, debt of $17,303,000 was refinanced and $1,023,000 was
extended. The debt obligations do not include interest associated with the debt.(2)
    
    Represents obligations related to the settlement of the Teachout litigation. See Note 7 
Notes Payable, Litigation Settlement and Note 15  Subsequent Events  in the accompanying consolidated
financial statements of the Company.(3)
    
    Represents commitments for tenant improvements and lease commissions related to the leasing of
space to new or renewing tenants for leases which have been executed.(4)
    
    Represents employment agreement commitments for officers of the Company. INFLATION
  FORWARD-LOOKING STATEMENTS
  RISK FACTORS
  30




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 INTEREST RATES
     
 ITEM 4. CONTROLS AND PROCEDURES
   31




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Company Purchases of Equity Securities
 (2) Total Number of(1) Total
    
    
    
    
    
    
    Shares Purchased as
    
    
    (2) Maximum NumberNumber of
    
    
    
    
    
    
    Part of Publicly
    
    
    of Shares that May YetShares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Be Purchased Under thePeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    Plans or ProgramsJuly 1-31, 2005
    
    
    3,660
    
    
    $
    8.80
    
    
    
    3,660
    
    
    
    232,512August 1-31, 2005
    
    
    23,202
    
    
    
    9.71
    
    
    
    3,202
    
    
    
    229,310September 1-30, 2005
    
    
    3,814
    
    
    
    10.62
    
    
    
    3,414
    
    
    
    225,896Total
    
    
    30,676
    
    
    $
    9.72
    
    
    
    10,276
    
    
    
    225,896
 
 (1)
    
    Represents 10,400 shares purchased in open market transactions, 10,000 shares
purchased in a private transaction and 10,276 shares purchased pursuant to an odd lot buy
back program (see footnote 2 below).(2)
    
    On April 4, 2005 the Company offered to purchase up to 250,000 shares pursuant to an
odd lot buy back program. Shareholders who participated in the program received the
price-per-share equal to the average of the daily closing prices of the Companys Common
Stock during the week in which response cards were received and processed. Shareholders
with fewer than 100 shares were eligible to participate. The offer expired September 30,
2005. During the quarter ended September 30, 2005, 10,276 odd lot shares were tendered at
an average price of $9.72 per share. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
     32




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##### Table of Contents



SIGNATURES
  AMERICAN SPECTRUM REALTY, INC.
 Date: November 9, 2005
    
    By:
    
    /s/ William J. CardenWilliam J. CardenChairman of the Board,
President,
Chief Executive Officer and Acting
Chief Financial OfficerDate: November 9, 2005
    
    By:
    
    /s/ Patricia A. NooneyPatricia A. NooneySenior Vice President, Chief
Operating Officer,
Secretary and Director of Accounting(Principal Accounting Officer)
 33




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title31
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 34