[DESCRIPTION] COVER
U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10 KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
-OR-
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number: 0-19154
AMERICAN ASSET MANAGEMENT CORPORATION
(Name of small business issuer in its charter)
NEW JERSEY 22 2902677
(State or other jurisdiction of)(IRS Employer Identification No.)
incorporation or organization)
150 MORRISTOWN ROAD, BERNARDSVILLE, NEW JERSEY 07924
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (908) 766-1701
Securities registered under Section 12(b) of the Exchange
Act: None
Securities registered under Section 12(g) of the Exchange Act:
NO PAR VALUE COMMON STOCK
(Title of Class)
CL. B COM. STOCK PURCHASE WTS. CL. C COM. STOCK PURCHASE WTS.
(Title of Class) (Title of Class)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. Yes ____ No _X_
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ( X )
For the year ended December 31, 1996, the issuer's revenues were
$602,916.
As of September 30, 1997 the aggregate market value of the
issuer's voting stock held by non-affiliates computed by
reference to the average bid and asked prices of such stock, was
$1,265,874.
As of September 30, 1997 the issuer has 936,119 shares of its no
par value common stock issued and outstanding.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes ___ No _X_
<PAGE>
[DESCRIPTION] 10KSB REPORT
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
American Asset Management Corporation (the "Company"),
conducts its business through two wholly-owned subsidiaries,
Capital Financial Corp.("Capital"), a licensed mortgage banking
company in New Jersey and American Asset Development Corporation
("Development"), which is engaged in the development of
residential real estate for sale in New Jersey. Unless otherwise
indicated, all references to the Company in this report include
the Company and its subsidiaries.
At a Special Meeting of Shareholders of the Company on
February 13, 1995, the shareholders approved amendments to the
Company's certificate of incorporation to effect a one-for-five
reverse stock split of its outstanding Common Stock and to
provide for an authorized capital of 10,000,000 shares of Common
Stock, no par value, and 2,000,000 shares of Preferred Stock, no
par value. As of December 1, 1996, no preferred shares have been
issued. Unless otherwise indicated, all share and per share
amounts in this report have been restated to retroactively
reflect the reverse split which was effected on February 21,
1995.
HISTORY OF THE COMPANY
The Company was incorporated on July 1, 1988 to engage in
real estate financing and investing. In October 1988, the
Company became a limited partner of Murray Hill Estates at
Franklin, L.P. ("Murray Hill"), a New Jersey limited partnership
established for the purpose of acquiring a property ("Property")
located in Hunterdon County, New Jersey. In January 1990, the
Company was elected successor general partner of Murray Hill for
the purpose of obtaining subdivision approvals necessary to
develop the property owned by Murray Hill. In February 1992,
Murray Hill received preliminary approval for the subdivision of
the Property. SEE BUSINESS - AMERICAN ASSET DEVELOPMENT
CORPORATION.
In July 1992, the Company formed Development which acquired
substantially all of the assets of Murray Hill in exchange for an
aggregate of 29,600 shares of Common Stock of the Company and the
assumption of all of the liabilities of Murray Hill.
In July 1989, the Company formed American Asset Mortgage
Corporation ("Mortgage") to provide mortgage banking services in
New Jersey.
In July 1991, the Company acquired all of the outstanding
stock of Capital Financial Corp., a New Jersey licensed mortgage
banking company. In June 1992, Capital Financial Corp. was
merged with and into Mortgage and the name of the surviving
subsidiary was changed to Capital Financial Corp.
BUSINESS - CAPITAL FINANCIAL CORP.
The Company, through Capital, is primarily engaged in
mortgage banking activities which involves the origination and
sale of residential first mortgage loans collateralized by one to
four family homes. The Company's service area is the State of
New Jersey and to date, its revenues have primarily consisted of
loan origination fees and interest received on mortgage loans
made primarily for the construction of single family residences.
Capital acts either as a "banker" or as a "banker acting as a
broker". When acting as a banker, Capital closes loans in its
own name. When acting as a broker, Capital does not make
mortgage loans or close loans in its own name, but receives
compensation at closing from the borrower for assisting in
obtaining a mortgage from a third party investor (purchaser of
the mortgage) and/or from the investor for referring the loan to
such investor.
Capital originates mortgage loans through direct
solicitation of borrowers by its own sales force, through media
advertising in its service area and through referrals from
mortgage bankers, credit unions, real estate brokers, accountants
and attorneys. Borrowers submit loan applications which are
processed by the Company's loan processors who conduct credit
checks, arrange for the property to be appraised and submit
fully processed loan application packages to potential investors
for final approval and commitment. After an investor commits to
purchase the loan, the Company either uses it's warehouse line of
credit, discussed below, to fund and close the loan or has the
loan funded by the investor, ("table funding"). The loan
documentation is then prepared and, in most cases, the loan is
closed in Capital's name.
The Company generally sells its loans on a loan-by-loan
basis to mortgage investors, primarily savings banks. The
Company estimates that generally 85% of its loan applications
close within 90 days from the date of application. During 1996,
the Company sold 52, 21, 20 and 17 of its 143 loans (35.4%,
14.3%, 13.6% and 11.6%), to four investors, which included two
savings banks and two mortgage bankers. The Company believes
that there are numerous other investors to which the Company
could readily sell its loans if, for any reason, it was unable to
sell its loans to the above investors. As of September 30, 1997,
the Company had agreements with approximately 25 investors, to
which the Company may sell its loans or refer applications to.
In May 1995, the Company obtained a $5,000,000 warehouse
line of credit from a mortgage warehouse lender which provides
the Company with a facility to borrow funds secured by originated
residential mortgage loans which will be temporarily warehoused
and then sold. The warehouse line of credit is secured by the
personal guarantees of the Company's President and Executive Vice
President. The Company will borrow only against takeout
commitments issued by qualified investors who have pre-approved
the loans and committed to purchase the closed loan from the
Company. By using the warehouse funds instead of table funding,
the Company has generally been able to receive more favorable
pricing from its investors which the Company believes has made it
more competitive in the market place. The warehouse line has
also allowed the Company to sell loans to investors which do not
table fund and only purchase closed loans from correspondents.
As of September 30, 1997, the interest rate charged to the
Company on borrowed warehouse funds outstanding is variable at 2%
over the prime lending rate as quoted by the Wall Street Journal.
As a result of continued higher mortgage interest rates
during 1996, the mortgage refinancing market which reached a
three year peak in December 1994, continued to be absent during
1996. Since Capital had historically obtained a large majority
of its loan originations from mortgage refinancings, the
increased level of mortgage rates severely impacted Capital's
ability to generate new loan applications, which had a material
adverse effect on the Company's revenues.
From January 1995 to July 1997, the Company took certain
actions in an effort to reduce its dependence on mortgage
refinancings including opening additional offices and hiring
experienced sales personnel, however, the results of these
efforts did not meet managements expectations and the offices
were subsequently closed.
In March 1996, the Company hired a Senior Vice
President/Sales Manager with 11 years of mortgage banking
experience to expand its commissioned sales personnel and to
assist management in expanding the Company's relationships with
additional sources of mortgage loan applications.
In October 1996, the Company entered into an agreement to
offer its mortgage products on an electronic network system
("Network") of thirty one mortgage bankers which originate
applications through a real estate broker branch office system
located throughout New Jersey. The applications are forwarded
to Capital for processing and closing. The Company has agreed to
compensate the Network of originators with a commission based on
closed loans originated by the Network. The Company believes it
is one of approximately twelve lenders which offer mortgage
products through this system. In February 1997, the Network was
acquired by another network which operated in a similar manner to
the original Network. In July 1997, the Company became a lender
on this new network. Both Networks operated in a similar manner
but continued as separate entities until July 1997 at which time
a majority of the mortgage bankers from the acquired Network were
terminated. Since July, the Company continues to receive business
from Network personnel as well as from the former mortgage
Network personnel. In August 1997, the Company entered into an
agreement with a new network which was formed as an independent
unit by former Network mortgage banking originators. In addition,
during July 1997, the Company employed, as originators, two
mortgage bankers that were formerly originators with the original
Network. There can be no assurance the Company will be
successful in these relationships as it faces intense competition
from the other lenders it competes with for this business, many
of which have greater resources and experience than the Company.
As of September 1, 1997, the Company has 35 mortgage loans in
process from the combined Networks aggregating approximately $7.1
million out of a total of 128 mortgage loans aggregating
approximately $27.25 million which are currently being processed
by the Company.
BUSINESS - AMERICAN ASSET DEVELOPMENT CORPORATION
In May 1992, Development was incorporated as a New Jersey
corporation to acquire Murray Hill, obtain final subdivision
approval, complete physical improvements to the Property and sell
the subdivided lots. The principal asset acquired by Development
from Murray Hill in July 1992, was approximately 40 acres of
undeveloped land located in Franklin Township, Hunterdon County,
New Jersey. In connection with the acquisition of Murray Hill,
Development assumed an existing liability of a loan payable to
Development's parent company which was secured by a first
mortgage on the Property in the principal amount of $667,575 as
of June 1, 1992. Subsequent to the acquisition, the Company
transferred the mortgage receivable in the amount of $675,326 to
Capital. Development continued to seek final subdivision
approval from authorities, which was received in October 1993,
subject to completing certain improvements or by posting
performance bonds or a letter of credit in lieu thereof.
In August 1994, the Company received a commitment from a
commercial bank for two lines of credit aggregating $700,000,
consisting of a $250,000 site improvement loan and a $450,000
revolving line of credit to finance construction of up to three
residences in the subdivision. The site improvement loan which
closed in November 1994, is secured by a first mortgage on the
development and is also secured by the personal guarantees of the
Company's President and Executive Vice President. The Company
has not utilized the construction line of credit. The interest
rate on the site improvement loan is the bank's prime interest
rate plus 1% and is payable monthly. The loan matured on
November 30, 1996 and the Company refinanced the loan through a
different commercial lending institution in December 1996.
In February 1995, the Company entered into a revised
contract of sale for a lot included in the Property containing an
uninhabitable farmhouse and a fieldstone barn for $148,000, of
which payments of $10,000 were received. At closing, the Company
received an additional $5,000 and agreed to provide the purchaser
a one-year interest only first mortgage in the principal amount
of $133,000 bearing interest at 9 1/2%. The Company transferred
title to the purchaser in April 1997. In May 1997, the Company
sold the mortgage, without recourse, to a non-affiliate of the
Company for $110,000.
In March 1995, the Company entered into a contract to sell
one three (3) acre building lot for $125,000, for which a down
payment of $25,000 was received. Under the terms of the
contract, the Company agreed to finance $100,000 of the purchase
price for six months, without interest, to be secured by a first
mortgage and personal note on the lot securing the buyers
obligation to the Company. The Company anticipates transferring
title to the purchaser of this lot during the second quarter of
1998 upon completion and sale of a single family home which the
purchaser under contract is expected to commence construction of
during the fourth quarter of 1997.
In May 1995, the Company agreed to sell an additional five
and one half (5 1/2) acre building lot to the same individual it
contracted to sell a lot to during March 1995, for the sum of
$100,000. The Company received a nonrefundable deposit of
$50,000. In December 1995, the Company received a letter from
the individual requesting to void the recent contract for the
5 1/2 acre lot and to apply the $50,000 deposit to the March 1995
contract for the 3 acre lot resulting in a total deposit on the 3
acre lot of $75,000 with a balance due the Company of $50,000 at
closing of title. During January 1996, the Company consented to
the request.
On August 4, 1995, the Company closed on a $100,000 line
of credit secured by a second mortgage on the Property. The line
of credit was also secured by the personal guarantee of the
Company's President. The term of the loan was for six months at
10% interest. In addition, the Company issued to the lenders
an aggregate of 20,000 shares of Common Stock, with registration
rights, as an inducement to secure the credit line which the
Company used as additional working capital. The loan was repaid
in full in January 1996.
In January 1996, the Company entered into a contract to sell
to a real estate development corporation, 5 building lots which
range in size from 3 to 5 1/2 acres for a total purchase price of
$487,500. The Company received a total of $340,000 nonrefundable
deposits and in December 1996 the contract was cancelled and the
related deposit was converted to shares of Series A Cumulative
Convertible Preferred Stock of the Company. See Item 5 - Market
for Common Equity and Related Stockholder Matters.
In August 1996, the Company entered into a contract to sell
one 3 acre building lot for $110,000 of which a down payment of
$11,000 was received. The contract was amended in September 1996
to provide for cancellation and the return of the buyers deposit
in the event the Company is unable to transfer title on a fully
approved single family building lot. In addition, during
September 1996 the Company, through Capital, agreed to provide
the buyer of this lot with a Construction/Permanent mortgage
loan to construct a single family residence. The Company closed
title to this lot during February 1997 and construction commenced
utilizing the services of an affiliate of the Company to act as
General Contractor. The affiliate company is majority owned by a
director of the Company. The construction of the house was
completed in July 1997.
In October 1996, the Company received approval of and
accepted a commitment issued by a commercial bank for a
construction mortgage financing line of credit in the amount of
$550,000. In December 1996, the Company closed on the
construction mortgage financing line of credit in the amount of
$550,000. The loan provides a letter of credit in the amount of
$111,583 which the Company assigned and deposited in escrow with
municipal authorities during January 1997 to guarantee the
township adequate funds to complete the balance of required site
improvements on the Property if the Company fails to complete the
required improvements. The mortgage loan further provided
$430,417 which was used to refinance the mortgage loan which was
on the property, funds to complete the balance of required site
improvements and provides an interest reserve. The loan is due
one year from the closing date, except for the letter of credit
which may be extended for an additional one year period. The
mortgage loan is further secured by the personal guarantees of
the Company's President and Executive Vice President.
In January 1997, the Company filed its maps with county
authorities on the subdivision located in Hunterdon County, New
Jersey.
In February, March and June 1997, the Company transferred
title to and received payment in full on 3 unimproved building
lots to 3 non-affiliates of the Company in the amount of $97,500,
$110,000 and $110,000 respectively. Proceeds from these sales
were used to pay down mortgage debt owed to a commercial bank and
the balance provided working capital to the Company. On the
first two of three lots sold, the Company arranged construction
financing through Capital and construction management through an
affiliate of the Company. The home was completed during July of
1997.
As of September 30, 1997 the Company owns 7 unimproved
building lots within the subdivision of the Property and has one
contract of sale pending in the amount of $125,000 of which it
has received total deposits of $75,000.
As of September 30, 1997 the Company is indebted to the
commercial bank for the mortgage loan on its subdivision in the
amount of approximately $157,000.
SEASONALITY
The mortgage banking industry and the sale of building lots
is generally subject to seasonal trends which reflect the pattern
of new home construction and resales of existing homes. These
sales typically peak during the spring and summer seasons and
decline to lower levels in the late fall and winter seasons.
COMPETITION
The market for mortgage based financing is highly
competitive. The Company competes with numerous entities,
primarily savings institutions, commercial banks, insurance
companies and other mortgage bankers, many of which have more
experience in mortgage based lending and have substantially
greater financial and other resources than the Company.
Competitive factors include the ability to offer competitive
interest rates, various types of loan programs and services
provided. With respect to its real estate activities, generally,
and the development and sale of Murray Hill property,
specifically, the Company competes with other real estate
developments and sellers of individual homes.
GOVERNMENT REGULATION AND ENVIRONMENTAL LAWS
The Company's mortgage origination activities are subject to
a variety of regulations, including but not limited to, the Equal
Credit Opportunity Act, Federal Truth-In-Lending Act and the Real
Estate Settlement Procedures Act and the regulations promulgated
thereunder which prohibit discrimination and require the
disclosure of certain basic information to applicants concerning
credit terms and settlement costs. Additionally, pursuant to the
regulations adopted by the State of New Jersey, the State has the
right to conduct financial and regulatory audits of loans under
its jurisdiction and to determine compliance with state
disclosure requirements and usury laws. If the Company decides
to expand its operations into other states, it is anticipated
that it will have to obtain the necessary permits and/or licenses
before it can commence operations in such states. There can be
no assurance that the Company will be able to obtain such permits
and/or licenses in any additional state which the Company may
plan to operate.
With respect to its real estate development activities,
the Company is responsible for Development's compliance with
Federal, State and local regulations concerning protection of
the environment, including but not limited to, the New Jersey
Fresh Water and Wetlands Act, soil erosion, sedimentation and
storm water management controls, various stream encroachment
regulations and local health department and zoning regulations.
The Company believes it has complied with all necessary material
regulations pertaining to its material real estate development
activities.
Amendments to existing regulations and statutes, changes in
regulatory policies, adoption of new statutes and regulations
applicable to the Company and the Company's need to comply with
additional regulations should the Company expand into other
jurisdictions could materially adversely affect the Company's
business in the future.
EMPLOYEES
As of September 30, 1997, the Company has twenty employees,
of which three were executives, seven were employed in the
processing of mortgage loans and other clerical positions and
ten were loan officers. None of the Company's employees are
covered by collective bargaining agreements and the Company
believes that its relations with its employees are satisfactory.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive offices occupy approximately 700
square feet of a total area of approximately 2,800 square feet of
office space it shares with Capital that is located in
Bernardsville, New Jersey. The 2,800 sq. ft. office is leased
from an unaffiliated third party pursuant to a lease which
expires in March 1999 and provides for a monthly rental of
approximately $4,317. Management believes that there is ample
alternative office space in the area for comparable rent should
the Company be required to relocate its office at the expiration
of the lease term.
As described in ITEM 1, "Business - American Asset
Development Corporation", as of December 31, 1996 the Company
owns approximately 40 acres of land in Franklin Township,
Hunterdon County, New Jersey, for which the Company in October
1993, received final approval to subdivide into 11 lots including
a lot with an existing uninhabitable farmhouse and a fieldstone
barn.
ITEM 3. LEGAL PROCEEDINGS
In March 1993, an action was commenced against the Company,
its President, Richard G. Gagliardi, and the brokerage firms of
G. K. Scott & Co., Inc. and L. C. Wegard & Co., Inc. in the
Supreme Court of the State of New York, Queens County, by two
individuals who invested a total of $250,000 in the Company's
1989 private offering of common stock (the "1989 Offering"). The
plaintiffs alleged that, in connection with their investments in
the 1989 Offering, certain of the defendants misrepresented or
failed to disclose certain material facts concerning the Company
and the 1989 Offering. The plaintiffs are seeking damages
against the parties, including compensatory damages of $1,000,000
and punitive damages of $5,000,000. The Company and its
President subsequently moved to dismiss the complaint, and, by
Order dated January 10, 1994, the Court dismissed with prejudice
the motion filed by the Company and Mr. Gagliardi and dismissed
with prejudice the claims of unjust enrichment and conversion
contained in the complaint and dismissed the plaintiffs' breach
of contract claims with leave to amend. On February 25, 1994,
plaintiffs filed an amended complaint containing allegations
similar to the original breach of contract allegations, which the
Company again moved to dismiss. In August 1994, the Court
reaffirmed its dismissal of the unjust enrichment and conversion
claims but allowed the breach of contract and fraud claims to
proceed. The Company believes that the claims are totally
without merit and intends to continue to vigorously defend the
action.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of its
security holders during the fourth quarter of the year ended
December 31, 1996.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In December 1996, the Company extended the expiration date
of the Company's Class B and Class C Common Stock Purchase
Warrants from January 29, 1997 until January 29, 1998.
In December 1996, the Company received stock subscriptions
to convert $565,000 of debt into 56,500 shares of 5% Non-voting
Series A Cumulative Convertible Preferred Stock. Of this amount
$340,000 represented the conversion into equity of a deposit the
Company had previously received on a January 1996 contract for 5
building lots that was later cancelled. Each preferred share
accrues $.50 in annual dividends, payable semi-annually
commencing July 1, 1997. Each share of Preferred Stock is
convertible into either two shares of the Company's common stock
or twenty shares of common stock of the Company's wholly owned
subsidiary, Capital. Initial conversion prices are $10.00 per
preferred share for two (2) shares of the Company's common stock
or $10.00 per preferred share for twenty (20) shares of common
stock in Capital. Conversion prices are subject to adjustment
under certain conditions. The Company has the right to require
conversion of the preferred stock into the Company's common stock
if the sales price of the Company's common stock has been a
least $6.50 per share for all ten trading days ending on the
third day prior to the day on which the Company gives notice of
mandatory conversion. The Company also has the right to redeem
the preferred shares with 10 days notice at $5.15 per share plus
all accrued and unpaid dividends.
In May 1997, the Company received a stock subscription for
10,000 shares of 5% Non-voting Series A Cumulative Convertible
Preferred Stock from an additional accredited investor under the
same terms and conditions as the December 1996 subscriptions. At
the time of subscription the investor tendered to the Company a
check for payment in full for 5,000 shares and subsequently
remitted a check representing full payment for the balance of
5,000 shares during August 1997.
MARKET INFORMATION
The Company's Common Stock is traded in the over-the-counter
market and was quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") SmallCap
Market under the symbol "AAMC" from April 22, 1991 to December 7,
1994. Since December 8, 1994, the Company's Common Stock has
been quoted on the OTC Bulletin Board.
The following table sets forth, for the periods indicated,
the range of the high and low bid prices for the Company's Common
Stock as reported by the OTC Bulletin Board. OTC Bulletin Board
prices reflect inter-dealer quotations, which do not reflect
mark-ups, mark-downs or commissions and may not represent actual
transactions.
1996 PRICES FOR THE QUARTER ENDED
March 31 June 30 Sept. 30 Dec. 31
High Low High Low High Low High Low
Common
Stock 1.00 0.96875 1.00 1.00 1.50 1.00 1.375 1.00
1995 PRICES FOR THE QUARTER ENDED
March 31 June 30 Sept. 30 Dec. 31
High Low High Low High Low High Low
Common
Stock 2.25 1.50 1.50 1.00 1.625 1.00 1.25 0.75
HOLDERS
The number of record holders of the Company's Common Stock
was approximately 125 as of September 30, 1997. The Company
believes that, in addition, there are in excess of 300 beneficial
owners of its Common Stock whose shares are held in "street
name".
DIVIDENDS
To date, the Company has not paid any cash dividends on its
Common Stock. The payment of dividends, if any, in the future is
within the discretion of the Board of Directors and will depend
upon the Company's earnings. The Company's Board does not intend
to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's
business operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995
Revenues for the year ended December 31, 1996 were $602,916
compared to $1,001,865 for the year ended December 31, 1995,
a decrease of $398,949 or 39.9%. The decrease was
attributable to a decrease in origination fees of $377,711 a
decrease in application fees of $11,045 and a decrease in
mortgage interest income of $10,193, primarily of Capital. The
decrease in revenues is primarily attributable to lower than
expected amount of mortgage closings during the year while the
Company was establishing outside sources of mortgage loan
applications and rebuilding its sales force of mortgage loan
originators. As a result, Capital closed 143 residential
mortgage loans in the principal amount of approximately
$22,882,447 in 1996 compared to 224 loans in the principal amount
of approximately $41,262,902 in the prior year, a decrease in
number of 36.2% and a decrease in amount of $18,380,455 or
approximately 44.5%. At December 31, 1996, the Company had
approximately 138 mortgage loan applications in process in the
amount of approximately $21,838,318 compared to approximately 22
mortgage loan applications in the approximate amount of
$4,567,000 at December 31, 1995, increases of 627% and 478%
respectively.
Total selling, general and administrative expenses
("SG&A")for the year ended December 31, 1996 were $1,052,831, a
decrease of $781,241 or 42.6% from the $1,834,072 incurred in the
prior year. The decrease in SG&A was the result of decreased
salaries and benefits of $312,809 or 39.3%, decreases in employee
commission costs of $94,066 or 39.3% decreases in other expenses
of $250,366 or approximately 38.1% and a decrease in the special
charge of $124,000 or 87.9%. Expressed as a percentage of
revenues, SG&A decreased to 174% in 1996 from 183% in 1995,
reflecting expenses decreasing at about the same rate as the
decrease in revenues.
As a result of the foregoing, the Company incurred a net
loss of $447,486 ($0.48 per share) for the year ended December
31, 1996 compared to a net loss of $822,663 ($0.90 per share) in
the prior year, a decrease of $375,177 or 45.6%. Other income
was $2,429 in 1996 compared to $9,544 in 1995.
The Company recorded a special charge of $17,000 and
$141,000 in December 1996 and 1995, respectively, for a provision
to adjust the carrying value of land and development costs to
estimated net realizable value. The provision was based on a
review of the sales price per sales contracts and the costs of
land and development incurred and anticipated for improvements.
As the total anticipated costs exceeded the anticipated sales
price, an allowance was provided to reduce the carrying amount to
the estimated net realizable value.
No provision for state income taxes was made in 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital resources during the year ended
December 31, 1996, have primarily been derived from revenues
generated by its mortgage banking operations and to a lesser
extent, interest received on mortgages outstanding. The
Company's cash position continued to deteriorate in 1996 and
during 1996 the Company has also been dependent on loans from the
Company's President, directors and third parties; proceeds of
partial payments received upon execution of contracts for sale of
building lots, the deferment of certain executive officers
compensation and director fees and proceeds derived from the
refinancing of the mortgage on property the Company owns in
Hunterdon County, New Jersey in order to obtain and preserve
sufficient cash to continue its operations. On December 31, 1996
the Company had a working capital deficit of $913,049 compared
to a working capital deficit of $1,016,268 on December 31, 1995.
Commencing in the second quarter of 1996, the Company took
certain actions which are intended to improve operating results.
Such actions included, but were not limited to, replacing
substantially all of its former loan officers with new
originators of mortgage loans and seeking other outside sources
of mortgage loans. The Company also recruited and hired loan
originators to work from its main office in Bernardsville, New
Jersey.
As a result of the Company's actions described above, loans
in process have increased from 22 loans with a principal amount
of approximately $4,567,000 as of December 31, 1995, to 138 loans
aggregating approximately $21,838,318 at December 31, 1996,
increases of 627% and 478%, respectively and as of September 1,
1997, the Company had 128 loans in process with a principal
amount of approximately $27,280,000. Since the Company estimates
that 85% of its loans in process will close approximately 90 days
from date of application, the Company will continue to incur
losses until such time, if ever, that future revenues are
sufficient to offset operating and any other costs.
The Company estimates that it will require additional
capital in order to successfully implement its existing
operational plans. As a result, the Company is seeking additional
capital through, among other means, an infusion of
noncollateralized loans and the sale of additional equity in the
Company. However, there can be no assurance that the Company
will be able to obtain additional capital on terms acceptable to
the Company.
In the event the Company's plans change, its assumptions
change or prove to be inaccurate due to unanticipated expenses,
delays, problems or otherwise, the Company could be required to
seek additional financing beyond the amounts management currently
estimates is needed to meet its capital requirements.
As of December 31, 1996, the Company had cash and cash
equivalents of $220,733 compared to $274,354 at December 31,
1995, a decrease of $53,621, or 19.5%. The decrease was primarily
attributable to net cash used in operating activities of
$399,627, offset by net cash provided by investing activities of
$4,605 and net cash provided by financing activities of $341,401.
Net cash used in operating activities was the result of the net
loss of $447,486 and increase in mortgage loans receivable of
$678,449, collection of commission advances of $2,220 and a
reserve for bad debts of $7,569, partially offset by cash
provided by operating activities which included depreciation and
amortization of $19,054, increase in deferred income of $23,349,
an allowance for net realizable value of $17,000, decreases in
notes receivable of $1,970, prepaid and other assets of $1,320
and decreases in accounts payable and accrued expenses of $22,752
and warehouse loans payable of $670,378. Net cash provided by
investing activities consisted of increases in land and
development costs of $61,217, purchases of fixed assets for
$9,398 and proceeds from lot deposits of $73,000.
Cash was provided by financing activities through proceeds
from loans payable of $140,411 and through proceeds of a mortgage
in the amount of $429,238 payable to a bank under a site
improvement loan which provides for the Company to borrow up to
an aggregate amount of $550,000 of which $228,248 was used for
the payment of the original mortgage as discussed in Item I,
Business - American Asset Development Corporation.
At December 31, 1996, the Company had executed contracts of
sale amounting to $480,500 for four of eleven lots, which
related to the Company's real estate activities. The Company had
collected $117,000 as down payments on the related contracts for
sale of these lots. In December 1996, a contract for five lots
was voided and the related $340,000 of down payments was applied
to the purchase price required to convert the debt into shares of
preferred stock of the Company.
ITEM 7. FINANCIAL STATEMENTS
This information appears in a separate section of this
report following Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS OF THE REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
POSITION WITH
NAME AGE THE COMPANY
Richard G. Gagliardi 50 Chairman of the Board,
President and Chief
Executive Officer
Lynn K. Gagliardi 40 Executive Vice President,
Secretary and Director
Robert J. DiQuollo 50 Director
Bernard Gitlow 71 Director
Theodore P. Rica, Jr. 35 Director
RICHARD G. GAGLIARDI has been Chairman, President and Chief
Executive Officer of the Company since its inception on July 1,
1988. Mr. Gagliardi was employed as a Registered Representative
at the investment banking firm of L. C. Wegard & Co., Inc.
("Wegard") from October 1989 to September 1991, and served as a
Vice President of Wegard from October 1989 to July 1991.
LYNN K. GAGLIARDI has been Secretary and a director of the
Company since its inception and Executive Vice President from
July 1992. From October 1989 to June 1991, Ms. Gagliardi served
as Assistant Operations Manager and a Registered Representative
of Wegard. Lynn K. Gagliardi is the wife of Richard G.
Gagliardi.
ROBERT J. DIQUOLLO has been a director of the Company since
June 1996. Since August 1988, Mr. DiQuollo has owned and
operated the certified public accounting firm of R. J. DiQuollo &
Co. From August 1988 to present, he has also been a principal
and Vice President of Brinton Eaton Associates, a financial
management company. From September of 1989, Mr. DiQuollo was a
founder and director of Growth Financial Corp. and its subsidiary
Growth Bank until the corporation was sold in January 1996, to
Hudson United Bank, a commercial lending institution.
BERNARD GITLOW has been a director of the Company since June
1993. He has been Executive Vice President of Victor Kramer,
Co., Inc. a consulting company in the laundry and linen supply
industry since August 1990. Since January 1988, Mr. Gitlow has
also served as a consultant to the linen supply, laundry and dry
cleaning industry.
THEODORE P. RICA, JR. has been a director of the Company
since August 1995. He has been employed by Pitney Bowes since
1984 as a salesman of office equipment and has also been self
employed as a builder of single family homes in New Jersey since
September 1985.
Directors are elected for one-year terms to serve until the
next annual meeting of shareholders or until their respective
successors are elected and qualified.
The executive officers of the Company are elected annually
at the first meeting of the Company's Board of Directors held
after each annual meeting of shareholders. Each executive officer
will hold office until his successor is duly elected and
qualified, until his resignation or until he shall be removed in
the manner provided by in the Company's By-Laws.
KEY EMPLOYEE
ANGELO PENNISI, 38, was employed by Capital from March 1996
through August 1996 as a Vice President and Sales Manager. In
August 1996, he was promoted to Senior Vice President of Capital
where he currently is in charge of secondary marketing, which
includes the selling of mortgages to investors in order to
maximize the Company's earnings potential and oversees the
pricing of mortgage loans and mortgage product lines. He was
Vice President Sales and Marketing for Sterling National Mortgage
Co., Inc. from August 1994 to February 1996 and Regional Manager
and Vice President for Meridian Mortgage Corporation from July
1987 to August 1994.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the periods presented the
compensation paid by the Company and its subsidiaries for
services rendered during the fiscal year ended December 31, 1996
to the Company's Chief Executive Officer (the "named executive").
No other executive officer of the Company received an annual
salary, bonus or other compensation in excess of $100,000 for the
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
Name and Principal Other Annual
Position Year Salary Compensation
Richard G. Gagliardi 1996 $ 90,000 $ 6,900
Chairman of the Board, 1995 90,000(1) 6,900(2)
President and Chief 1994 114,017(3) 10,113(2)
Executive Officer
(1) Includes $48,462 in accrued salary not paid to Mr. Gagliardi
as of December 31, 1995.
(2) Represents the approximate reimbursement cost of an
automobile leased by Mr. Gagliardi for business purposes.
(3) Includes additional compensation in the amount of three
percent (3%) of revenues of Capital generated directly from the
origination of mortgage loans (i.e., Application Fees, Commitment
Fees, Fee Income-regular, less any Fees Refunded), commencing
January 1994. The additional compensation to Mr. Gagliardi, which
was $24,017 for the year ended December 31, 1994, was
discontinued as of July 1, 1994.
COMPENSATION OF DIRECTORS
In 1995, the Company did not compensate its directors for
their services as directors and has not compensated its
directors for their services as directors through October 1996.
The Board of Directors, in October 1996, agreed to forego
receiving cash compensation and to receive Common Stock of the
Company in lieu of cash for attendance at the Company's future
Board of Directors and Stockholders meetings. However, in May
1993, the Company's wholly owned subsidiary, Capital began
compensating its directors $200 for attending each board meeting
except for the Annual Meeting for which they each receive $400.
In December 1994, Capital ceased compensating its directors for
attending board meeting. Pursuant to the Company's 1992 Stock
Option Plan (the "Plan"), directors are eligible to receive
non-qualified options, and in addition, directors who are
employees of the Company are also eligible to receive incentive
options.
STOCK OPTION PLAN
In July 1992, shareholders of the Company ratified the
adoption by the Board of Directors of the Plan. The Plan
authorizes the grant of incentive and non-qualified options to
purchase up to 100,000 shares of the Company's Common Stock and
is administered by the Board of Directors. Only employees of the
Company are eligible to receive incentive stock options pursuant
to the Plan. As of December 31, 1996, options to purchase 65,000
shares of the Company's Common Stock have been granted pursuant
to the Plan including non-qualified options to purchase 20,000
shares of Common Stock at $1.25 per share to Theodore P. Rica,
Jr., a director of the Company; 10,000 shares of Common Stock at
$1.25 per share and 10,000 shares of Common Stock at $1.50 to
Robert J. DiQuollo, a director of the Company and 3,000 shares of
Common Stock at $3.75 per share to Bernard Gitlow, a director of
the Company. No options were exercised during 1996. As of
December 31, 1996, options to purchase 35,000 shares of the
Company's Common Stock were available for grant under the Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of
September 30, 1997 based on information obtained from the persons
named below, with respect to the beneficial ownership of shares
of Common Stock by (i) each person known by the Company to be the
beneficial owner of more than five percent of the outstanding
shares of Common Stock, (ii) the named executive, (iii) each of
the Company's directors and (iv) all directors and executive
officers as a group:
<PAGE>
AMOUNT AND NATURE PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OUTSTANDING
BENEFICIAL OWNER (1) OWNERSHIP (2) SHARES OWNED
Richard G. Gagliardi 500,579 (3)(8) 53.5%
Lynn K. Gagliardi 10,000 (4)(8) 1.1%
Theodore P. Rica, Jr. 20,567 (5)(8) 2.2%
Robert J. DiQuollo 20,000 (6)(9) 2.1%
Bernard Gitlow 6,426 (7)(10)(11) *
All directors and executive
officers as a group (five persons) 557,572 (5)(6)(7)(8)(9)
58.9%
* less than 1%
- ---------------------------------
(1) The address of each of the beneficial owners identified is
150 Morristown Road, Suite 108, Bernardsville, New Jersey 07924.
(2) Unless otherwise noted, the Company believes that all
persons named in the table have sole voting and investment power
with respect to all shares of Common Stock beneficially owned by
them.
(3) Does not include shares beneficially owned by Lynn K.
Gagliardi, Mr. Gagliardi's wife, as to which he disclaims
beneficial ownership.
(4) Does not include shares owned by Richard G. Gagliardi, Ms.
Gagliardi's husband, as to which she disclaims beneficial
ownership.
(5) Includes 20,000 shares of Common Stock which may be
purchased by Mr. Rica upon exercise of immediately exercisable
options.
(6) Represents 20,000 shares of Common Stock which may be
purchased by Mr. DiQuollo upon exercise of immediately
exercisable options.
(7) Includes 3,426 shares of Common Stock which may be purchased
by Mr. Gitlow upon exercise of immediately exercisable warrants.
(8) Does not include 1,890 shares to be issued in lieu of cash
compensation for attendance at directors meetings during 1996 for
each of Mr. Gagliardi, Mrs. Gagliardi and Mr. Rica.
(9) Does not include 1,553 shares to be issued in lieu of cash
compensation for attendance at directors meetings during 1996 to
Mr. DiQuollo.
(10) Does not include 1,730 shares to be issued in lieu of cash
compensation for attendance at directors meetings during 1996 to
Mr. Gitlow.
(11) Does not include 3,000 shares of Common Stock which may be
purchased by Mr. Gitlow upon exercise of immediately exercisable
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, an agreement was entered into between the
Company and a general contractor, who is a director of the
Company, regarding the building of single family residences on
lots owned by Development. According to the terms of the
agreement, any general contracting contracts Development
negotiates with third parties on lots contained in the property,
will be done for the benefit of Development by the contractor and
for which the contractor will receive a fee of $5,000 per home.
In August 1996, the Company received a request, from the
purchaser under the January 1996 contract for the 5 building
lots, to assign one of the 5 lots to a third party. The
assignment called for a payment from the new buyer to the
original contracted buyer of $2,500 and the balance of $97,500 to
the Company for the lot. In September 1996, the Company agreed
to the assignment. In October 1996 the Company, through Capital
committed to provide a construction/permanent mortgage loan to
the new buyer and in November 1996 a building permit was issued
to the purchaser under contract to construct a single family
residence. An affiliate of the Company acted as site manager
for the construction of this house which was completed in July
1997. The affiliate company is majority owned by Theodore P.
Rica, Jr., a director of the Company. The Company closed title
to this lot during March 1997.
As of December 31, 1996, the Company had borrowed from
various stockholders, including but not limited to Alice E.
Gagliardi, Mr. Gagliardi's mother, Bernard Gitlow and Theodore P.
Rica, Jr. directors of the Company and Richard G. Gagliardi and
Lynn K. Gagliardi officers of the Company, in the aggregate
amount of $192,491. The loans bear interest at the rate of 12%.
See NOTE 11 of notes to the financial statements.
In June 1997, the Company received a stock subscription for
2,250 shares of 5% non-voting Series A, Cumulative Convertible
Preferred Stock in lieu of accumulated interest due a creditor
through the date of subscription on a corporate debt of $75,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENT
PAGE NO.
Report of Independent Accountants F-1
Consolidated Balance Sheet - December 31, 1996 F-2
Consolidated Statements of Operations -
for the years ended December 31, 1996 and 1995 F-3
Consolidated Statements of Changes In Stockholders'
Equity - for the years ended December 31, 1996 and 1995 F-4
Consolidated Statements of Cash Flows - for the years
ended December 31, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6 - F-12
<PAGE>
<AUDIT-REPORT> INDEPENDENT AUDITORS' REPORT
To the Stockholders of
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES as of
December 31, 1996 and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for
the years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the
consolidated financial position of AMERICAN ASSET MANAGEMENT
CORPORATION AND SUBSIDIARIES as of December 31, 1996 and the
results of their operations and their cash flows for the years
ended December 31, 1996 and 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements,
the Company is involved in litigation relating to the Company's
1989 private offering of common stock. The outcome of the
litigation cannot presently be determined. Accordingly, no
provision for any liability that may result upon adjudication has
been made in the accompanying consolidated financial statements.
Paramus, New Jersey /s/RD Hunter & Company LLP
April 30, 1997 Certified Public Accountants
F-1
<PAGE>
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES Exh. A
Consolidated Balance Sheet
December 31, 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 220,733
Notes receivable 28,655
Mortgage loans receivable 1,336,875
Prepaid and other current assets 60,294
Total current assets $1,646,557
Land and development costs 1,534,603
Furniture and equipment, at cost, less
accumulated depreciation 14,933
OTHER ASSETS:
Intangible assets 1,204
Commission advances 9,550
Total other assets 10,754
TOTAL: $3,206,847
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 379,014
Deferred income 23,349
Liability for land development costs 134,386
Loans payable 192,491
Lot deposits 91,000
Warehouse loans payable 1,310,128
Mortgage payable 429,238
Total current liabilities 2,559,606
STOCKHOLDERS' EQUITY
Preferred stock subscribed, no par value;
56,500 shares - 5% Non-voting
Series A Cumulative Convertible 565,000
Common stock, no par value; 10,000,000
shares authorized; 916,119 shares issued
and outstanding 2,449,325
Additional paid-in capital 231,207
Accumulated deficit (2,598,291)
Total stockholders' equity 647,241
TOTAL: $3,206,847
(The accompanying notes are an integral part of these financial
statements.)
F-2
<PAGE>
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES Exh. B
Consolidated Statements of Operations
December 31, 1996 and 1995
1996 1995
REVENUES:
Mortgage origination fees $ 476,273 $ 853,984
Application fees 82,165 93,210
Mortgage interest income 44,478 54,671
Total revenues 602,916 1,001,865
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Salaries and benefits 482,995 795,804
Commissions 145,306 239,372
Other expenses 407,530 657,896
Special charge 17,000 141,000
Total selling, general
& administrative
expenses 1,052,831 1,834,072
LOSS FROM OPERATIONS (449,915) (832,207)
Other Income 2,429 9,544
LOSS BEFORE PROVISION FOR INCOME TAXES (447,486) (822,663)
Provision for income taxes - -
NET LOSS (447,486) (822,663)
NET LOSS PER COMMON SHARE $ (0.48) $ (0.90)
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 936,119 916,119
(The accompanying notes are an integral part of these financial
statements.)
F-3
<PAGE>
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES Exh. C
Consolidated Statements of Changes in Stockholders' Equity
December 31, 1996 and 1995
PREF'D STOCK ADDTN'L
COMMON STOCK SUBSCRIBED PAID-IN ACCUM'D
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
Balance, December 31, 1994:
916,119 $2,434,325 -- -- $231,207 $(1,328,142) $1,337,390
Net loss for year ended 1995:
-- -- -- -- -- (822,663) (822,663)
Balance, December 31, 1995:
916,119 $2,434,325 -- -- 231,207 (2,150,805) 514,727
Preferred stock subscriptions:
-- -- 56,500 565,000 -- -- 565,000
Issuance of common stock:
20,000 15,000 -- -- -- -- 15,000
Net loss for year ended 1996:
-- -- -- -- -- (447,486) (447,486)
BALANCE, December 31, 1996:
936,119 2,449,325 56,000 $565,000 $231,207 $(2,598,291) $647,241
(The accompanying notes are an integral part of these financial
statements)
F-4
<PAGE>
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES Exh D
Consolidated Statements of Cash Flows
December 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (447,486) $ (822,663)
ADJUSTMENTS TO RECONCILE
NET LOSS TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation and amortization 19,054 24,174
Gain on sale of fixed assets -- (5,699)
Reserve for bad debts 7,569 (42,668)
Allowance for net realizable value 17,000 141,000
Interest expense value assigned to
common stock issued 15,000 --
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN:
Notes receivable (1,970) 2,404
Mortgage loans receivable (678,449) (658,426)
Prepaid and other assets (1,320) 59,099
INCREASE (DECREASE) IN:
Accounts payable & accrued expenses (22,752) 211,350
Deferred income 23,349 (2,801)
Warehouse loans payable 670,378 639,750
Net cash used in operating activities (399,627) (454,480)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of commission advances 2,220 --
Sale of fixed assets -- 25,176
Purchase of fixed assets (9,398) (19,666)
Increase in land & development costs (61,217) (277,243)
Proceeds from lot deposits 73,000 358,000
Net cash provided by
investing activities 4,605 86,267
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of mortgage (228,248) --
Proceeds from mortgage payable to bank 429,238 153,248
Proceeds from loans payable 140,411 277,080
Net cash provided by
financing activities 341,401 430,328
Net increase (decrease) in cash (53,621) 62,115
Cash and cash equivalents,
at beginning of year 274,354 212,239
CASH & CASH EQUIVALENTS, AT END OF YEAR $ 220,733 $ 274,354
Supplemental non-cash financing activities: See Note 13
(The accompanying notes are an integral part of these financial
statements)
F-5
<PAGE>
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES Exh. E
Notes to Consolidated Financial Statements Page 1
December 31, 1996 and 1995
Note 1 - SIGNIFICANT ACCOUNTING POLICIES:
AMERICAN ASSET MANAGEMENT CORPORATION (the "Company") and its
subsidiaries are engaged in mortgage banking and real estate
financing and development. The Company's mortgage banking
subsidiary is a licensed mortgage banker in the State of New
Jersey. The real estate project involves a parcel of land being
developed for subdivision and sale.
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
American Asset Management Corporation and its wholly-owned
subsidiaries. All material intercompany accounts and
transactions have been eliminated.
B. CONCENTRATION, SIGNIFICANT RISKS AND USE OF ESTIMATES
The Company's lending is primarily concentrated in the New Jersey
market.
During 1996, the Company sold, 52, 21, 20 and 17 of its 143
closed loans (35.4%, 14.3%, 13.6% and 11.6%), to four investors,
which included two savings banks and two mortgage bankers.
The Company receives all of its funds for mortgage banking
activities from one mortgage warehouse lender.
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period.
Actual results could affect those estimates.
C. FIXED ASSETS AND DEPRECIATION
Fixed assets are stated at cost. Depreciation is computed by
using the straight line method over the estimated useful lives of
3 years for computer equipment and 5 years for furniture and
equipment, for both financial reporting and income tax purposes.
D. MORTGAGE LOANS RECEIVABLES
Mortgage loans receivable are held for sale and are reported at
the lower of cost, or market value. The method used to determine
this amount is the individual loan amount. At December 31, 1996,
cost approximates the market value of such loans.
F-6
E. INTANGIBLE ASSETS Exh. E
Page 2
Goodwill and organization costs are both amortized on the
straight-line basis over a period of five years.
F. FEE INCOME
Fee income resulting from the Company's mortgage banking
activities is recognized when a financing occurs. The Company's
application fees for processing mortgage applications and
commitment fees for committing to fund a loan are recorded when
the fees are received.
G. INCOME TAXES
Deferred taxes are provided on temporary differences between the
financial reporting and income tax basis of assets and
liabilities based on enacted tax rates and the expected effect on
future cash flows for income taxes.
H. STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
I. LOSS PER SHARE
Loss per share amounts are based on the weighted average number
of shares outstanding. No effect has been given to shares
issuable for outstanding options and warrants as the effect would
be antidilutive.
J. RESERVE FOR BAD DEBTS
A reserve for bad debts has been provided for on all commission
advances and notes receivable turned over for collection. The
reserve at December 31, 1996 was $25,606.
NOTE 2 - CASH:
Included in the cash balance at December 31, 1996 is $50,000 held
in escrow by a lending institution used to support interest
payments on an outstanding loan balance (see Note 8). Also
included in the cash balance is $11,000 held in a legal escrow
account and used as a down payment on a real estate lot which
closed during March, 1997 (see Note 16). Total unrestricted cash
amounts to $159,733 at December 31, 1996.
NOTE 3 - FIXED ASSETS:
Fixed assets consist of:
Computer equipment $ 45,124
Furniture and fixtures 19,291
Office equipment 37,413
Leasehold improvements 2,240
104,068
Less, Accumulated depreciation 89,135
NET FIXED ASSETS $ 14,933
F-7
<PAGE> Exh. E
Page 3
Depreciation expense was $17,850 and $19,508 for the years ended
December 31, 1996 and 1995 respectively.
NOTE 4 - INTANGIBLE ASSETS:
Intangible assets at December 31, 1996 consist of:
Goodwill $ 86,370
Organization costs 45,515
131,885
Less, Accumulated amortization 130,681
NET INTANGIBLE ASSETS $ 1,204
Amortization expense was $1,204 and $4,666 for the years ended
December 31, 1996 and 1995, respectively.
NOTE 5 - LAND AND DEVELOPMENT COSTS:
Land and development costs are comprised of an investment in
capitalized loans of $675,000 to acquire the land, issuance of
148,000 shares of common stock in 1992 with a fair market value
of $259,000 to acquire the minority interest and development
costs incurred of $758,603, less an allowance of $158,000 to
reduce the carrying amount to estimated net realizable value as
of December 31, 1996.
NOTE 6 - MORTGAGE LOANS RECEIVABLE:
On March 3, 1995, the Company received a commitment for a
$5,000,000 warehouse line of credit from a mortgage warehouse
lender. Funds from this line of credit are lent to borrowers
once an investor (usually a bank) has agreed to purchase the
mortgage. These funds are secured by residential mortgage loans.
The line of credit is repaid by the investor at the time of the
closing. As of December 31, 1996, fourteen loans had yet to be
closed, resulting in a warehouse loan payable of $1,310,128
offset by mortgage loan receivables of $1,336,875. Three loans
were closed in the first quarter of 1997. Interest expense was
$87,057 and $81,240 for the years ended December 31, 1996 and
1995, respectively.
NOTE 6 - LOT DEPOSITS:
At December 31, 1995, the Company had executed contracts of sale
amounting to $1,040,500 for ten of eleven lots, which related to
the Company's real estate activities. The Company had collected
$358,000 as down payments on the related contracts. Subsequent
to December 31, 1995, a contract for three lots was voided and
the related deposit of $28,000 was returned.
In 1996, an additional $101,000 was collected as down payments.
In December 1996, contracts for five of the lots were cancelled
and the related $340,000 of down payments were applied to the
stock subscriptions to convert the debt into preferred stock of
the Company (see Note 10).
F-8
<PAGE> Exh. E
Page 4
NOTE 8 - MORTGAGE PAYABLE
During December, 1996, the Company refinanced a site improvement
loan from a Commercial bank, which is evidenced by a note and
collateralized by a mortgage creating a valid first lien on ten
of the Company's eleven land development lots. Interest is
charged at a rate equal to one and one-half percent (1.5%) per
annum above The Wall Street Journal prime rate (8.25% at December
31, 1996). The refinancing increased the total mortgage payable
to $429,238 at December 31, 1996. The principal portion of the
debt is to be paid down with the use of proceeds obtained from
the sale of the ten real estate lots. Interest is to be paid
from a $50,000 escrow account set up by the bank and included in
the principal balance. The mortgage is payable in full no later
than December 30, 1997.
In addition to the site improvement loan, the Company received a
$111,583 letter of credit, secured by the same mortgage lien on
the ten real estate lots. The interest rate on all advances from
the letter of credit will be equal to one and one-half percent
(1.5%) per annum above The Wall Street Journal prime rate. All
advances are payable in full at December 30, 1997. As of
December 31, 1996, the Company had not received any advances from
the letter of credit.
NOTE 9 - INCOME TAXES
The Company has deferred tax assets of $1,006,000 at December 31,
1996 arising from net operating loss ("NOL") carryforwards of
$2,324,000 which expire between 2001 and 2011. The Company's
valuation allowance increased from $828,000 at December 31, 1995
to $1,006,000 at December 31, 1996 due to the uncertainty of
future utilization of the Company's NOL carryforwards.
NOTE 10 - STOCKHOLDERS' EQUITY:
Through a public offering in April 1991, the Company sold 150,878
units (unadjusted), each unit consisting of three shares of
common stock, one Class A Common Stock Purchase Warrant, one
Class B Common Stock Purchase Warrant and one Class C Common
Stock Purchase Warrant. Net proceeds of the offering were
$1,089,821. Each Class A Warrant entitled the holder to purchase
one share of common stock at an exercise price of $17.50 until
January 29, 1994, when the unexercised warrants expired. Each
Class B Warrant entitles the holder to purchase .20941 share of
common stock at an exercise price of $19.10 per whole share until
January 29, 1998. Each Class C Warrant entitles the holder to
purchase .20977 share of common stock at an exercise price of
$21.45 per whole share until January 29, 1998. No fractional
shares will be issued upon exercise of the Class B and C
F-9
<PAGE> Exh. E
Page 5
Warrants. The Company may redeem the warrants at $0.10 each upon
30 days written notice, providing the closing bid price of the
common stock shall have exceeded $25.00 per share for ten
consecutive days preceding the date of such notice.
On February 20, 1995, the Company filed amendments to its
certificate of incorporation to effect a one-for-five reverse
stock split of the outstanding common stock and to provide for an
authorized capital consisting of 10,000,000 shares of common
stock, no par value, and 2,000,000 shares of preferred stock, no
par value. Unless otherwise indicated, all share and per share
amounts have been restated to retroactively reflect the reverse
stock split.
In January of 1996, the Company issued 20,000 shares of common
stock to two individuals in order to satisfy an obligation from a
loan agreement drawn up in June, 1995. The agreement called for
the issuance of 20,000 shares of Company common stock to the
individuals upon final payment of the principal and interest.
The value of the shares at the time of transfer was $15,000. As
a result of the transaction, $15,000 has been reflected as
interest expense and $15,000 as an addition to common stock.
On December 18, 1996, the Company issued a confidential private
offering memorandum for the sale or exchange to "Accredited
Investors" of up to 75,000 shares of no par value, 5% Non-voting
Series A Cumulative Convertible Preferred Stock without
registration, (the "Preferred Stock") at an offering price of
$10.00 per share. The offering shall terminate upon the earlier
of (i) the sale or exchange of all of the Preferred Stock (ii) or
March 31, 1997.
As of December 31, 1996, the Company received stock subscriptions
to convert $565,000 of debt into 56,500 shares of 5% Non-voting
Series A Cumulative Convertible Preferred Stock. Each preferred
share accrues $.50 in annual dividends, payable semi-annually
commencing July 1, 1997. Each share is convertible into either
two shares of the Company's common stock or twenty shares of
common stock of an affiliated company, Capital Financial
Corp.(CFC). Initial conversion prices are $10.00 per preferred
share for two (2) shares of the Company's common stock or $10.00
per preferred share for twenty (20) shares of common stock of
CFC. Conversion prices are subject to adjustment under certain
conditions. The Company has the right to require conversion of
the preferred stock into common stock if the sales price of the
common stock has been at least $6.50 per share for all ten
trading days ending on the third day prior to the day on which
the Company gives notice of mandatory conversion. The Company
also has the right to redeem the preferred shares with 10 days
notice at $5.15 per share plus all accrued and unpaid dividends.
The aggregate redemption value amounts to $290,975.
NOTE 11 - RELATED PARTIES:
A. Notes receivable as of December 31, 1996 included a $30,378
demand note with interest at 8% and payable monthly from the
Company's former Chief Financial Officer. An allowance of $7,569
for the note has been established for the amount assumed to be
uncollectible.
B. Loans payable as of December 31, 1996 included the following
related party demand notes:
ANNUAL
INTEREST
RELATED PARTY AMOUNT RATE
Stockholders $ 139,637 12%
Chief Executive Officer $ 32,137 12%
Executive Vice President $ 20,717 12%
C. Included in accrued expenses as of December 31, 1996 are back
salaries owed to the Chief Executive Officer and the Executive
Vice President for $30,231 and $24,256, respectively.
NOTE 12 - COMMITMENTS
The Company has entered into various operating lease agreements
for office space and office equipment. The leases expire
periodically through October 1999.
The future minimum rental commitments under noncancelable
operating leases are as follows:
YEAR AMOUNT
1997 $ 55,857
1998 52,625
1999 13,392
TOTAL: $121,874
Rental costs under operating leases amounted to $59,652 and
$126,740 for the years ended December 31, 1996 and 1995,
respectively.
Rental costs were substantially higher in 1995 due to the
operation of two office branches which were opened and closed
during the year.
F-10
<PAGE> Exh. E
Page 6
NOTE 13 - CONSOLIDATED STATEMENTS OF CASH FLOWS:
Supplemental non-cash investing and financing activities:
In January 1996, the Company issued 20,000 shares of stock, worth
a value of $15,000 at the time of transfer, as part of the final
payment of a loan agreement drawn up in June, 1995 (see Note 10).
In December 1996, the Company received stock subscriptions to
convert $565,000 of debt into 56,500 shares of 5% Non-voting
Series A Cumulative Convertible Preferred Stock (see Note 10).
Cash paid during the year for:
1996 1995
Income taxes $ - $ -
Interest $ 35,164 $ 70,938
NOTE 14 - LITIGATION:
In August, 1996, an arbitration was commenced against the Company
and its President, Vice-President, Addison Financial Services,
Inc., Donovan Peterkin, G. K. Scott & Co., Inc., I.A. Rabinowitz
& Co., L. C. Wegard & Co., Inc., and Russell Frayko in the
Arbitration Department of the National Association of Securities
Dealers (NASD). The complaint, which claims fraud,
misrepresentation, unsuitability and breach of fiduciary duty,
was brought by two individuals who allegedly lost $59,000
investing in shares of the Company's 1989 private offering of
common stock. The Company has refused to submit to the NASD
arbitration on the grounds that all alleged transactions or
occurrences cited in the complaint occurred more than six years
before the commencement of the arbitration and are, therefore,
past the statute of limitations as defined under the NASD's Code
of Arbitration Procedure. Although the outcome of the
arbitration cannot currently be determined, the Company believes
that an award against it is unlikely.
In March 1993, an action was commenced against the Company, its
President and the brokerage firms of G. K. Scott & Co., Inc. and
L. C. Wegard & Co., Inc. in the Supreme Court of the State of New
York, Queens County. The complaint, which claimed fraud, unjust
enrichment, conversion, breach of fiduciary duty and breach of
contract, was brought by two individuals who invested a total of
$250,000 in the Company's 1989 private offering of common stock
(the "1989 Offering"). The plaintiffs alleged that, in
connection with their investments in the 1989 Offering, certain
of the defendants misrepresented or failed to disclose certain
material facts concerning the Company and the 1989 Offering. The
plaintiffs sought damages against the parties, including
compensatory damages of $1,000,000 and punitive damages of
$5,000,000. The Company and its President subsequently moved to
dismiss the complaint, and, by order dated January 10, 1994, the
Court dismissed with prejudice the claims with leave to amend.
On February 25, 1994, the plaintiffs filed an amended complaint
containing allegations similar to those in the original complaint
and purporting to amend their original breach of contract
allegations. In August 1994, the court reaffirmed its dismissal
of the unjust enrichment and conversion claims but allowed the
breach of contract and fraud claims to proceed. Outside counsel
for the Company has advised that at report date they cannot offer
an opinion as to the probable outcome.
In February 1995, a settlement was reached with a law firm
utilized by the President of the Company, for unpaid legal fees
and disbursements related to services allegedly performed for the
benefit of the Company. At December 31, 1996, the Company has
fulfilled its obligation, and accordingly, no balance is due.
F-11
<PAGE> Exh. E
Page 7
In the ordinary course of its business, the Company is from time
to time subject to litigation. The Company does not believe that
any litigation to which the Company is currently subject is
likely to have a material adverse effect on the consolidated
financial condition of the Company and its subsidiaries.
NOTE 15 - SPECIAL CHARGE:
The Company recorded a special charge of $17,000 and $141,000 in
December 1996 and 1995, respectively, for a provision to adjust
the carrying value of land and development costs to estimated net
realizable value. The provision was based on a review of the
sales price per sales contracts and the costs of land and
development incurred and anticipated for improvements. As the
total anticipated costs exceeded the anticipated sales price, an
allowance was provided to reduce the carrying amount to the
estimated net realizable value.
NOTE 16 - SUBSEQUENT EVENTS:
The Company's real estate development subsidiary executed and
closed on three contracts of sale during the first four months of
1997. Total proceeds from the closing amounted to $355,000. In
addition, the subsidiary anticipates two additional closings
during the second quarter of 1997. Total proceeds from the
closings amounted to $235,000.
NOTE 17 - MANAGEMENT PLANS:
As shown in the accompanying financial statements, the Company
incurred a net loss of $447,486 for the year ended December 31,
1996 and a net loss of $822,663 for the year ended December 31,
1995. These losses have caused management to institute a
reorganization plan. Pursuant to the plan, management has
received stock subscriptions to convert $565,000 of debt to
equity (see Note 10), closed two branch offices at the end of
1995, and obtained additional sources of business. Also as part
of the plan, the Company has refinanced its property mortgage in
December 1996 (see Note 8) and executed and closed on three
contracts of sale for three lots totaling $355,500 during the
first four months of 1997. Two contracts of sale totaling
$235,000 are anticipated to close in the second quarter of 1997
(see Note 16).
In addition, an agreement was reached in August of 1996 between
the Company's real estate development subsidiary and a general
contractor regarding the building of single family residences on
lots owned by the subsidiary. According to the terms of the
agreement, any general contracting contracts the contractor
receives on the property owned by the subsidiary, will be done
for the benefit of the subsidiary. The contractor will receive a
fee of $5,000 per home. The Company is also actively pursuing
better terms from investors and is seeking additional financing
and capital. The ability of the Company to continue its business
as currently conducted is dependent on the plan's success.
F-12
</AUDIT-REPORT>
<PAGE>
(b) CURRENT REPORTS OF FORM 8-K
The Company did not file any reports on Form 8-K during the
last quarter of the year ended December 31, 1996.
(c) EXHIBITS
*3.1(a) Certificate of Incorporation as Amended
***3.1(b) Amendment to Certificate of Incorporation filed
February 1995
*3.2 By-Laws
*4.3 Form of Warrant Agreement between the Company and
Continental Stock Transfer and Trust Company, as
Warrant Agent
**10.5 1992 Stock Option Plan
10.6 Lease agreement for Capital Financial -
Bernardsville, NJ
21 Subsidiaries of the Company
27 Financial Data Schedule - For SEC Use Only
_________________________
* Incorporated by reference to the corresponding exhibits in
the Company's Registration Statement of Form S-1 (SEC File
No. 33-34145).
** Incorporated by reference to the corresponding exhibit in the
Company's Form 10-KSB for the year ended December 31, 1992.
*** Incorporated by reference to the corresponding exhibit in the
Company's Form 10-KSB for the year ended December 31, 1994.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant cause this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN ASSET MANAGEMENT CORPORATION
(Registrant)
/S/_Richard G. Gagliardi________
09/30/97 Richard G. Gagliardi
Date President
(Signature)
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/S/_Richard G. Gagliardi________
9/30/97 Richard G. Gagliardi
Date President
(Principal Executive,
Financial and Accounting
Officer)
(Signature)
/S/_Lynn K. Gagliardi___________
9/30/97 Lynn K. Gagliardi
Date Executive Vice President
(Signature)
9/30/97 /S/_Robert J. DiQuollo__________
Date Robert J. DiQuollo
Director
(Signature)
9/30/97 /S/_Bernard Gitlow______________
Date Bernard Gitlow
Director
(Signature)
9/30/97 /S/_Theodore P. Rica, Jr._______
Date Theodore P. Rica, Jr.
Director
(Signature)
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
10.6 Lease agreement for Capital Financial,
Bernardsville, NJ
21 Subsidiaries of the Company
27 Financial Data Schedule (For SEC Use Only)
<PAGE>
Exhibit No. 21
SUBSIDIARIES OF THE COMPANY
JURISDICTION
NAME OF INCORPORATION
American Asset Development Corporation New Jersey
Capital Financial Corp. New Jersey
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 220,733
<SECURITIES> 0
<RECEIVABLES> 1,336,875
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,646,557
<PP&E> 14,933
<DEPRECIATION> 89,135
<TOTAL-ASSETS> 3,206,847
<CURRENT-LIABILITIES> 2,559,606
<BONDS> 0
0
0
<COMMON> 2,449,325
<OTHER-SE> 231,207
<TOTAL-LIABILITY-AND-EQUITY> 3,206,847
<SALES> 602,916
<TOTAL-REVENUES> 602,916
<CGS> 0
<TOTAL-COSTS> (1,052,831)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (447,486)
<INCOME-TAX> 0
<INCOME-CONTINUING> (447,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (447,486)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
