UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-28378
AMREIT, INC.
MARYLAND CORPORATION IRS IDENTIFICATION NO.
76-0410050
8 GREENWAY PLAZA, SUITE 824 HOUSTON, TX 77046
(713) 850-1400
Indicate by check mark whether the issuer (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the issuer was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(Unaudited)
<S> <C>
ASSETS
Cash and cash equivalents $ 1,377,760
Accounts receivable 170,055
Property:
Escrow deposits 35,000
Land 9,106,583
Buildings 14,314,991
Construction in progress 3,415,681
Furniture, fixture and equipment 63,960
26,936,215
Accumulated depreciation (472,018)
Total property 26,464,197
Net investment in direct financing leases 3,166,333
Other assets:
Preacquisition costs 430,972
Accrued rental income 199,304
Organization costs, net of accumulated amortization of $255,049 58,719
Total other assets 688,995
TOTAL ASSETS $31,867,340
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 8,732,150
Accounts payable 157,070
Security deposit 15,050
TOTAL LIABILITIES 8,904,270
Minority interest 5,236,013
Commitments (Note 7)
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued
Common stock, $.01 par value, 100,000,000 shares authorized,
2,374,306 shares issued and outstanding 23,743
Capital in excess of par value 21,554,401
Accumulated distributions in excess of earnings (3,851,087)
TOTAL SHAREHOLDERS' EQUITY 17,727,057
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,867,340
See Notes to Consolidated Financial Statements.
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2
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AMREIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
<CAPTION>
Quarter Year to Date
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 527,197 $ 270,976 $ 963,206 $ 523,586
Earned income from direct financing leases 85,151 84,885 170,254 169,726
Advisory fee income 12,931 - 12,931 -
Interest income 20,940 43,819 40,722 73,347
Total revenues 646,219 399,680 1,187,113 766,659
Expenses:
General operating and administrative 92,552 33,404 161,345 64,948
Reimbursements and fees to related party 40,140 13,308 57,800 27,000
Interest 10,936 3,000 37,831 6,000
Depreciation 73,796 31,483 130,745 59,920
Amortization 15,689 15,689 31,377 31,377
Merger costs (Note 5) 2,339,635 - 2,389,918 -
Potential acquisition costs 50,702 - 182,741 -
Total expenses 2,623,450 96,884 2,991,757 189,245
Income (loss) before minority interest in
net income of consolidated joint ventures (1,977,231) 302,796 (1,804,644) 577,414
Minority interest in net income of consolidated
joint ventures (127,709) (101,015) (263,068) (194,466)
Net income (loss) $(2,104,940) $ 201,781 $(2,067,712) $ 382,948
Basic earnings (loss) per share $ (0.95) $ 0.14 $ (1.00) $ 0.28
Diluted earnings (loss) per share $ (0.95) $ 0.13 $ (1.00) $ 0.26
Weighted average number of common shares
outstanding 2,222,662 1,478,854 2,075,216 1,392,503
Weighted average number of common shares
outstanding plus dilutive potential
common shares 2,222,662 1,540,333 2,075,216 1,453,982
See Notes to Consolidated Financial Statements.
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3
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AMREIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
<CAPTION>
Quarter Year to Date
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,104,940) $ 201,781 $(2,067,712) $ 382,948
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Amortization 15,689 15,689 31,377 31,377
Depreciation 73,796 31,483 130,745 59,920
Merger costs 2,283,322 - 2,283,322 -
Decrease (increase) in accounts receivable (132,009) - (45,455) 5,119
Increase (decrease) in accounts payable 155,528 (5,200) 62,752 (1,791)
Cash receipts from direct financing leases
less than income recognized (2,593) (2,328) (5,137) (4,612)
Decrease (increase) in escrow deposits, net of
minority interest partners (24,000) 38,250 (23,900) 38,250
Increase in accrued rental income (883) (19,473) (31,125) (38,946)
Increase in other assets - (47,083) - (47,083)
Increase in minority interest 127,709 101,015 263,068 194,466
Net cash provided by operating activities 391,619 314,134 597,935 619,648
Cash flows from investing activities:
Acquisition of real estate (947,694) (1,517,005) (4,679,217) (1,519,004)
Change in preacquisition costs (29,210) (75,256) (58,286) (155,700)
Net cash used in investing activities (976,904) (1,592,261) (4,737,503) (1,674,704)
Cash flows from financing activities:
Proceeds from issuance of stock, net 1,337,108 1,769,564 2,479,782 3,143,471
Proceeds from (reduction of) notes payable (134,141) - 2,653,254 -
Distributions paid to shareholders (387,634) (258,652) (729,599) (486,038)
Distributions to minority interest partners (147,761) (103,712) (287,849) (198,425)
Net cash provided by financing activities 667,572 1,407,200 4,115,588 2,459,008
Net increase (decrease) in cash and cash equivalents 82,287 129,073 (23,980) 1,403,952
Cash and cash equivalents at beginning of period 1,295,473 2,891,190 1,401,740 1,616,311
Cash and cash equivalents at end of period $ 1,377,760 $3,020,263 $ 1,377,760 $3,020,263
Supplemental disclosure of non-cash financing activities:
Real estate contributed by partners of the
consolidated joint ventures $ - $1,392,780 $ - $1,392,780
Issuance of stock in lieu of note payment $ 170,000 $ - $ 170,000 $ -
Issuance of stock in connection with Merger $ 2,244,380 $ - $ 2,244,380 $ -
See Notes to Consolidated Financial Statements.
</TABLE>
4
AMREIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmREIT, Inc. ("the Company"), formerly American Asset Advisers
Trust, Inc., was incorporated on August 17, 1993 as a Maryland
corporation. The initial issuance of 20,001 shares of stock
for $200,010 was to American Asset Advisers Realty Corporation
("AAA"). Commencing March 17, 1994, the Company offered up to
2,000,000 additional shares of common stock together with
1,000,000 warrants. The warrants were exercisable at $9 per
share until March 15, 1998. The offering period of the
initial public offering terminated on March 15, 1996 with
1,008,252 shares being issued. In addition, 57,316 shares
were issued from the exercise of the Warrants. On June 18,
1996, the Company commenced a follow-on offering of up to
2,853,659 additional shares of its common stock. The offering
was terminated on May 22, 1998 with 1,056,946 shares being
issued.
The Company was formed with the intention to qualify and to
operate as a real estate investment trust under federal tax
laws. The Company will acquire commercial and industrial
properties using invested and borrowed funds.
The consolidated financial statements include the accounts of
AmREIT, Inc., its wholly-owned subsidiaries and its six joint
ventures with related parties. All significant intercompany
accounts and transactions have been eliminated in
consolidation. The Company owns greater than 50% of these
joint ventures and exercises control over operations.
The financial records of the Company are maintained on the
accrual basis of accounting whereby revenues are recognized
when earned and expenses are reflected when incurred.
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
There has been no cash paid for income taxes during 1998 or
1997. For the three and six months ended June 30, 1998, the
Company paid interest of $163,015 and $316,518, respectively,
of which $152,079 and $278,687 were capitalized on properties
under construction. There was no other cash paid for interest
during the first six months of 1998 or 1997.
Real estate is leased to others on a net lease basis whereby
all operating expenses related to the properties including
property taxes, insurance and common area maintenance are the
responsibility of the tenant. The leases are accounted for
under the operating method or the direct financing method.
Under the operating lease method, the properties are recorded
at cost. Rental income is recognized ratably over the life of
the lease and depreciation is charged based upon the estimated
useful life of the property.
Under the direct financing lease method, properties are
recorded at their net investment. Unearned income is deferred
and amortized to income over the life of the lease so as to
produce a constant periodic rate of return.
5
Expenditures related to the development of real estate are
carried at cost plus capitalized carrying charges, acquisition
costs and development costs. Carrying charges, primarily
interest and loan acquisition costs, and direct and indirect
development costs related to buildings under construction are
capitalized as part of construction in progress. The Company
capitalizes acquisition costs once the acquisition of the
property becomes probable.
Management reviews its properties for impairment whenever
events or changes in circumstances indicate that the carrying
amount of the assets, including accrued rental income, may not
be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the
estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with
the carrying cost of the individual property. If an
impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its
fair value.
Buildings are depreciated using the straight-line method over
an estimated useful life of 39 years.
Organization costs incurred in the formation of the Company
are amortized on a straight-line basis over five years.
Issuance costs incurred in the raising of capital through the
sale of common stock are treated as a reduction of
shareholders' equity.
The Company is qualified as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, and is,
therefore, not subject to Federal income taxes provided it
meets all conditions specified by the Internal Revenue Code
for retaining its REIT status, including the requirement that
at least 95% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
The Company believes the carrying value of financial
instruments consisting of cash, cash equivalents, accounts
receivable and accounts and notes payable approximate their
fair value.
The accompanying unaudited financial statements have been
prepared in accordance with the instructions to Form 10-QSB
and do not include all of the disclosures required by
generally accepted accounting principles. The financial
statements reflect all normal and recurring adjustments which
are, in the opinion of management, necessary to present a fair
statement of results for the three and six month periods ended
June 30, 1998 and June 30, 1997.
The financial statements of AmREIT, Inc. contained herein
should be read in conjunction with the financial statements
included in the Company's annual report on Form 10-KSB for the
year ended December 31, 1997.
6
2. NOTES PAYABLE
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement bears
interest at 2.00% over varying London Interbank Offered Rates
and it is being used to acquire additional properties. As of
June 30, 1998, $8,568,884 was outstanding under the Amended
Credit Agreement.
In addition, the Company has a note payable to its president
in the amount of $163,266 plus accrued interest totaling $925
as of June 30, 1998. This note is unsecured, payable upon
demand and bears interest at 8%. Interest incurred on this
note was $925 in the second quarter of 1998.
3. MAJOR TENANTS
The following schedule summarizes rental income by lessee for
the three and six months ended June 30, 1998 and June 30, 1997:
Quarter Year to Date
1998 1997 1998 1997
Tandy Corporation $27,225 $27,225 $54,450 $54,450
America's Favorite Chicken Co. 24,566 24,482 49,132 48,964
Blockbuster Music Retail, Inc. 94,476 94,476 188,952 188,952
One Care Health Industries, Inc. 50,409 50,409 100,818 100,818
Just For Feet, Inc. 188,847 119,820 373,399 221,230
Bank United 39,449 39,449 78,898 78,898
Hollywood Entertainment Corp. 68,290 - 140,427 -
OfficeMax, Inc. 119,086 - 147,384 -
612,348 355,861 1,133,460 693,312
4. EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net
income by the weighted average number of common shares
outstanding. Diluted earnings per share has been computed by
dividing net income (as adjusted) by the weighted average
number of common shares outstanding plus dilutive potential
common shares.
5. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve
an agreement and plan of merger with AAA, whereby the
stockholder of AAA agreed to exchange 100% of the outstanding
shares of common stock of AAA for up to 900,000 shares (the
"Share Consideration") of the Company's common stock (the
"Merger"). The common stock of AAA was wholly owned by the
president and director of the Company. As a result of the
Merger, the Company became a fully integrated, self-
administered real estate investment trust ("REIT") effective
June 5, 1998. Effective June 5, 1998, 213,260 shares will be
paid and the balance (the "Share Balance") of the Share
Consideration is to be paid over time to the extent certain
goals are achieved after the Merger. The market value of the
common shares to be issued effective June 5, 1998 was
$2,185,915 of which $58,465 was allocated to the net tangible
assets acquired and the difference of $2,127,450 was accounted
7
for as expenses incurred in acquiring AAA from a related
party. In addition, in connection with the Merger, the
Company incurred costs during the three and six months ended
June 30, 1998 of $212,185 and $262,468, respectively,
consisting primarily of legal and accounting fees, valuation
opinions and fairness opinions. For accounting purposes, AAA
was not considered a "business" for purposes of applying APB
Opinion No. 16, "Business Combinations," and therefore, the
market value of the common shares issued in excess of the fair
value of the net tangible assets acquired was charged to
expense rather than capitalized as goodwill. To the extent
the Share Balance is paid over time, the market value of the
common shares issued will also be charged to expense. Upon
consummation of the Merger on June 5, 1998, certain employees
of AAA became employees of the Company, and any obligation to
pay fees under the advisor agreement between the Company and
AAA was terminated.
6. RELATED PARTY TRANSACTIONS
See Note 5 regarding the Merger.
Related Party Transactions Subsequent to the Merger:
Beginning June 5, 1998, the Company provides property
acquisition, leasing, administrative and management services
for eleven affiliated real estate limited partnerships (the
"Partnerships"). The president and director of the Company
owns between 80% and 100% of the stock of the companies that
serve as the general partner of the Partnerships.
Reimbursements and fees of $12,931 were paid by the
Partnerships to the Company for the three and six months ended
June 30, 1998.
Related Party Transactions Prior to the Merger:
The Company had entered into an Omnibus Services Agreement
with AAA whereby AAA provided property acquisition, leasing,
administrative and management services for the Company.
Reimbursements and fees of $40,140 and $57,800 were incurred
and charged to expense for the three and six months ended June
30, 1998, respectively. Reimbursements and fees of $13,308
and $27,000 were incurred and charged to expense for the three
and six months ended June 30, 1997, respectively.
AAA had incurred certain costs in connection with the
organization and syndication of the Company. Reimbursement of
these costs become obligations of the Company in accordance
with the terms of the offering. Costs of $37,190 and $56,164
were incurred by AAA for the three and six months ended June
30, 1998, respectively, in connection with the issuance and
marketing of the Company's stock. Costs of $48,848 and $86,840
were incurred by AAA for the three and six months ended June
30, 1997, respectively, in connection with the issuance and
marketing of the Company's stock. These costs are reflected
as issuance costs and are recorded as a reduction to capital
in excess of par value.
Acquisition fees, including real estate commissions, finders
fees, consulting fees and any other non-recurring fees
incurred in connection with locating, evaluating and selecting
properties and structuring and negotiating the acquisition of
properties are included in the basis of the properties.
Acquisition fees of $67,961 and $123,389 were incurred and
paid to AAA for the three and six months ended June 30, 1998,
respectively. Acquisition fees of $156,712 and $236,775 were
incurred and paid to AAA for the three and six months ended
June 30, 1997, respectively. Acquisition fees paid to AAA
included $430,972 that was earned prior to purchasing certain
properties.
8
On October 16, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd., an entity with common
management. The joint venture was formed to purchase a
property, which is being operated as a Hollywood Video store
in Lafayette, Louisiana. The property was purchased on October
31, 1997 after the construction was completed. The Company's
interest in the joint venture is 74.58%.
On February 11, 1997, the Company entered into a joint venture
with AAA Net Realty XI, Ltd. The joint venture was formed to
purchase a property, which is being operated as a Just For
Feet retail store in Baton Rouge, Louisiana. The property was
purchased on June 9, 1997 after the construction was
completed. The Company's interest in the joint venture is 51%.
On September 23, 1996, the Company entered into a joint
venture with AAA Net Realty XI, Ltd. The joint venture was
formed to purchase a parcel of land in The Woodlands, Texas
upon which the tenant, Bank United, constructed a branch bank
building at its cost. At the termination of the lease the
improvements will be owned by the joint venture. The
Company's interest in the joint venture is 51%.
On April 5, 1996, the Company entered into a joint venture
with AAA Net Realty Fund XI, Ltd. and AAA Net Realty Fund X,
Ltd., entities with common management, to purchase a property
which is being operated as a Just For Feet retail store in
Tucson, Arizona. The property was purchased on September 11,
1996 after the construction was completed. The Company's
interest in the joint venture is 51.9%.
On September 12, 1995, the Company entered into a joint
venture agreement with AAA Net Realty Fund XI, Ltd. to
purchase a property, which is being operated as a Blockbuster
Music Store in Wichita, Kansas. The Company's interest in the
joint venture is 51%.
On October 27, 1994, the Company entered into a joint venture
agreement with AAA Net Realty Fund X, Ltd., an entity with
common management. The joint venture was formed to purchase a
property, which is being operated as a Blockbuster Music Store
in Independence, Missouri. The Company's interest in the joint
venture is 54.84%.
7. COMMITMENTS
At June 30, 1998, the Company is committed to incur additional
costs of approximately $475,000 in connection with a property
under development.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The Company is a fully integrated, self-administered real estate
investment trust. The Company was organized on August 17, 1993
to acquire, either directly or through joint venture
arrangements, undeveloped, newly constructed and existing net-
lease real estate that is located primarily on corner or out-
parcel locations in strong commercial corridors, to lease on a
net-lease basis to major retail businesses and to hold the
properties with the expectation of equity appreciation producing
a steadily rising income stream for its shareholders.
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the
Year 2000 Issue. The Year 2000 Issue is the result of computer
programs being written using two digits rather than four to
define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000. The Company's hardware and software are
believed to be Year 2000 compliant. Accordingly, the Company does
not expect to incur any material costs in connection with the
compliance of the Year 2000 Issue.
In June 1998, the Company changed transfer agents from Service
Data Corporation to The Bank of New York.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has been the principal source of
capital to fund the Company's ongoing operations. The Company's
issuance of common stock and the use of the Company's credit
facility have been the principal sources of capital required to
fund its growth.
In order to continue to expand and develop its portfolio of
properties and other investments, the Company intends to finance
future acquisitions and growth through the most advantageous
sources of capital available to the Company at the time. Such
capital sources may include proceeds from public or private
offerings of the Company's debt or equity securities, secured or
unsecured borrowings from banks or other lenders, or the
disposition of assets, as well as undistributed funds from
operations.
The Company's leases typically provide that the tenant bears
responsibility for substantially all property costs and expenses
associated with ongoing maintenance and operation, including
utilities, property taxes and insurance. In addition, the
Company's leases generally provide that the tenant is responsible
for roof and structural repairs. Certain of the Company's
properties are subject to leases under which the Company retains
responsibility for certain costs and expenses associated with the
property. Because many of the properties which are subject to
leases that place these responsibilities on the Company are
recently constructed, management anticipates that capital demands
to meet obligations with respect to these properties will be
minimal for the foreseeable future and can be met with funds from
operations and working capital. The Company may be required to
use bank borrowing or other sources of capital in the event of
unforeseen significant capital expenditures.
The initial issuance of 20,001 shares of stock for $200,010 was
to AAA. On March 17, 1994, the Company commenced an offering of
2,000,000 Shares of Common Stock, together with 1,000,000
Warrants (collectively "Securities"). Until the completion of the
offering in March 1996, the Securities were offered on the basis
of two (2) Shares of Common Stock and one (1) Warrant for a total
purchase price of $20.00. The Shares and Warrants are separately
transferable by an investor. Each Warrant entitled the holder to
purchase one Share for $9.00 until March 15, 1998. The offering
period for the initial public offering terminated on March 15,
1996 with gross proceeds totaling $10,082,520 (1,008,252 shares).
In addition, $515,844 (57,316) was received from the exercise of
the Warrants. On June 18, 1996, the Company commenced a follow-
on offering of up to $29,250,000 (2,853,659 shares) of additional
shares of its common stock. The offering terminated on May 22,
1998 with gross proceeds totaling $10,827,300 (1,056,946 shares).
10
In December 1997, the Company entered into an amended and
restated unsecured revolving credit agreement (the "Amended
Credit Agreement") with a borrowing capacity up to $15,000,000
through February 1999. The actual amount available to the
Company is dependent on certain covenants such as the value of
unencumbered assets. The Amended Credit Agreement bears interest
at 2.00% over varying London Interbank Offered Rates and it is
being used to acquire additional properties. As of June 30,
1998, $8,568,884 was outstanding under the Amended Credit
Agreement. These funds were used to acquire properties.
As of June 30, 1998, the Company had acquired eight properties
directly and six properties through joint ventures with entities
with common management and had invested $21,275,145, exclusive of
any minority interests, including certain acquisition expenses
related to the Company's investment in these properties. These
expenditures resulted in a corresponding decrease in the
Company's liquidity.
On June 5, 1998, the Company's shareholders voted to approve an
agreement and plan of merger with AAA, whereby the stockholder of
AAA agreed to exchange 100% of the outstanding shares of common
stock of AAA for up to 900,000 shares (the "Share Consideration")
of the Company's common stock (the "Merger"). The common stock
of AAA was wholly owned by the president and director of the
Company. As a result of the Merger, the Company became a fully
integrated, self-administered real estate investment trust
("REIT") effective June 5, 1998. Effective June 5, 1998, 213,260
shares will be paid and the balance (the "Share Balance") of the
Share Consideration is to be paid over time to the extent certain
goals are achieved after the Merger. The market value of the
common shares to be issued effective June 5, 1998 was $2,185,915
of which $58,465 was allocated to the net tangible assets
acquired and the difference of $2,127,450 was accounted for as
expenses incurred in acquiring AAA from a related party. In
addition, in connection with the Merger, the Company incurred
costs during the three and six months ended June 30, 1998 of
$212,185 and $262,468, respectively, consisting primarily of
legal and accounting fees, valuation opinions and fairness
opinions. For accounting purposes, AAA was not considered a
"business" for purposes of applying APB Opinion No. 16, "Business
Combinations," and therefore, the market value of the common
shares issued in excess of the fair value of the net tangible
assets acquired was charged to expense rather than capitalized as
goodwill. To the extent the Share Balance is paid over time, the
market value of the common shares issued will also be charged to
expense. Upon consummation of the Merger on June 5, 1998, certain
employees of AAA became employees of the Company, and any
obligation to pay fees under the advisor agreement between the
Company and AAA was terminated.
Until the Company acquires properties, proceeds are held in
short-term, highly liquid investments that the Company believes
to have appropriate safety of principal. This investment strategy
has allowed, and continues to allow, high liquidity to facilitate
the Company's use of these funds to acquire properties at such
time as properties suitable for acquisition are located. At June
30, 1998, the Company's cash and cash equivalents totaled
$1,377,760.
Inflation has had very little effect on income from operations.
Management expects that increases in store sales volumes due to
inflation as well as increases in the Consumer Price Index
(C.P.I.), may contribute to capital appreciation of the Company
properties. These factors, however, also may have an adverse
impact on the operating margins of the tenants of the properties.
11
FUNDS FROM OPERATIONS
Funds from operations (FFO) increased $125,929 or 54% to $359,193
for the three months ended June 30, 1998 from $233,264 for the
three months ended June 30, 1997. FFO increased $192,824 or 44%
to $635,692 for the six months ended June 30, 1998 from $442,868
for the six months ended June 30, 1997. The Company has adopted
the National Association of Real Estate Investment Trusts
(NAREIT) definition of FFO. FFO is calculated as net income
(computed in accordance with generally accepted accounting
principles) excluding gains or losses from sales of property,
depreciation and amortization of real estate assets, and
nonrecurring items of income or expense. For purposes of the
table below, FFO excludes nonrecurring merger costs and potential
acquisition costs. FFO is generally considered by industry
analysts to be the most appropriate measure of performance and
does not necessarily represent cash provided by operating
activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to
meet cash needs. Management considers FFO an appropriate measure
of performance of an equity REIT because it is predicated on cash
flow analysis. The Company's computation of FFO may differ from
the methodology for calculating FFO utilized by other equity
REIT's and, therefore, may not be comparable to such other
REIT's. FFO is not defined by generally accepted accounting
principles and should not be considered an alternative to net
income as an indication of the Company's performance.
Below is the reconciliation of net income to funds from
operations for the three and six months ended June 30:
Quarter Year to Date
1998 1997 1998 1997
Net income (loss) $ (2,104,940) $ 201,781 $ (2,067,712) $ 382,948
Plus depreciation 73,796 31,483 130,745 59,920
Plus merger costs 2,339,635 - 2,389,918 -
Plus potential acquisition
costs 50,702 - 182,741 -
Total funds from operations $ 359,193 $ 233,264 $ 635,692 $ 442,868
Cash flows from operating activities, investing activities, and
financing activities for the three and six months ended June 30
are presented below:
Quarter Year to Date
1998 1997 1998 1997
Operating activities $ 391,619 $ 314,134 $ 597,935 $ 619,648
Investing activities $ (976,904) $ (1,592,261) $ (4,737,503) $ (1,674,704)
Financing activities $ 667,572 $ 1,407,200 $ 4,115,588 $ 2,459,008
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1998 to June 30, 1997:
During the three months ended June 30, 1998 and June 30, 1997,
the Company owned and leased 14 and 9 properties, respectively.
During the three months ended June 30, 1998 and June 30, 1997,
the Company earned $612,348 and $355,861, respectively, in rental
income from operating leases and earned income from direct
financing leases. This 72 percent increase in rental income and
earned income is primarily attributable to rental income earned
on the five additional properties owned during 1998.
12
During the three months ended June 30, 1998 and June 30, 1997,
the Company's expenses were $2,623,450 and $96,884, respectively.
The $2,526,566 increase in expenses is primarily attributable to
$2,339,635 of merger costs incurred during the second quarter of
1998 related to the acquisition of the Company's advisor, AAA, on
June 5, 1998. The increase is also attributable to (i) $50,702
of costs incurred during the second quarter of 1998 related to
potential acquisition costs related to the proposed acquisition
of properties, (ii) a $42,313 increase in depreciation as a
result of the depreciation of the additional properties owned
during 1998, and (iii) a $26,832 increase in reimbursements and
fees paid to AAA due to the additional properties acquired during
1998. In addition, the increase in expenses is attributable to a
$59,148 increase in general operating and administrative
expenses. Pursuant to the Merger, the Company acquired AAA and
became internally managed. Effective June 5, 1998, the
reimbursements and fees paid to AAA were replaced with the actual
personnel and other operating costs associated with being
internally managed.
Comparison of the Six Months Ended June 30, 1998 to June 30, 1997:
During the six months ended June 30, 1998 and June 30, 1997, the
Company owned and leased 14 and 9 properties, respectively.
During the six months ended June 30, 1998 and June 30, 1997, the
Company earned $1,133,460 and $693,312, respectively, in rental
income from operating leases and earned income from direct
financing leases. This 63 percent increase in rental income and
earned income is primarily attributable to rental income earned
on the five additional properties owned during 1998.
During the six months ended June 30, 1998 and June 30, 1997, the
Company's expenses were $2,991,757 and $189,245, respectively.
The $2,802,512 increase in expenses is primarily attributable to
$2,389,918 of merger costs incurred during the first six months
of 1998 related to the acquisition of the Company's advisor, AAA,
on June 5, 1998. The increase is also attributable to (i)
$182,741 of costs incurred during the first six months of 1998
related to potential acquisition costs related to the proposed
acquisition of properties, (ii) a $70,825 increase in
depreciation as a result of the depreciation of the additional
properties owned during 1998, (iii) a $31,831 increase in
interest expense as a result of higher average borrowing levels,
and (iv) a $30,800 increase in reimbursements and fees paid to
AAA due to the additional properties acquired during 1998. In
addition, the increase in expenses is attributable to a $96,397
increase in general operating and administrative expenses.
Pursuant to the Merger, the Company acquired AAA and became
internally managed. Effective June 5, 1998, the reimbursements
and fees paid to AAA were replaced with the actual personnel and
other operating costs associated with being internally managed.
13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of the shareholders on June 5,
1998. At this meeting, the shareholders voted to approve the
following proposals: (i) to acquire American Asset Advisers
Realty Corporation (the "Adviser") by the Company and the
Company's change to self-management (1,163,558 voted for, 23,180
voted against and 65,383 abstained), (ii) amend the Company's
Bylaws authorizing the Company's acquisition of the Adviser
(1,162,433 voted for, 19,080 voted against and 70,638 abstained),
(iii) amend the Company's Bylaws removing certain policy
restrictions regarding the nature and leasing of the Companies
properties (1,151,881 voted for, 16,960 voted against and 83,310
abstained), and (iv) amend the Company's Articles of
Incorporation to change the Company's name to AmREIT, Inc.
(1,161,492 voted for, 28,716 voted against and 61,944 abstained).
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the issuer has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
AmREIT, Inc.
(Issuer)
August 14, 1998 /s/ H. Kerr Taylor
Date H. Kerr Taylor, President
August 14, 1998 /s/ L. Larry Mangum
Date L. Larry Mangum (Principal Accounting
Officer)
15
<TABLE>
EXHIBIT 11
AMREIT, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
<CAPTION>
Quarter Year to Date
1998 1997 1998 1997
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,222,662 1,478,854 2,075,216 1,392,503
NET INCOME (LOSS) $(2,104,940) $ 201,781 $(2,067,712) $ 382,948
BASIC EARNINGS (LOSS) PER SHARE $ (0.95) $ 0.14 $ (1.00) $ 0.28
DILUTED EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,222,662 1,478,854 2,075,216 1,392,503
SHARES ISSUABLE FROM ASSUMED
CONVERSION OF STOCK WARRANTS - 61,479 - 61,479
TOTAL WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING,
AS ADJUSTED 2,222,662 1,540,333 2,075,216 1,453,982
NET INCOME (LOSS) $(2,104,940) $ 201,781 $(2,067,712) $ 382,948
DILUTED EARNINGS (LOSS) PER SHARE $ (0.95) $ 0.13 $ (1.00) $ 0.26
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,377,760
<SECURITIES> 0
<RECEIVABLES> 170,055
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,547,815
<PP&E> 26,936,215
<DEPRECIATION> 472,018
<TOTAL-ASSETS> 31,867,340
<CURRENT-LIABILITIES> 8,904,270
<BONDS> 0
0
0
<COMMON> 23,743
<OTHER-SE> 21,554,401
<TOTAL-LIABILITY-AND-EQUITY> 31,867,340
<SALES> 1,146,391
<TOTAL-REVENUES> 1,187,113
<CGS> 0
<TOTAL-COSTS> 2,991,757
<OTHER-EXPENSES> 263,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,067,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,067,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,067,712)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
