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, 1999
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
Issuer's revenues for its most recent fiscal year: $3,028,026
Aggregate market value of the voting stock held by non-affiliates of the issuer:
No Established Trading Market
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,372,744 shares of Common Stock as
of July 31, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,204,876
Accounts receivable 75,076
Note receivable 1,540,485
Property:
Land 13,662,625
Buildings 17,834,384
Furniture, fixture and equipment 91,237
----------------
31,588,246
Accumulated depreciation (932,273)
----------------
Total property 30,655,973
----------------
Net investment in direct financing leases 3,175,895 Other assets:
Prepaid acquisition costs 378,700
Accrued rental income 294,134
Other 78,998
----------------
Total other assets 751,832
----------------
TOTAL ASSETS $ 37,404,137
================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,379,489
Accounts payable 345,252
Security deposit 15,050
----------------
TOTAL LIABILITIES 15,739,791
----------------
Minority interest 5,200,808
Commitments (Note 8)
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000
shares authorized, none issued
Common stock, $.01 par value, 100,010,000
shares authorized, 2,384,117 shares issued
and outstanding 23,841
Capital in excess of par value 21,657,868
Accumulated distributions in excess of earnings (5,111,678)
Cost of treasury stock, 11,373 shares (106,493)
----------------
TOTAL SHAREHOLDERS' EQUITY 16,463,538
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,404,137
================
See Notes to Consolidated Financial Statements.
2
<PAGE>
<TABLE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<CAPTION>
Quarter Year to Date
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Rental income from operating leases $ 800,205 $ 527,197 $ 1,577,965 $ 963,206
Earned income from direct financing leases 85,427 85,151 170,802 170,254
Interest income 124,260 20,940 149,235 40,722
Service fees and other income 106,914 12,931 308,926 12,931
----------- ----------- ------------ -----------
Total revenues 1,116,806 646,219 2,206,928 1,187,113
----------- ----------- ------------ -----------
Expenses:
General operating and administrative 318,063 92,552 501,082 161,345
Reimbursements and fees to related party - 40,140 - 57,800
Interest 267,383 10,936 515,357 37,831
Depreciation 118,220 73,796 235,890 130,745
Amortization 11,654 15,689 27,342 31,377
Merger costs (Note 6) - 2,339,635 - 2,389,918
Potential acquisition costs 377,776 50,702 398,299 182,741
----------- ----------- ------------ -----------
Total expenses 1,093,096 2,623,450 1,677,970 2,991,757
----------- ----------- ------------ -----------
Income (loss) before federal income taxes
and minority interest in net income of
consolidated joint ventures 23,710 (1,977,231) 528,958 (1,804,644)
Federal income taxes from non REIT
subsidiaries (11,656) - (63,596) -
Minority interest in net income of
consolidated joint ventures (131,651) (127,709) (263,271) (263,068)
----------- ----------- ------------ -----------
Net income (loss) $ (119,597) $(2,104,940) $ 202,091 $(2,067,712)
=========== =========== ============ ===========
Basic and diluted earnings (loss)
per share $ (.05) $ (0.95) $ 0.09 $ (1.00)
=========== =========== ============ ===========
Weighted average number of common
shares outstanding 2,372,744 2,222,662 2,372,744 2,075,216
=========== =========== ============ ===========
Weighted average number of common
shares outstanding plus dilutive
potential common shares 2,372,744 2,222,662 2,372,744 2,075,216
=========== =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
<CAPTION>
Quarter Year to Date
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (119,597) $(2,104,940) $ 202,091 $(2,067,712)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization 11,654 15,689 27,342 31,377
Depreciation 118,220 73,796 235,890 130,745
Merger costs - 2,283,322 - 2,283,322
Increase (decrease) in accounts receivable 15,612 (132,009) (61,938) (45,455)
Increase (decrease) in prepaid expenses (1,250) - 12,284 -
Increase in accounts payable 35,985 155,528 143,973 62,752
Cash receipts from direct financing leases
less than income recognized (2,138) (2,593) (4,225) (5,137)
Decrease (increase) in escrow deposits, net of
minority interest partners - (24,000) 10,000 (23,900)
Increase in accrued rental income (22,843) (883) (48,546) (31,125)
Increase in other assets (8,006) - (55,749) -
Increase in minority interest 131,651 127,709 263,271 263,068
----------- ----------- ----------- -----------
Net cash provided by operating activities 159,288 391,619 724,393 597,935
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of real estate (40,518) (947,694) (2,001,622) (4,679,217)
Acquisition of furniture, fixtures and equipment (21,445) - (22,258) -
Investments in joint venture 348,936 - 362,149 -
Change in notes receivable 26,543 - (1,540,485) -
Change in prepaid acquisition costs (10,368) (29,210) (23,077) (58,286)
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities 303,148 (976,904) (3,225,293) (4,737,503)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net 2,000 1,337,108 2,000 2,479,782
Proceeds from (reduction of) notes payable 299,378 (134,141) 4,799,379 2,653,254
Distributions paid to shareholders (431,839) (387,634) (862,661) (729,599)
Distributions to minority interest partners (141,381) (147,761) (281,462) (287,849)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities (271,842) 667,572 3,657,256 4,115,588
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents 190,594 82,287 1,156,356 (23,980)
Cash and cash equivalents at beginning of period 1,014,282 1,295,473 48,520 1,401,740
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,204,876 $ 1,377,760 $ 1,204,876 $ 1,377,760
=========== =========== =========== ===========
Supplemental disclosure of non-cash financing
activities:
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.
4
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AmREIT, Inc., formerly American Asset Advisers Trust, Inc. ("Issuer" or the
"Company"), was incorporated in the state of Maryland on August 17, 1993.
The Company is a real estate investment trust (a "REIT") that acquires,
develops, owns and manages high-quality, retail properties leased to major
retail businesses under long-term commercial net leases. Through a
wholly-owned subsidiary, the Company also provides advisory services to
eleven real estate limited partnerships.
The consolidated financial statements include the accounts of AmREIT, Inc.,
its wholly-owned subsidiaries, AmREIT Realty Investment Corporation
("ARIC"), AmREIT Securities Company ("ASC"), AmREIT Operating Corporation
("AOC"), AmREIT Opportunity Corporation ("AOP"), and AmREIT SPE 1, Inc.
("SPE 1"), and its six joint ventures with related parties. The three
subsidiaries were formed in June, July and April 1998, respectively. ARIC
was organized to acquire, develop, hold and sell real estate in the
short-term for capital gains and/or receive fee income. The Company owns
100% of the outstanding preferred shares of ARIC and AOP. The preferred
shares are entitled to receive dividends equal to 95% of net income and are
expected to be paid from cash flows, if any. AOC and AOP were formed with
the intention to qualify and to operate as a real estate investment trust
under federal tax laws. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company owns
greater than 50% of the aforementioned 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. $6,096 and $0 have been paid for income taxes
during 1999 and 1998, respectively, for the Company's non REIT subsidiary.
For the three and six months ended June 30, 1999, the Company paid interest
of $267,285 and $515,259, respectively. There was no other cash paid for
interest during the first six months of 1999 or 1998.
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.
5
<PAGE>
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.
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.
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, notes 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 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, 1999 and 1998.
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, 1998.
6
<PAGE>
2. NOTES RECEIVABLE
On January 19, 1999, the Company entered into a note agreement with KMH
Land Development, Inc. in the amount of $1,953,715 for the construction of
a property. As of June 30, 1999, the Company had advanced $1,540,485 on the
note. The note bears interest at the prime lending rate plus one percent
with principal and interest payable monthly. The note is secured by the
land and construction in progress and is due on February 1, 2000.
3. NOTES PAYABLE
In November 1998, the Company entered into an unsecured credit facility
(the "Credit Facility"), which is being used to provide funds for the
acquisition of properties and working capital, and repaid all amounts
outstanding under the Company's prior credit facility. Under the Credit
Facility, which has a one-year original term and was extended under the
same terms and covenants through February 2000, the Company may borrow up
to $30 million subject to the value of unencumbered assets. The Credit
Facility contains covenants which, among other restrictions, require the
Company to maintain a minimum net worth, a maximum leverage ratio, and
specified interest coverage and fixed charge coverage ratios. The Credit
Facility bears interest at an annual rate of LIBOR plus a spread ranging
from 1.625% to 2.150% (6.625% as of June 30, 1999), set quarterly depending
on the Company's leverage ratio. As of June 30, 1999, $14,380,110 was
outstanding under the Credit Facility.
In March 1999, the Company entered into a ten year mortgage note payable
with NW L.L.C. for $1,000,000 with $999,379 being outstanding at June 30,
1999. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009. The note is
collateralized by a first lien mortgage on property with an aggregate
carrying value of approximately $1,253,706, net of $32,148 of accumulated
depreciation.
Aggregate annual maturity of the mortgage note payable for each of the
following five years ending December 31 are as follows:
1999 $ 48,920
2000 71,068
2001 77,253
2002 83,978
2003 91,287
Thereafter 626,873
-----------
$ 999,379
As part of the Merger (Note 7), the Company assumed a 5-year lease
agreement for its office telephone system. The lease terminates in
September 2000, at which time the Company has the option to purchase the
equipment. Monthly lease payments total $313. Future minimum lease payments
required under this lease are summarized as follows:
1999 $ 1,880
2000 $ 2,820
7
<PAGE>
4. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the three and
six months ended June 30, 1999 and 1998:
</TABLE>
<TABLE>
<CAPTION>
Quarter Year to Date
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Tandy Corporation $ 27,225 $ 27,225 $ 54,450 $ 54,450
America's Favorite Chicken Co. 23,903 24,566 47,808 49,132
Blockbuster Music Retail, Inc. 94,475 94,476 188,951 188,952
One Care/Memorial Hermann Hospital 50,411 50,409 100,818 100,818
Just For Feet, Inc. 365,385 188,847 730,712 373,399
Bank United 39,447 39,449 78,898 78,898
Hollywood Entertainment Corp. 68,290 68,290 136,581 140,427
Don Pablos 19,612 - 39,224 -
Krispy Kreme 40,441 - 85,260 -
OfficeMax, Inc. 129,623 119,086 259,245 147,384
IHOP Properties, Inc. 26,820 - 26,820 -
---------- ---------- ---------- ----------
$ 885,632 $ 612,348 $1,748,767 $1,133,460
========== ========== ========== ==========
5. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share has been computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share has been computed by dividing net income (loss)
(as adjusted) by the weighted average number of common shares outstanding
plus dilutive potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings (loss) per share for the periods indicated:
</TABLE>
<TABLE>
<CAPTION>
Quarter To Date Year To Date
--------------- ------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding 2,372,744 2,222,662 2,372,744 2,075,216
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.05) $ (0.95) $ 0.09 $ (1.00)
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding 2,372,744 2,222,662 2,372,744 2,075,216
Shares issuable from assumed conversion of warrants - - - -
Weighted average common shares outstanding, as
adjusted 2,372,744 2,222,662 2,372,744 2,075,216
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.05) $ (0.95) $ 0.09 $ (1.00)
=========== =========== =========== ===========
EARNINGS (LOSS) FOR BASIC AND DILUTED
COMPUTATION
Net income (loss) to common shareholders (basic
and diluted Earnings (loss) per share computation) $ (119,597) $(2,104,940) $ 202,091 $(2,067,712)
=========== ============ =========== ===========
</TABLE>
8
<PAGE>
6. MERGER TRANSACTION
On June 5, 1998, the Company's shareholders voted to approve an agreement
and plan of merger with American Asset Advisers Realty Corporation ("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 were paid and the balance (the
"Share Balance") of the Share Consideration is to be paid over a six year
period to the extent certain goals are achieved after the Merger. None of
the Share Balance has been earned subsequent to June 5, 1998. The market
value of the common shares issued effective June 5, 1998 was $2,185,915 was
accounted for as expenses incurred in acquiring AAA from a related party.
In addition, the Company assumed an obligation to the stockholder of AAA in
the amount of $97,407. This obligation and the related accrued interest of
$3,157 were subsequently paid with the issuance of 9,811 shares. In
connection with the Merger, the Company incurred costs during the six
months ended June 30, 1998 of $182,741, 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.
7. RELATED PARTY TRANSACTIONS
See Note 6 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 45% and 100% of the stock of the companies that
serve as the general partner of the Partnerships.
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. There were no reimbursements and fees incurred or
charged to expense for the three and six months ended June 30, 1999.
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
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. There were no
costs incurred by AAA for the three and six months ended June 30, 1999, in
connection with the issuance and marketing of the Company's stock. 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. These costs are reflected as issuance costs and are
recorded as a reduction to capital in excess of par value.
9
<PAGE>
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. There were no acquisition fees incurred or paid to AAA for the
three and six months ended June 30, 1999. 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 paid to AAA included $430,972
that was earned prior to purchasing certain properties.
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%.
8. COMMITMENTS
At June 30, 1999, the Company is committed to incur additional costs of
approximately $4,466,000, not to exceed $4,761,000, in connection with
properties under development.
10
<PAGE>
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.
Through a wholly-owned subsidiary, the Company also provides advisory services
to eleven real estate limited partnerships.
The Company filed an S-4 registration document with the Securities Exchange
Commission ("SEC") on June 29, 1999. As of June 30, 1999, this registration
document is under the review process of the SEC. This registration document
proposes the merger of 10 affiliated partnerships into the Company.
The Year 2000 problem ("Y2K") concerns the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The Company's information
technology system consists of a network of personal computers and servers built
using hardware and software from mainstream suppliers. The Company has no
internally generated programmed software coding to correct, as all of the
software utilized by the Company is purchased or licensed from external
providers.
In 1998, the Company formed a Year 2000 committee (the "Y2K Team") for the
purpose of identifying, understanding and addressing the various issues
associated with the Year 2000 problems. The Y2K Team consists of members from
the Company, including representatives from senior management, accounting and
computer consultants. The Y2K Team's initial step in assessing the Company's Y2K
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Y2K problems. The Y2K Team is in the process
of conducting inspections, interviews and tests to identify which of the
Company's systems could have a potential Y2K problem.
The Company's information system is comprised of hardware and software
applications from mainstream suppliers; accordingly, the Y2K Team is in the
process of contacting the respective vendors and manufacturers to verify the Y2K
compliance of their products. In addition, the Y2K Team has also requested and
is evaluating documentation from other companies with which the Company has a
material third party relationship, including the Company's tenants, major
vendors, financial institutions and the Company's transfer agent. The Company
depends on its tenants for rents and cash flows, its financial institutions for
availability of cash and financing and its transfer agent to maintain and track
investor information. Although the Company continues to receive positive
responses from its third party relationships regarding their Y2K compliance, the
Company cannot be assured that the tenants, financial institutions, transfer
agent and other vendors have adequately considered the impact of the Year 2000.
The Company does not expect the Y2K impact of third parties to have a materially
adverse effect on its results of operation or financial position.
The Company has identified and has implemented upgrades for certain hardware
equipment. In addition, the Company has identified certain software applications
which will require upgrades to become Year 2000 compliant. The Company has spent
approximately $7,000 in order to upgrade its accounting software and for
information technology consulting fees paid to third parties in order to
evaluate the Company's systems. The Company expects all of these upgrades as
well as any other necessary remedial measures on the information technology
systems used in the business activities and operations of the Company to be
completed by September 30, 1999. The Company does not expect the aggregate cost
of the Year 2000 remedial measures to exceed $10,000.
Based upon the progress the Company has made in addressing its Year 2000 issues,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. The Company plans to address its significant Year 2000
issues prior to being affected by them; therefore, it has not developed a
comprehensive contingency plan. However, if the Company identifies significant
11
<PAGE>
risks related to its Year 2000 compliance, the Company will develop contingency
plans as deemed necessary at that time.
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 cash flow from operating results 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 capitalization of the Company, formerly American Asset Advisers
Trust, Inc., on August 17, 1993 was with the issuance of 20,001 shares of stock
for $200,010 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 warrants)
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).
In November 1998, the Company entered into an unsecured credit facility (the
"Credit Facility") with a borrowing capacity up to $30 million, subject to
certain covenants such as the value of unencumbered assets, through November
1999. The Credit Facility contains covenants which, among other restrictions,
require the Company to maintain a minimum net worth, a maximum leverage ratio,
and specified interest coverage and fixed charge coverage ratios. The Credit
Facility bears interest at an annual rate of LIBOR plus a spread ranging from
1.625% to 2.150%, set quarterly depending on the Company's leverage ratio. As of
June 30, 1999, $14,380,110 was outstanding under the Credit Facility. These
funds were used to acquire properties.
In March 1999, the Company entered into a ten year mortgage note payable with NW
L.L.C. for $1,000,000 with $999,379 being outstanding at June 30, 1999. The
interest rate is fixed at 8.375% with payments of principal and interest due
monthly. The note matures April 1, 2009. The note is collateralized by a first
12
<PAGE>
lien mortgage on property with an aggregate carrying value of approximately
$1,253,706, net of $32,148 of accumulated depreciation.
As of June 30, 1999, the Company had acquired ten properties directly and six
properties through joint ventures with entities with common management and had
invested $27,421,942, 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.
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,
1999, the Company's cash and cash equivalents totaled $1,204,876.
As of June 30, 1999, the Company is committed to incur additional costs of
approximately $4,466,000, not to exceed $4,761,000, in connection with
properties under development. The Company intends to fund these commitments
through a combination of existing cash, proceeds from payment of notes
receivable of approximately $1,800,000, and by utilizing the Company's unsecured
credit facility.
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.
FUNDS FROM OPERATIONS
Funds from operations (FFO) increased $200,588 or 32% to $836,280 for the six
months ended June 30, 1999 from $635,692 for the six months ended June 30, 1998.
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.
Management considers FFO an appropriate measure of performance of an equity REIT
because it is predicated on cash flow analysis. However, FFO should not be
considered an alternative to cash flows from operating, investing and financing
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to meet cash needs. The Company's
computation of FFO may differ from the methodology for calculating FFO utilized
by other equity REITs and, therefore, may not be comparable to such other REITs.
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 (loss) to funds from operations for
the three and six months ended June 30:
<TABLE>
<CAPTION>
Quarter Year to Date
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
Net income (loss) $ (119,597) $ (2,104,940) $ 202,091 $ (2,067,712)
Plus depreciation 118,220 73,796 235,890 130,745
Plus merger costs - 2,339,635 - 2,389,918
Plus potential acquisition costs 377,776 50,702 398,299 182,741
------------- -------------- -------------- --------------
Total funds from operations $ 376,399 $ 359,193 $ 836,280 $ 635,692
============= ============== ============== ==============
13
<PAGE>
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
1999 1998 1999 1998
---- ---- ---- ----
Operating activities $ 159,288 $ 391,619 $ 724,393 $ 597,935
Investing activities $ 303,148 $ (976,904) $(3,225,293) $(4,737,503)
Financing activities $ (271,842) $ 667,572 $ 3,657,256 $ 4,115,588
RESULTS OF OPERATIONS
Comparison of the Three Months Ended June 30, 1999 to June 30, 1998:
During the three months ended June 30, 1999 and 1998, the Company owned and
leased 16 and 14 properties, respectively. During the three months ended June
30, 1999 and 1998, the Company earned $885,632 and $612,348, respectively, in
rental income from operating leases and earned income from direct financing
leases. This 45 percent increase in rental income and earned income is primarily
attributable to rental income earned on the two additional properties owned
during 1999.
During the three months ended June 30, 1999 and 1998, the Company's expenses
were $1,093,096 and $2,623,450, respectively. The $1,530,354 decrease in
expenses is primarily attributable to a $2,339,635 decrease in merger costs as a
result of the completion of the adviser merger in 1998. The change is also
attributable to an increase in (i) potential acquisition costs of $327,074
related to the acquisition of properties, (ii) interest expense of $256,447 due
to higher borrowing levels on the line of credit related to the addition of
seven properties, and (iii) general operating and administrative of $225,511
related to the Merger with the adviser, AAA, whereby salaries and other
corporate overhead of the Company is now paid by the Company as opposed to the
adviser. 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 actual personnel and other operating costs associated with being
internally managed.
Comparison of the Six Months Ended June 30, 1999 to June 30, 1998:
During the six months ended June 30, 1999 and 1998, the Company owned and leased
16 and 14 properties, respectively. During the six months ended June 30 1999 and
1998, the Company earned $1,748,767 and $1,133,460, respectively, in rental
income from operating leases and earned income from direct financing leases.
This 54 percent increase in rental income and earned income from direct
financing leases is primarily due to rental income earned on the two additional
properties owned during 1999.
During the six months ended June 30, 1999 and 1998, the Company's expenses were
$1,677,970 and $2,991,757, respectively. The $1,313,787 decrease in expenses is
primarily attributable to a $2,389,918 decrease in merger costs as a result of
the completion of the adviser merger in 1998. The change is also attributable to
an increase in (i) potential acquisition costs of $215,558 related to the
acquisition of properties, (ii) interest expense of $477,526 due to higher
borrowing levels on the line of credit related to the addition of seven
properties, and (iii) general operating and administrative of $339,737 related
to the Merger with the adviser, AAA, whereby salaries and other corporate
overhead of the Company is now paid by the Company as opposed to the adviser.
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 actual personnel and other operating costs associated with being internally
managed.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NONE
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
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
15
<PAGE>
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 16, 1999 /s/ H. Kerr Taylor
Date H. Kerr Taylor, President
August 16, 1999 /s/ L. Larry Mangum
Date L. Larry Mangum (Principal Accounting Officer)
16
<PAGE>
</TABLE>
<TABLE>
EXHIBIT 11
AMREIT, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<CAPTION>
Quarter Year to Date
<S> <C> <C> <C> <C>
1999 1998 1999 1998
---- ---- ---- ----
BASIC EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 2,222,662 2,372,744 2,075,216
=========== ============ =========== ===========
NET INCOME (LOSS) $ (119,597) $ (2,104,940) $ 202,091 $ (2,067,712)
=========== ============ =========== ============
BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ (0.95) $ 0.09 $ (1.00)
=========== ============ =========== ============
DILUTED EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 2,222,662 2,372,744 2,075,216
SHARES ISSUABLE FROM ASSUMED
CONVERSION OF STOCK WARRANTS - - - -
----------- ------------ ----------- ------------
TOTAL WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING,
AS ADJUSTED 2,372,744 2,222,662 2,372,744 2,075,216
=========== ============ =========== ============
NET INCOME (LOSS) $ (119,597) $ (2,104,940) $ 202,091 $ (2,067,712)
=========== ============ =========== ============
DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ (0.95) $ 0.09 $ (1.00)
=========== ============ =========== ============
</TABLE>
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,204,876
<SECURITIES> 0
<RECEIVABLES> 1,615,561
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,820,437
<PP&E> 31,588,246
<DEPRECIATION> 932,273
<TOTAL-ASSETS> 37,404,137
<CURRENT-LIABILITIES> 15,739,791
<BONDS> 0
0
0
<COMMON> 23,841
<OTHER-SE> 16,437,696
<TOTAL-LIABILITY-AND-EQUITY> 37,404,137
<SALES> 1,748,767
<TOTAL-REVENUES> 2,206,928
<CGS> 0
<TOTAL-COSTS> 1,162,613
<OTHER-EXPENSES> 63,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 202,091
<INCOME-TAX> 0
<INCOME-CONTINUING> 202,091
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 202,091
<EPS-BASIC> 0.09
<EPS-DILUTED> 0.09
</TABLE>
