<PAGE>
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 September 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 October 31, 1999
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents $ 1,673,437
Accounts receivable 88,771
Property:
Land 12,897,732
Buildings 19,609,255
Furniture, fixture and equipment 100,737
------------
32,607,724
Accumulated depreciation (1,032,201)
------------
Total property 31,575,523
------------
Net investment in direct financing leases 3,178,073
Other assets:
Prepaid acquisition costs 262,585
Accrued rental income 304,229
Other 66,105
------------
Total other assets 632,919
------------
TOTAL ASSETS $ 37,148,723
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $ 15,377,597
Accounts payable 348,652
Security deposit 15,050
------------
TOTAL LIABILITIES 15,741,299
------------
Minority interest 5,190,452
Commitments (Note 7)
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 (5,358,244)
Cost of treasury stock, 11,373 shares (106,493)
------------
TOTAL SHAREHOLDERS' EQUITY 16,216,972
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,148,723
============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 818,405 $ 715,227 $2,396,370 $ 1,678,433
Earned income from direct financing leases 85,484 85,200 256,286 255,454
Interest income 28,945 49,240 178,180 89,962
Gain on sale of property 261,776 - 261,776 -
Service fees and other income 119,228 78,554 428,154 91,485
---------- ---------- ---------- -----------
Total revenues 1,313,838 928,221 3,520,766 2,115,334
---------- ---------- ---------- -----------
Expenses:
General operating and administrative 341,659 195,653 842,741 356,998
Reimbursements and fees to related party - - - 57,800
Interest 314,480 164,676 829,837 202,507
Depreciation 115,260 110,970 351,150 241,715
Amortization - 15,689 27,342 47,066
Merger costs (Note 5) - 37,740 - 2,427,658
Potential acquisition costs 225,019 112,711 623,318 295,452
---------- ---------- ---------- -----------
Total expenses 996,418 637,439 2,674,388 3,629,196
---------- ---------- ---------- -----------
Income (loss) before federal income taxes and minority
interest in net income of consolidated joint ventures 317,420 290,782 846,378 (1,513,862)
Federal income taxes from non REIT subsidiaries - - (63,596) -
Minority interest in net income of consolidated joint ventures (131,675) (131,571) (394,946) (394,639)
---------- ---------- ---------- -----------
Net income (loss) $ 185,745 $ 159,211 $ 387,836 $(1,908,501)
========== ========== ========== ===========
Basic and diluted earnings (loss) per share $ 0.07 $ 0.07 $ 0.16 $ (0.88)
========== ========== ========== ===========
Weighted average number of common shares outstanding 2,372,744 2,377,505 2,372,744 2,177,086
========== ========== ========== ===========
Weighted average number of common shares outstanding
plus dilutive potential common shares 2,372,744 2,377,505 2,372,744 2,177,086
========== ========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Unaudited)
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 185,745 $ 159,211 $ 387,836 $(1,908,501)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization - 15,689 27,342 47,066
Depreciation 115,260 110,970 351,150 241,715
Gain on sale of property (261,776) - (261,776) -
Merger costs - - - 2,283,322
Increase (decrease) in accounts receivable (13,695) 157,055 (75,633) 111,600
Increase in prepaid expenses 1,250 - 13,534 -
Increase (decrease) in accounts payable 3,399 (69,601) 147,372 (6,849)
Cash receipts from direct financing leases
less than income recognized (2,178) (2,644) (6,403) (7,782)
Decrease in escrow deposits, net of
minority interest partners - 34,000 10,000 10,100
Increase in accrued rental income (17,467) (25,121) (66,013) (56,246)
Decrease (increase) in other assets 11,644 (8,614) (44,105) (8,614)
Increase in minority interest 131,675 131,571 394,946 394,639
--------- --------- --------- -----------
Net cash provided by operating activities 153,857 502,516 878,250 1,100,450
--------- --------- --------- -----------
Cash flows from investing activities:
Acquisition of real estate (3,542,972) (1,288,232) (5,544,594) (5,967,449)
Acquisition of furniture, fixtures and equipment (9,500) (2,473) (31,758) (2,473)
Proceeds from sale of property 2,786,809 - 2,786,809 -
Investments in joint venture - (368,584) 362,149 (368,584)
Change in notes receivable 1,540,485 (732,226) - (732,226)
Change in prepaid acquisition costs 116,116 86,429 93,039 28,143
--------- --------- --------- -----------
Net cash provided by (used in) investing activities 890,938 (2,305,086) (2,334,355) (7,042,589)
--------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net - 1,000 2,000 2,480,782
Common stock repurchases - (3,075) - (3,075)
Proceeds from (reduction of) notes payable (1,892) 1,237,298 4,797,487 3,890,552
Distributions paid to shareholders (432,311) (431,108) (1,294,972) (1,160,707)
Distributions to minority interest partners (142,031) (140,089) (423,493) (427,937)
--------- --------- --------- -----------
Net cash provided by (used in) financing activities (576,234) 664,026 3,081,022 4,779,615
--------- --------- --------- -----------
Net increase (decrease) in cash and cash equivalents 468,561 (1,138,544) 1,624,917 (1,162,524)
Cash and cash equivalents at beginning of period 1,204,876 1,377,760 48,520 1,401,740
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,673,437 $ 239,216 $ 1,673,437 $ 239,216
=========== =========== =========== ===========
Supplemental disclosure of non-cash financing activities:
Issuance of stock in lieu of note payment $ 100,564 $ 270,564
=========== ===========
Issuance of stock in connection with Merger $ - $ 2,244,380
=========== ===========
</TABLE>
<PAGE>
AMREIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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. ARIC, AOC, and AOP were formed in
June, July and April 1998, respectively. ASC and SPE1 were both formed in
February 1999. 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-qualified REIT subsidiary.
For the three and nine months ended September 30, 1999 and 1998, the Company
paid interest of $137,989 and $653,346, and $202,480 and $518,998,
respectively. There was no other cash paid for interest during the first nine
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 nine month periods ended September 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 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 January 2000, the Company may borrow up to $20 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% (7.3125% as of September 30,
1999), set quarterly depending on the Company's leverage ratio. As of
September 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 $997,487 being outstanding at September 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 $1,248,348, net of $37,506 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 $ 47,028
2000 71,068
2001 77,253
2002 83,978
2003 91,287
Thereafter 626,873
--------
$997,487
========
As part of the Merger (Note 5), 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 $ 941
2000 $ 2,820
7
<PAGE>
3. MAJOR TENANTS
The following schedule summarizes rental income by lessee for the three and
nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Tandy Corporation $ 27,225 $ 27,225 $ 81,675 $ 81,675
America's Favorite Chicken Co. 25,860 24,566 73,668 73,698
Blockbuster Music Retail, Inc. 94,474 94,475 283,425 283,427
One Care/Memorial Hermann Hospital 50,412 51,572 151,230 152,390
Just For Feet, Inc. 365,433 365,225 1,096,145 738,624
Bank United 39,451 39,458 118,349 118,356
Hollywood Entertainment Corp. 68,293 68,282 204,874 208,709
Don Pablos 19,612 - 58,836 -
Krispy Kreme 12,148 - 97,408 -
OfficeMax, Inc. 129,623 129,624 388,868 277,008
IHOP Properties, Inc. 71,358 - 98,178 -
-------- -------- ---------- ----------
$903,889 $800,427 $2,652,656 $1,933,887
======== ======== ========== ==========
</TABLE>
On November 4, 1999, Just For Feet, Inc. ("Just For Feet") filed a petition
for relief under Chapter 11 of the Bankruptcy Code. Rental income from Just
For Feet amounted to 40% and 41% of the Company's total rental income for the
three and nine months ended September 30, 1999, respectively. Although
management does not expect for Just For Feet's bankruptcy to have a materially
negative long-term impact on the financial condition of the Company, it is too
early to determine the consequences at this time.
4. 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>
<CAPTION>
Quarter To Date Year To Date
------------------------- --------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding 2,372,744 2,377,505 2,372,744 2,177,086
========== ========== ========== ===========
Basic earnings (loss) per share $ .07 $ .07 $ .16 $ (.88)
========== ========== ========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Weighted average common shares outstanding 2,372,744 2,377,505 2,372,744 2,177,086
Shares issuable from assumed conversion of warrants - - - -
---------- ---------- ----------- -----------
Weighted average common shares outstanding, as
adjusted 2,372,744 2,377,505 2,372,744 2,177,086
---------- ---------- ---------- -----------
Diluted earnings (loss) per share $ .07 $ .07 $ .16 $ (.88)
========== ========== ========== ===========
EARNINGS (LOSS) FOR BASIC AND DILUTED COMPUTATION
Net income (loss) to common shareholders (basic
and diluted Earnings (loss) per share computation) $ 185,745 $ 159,211 $ 387,836 $(1,908,501)
========== ========== ========== ===========
</TABLE>
8
<PAGE>
5. 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 three and nine months ended
September 30, 1998 of $37,740 and $300,208, 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 was no longer obligated to pay fees under the
advisor agreement between the Company and AAA. The Company assumed/took over
AAA's existing management contracts. This transaction was not accounted for as
a contract termination because the contracts AAA had with the various entities
were not terminated, but rather assumed by the Company.
6. 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 nine months ended September 30, 1999.
Reimbursements and fees of $57,800 were incurred and charged to expense for
the period ended June 5, 1998.
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 nine months ended September 30, 1999, in
connection with the issuance and marketing of the Company's stock. Costs of
$56,164 were incurred by AAA for the period ended June 5, 1998 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 nine months
ended September 30, 1999. Acquisition fees of $123,389 were incurred and paid
to AAA for the period ended June 5, 1998. Acquisition fees paid to AAA
included $344,543 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%.
7. COMMITMENTS
At September 30, 1999, the Company is committed to incur additional costs of
approximately $1,721,000, not to exceed approximately $1,884,000, 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 September 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 December 31, 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
risks related to its Year 2000 compliance, the Company will
11
<PAGE>
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.
On November 4, 1999, Just For Feet, Inc. ("Just For Feet") filed a petition for
relief under Chapter 11 of the Bankruptcy Code. The Company owns two Just For
Feet properties directly and two properties through joint ventures with entities
with common management. Rental income from these Just For Feet properties
amounted to 40% and 41% of the Company's total rental income for the three and
nine months ended September 30, 1999, respectively. Although management does not
expect for Just For Feet's bankruptcy to have a materially negative long-term
impact on the financial condition of the Company, it is too early to determine
the consequences at this time. The Company has implemented an aggressive
contingency plan to re-lease these properties.
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
12
<PAGE>
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 September 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 $997,487 being outstanding at September 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
$1,248,348, net of $37,506 of accumulated depreciation.
As of September 30, 1999, the Company owned thirteen properties directly and six
properties through joint ventures with entities with common management and had
invested $30,494,608, 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 September
30, 1999, the Company's cash and cash equivalents totaled $1,673,437.
As of September 30, 1999, the Company is committed to incur additional costs of
approximately $1,721,000, not to exceed approximately $1,884,000, in connection
with properties under development. The Company intends to fund these
commitments through a combination of existing cash 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 $305,980 or 29% to $1,362,304 for the nine
months ended September 30, 1999 from $1,056,324 for the nine months ended
September 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.
13
<PAGE>
Below is the reconciliation of net income (loss) to funds from operations for
the three and nine months ended September 30:
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income (loss) $ 185,745 $ 159,211 $ 387,836 $(1,908,501)
Plus depreciation 115,260 110,970 351,150 241,715
Plus merger costs - 37,740 - 2,427,658
Plus potential acquisition costs 225,019 112,711 623,318 295,452
--------- --------- ---------- -----------
Total funds from operations $ 526,024 $ 420,632 $1,362,304 $ 1,056,324
========= ========= ========== ===========
</TABLE>
Cash flows from operating activities, investing activities, and financing
activities for the three and nine months ended September 30 are presented below:
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating activities $ 153,857 $ 502,516 $ 878,250 $ 1,100,450
Investing activities $ 890,938 $(2,305,086) $(2,334,355) $(7,042,589)
Financing activities $(576,234) $ 664,026 $ 3,081,022 $ 4,779,615
</TABLE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 TO SEPTEMBER 30, 1998:
During the three months ended September 30, 1999 and 1998, the Company owned and
leased 22 and 16 properties, respectively. During the three months ended
September 30, 1999 and 1998, the Company earned $903,889 and $800,427,
respectively, in rental income from operating leases and earned income from
direct financing leases. This 13 percent increase in rental income and earned
income is primarily attributable to rental income earned on the six additional
properties owned during 1999.
During the three months ended September 30, 1999 and 1998, the Company's
expenses were $996,418 and $637,439, respectively. The $358,979 increase in
expenses is primarily attributable to an increase in (i) potential acquisition
costs of $112,308 related to the acquisition of properties, (ii) interest
expense of $149,804 due to higher borrowing levels on the line of credit, and
(iii) general operating and administrative of $146,006 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 TO SEPTEMBER 30, 1998:
During the nine months ended September 30, 1999 and 1998, the Company owned and
leased 22 and 16 properties, respectively. During the nine months ended
September 30, 1999 and 1998, the Company earned $2,652,656 and $1,933,887,
respectively, in rental income from operating leases and earned income from
direct financing leases. This 37 percent increase in rental income and earned
income from direct financing leases is primarily due to rental income earned on
the six additional properties owned during 1999.
14
<PAGE>
During the nine months ended September 30, 1999 and 1998, the Company's expenses
were $2,674,388 and $3,629,196, respectively. The $954,808 decrease in expenses
is primarily attributable to a $2,427,658 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 $327,866
related to the acquisition of properties, (ii) interest expense of $627,330 due
to higher borrowing levels on the line of credit, and (iii) general operating
and administrative of $485,743 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.
15
<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
16
<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)
November 15, 1999 /s/ H. Kerr Taylor
- ----------------- ----------------------------------
Date H. Kerr Taylor, President
November 15, 1999 /s/ L. Larry Mangum
- ----------------- -------------------------------------
Date L. Larry Mangum (Principal Accounting
Officer)
17
<PAGE>
EXHIBIT 11
AMREIT, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Quarter Year to Date
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 2,377,505 2,372,744 2,177,086
========== ========= ========== ===========
NET INCOME (LOSS) $ 185,745 $ 159,211 $ 387,836 $ (1,908,501)
========== ========== ========== ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.07 $ 0.07 $ 0.16 $ (0.88)
========== ========== ========== ============
DILUTED EARNINGS (LOSS) PER SHARE:
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,372,744 2,377,505 2,372,744 2,177,086
SHARES ISSUABLE FROM ASSUMED
CONVERSION OF STOCK WARRANTS - - - -
----------- ---------- ---------- -----------
TOTAL WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING,
AS ADJUSTED 2,372,744 2,377,505 2,372,744 2,177,086
========== ========== ========== ============
NET INCOME (LOSS) $ 185,745 $ 159,211 $ 387,836 $ (1,908,501)
========== ========== ========== ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.07 $ 0.07 $ 0.16 $ (0.88)
========== ========== ========== ============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,673,437
<SECURITIES> 0
<RECEIVABLES> 88,771
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,762,208
<PP&E> 32,607,724
<DEPRECIATION> 1,032,201
<TOTAL-ASSETS> 37,148,723
<CURRENT-LIABILITIES> 15,741,299
<BONDS> 0
0
0
<COMMON> 23,841
<OTHER-SE> 16,193,131
<TOTAL-LIABILITY-AND-EQUITY> 37,148,723
<SALES> 2,652,656
<TOTAL-REVENUES> 3,520,766
<CGS> 0
<TOTAL-COSTS> 2,674,388
<OTHER-EXPENSES> 63,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 387,836
<INCOME-TAX> 0
<INCOME-CONTINUING> 387,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387,836
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
