UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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Date of Report (Date of earliest event reported)
December 23, 2003
Commission File Number
0-28378
AmREIT
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(Exact name of registrant as specified in its charter)
TEXAS 76-0410050
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(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
8 Greenway Plaza, Suite 824,
Houston, Texas 77046 713-850-1400
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(Address of principal executive offices) (Registrant's telephone number)
[N/A]
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(Former name or former address, if changed since last report)
TABLE OF CONTENTS
Item 5. Other Events and Required FD Disclosure
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits
1
Item 5. Other Events and Required FD Disclosure
The Company is filing this Form 8-K to update the Company's historical
financial statements included in our current Report on form 10-KSB filed on
April 4, 2003 for discontinued operations that have resulted from real estate
assets disposed of or contracted to be disposed of during the period from July
1 through September 30, 2003 in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The remaining information as presented in the
original filing of our 2002 Form 10-KSB is considered relatively unchanged.
Copies of the Company's SEC filings can be accessed free of charge at the
Company's website address, www.amreit.com
The following Item 7 is intended to update the corresponding section of the
Company's Form 10-KSB.
Part II
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" issued by the Financial Accounting Standards Board, the
consolidated statement of operations have been revised from those originally
reported for the years ended December 31, 2002 and 2001 to reflect separately
the results of discontinued operations for two properties under contract
pending sale during the nine months ended September 30, 2003. The revisions had
no impact on the consolidated balance sheet, statement of shareholder's equity
or statement of cash flows. The revisions had no impact on net (loss) income or
net (loss) income per share for the years ended December 31, 2002 and 2001.
Certain information presented in this Form 10-KSB constitutes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, the Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference include the following: changes in
general economic conditions, changes in real estate market conditions,
continued availability of proceeds from the Company's debt or equity capital,
the ability of the Company to locate suitable tenants for its properties and
the ability of tenants to make payments under their respective leases.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selected
2
financial data appearing elsewhere in this report. Historical results and
trends which might appear should not be taken as indicative of future
operations. The results of operations and financial condition of the Company,
as reflected in the accompanying statements and related footnotes, are subject
to management's evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of the Company's tenants. Management believes the
most critical accounting policies in this regard are the accounting for lease
revenues (including the straight-line rent), the regular evaluation of whether
the value of a real estate asset has been impaired and the allowance for
doubtful accounts. Each of these issues requires management to make judgments
that are subjective in nature. Management relies on its experience, collects
historical data and current market data, and analyzes these assumptions in
order to arrive at what it believes to be reasonable estimates.
AmREIT, a Texas real estate investment trust, is listed on the American Stock
Exchange (AMY) and is a pre-eminent sponsor of high quality real estate
investment opportunities to the financial planning community. The Company
researches, identifies and participates in real estate opportunities and works
hand in hand with the broker-dealer community to sponsor real estate investment
products and services.
For more than 17 years we have established a track record of investing in
commercial real estate leased primarily to corporate tenants in the retail,
financial services and banking, medical and restaurant sectors. AmREIT's real
estate team focuses on development, management, brokerage and ownership of
freestanding credit tenant leased ("CTL") and frontage shopping centers ("FSC")
that are located contiguous to major thoroughfares and traffic generators.
AmREIT's real estate customer list includes national and regional tenants such
as: Walgreen's, Goodyear Tire, Washington Mutual, IHOP, McDonald's, Herman
Hospital, Radio Shack, Sprint, Coldwell Banker, Guaranty Federal, Bennigan's,
Chili's, Texas Children's Hospital, Discount Tire, etc.
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
to fund its growth.
Net cash provided by operating activities increased from $1.64 million in 2001
to $3.73 million in 2002. The increase in cash provided by operating activities
was due primarily to the following components: (1) an increase in deferred
merger costs of $1.9 million in 2002, compared to $0 in 2001. The deferred
merger costs represent a charge to earnings taken for class A common shares
issued to H. Kerr Taylor as deferred consideration as a result of the sale of
his advisory company to AmREIT in June 1998. The merger of the Affiliated
Partnerships triggered a payment under the deferred consideration agreement,
and 302,281 class A common shares of AmREIT were issued and the charge taken to
earnings, which is the primary cause of the $659 thousand loss in 2002, (2) a
decrease in accounts receivable from during 2002 of $1.53 million compared to
an increase in accounts receivable during 2001 of $388 thousand, and (3) an
increase in deferred compensation of $0 in 2001 to $48 thousand in 2002. The
increase in deferred compensation was due to restricted shares issued to
employees and the board of trust managers as compensation in 2002. The above
3
changes are offset by the operating loss of $659 thousand in 2002 compared to
an operating profit of $790 thousand in 2001. The primary cause for the loss in
2002 is the $1.9 million charge to earnings for the deferred acquisition costs.
Net cash used in investing activities increased by $12.94 million to $15.27
million in 2002 when compared to 2001. The increase was primarily due to an
increase in property acquisitions of $15.51 million to $18.95 million in 2002.
This increase is related to the purchase of seventeen IHOP properties purchased
during 2002 through a majority owned subsidiary. Eighty-three percent of the
$17.96 million aggregate purchase price was financed with 83% non-recourse
debt. This increase in net cash was partially offset by the proceeds from the
sale of the OfficeMax property located in Lake Jackson, Texas, which increased
$1.17 million from $2.52 million in 2001 to $3.69 million in 2002.
Net cash provided by financing activities increased $13.84 million in 2002 to
$13.82 million in 2002 when compared to 2001. The increase was primarily due
to: (1) proceeds from notes payable, which totaled $19.25 million in 2002
compared to $8.04 million in 2001, the proceeds of which were primarily used to
fund the acquisition of the seventeen IHOP properties purchased during 2002,
(2) a decrease in payments of notes payables from $6.54 million in 2001 to
$3.40 million in 2002, and (3) an increase in dividends paid from $605 thousand
in 2001 to $1.73 million in 2002. The increase in dividends paid is a result of
a 28% increase in the dividends per share paid to holders of class A shares,
the issuance of additional class A common shares, and the dividends paid on the
issuance of class B shares in July 2002 pursuant to the merger described below.
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 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, acquisitions of the Company's affiliated entities or
other unrelated companies, or the disposition of assets, as well as
undistributed funds from operations.
On July 23, 2002, the Company completed a merger with the Affiliated
Partnerships, which increased the Company's real estate assets by approximately
$24.3 million. Pursuant to the merger, the Company issued approximately 2.6
million class B common shares to the limited partners in the Affiliated
Partnerships. Approximately $760 thousand in 8 year, interest only,
subordinated notes were issued to limited partners of the Affiliated
Partnerships who dissented against the merger. The acquired properties are
unencumbered, single tenant, free standing properties on lease to national and
regional tenants, where the lease is the direct obligation of the parent
company. A deferred merger expense stemmed from stock issued to H. Kerr Taylor,
President and Chief Executive Officer, based on deferred consideration that was
approved by the stockholders in 1998 as a result of the sale of his advisory
company to AmREIT. Mr. Taylor was issued 302,281 shares of Class A common
shares, which resulted in a charge to earnings in the third quarter 2002.
The Company's leases typically provide that the tenant bear 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 be
4
responsible for roof and structural repairs. Some of the tenants' leases
require the Company to be responsible for roof and structural repairs. In these
instances, the Company normally requires warranties and/or guarantees from the
related vendors, suppliers and/or contractors, to mitigate the potential costs
of repairs during the primary terms of the leases. 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.
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 had an
original term of one year, and has been extended through April 2003, the
Company may borrow up to $20 million subject to the value of unencumbered
assets. The Company is working on a modification of the Credit Facility, and
the lender has agreed to extend the term by a period of fifteen months under
comparable terms and conditions. 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. At December 31, 2002, the Lender waived these financial
covenants. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread of 2.00%, which resulted in an effective interest rate of 3.4375% at
December 31, 2002. As of December 31, 2002, $11.76 million was outstanding
under the Credit Facility. The Company has approximately $8.24 million
availability under its line of credit, subject to use of proceeds approval by
the lender.
As of December 31, 2002, the Company owned forty-six properties directly and,
since its inception, had invested $70.83 million, 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 properties are acquired by the Company, the Company's funds are held in
short-term, highly liquid investments which 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 December 31, 2002, the Company's cash and cash equivalents
totaled $2.51 million.
The Company paid aggregate cash dividends to the holders of its class A and
class B common shares, as applicable, during 2002 and 2001, distributing a
total of $1.73 million and $605 thousand, respectively, for each such fiscal
year.
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, 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.
5
Funds From Operations
Funds from operations (FFO) decreased $973 thousand to $6 thousand in 2002 from
$979 thousand in 2001. The decrease in FFO is primarily due to the $1.90
million charge to earnings in the third quarter 2002 resulting from 302,281
class A common shares issued to Mr. Taylor, resulting from the merger of the
Affiliated Partnerships. The Company has adopted the National Association of
Real Estate Investment Trust's (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 depreciable operating
property, depreciation and amortization of real estate assets, and excluding
results defined as "extraordinary items" under generally accepted accounting
principles ("GAAP"). 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 REIT's and,
therefore, may not be comparable to such other REIT's. FFO is not defined by
GAAP 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, which the Company believes is the
most comparable GAAP financial measure, to FFO in thousands:
2002 2001
Net (loss) income $(659) $ 791
Plus depreciation of real estate assets:
Continuing operations 562 391
Discontinued operations 55 51
Less loss (gain) on sale of real estate assets 48 (254)
----------------- -------------------
----------------- -------------------
Total Funds From Operations * $ 6 $ 979
Cash dividends paid $ 1,730 $ 605
Dividends in excess of (less than) FFO * $ 1,724 $(374)
* Based on the adherence to the NAREIT definition of FFO, we have not added
back the $1.90 million charge to earnings in the third quarter 2002 resulting
from shares issued to Mr. Taylor. Adding this $1.90 million charge to earnings
back to earnings would result in $1.90 million adjusted funds from operations,
and dividends paid less than adjusted FFO of $170 thousand.
Cash flows from operating activities, investing activities, and financing
activities are presented below in thousands:
2002 2001
------------------------ -----------------------
Operating activities $ 3,729 $ 1,642
Investing activities (15,268) (2,333)
Financing activities 13,819 (18)
6
Results of Operations
Years Ended December 31, 2002 and 2001:
As of December 31, 2002 and 2001, the Company owned and leased 46 and 19
properties, respectively. During the years ended December 31, 2002 and 2001,
the Company had revenues of: (1) $5.19 million and $3.00 million, respectively,
in rental income from operating leases and earned income from direct financing
leases, (2) $2.04 million and $2.03 million, respectively, in service fee and
other income, (3) $280 thousand and $342 thousand, respectively, in management
fee income, (4) $417 thousand and $20 thousand, respectively, in income from
non-consolidated affiliates and (5) $(48) thousand and $254 thousand,
respectively, in (loss) gain on sale of property.
The increase in gross revenue is primarily attributed to the merger of the
Affiliated Partnerships in July 2002 and the acquisition of the 17 IHOP
properties during 2002, which generated increases in both rental income from
operating leases and earned income from direct financing leases.
The Company sold an OfficeMax in Lake Jackson, Texas during 2002. The Company
recorded a loss on the sale of this property primarily due to the write-off of
accrued rental income .
The decrease in management fee income is primarily due to the merger of the
Affiliated Partnerships in July 2002, which resulted in a decrease in
management fees that had historically been paid from the Affiliated
Partnerships.
The increase in income from non-consolidated affiliates is primarily due to
Company's interest in AmREIT Opportunity Fund and AmREIT Income & Growth Fund.
The Company is the general partner of AmREIT Opportunity Fund and AmREIT Income
& Growth Fund, and receives a profit interest in these funds as certain
investment objectives and returns are met for the third party limited partners.
Service fees and other income increased based on: (1) additional asset
management and advisory fee income and commissions generated by an increase in
capital raised through the Company's direct participation investment funds and
(2) income earned in our non-consolidated affiliates, which are a result of the
Company's general partner interest's in its direct participation investment
funds.
General and administrative costs were $2.80 million in 2002 compared to $1.95
million in 2001. The increased general and administrative costs are primarily
related to: (1) property costs incurred due to a vacancy and required
maintenance at Copper Plaza, and (2) increase in the number of employees during
2002 as we built the management and facilitation teams, resulting in an
increase in personnel and benefit costs.
Legal and professional fees increased from $1.00 million in 2001 to $1.33
million in 2002. The primary increase was an increase in commission expense to
third party broker dealers as a result of an increase in capital raised through
the Company's direct participation investment funds and an increase in transfer
7
agent costs due to the issuance of 2.6 million class B common shares as a
result of the merger of the Affiliated Partnerships.
Interest expense was $1.77 million in 2002 compared to $1.06 million in 2001.
The increase in interest expense is due to the acquisition of seventeen IHOP
properties, which were purchased utilizing approximately $14.76 million in
non-recourse debt with an average interest rate of 7.85%. Included in interest
expense is $131 thousand and $8 thousand, respectively for 2002 and 2001, for
amortized loan acquisition costs.
8
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits
(a) (1) Financial Statements
Independent Auditors' Report
Independent Auditors' Report
Consolidated Balance Sheet, December 31, 2002
Consolidated Statements of Operations for the Years Ended
December 31, 2002 and 2001 Consolidated Statements of
Shareholders' Equity for the Years Ended December 31, 2002 and
2001 Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002 and 2001 Notes to Consolidated Financial
Statements for the Years Ended December 31, 2002 and 2001
(2) Financial Statement Schedules
Schedule III - Consolidated Real Estate Owned and Accumulated
Depreciation
9
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT:
We have audited the accompanying consolidated balance sheet of AmREIT and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended December 31, 2002. In connection with our audit of the
consolidated financial statements, we have also audited the related financial
statement schedule. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AmREIT and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
The consolidated financial statements of AmREIT and subsidiaries for 2001
prior to their restatement as required under Financial Accounting
Standards Board Statement No. 144 (Statement 144) as described in Note 10 to
the consolidated financial statements, were audited by other auditors whose
report is presented separately herein. We audited the reclassifications that
were applied to revise the 2001 financial statements. In our opinion, such
reclassifications are appropriate and have been properly applied. However, we
were not engaged to audit, review, or apply any procedures to the 2001
financial statements of AmREIT and subsidiaries other than with respect to
such reclassifications and, accordingly, we do not express an opinion or any
other form of assurance on the 2001 consolidated financial statements taken as
a whole.
KPMG LLP
Houston, Texas
March 31, 2003, except for the 5th
paragraph of Note 1, Item 5 of Note 6
and Note 10, which are as of December 17, 2003.
10
INDEPENDENT AUDITORS' REPORT
To the Board of Trust Managers
AmREIT
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of AmREIT (formerly AmREIT,Inc.) and subsidiaries (the "Company")
for the year ended December 31, 2001 (none of which are presented herein in
their original format). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, AmREIT and subsidiaries results of operations and cash flows
for the year ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America
DELOITTE & TOUCHE LLP
Houston, Texas
March 15, 2002
11
AMREIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2002
2002
ASSETS
Property:
Land $18,945,607
Buildings 28,652,858
Furniture, fixtures and equipment 381,383
__________
47,979,848
Accumulated depreciation (2,136,376)
__________
Total property, net 45,843,472
Net investment in direct financing leases 23,405,324
Cash and cash equivalents 2,506,868
Accounts receivable 173,659
Accounts receivable - related party 68,934
Escrow deposits 120,466
Prepaid expenses, net 438,696
Other assets:
Preacquisition costs 1,765
Loan acquisition cost, net of $85,579 in accumulated amortization 249,572
Accrued rental income 360,062
Intangible lease cost 257,600
Investment in non-consolidated affiliates 549,335
__________
Total other assets 1,418,334
__________
TOTAL ASSETS $73,975,753
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable $33,586,085
Accounts payable 1,126,219
Accounts payable - related party 206,123
Security deposit 33,930
Prepaid rent 6,177
___________
TOTAL LIABILITIES 34,958,534
___________
Minority interest 810,971
Shareholders' equity:
Preferred stock, $.01 par value, 10,001,000 shares authorized, none issued -
Class A Common stock, $.01 par value, 100,010,000 shares authorized,
2,772,340 shares issued and outstanding 27,723
Class B Common stock, $.01 par value, 3,000,000 shares authorized,
2,464,207 shares issued and outstanding 24,642
Capital in excess of par value 47,183,271
Accumulated distributions in excess of earnings (8,426,846)
Deferred compensation (205,353)
Cost of treasury stock, 65,379 shares (397,189)
___________
TOTAL SHAREHOLDERS' EQUITY 38,206,248
___________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,975,753
===========
See Notes to Consolidated Financial Statements.
12
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
2002 2001
Revenues:
Rental income from operating leases $ 3,386,030 2,371,793
Earned income from direct financing leases 1,807,117 637,537
Service fees and other income 2,041,999 2,033,008
Management fees 279,910 342,349
Income from non-consolidated affiliates 416,904 20,743
(Loss) gain on sale of property (47,553) 254,013
Interest income 4,206 10,555
_________ _________
Total revenues 7,888,613 5,669,998
_________ _________
Expenses:
General operating and administrative 2,801,946 1,953,285
Legal and professional 1,332,188 1,002,776
Interest 1,774,973 1,063,574
Depreciation 611,084 413,583
Deferred merger costs 1,904,370 -
_________ _________
Total expenses 8,424,561 4,433,218
_________ _________
(Loss) income before federal income taxes and minority
interest in net income of consolidated joint ventures (535,948) 1,236,780
Federal income tax expense for taxable REIT subsidiary 60,656 144,420
Minority interest in net income of consolidated joint ventures (308,010) (527,571)
__________ _________
(Loss) income from continuing operations (904,614) 564,789
Income from discontinued operations 245,841 225,719
__________ _________
Net (loss) income (658,773) 790,508
Distributions paid to Class B shareholders (865,293) -
__________ _________
Net (loss) income available to Class A shareholders $(1,524,066) 790,508
========== =========
Basic and diluted (loss) income from continuing operations per share (0.72) 0.24
Net (loss) income per common share, basic and diluted (0.62) 0.34
========== =========
Common shares used to compute net (loss) and income
per share, basic and diluted 2,469,725 2,354,572
========== =========
See Notes to Consolidated Financial Statements.
13
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002 and 2001
Capital in
Common Shares excess of
Number Amount par value
Balance at December 31, 2000 2,384,117 $ 23,841 $ 21,655,867
Net income - - -
Repurchase of common shares, Class A (24,723 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2001 2,384,117 23,841 21,655,867
_________ ______ __________
Net loss - - -
Issuance of common shares Class A 388,200 3,882 2,057,755
Issuance of common shares Class B, net of 124,750 that
converted to Class A 2,464,207 24,642 23,469,649
Issuance of restricted shares Class A - - -
Repurchase of common shares Class A (46,069 shares) - - -
Distributions - - -
_________ ______ __________
Balance at December 31, 2002 5,236,524 $52,365 $47,183,271
========= ====== ==========
Accumulated
distributions Defered Cost of
in excess of Compensation treasury
earnings Obligation shares Total
Balance at December 31, 2000 $ (6,223,523) $ - $ (127,467) $ 15,328,718
Net income 790,508 - - 790,508
Repurchase of common shares Class A (24,723 shares) - - (160,703) (160,703)
Distributions (604,742) - - (604,742)
_________ _________ ________ __________
Balance at December 31, 2001 (6,037,757) - (288,170) 15,353,781
_________ _________ ________ __________
Net loss (658,773) - - (658,773)
Issuance of common shares, Class A - - - 2,061,637
Issuance of common shares, Class B, net of 124,750 that
converted to Class A - - - 23,494,291
Issuance of restricted shares Class A - (205,353) 185,119 (20,234)
Repurchase of common shares Class A (46,069 shares) - - (294,138) (294,138)
Distributions (1,730,316) - - (1,730,316)
_________ _______ _______ __________
Balance at December 31, 2002 $(8,426,846) $ (205,353) $(397,189) $38,206,248
========= ======== ======= ==========
See Notes to Consolidated Financial Statements.
14
AMREIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
2002 2001
Cash flows from operating activities:
Net (loss) income $ (658,773) 790,508
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Loss (gain) on sale of property 47,553 (254,013)
Depreciation and amortization 723,607 481,265
Increase in minority interest in net income of consolidated
joint ventures 308,010 527,571
Deferred merger costs 1,904,370 -
Decrease (increase) in accounts receivable 1,155,875 (89,921)
Decrease (increase)in accounts receivable - related party 378,494 (298,521)
Increase in prepaid expenses, net (170,028) (128,324)
(Decrease) increase in accounts payable (365,018) 821,168
Increase in accounts payable- related party 181,123 15,524
Cash receipts from direct financing leases
less than income recognized 282,805 (38,581)
Decrease (increase) in accrued rental income 32,095 (102,757)
Increase in prepaid rent 6,177 -
Increase in other assets (49,114) (81,545)
Increase in deferred compensation (48,086) -
_________ _________
Net cash provided by operating activities 3,729,090 1,642,374
_________ _________
Cash flows from investing activities:
Improvements to real estate (623,124) (432,276)
Acquisitions of real estate (18,951,523) (3,445,279)
Additions to furniture, fixtures and equipment (25,131) (37,061)
Distributions from (investment in) joint ventures 431,604 (729,958)
Proceeds from sale of property 3,692,544 2,520,259
Decrease (increase) in preacquisition costs 207,435 (208,576)
__________ _________
Net cash used in investing activities (15,268,195) (2,332,891)
__________ _________
Cash flows from financing activities:
Proceeds from notes payable 19,253,403 8,038,500
Payments of notes payable (3,399,277) (6,539,134)
Loan acquisition costs (38,035) (169,579)
Issuance of treasury stock 185,119 -
Purchase of treasury stock (294,138) (160,703)
Issuance of common stock (517,857) -
Retirement of common stock (106,500) -
Common dividends paid (1,730,316) (604,742)
Contributions from minority interests 809,971 -
Distributions to minority interests (343,514) (582,575)
__________ ___________
Net cash provided by (used in) financing activities 13,818,856 (18,233)
__________ ___________
Net increase (decrease) in cash and cash equivalents 2,279,751 (708,750)
Cash and cash equivalents at January 1 227,117 935,867
__________ ___________
Cash and cash equivalents at December 31 $ 2,506,868 $ 227,117
========== ===========
Supplemental schedule of noncash investing and financing activities
On July 23, 2002, the Company merged with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd. and
AAA Net Realty Fund XI, Ltd. In conjunction with the merger, the Company
acquired $23,890,319 worth of property and issued 2,589,179 shares of Class
B common stock.
Supplemental schedule of cash flow information: Cash paid during the year
for:
Interest 1,691,927 1,063,574
Income taxes 133,841 -
See Notes to Consolidated Financial Statements.
15
AMREIT AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT, ("AmREIT" or the "Company") formally AmREIT, Inc., which was
incorporated in the state of Maryland in August 1993, is a real estate
investment trust ("REIT") based in Houston, Texas and is listed on the
American Stock Exchange (AMY). AmREIT was organized in the state of Texas on
December 22, 2002 and is a pre-eminent sponsor of real estate direct
participation programs to the financial planning community. For more than 17
years, the Company has established a track record of investing in commercial
real estate leased to parent companies in the retail, financial services and
banking, medical and restaurant sectors. AmREIT's real estate team focuses on
development, management, brokerage and ownership of freestanding credit tenant
leased ("CTL") and frontage shopping centers ("FSC") that are located
contiguous to major thoroughfares and traffic generators. AmREIT's customer
list includes national and regional tenants such as: Walgreens, Goodyear Tire,
Washington Mutual, IHOP, McDonald's, Herman Hospital, Radio Shack, Coldwell
Banker, Guaranty Federal, Bennigan's, Chili's, Texas Children's Pediatric
Associates, Discount Tire, etc.
AmREIT owns a real estate portfolio that consists of over 46 properties located
in 18 states. Its properties include single-tenant; free standing credit tenant
leased projects and multi-tenant frontage projects. The single tenant projects
are located from coast to coast and are primarily leased to corporate tenants
where the lease is the direct obligation of the parent companies. In so doing,
the dependability of the lease payments are based on the strength and viability
of the entire company, not just that location. The multi-tenant projects are
situated primarily throughout Texas. Supporting the real estate portfolio is an
operating company subsidiary of AmREIT that provides a complete range of
services including development, construction management, property management,
brokerage and leasing.
Through AmREIT's direct participation programs, it creates new investment
entities that buy and develop commercial real estate with proceeds raised from
third-party investors. AmREIT has extensive experience and long-term
relationships in the commercial real estate market - the basis of its ability
to sponsor real estate investment opportunities while creating fee income and
carried interests for AmREIT and its shareholders.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. With the merger of the affiliated partnerships,
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million Class B common shares to the limited
partners in the affiliated partnerships. Approximately $760 thousand in 8 year,
interest only, subordinated notes were issued to limited partners of the
affiliated partnerships who dissented against the merger. The acquired
16
properties are unencumbered, single tenant, free standing properties on lease
to national and regional tenants, where the lease is the direct obligation of
the parent company. This merger transaction triggered a payment under the
deferred consideration agreement between AmREIT and H. Kerr Taylor, President
and Chief Executive Officer. The deferred consideration agreement was approved
by the shareholders in 1998 as part of the sale of Mr. Taylor's advisory
company to AmREIT. In the agreement, Mr. Taylor would receive additional class
A common shares, in exchange for the sale of his advisory company, as AmREIT
issued additional capital. Mr. Taylor was issued approximately 302 thousand
Class A common shares, which resulted in a deferred merger expense of $1.9
million in the third quarter 2002. Under the deferred consideration agreement,
approximately 384 thousand shares remain to be issued to Mr. Taylor in the
event the Company issues additional shares prior to June 4, 2004, the
expiration date of the agreement.
In accordance with Statement of Financial Accounting Standard ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" issued by the
Financial Accounting Standards Board, the consolidated statements of operations
have been restated from those originally reported for the years ended December
31, 2002 and 2001 to reflect separately the results of discontinued operations
for properties held for sale during the nine-months ended September 30, 2003.
The restatement had no impact on the consolidated balance sheets, consolidated
statement of shareholders equity or statements of cash flows. The restatement
had no impact on net (loss) income or net (loss) income per share for the years
ended December 31, 2002 and 2001, see Note 10.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of AmREIT, and its
wholly or majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
BASIS OF ACCOUNTING
The financial records of the Company are maintained on the accrual basis of
accounting whereby revenues are recognized when earned and expenses are
recorded when incurred.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents consist of demand deposits at commercial banks and money market
funds.
PROPERTY
Property is leased to others, primarily on a net lease basis, whereby the
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 in accordance with generally accepted accounting principles. Under the
operating lease method, the properties are recorded at cost. Rental income is
17
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.
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. Prior to that time, the
Company expenses these costs as acquisition expense.
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 impairment is indicated, a loss will be recorded for the amount by
which the carrying value of the asset exceeds its fair value.
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated
useful life of 39 years. Leasehold estate properties, where the Company owns
the building and improvements but not the related ground, therefore there is no
residual value beyond the lease, are depreciated over the life of the lease.
INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT invested $250 thousand as a limited partner and $1,000 as a general
partner in AmREIT Opportunity Fund, Ltd. ("AOF"), which is accounted for using
the equity method. The limited partners have the right to remove and replace
the general partner by a vote of the limited partners owning two-thirds of the
outstanding units. AmREIT currently owns a 10.5% limited partner interest in
AOF. AOF was formed to develop, own, manage, and hold for investment and, or
resell property and to make or invest in loans for the development or
construction of property. Liquidation of AOF commenced in July of 2002. Based
on the general partner's analysis of owned real estate as of December 31, 2002,
none of the assets owned or in liquidation by AOF are impaired.
AmREIT invested $200 thousand as a limited partner and $1,000 as a general
partner in AmREIT Income & Growth Fund, Ltd. ("AIG") that is accounted for
using the equity method. The limited partners have the right to remove and
replace the general partner by a vote of the limited partners owning a majority
of the outstanding units. AmREIT currently owns an approximately 3.9% limited
partner interest in AIG. AIG was formed to develop, own, manage, and hold for
investment and, or resell property and to make or invest in loans for the
development or construction of property.
AmREIT invested $70 thousand as a limited partner in AmREIT CDP #27, LP that is
accounted for using the equity method. AmREIT CDP #27, LP was formed to acquire
18
commercial real property and to develop, operate, lease, manage, and or sell
real property. AmREIT CDP #27, LP purchased two IHOP properties in 2001 located
in Memphis, Tennessee and Tupelo, Mississippi. The Memphis, Tennessee property
was sold for a profit in the first quarter of 2002.
ARIC invested $122 thousand as a limited partner in AmREIT CDP SPE #33, Ltd.
that is accounted for using the equity method. AmREIT CDP SPE #33, Ltd. was
formed to acquire commercial real property and to develop, operate, lease,
manage, and or sell real property. In December 2001, AmREIT CDP #33, Ltd.
purchased three IHOP leasehold estate properties located in Houston, Texas,
Orem, Utah, and Hagerstown, Maryland.
AmREIT invested $330 thousand as a member in AmREIT CDP #31, LLC ("CDP 31")
that is accounted for using the equity method. CDP 31 was formed to acquire
commercial real property and to develop, operate, lease, manage, and or sell
real property. CDP 31 purchased two IHOP properties in 2001 located in
Cookeville, Tennessee and Scottsdale, Arizona. Both properties were sold during
the first quarter 2002, and CDP 31 does not own any real property as of
December 31, 2002.
OTHER ASSETS
Other assets include loan acquisition costs, net of accumulated amortization,
of $250 thousand. Loan acquisitions costs are incurred in obtaining property
financing and are amortized to interest expense on the effective interest
method over the term of the debt agreements. Accumulated amortization related
to loan acquisition costs as of December 31, 2002 totaled $86 thousand.
DEFERRED COMPENSATION
Deferred compensation includes stock grants to employees as a form of long term
compensation. The stock grants vest over a period of time not to exceed four
years. This allows the Company to align the interest of its employees with the
interest of our shareholders. As the stock grants vest, the Company will
amortize the vested portion to compensation expense. The expense will be
calculated by taking the number of shares vested multiplied by the market price
per share as determined on the vesting dates.
Effective January 1, 2003, AmREIT will adopt SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123".
STOCK ISSUANCE COSTS
Issuance costs incurred in the raising of capital through the sale of common
stock are treated as a reduction of shareholders' equity.
REVENUE RECOGNITION
Properties are primarily leased on a net lease basis. Revenue is recognized on
a straight-line basis over the terms of the individual leases. Service fees are
recognized when earned.
19
FEDERAL INCOME TAXES
AmREIT 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 to the extent of dividends paid, provided it meets all conditions
specified by the Internal Revenue Code for retaining its REIT status, including
the requirement that at least 90% of its real estate investment trust taxable
income is distributed by March 15 of the following year.
AmREIT Realty Investment Corporation ("ARIC"), a wholly owned subsidiary of
AmREIT, is treated as a taxable REIT subsidiary for Federal income tax
purposes. As such, ARIC and its consolidated subsidiaries have recorded a
Federal income tax expense at December 31, 2002 of $61 thousand, which
represents the Federal income tax obligations on the consolidated taxable REIT
subsidiary's taxable net income. Additionally, in 2002, a deferred tax
liability of $28 thousand was established to record the taxes on certain
real estate assets of ARIC.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income to class A
common shareholders by the weighted average number of class A 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 the weighted average number of dilutive potential common
shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated:
For the Years Ended December 31,
BASIC AND DILUTED EARNINGS PER SHARE 2002 2001
Weighted average common shares outstanding (in thousands) 2,470 2,355
Basic and diluted (loss)/earnings per share * $(0.62) $0.34
------- -----
EARNINGS FOR BASIC AND DILUTED COMPUTATION
(Loss) earnings to Class A common shareholders (in thousands) * $(1,524) $791
====== ====
* For 2002, the loss of $1.524 million includes the charge taken against
earnings during the third quarter of $1.9 million, which was the market value
of the Class A common shares issued to H. Kerr Taylor, President & CEO, related
to the sale of his advisory company to AmREIT in 1998. The charge was for the
deferred merger cost due from this sale that was triggered by the issuance of
additional common stock as part of the merger with AmREIT's affiliated
partnerships during the third quarter of 2002.
20
USE OF ESTIMATES
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's consolidated financial instruments consist primarily of cash,
cash equivalents, accounts receivable and accounts and notes payable. The
carrying value of cash, cash equivalents, accounts receivable and accounts
payable are representative of their respective fair values due to the
short-term maturity of these instruments. The Company's total debt obligations
are $33.6 million, of which $13.42 million has variable rate terms and
therefore, the fair value is representative of its carry value. Approximately
$20.18 million has fixed rate terms, of which approximately $15.5 million was
entered into during 2002. Based on the dates that the debt obligations were
entered into and the pricing on current debt obligations, the Company believes
that the fair value of its fixed rate debt obligations is materially
representative of its carry value.
NEW ACCOUNTING STANDARDS
On June 29, 2001, SFAS No. 141, "Business Combinations" was approved by the
Financial Accounting Standards Board ("FASB"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Goodwill and certain intangible assets will remain on the
balance sheet and not be amortized. On an annual basis, and when there is
reason to suspect that their values have been diminished or impaired, these
assets must be tested for impairment, and write-downs may be necessary. The
Company implemented SFAS No. 141 on July 1, 2001. The adoption of this
Statement had no effect on the Company's consolidated financial position or
results of operations.
On June 29, 2001, SFAS No. 142, "Goodwill and Other Intangible Assets " was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of this statement. The Company implemented SFAS No. 142 on January 1,
2002. The adoption of SFAS No. 142 did not have a material impact on our
consolidated financial position, results of operations, or cash flows.
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which is effective for fiscal years beginning after June 15,
2002. SFAS No. 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of SFAS No. 143 did not have a material
impact on our consolidated financial position, results of operations, or cash
flows.
On January 1, 2002, the company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting
21
and reporting for the impairment or disposal of a segment of a business. More
specifically, this statement broadens the presentation of discontinued
operations to include a component of an entity whose operations and cash flows
can be clearly distinguished, opertionally and for financial reporting
purposes, from the rest of the entity. The adoption of SFAS No. 144 did not
have a material impact on our consolidated financial position, results of
operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation
undertaken. The disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not expected to
have a material effect on the Company's consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002, however, these disclosure
modifications are not applicable to the Company and adoption of SFAS 148 is not
anticipated to have a material impact on our consolidated financial position,
results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This
Interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements. The
Interpretation requires certain disclosures in financial statements issued
after January 31, 2003 if it is reasonably possible that the Company will
consolidate or disclose information about variable interest entities when the
Interpretation becomes effective.
Reclassification
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the presentation used in the 2002 consolidated
financial statements.
22
2. OPERATING LEASES
A summary of minimum future rentals to be received, exclusive of any renewals,
under noncancellable operating leases in existence at December 31, 2002 is as
follows:
2003 4,342,650
2004 4,260,343
2005 4,015,934
2006 3,994,020
2007 3,754,100
2008-2027 15,285,089
----------
$35,652,136
3. NET INVESTMENT IN DIRECT FINANCING LEASES
The Company's net investment in its direct financing leases at December 31,
2002 included:
Minimum lease payments receivable $ 61,306,182
Unguaranteed residual value 3,858,403
Less: Unearned income (41,759,261)
------------
$ 23,405,324
A summary of minimum future rentals, exclusive of any renewals, under the
noncancellable direct financing leases follows:
2003 2,444,944
2004 2,453,682
2005 2,462,421
2006 2,471,778
2007 2,605,857
2008 - 2027 48,867,500
-----------
Total $61,306,182
===========
4. INVESTMENT IN NON-CONSOLIDATED AFFILIATES
AmREIT owns interests in 5 limited liability companies or limited
partnerships, which are accounted for under the equity method since
AmREIT exercises significant influence. Our interests in these joint ventures
and limited partnerships range from 2% to 40%, which are primarily single and
multi-tenant net lease retail real estate assets. Combined condensed financial
information of these ventures (at 100%) is summarized as follows:
23
Combined Balance Sheet December 31, 2002
Assets
Property, net $ 8,698,634
Cash 4,172,585
Other assets 2,456,268
-------------
TOTAL ASSETS $15,327,487
===========
Liabilities and partners' capital
Notes payable $ 3,859,810
Other liabilities 493,454
Partners capital 10,974,223
------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $15,327,487
===========
Combined Statement of Operations
2002 2001
Total Revenue $ 2,624,850 $ 582,001
Expense
Interest 358,672 83,110
Depreciation and amortization 189,066 71,640
Other 188,834 188,598
-------------- ---------
TOTAL EXPENSE 736,572 343,348
-------------- ---------
NET INCOME $ 1,888,278 $ 238,653
============= ============
5. 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 had an
original term of one year, and has been extended through April 2003, the
Company may borrow up to $20 million subject to the value of unencumbered
assets. The Company is negotiating with the Lender for an extension of the
Credit Facility, which would extend the maturity of the Credit Facility beyond
December 31, 2003. The Credit Facility contains covenants, which among other
restrictions, require the Company to maintain a minimum net worth and a maximum
leverage ratio. As of December 31, 2002, the Lender had waived these financial
covenants. The Credit Facility bears interest at an annual rate of LIBOR plus a
spread of 2.0% (3.4375% as of December 31, 2002). On December 31, 2002, $11.76
million was outstanding under the Credit Facility. Thus the Company has
approximately $8.24 million available under its line of credit subject to use
of proceeds by the lender.
24
In March 1999, the Company entered into a ten-year mortgage note, amortized
over 30 years, for $1 million with $968 thousand being outstanding at December
31, 2002. The interest rate is fixed at 8.375% with payments of principal and
interest due monthly. The note matures April 1, 2009 and as of December 31,
2002 the Company is in compliance with all terms of the agreement. The note is
collateralized by a first lien mortgage on property with an aggregate carrying
value of $1.179 million, net of $107 thousand of accumulated depreciation.
In February 2001, the Company entered into a ten-year mortgage note, amortized
over 20 years, for $1.35 million with $1.3 million being outstanding at
December 31, 2002. The interest rate is fixed at 8.25% with payments of
principal and interest due monthly. The note matures February 28, 2011 and as
of December 31, 2002 the Company is in compliance with all terms of the
agreement. The note is collateralized by a first lien mortgage on property,
which is accounted for as a direct financing lease with a net investment in
direct financing lease of $1 million and land of $741 thousand.
In October 2001, the Company entered into a ten-year mortgage note amortized
over 30 years, for $2.4 million with $2.378 million being outstanding at
December 31, 2002. The interest rate is fixed at 7.60% with payments of
principal and interest due monthly. The note matures November 1, 2011 and as of
December 31, 2002 the Company is in compliance with all terms of the agreement.
The note is collateralized by a first lien mortgage on property with an
aggregate carrying value of $3.967 million, net of $330 thousand of accumulated
depreciation.
In October 2001, the Company entered into a note payable for $1.658 million
with $1.658 million being outstanding at December 31, 2002. The interest rate
is equal to the thirty day LIBOR rate plus 280 basis points, but in no event
lower than 6.75%, which equated to 6.75% at December 31, 2002. The note matures
November 1, 2004 and as of December 31, 2002 the Company is in compliance with
all terms of the agreement. The note is collateralized by a first lien mortgage
on property, which is accounted for as a direct financing lease with a net
investment in direct financing lease of $1.33 million and land of $564
thousand.
Beginning in April 2002, AAA CTL Notes, Ltd., a majority owned subsidiary of
AmREIT, began entering into non-recourse ten-year mortgages, amortized over 20
years, related to the purchase of seventeen IHOP properties. The following
table summarizes the terms of loan agreements and the property collateralizing
the non-recourse notes. As of December 31, 2002 the Company is in compliance
with all terms of the agreement. The non-recourse notes have
cross-collateralization and default provisions with each other.
25
Loan amount at Net investment in
Location Original loan December 31, Fixed direct financing
amount 2002 interest Date loan lease
(in thousands) (in thousands) rate matures (in thousands)
Shawnee, KS $ 751 $ 741 7.82% May 1, 2012 $ 889
El Paso, TX 760 751 7.82% May 1, 2012 897
Beaverton, OR 887 876 7.82% May 1, 2012 1,046
Rochester, NY 951 939 7.82% May 1, 2012 1,136
Baton Rouge, LA 1,250 1,235 7.82% May 1, 2012 1,460
Charlottesville, VA 630 622 7.82% May 1, 2012 749
Albuquerque, NM 767 747 7.82% May 1, 2012 887
Springfield, MO 1,030 1,019 7.82% June 1, 2012 1,208
Salem, OR 621 614 7.82% June 1, 2012 732
Roanoke, VA 712 706 7.89% July 1, 2012 845
Alexandria, LA 716 711 7.89% Aug. 1, 2012 855
Centerville, UT 1,242 1,233 7.89% Aug. 1, 2012 1,078
Memphis, TN 1,342 1,333 7.89% Aug. 1, 2012 1,088
La Verne, CA 745 741 7.89% Sept. 1, 2012 998
El Paso, TX 894 890 7.89% Sept. 1, 2012 1,156
Memphis, TN 777 773 7.89% Sept. 1, 2012 1,062
Parker, CO 835 831 7.89% Sept. 1, 2012 1,112
----------------- ----------------- --------------------
Total $14,910 $14,762 $17,198
================= ================= ====================
In July of 2002, the Company issued thirteen, 8 year subordinated, 5.47%
interest-only notes totaling $760 thousand, maturing July 2010. The notes,
which are callable by the Company at par plus accrued interest, were issued to
partners who dissented against the Company's merger with three affiliated
public partnerships.
Aggregate annual maturity of the notes payable for each of the following five
years ending December 31 are as follows:
(in thousands)
2003 $ 12,172
2004 447
2005 483
2006 522
2007 565
Thereafter 19,397
------------
$ 33,586
26
6. MAJOR TENANTS
The following schedule summarizes rental income by lessee for 2002 and 2001 (in
thousands):
2002 2001
International House of Pancakes $ 1,784 $ 510
Footstar, Inc. 735 713
OfficeMax, Inc. (5) 509 518
Wherehouse Entertainment 381 378
Hollywood Entertainment Corp. 273 273
Sugar Land Imaging Affiliates Ltd. 264 217
Mattress Giant, Inc. 168 106
Washington Mutual 158 158
Radio Shack 109 109
Golden Corral (4) 167 0
Texas Children's Pediatrics (2) 137 0
Don Pablos 78 79
One Care Health Industries, Inc. (1) 57 204
Comp USA (4) 123 0
Baptist Memorial Hospital (4) 102 0
TGI Friday's (4) 83 0
Dr. Pucillo (4) 87 0
Pier 1 62 0
America's Favorite Chicken Co. (3) (4) 55 21
Blockbuster (4) 42 0
Waldenbooks (4) 38 0
Jack in the Box (4) 34 0
Goodyear (4) (5) 25 0
Skewers 18 0
Hope Rehab 5 0
------- -------
Total $ 5,494 $ 3,286
======= =======
(1) One Care Health Industries, Inc. was a tenant at Copperfield Medical
Plaza. In April of 2002, AmREIT negotiated a lease buy out agreement
with One Care for approximately $190 thousand. As a result, AmREIT
immediately released approximately 75% of the available space to Texas
Children's Pediatrics and the Company has negotiated a lease for
balance of the space.
(2) Texas Children's Pediatrics entered into a long-term lease with
AmREIT, beginning in May 2002, at Copperfield Medical Plaza. The lease
was entered into as a result of the negotiated lease buy out by AmREIT
and One Care Health Industries, Inc.
(3) The America's Favorite Chicken Co. restaurant located in Atlanta
was sold by AmREIT during the first quarter 2001.
(4) Properties were purchased from three affiliated partnerships in
July 2002.
(5) In accordance with Statement ofFinancial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets"
issued by the Financial Accounting Standards Board, the rental income
from the Office Max located in Dover, DE (2002 and 2001) and the
Goodyear Tire Store located in Houston, TX (2002) have been restated
to reflect separately the results from discontinued operations for
these properties, which were held for sale during the nine months
ended September 30, 2003. Accordingly, the above table reflects
income from continuing operations and discontinued operations.
27
7. FEDERAL INCOME TAXES
The differences between net income for financial reporting purposes and taxable
income before distribution deductions relate primarily to temporary
differences, merger costs and potential acquisition costs which are expensed
for financial reporting purposes.
For income tax purposes, distributions paid to shareholders consist of ordinary
income, capital gains and return of capital as follows (in thousands):
2002 2001
-------- --------
Ordinary income $ - $ 6
Return of capital 1,730 143
Capital gain - 456
-------- --------
$ 1,730 $ 605
======== ========
8. RELATED PARTY TRANSACTIONS
See Note 4 regarding investments in non-consolidated affiliates.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd. AmREIT accounted for this merger as a purchase,
whereby the assets of the partnerships have been recorded at fair market value.
AmREIT increased its real estate assets by approximately $24.3 million and
issued approximately 2.6 million shares of Class B common stock to the limited
partners in the affiliated partnerships as a result of the merger.
Approximately $760 thousand in 8 year, 5.47% interest only, subordinated notes
were issued to limited partners of the affiliated partnerships who dissented to
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company. A deferred merger expense
stemmed from stock issued to H. Kerr Taylor, President and Chief Executive
Officer, based on a deferred consideration that was approved by the
stockholders in 1998. Mr. Taylor was issued 302 thousand shares of Class A
common stock, which resulted in a $1.9 million charge to earnings in the third
quarter 2002. As the Company raises additional equity, Mr. Taylor is eligible
to receive up to an additional 384 thousand shares of Class A common stock
pursuant to the deferred consideration agreement approved by the stockholders
in 1998 related to the sale of Mr. Taylor's advisory company to AmREIT.
The Company provides property acquisition, leasing, administrative and
management services for ten affiliated real estate limited partnerships that
are under common management (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. Service fees of $245 thousand and
$335 thousand were paid by the Partnerships to the Company for 2002 and 2001
respectively.
28
As a sponsor of real estate investment opportunities to the NASD financial
planning broker dealer community, the Company maintains a 1% general partner
interest in the investment funds that it sponsors. The funds are typically
structured such that the limited partners receive 99% of the available cash
flow until 100% of their original invested capital has been returned and a
preferred return has been met. Once this has happened, then the general partner
begins sharing in the available cash flow at various promoted levels. The
Company also assigns a portion of this general partner interest in these
investment funds to its employees as long term, contingent compensation. In so
doing, the Company believes that it will align the interest of management with
that of the shareholders, while at the same time allowing for a competitive
compensation structure in order to attract and retain key management positions
without increasing the overhead burden.
On March 20, 2002, the Company formed AAA CTL Notes, Ltd. ("AAA"), a majority
owned subsidiary which is consolidated in the financial statements of AmREIT,
through which the Company purchased fifteen IHOP leasehold estate properties
and two IHOP fee simple properties.
Locke Liddell and Sapp, LLP acts as the Company's corporate attorneys. Bryan
Goolsby is the managing director of Locke Liddell and Sapp LLP and is a member
of the Company's board of trust managers. During 2002 and 2001, the Company
paid Locke Liddell and Sapp LLP approximately $777 thousand and $133 thousand,
respectively, for legal services rendered.
9. PROPERTY ACQUISITIONS AND DISPOSITIONS
During the third quarter, the Company purchased seventeen IHOP restaurant
properties. Fifteen of the properties are leasehold estate properties, whereby
the Company owns the physical improvements, but does not own the underlying
land. Two of the properties were purchased in fee simple. The total purchase
price was $17.25 million. The properties were purchased utilizing $2.34 million
cash and $14.91 million non-recourse, 10-year debt with an average
interest rate of 7.85%. Each lease agreement extends for a period of 18-25
years, however, the tenant has the ability to extend the primary term of the
lease for two to three additional terms of five years each. Additionally, each
lease is subject to a corresponding ground lease with the same term of 18-25
years and two to three additional terms of five years each. The Company
recorded $1.18 million in rental income during 2002 from properties acquired
in this transaction.
On July 23, 2002, the Company completed a merger with three of its affiliated
partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
AAA Net Realty Fund XI, Ltd., which was accounted for as an acquisition. With
the merger of the affiliated partnerships, AmREIT increased its real estate
assets by approximately $24.3 million and issued approximately 2.6 million
shares of Class B common stock to the limited partners in the affiliated
partnerships. The class B common shares are not listed on an exchange and
there is currently no available trading market for the class B common shares.
The class B common shares do not have voting rights, receive a fixed 8%
29
cumulative and preferred dividend, and are convertible into the class A common
shares on a one-for-one basis at any time, at the holder's option.
Approximately $760 thousand in 8 year, interest only, subordinated notes were
issued to limited partners of the affiliated partnerships who dissented against
the merger. The acquired properties are unencumbered, single tenant, free
standing properties on lease to national and regional tenants, where the lease
is the direct obligation of the parent company.
The following selected unaudited pro forma consolidated statement of operations
for AmREIT and subsidiaries gives effect to the merger with its three
affiliated partnerships, which assumes that the merger occurred on January 1,
2002 and January 1, 2001, respectively. Additionally, we have presented a
summary of assets acquired and liabilities assumed as of the date of the
merger, July 23, 2002.
Pro Forma Consolidated Statement of Operations
For the Twelve Months Ended December 31,
(Unaudited)
2002 2001
Revenues
Rental income and earned income $ 6,399,475 $ 5,012,747
Other income 2,542,974 2,459,287
----------- -----------
Total Revenues 8,942,449 7,472,034
----------- -----------
Total Expense 8,806,471 6,811,762
----------- -----------
Proforma Income Before Minority Interest in Net Income of
Consolidated Joint Ventures 135,978 660,272
Federal Income Tax Expense from Non-Qualified Subsidiary (20,524) (144,420)
------------ ------------
Minority Interest in Net Income of Consolidated Joint Ventures (46,419) -
Pro Forma Net Income $ 69,035 $ 515,852
Distributions to Class B Shareholders (1,822,262) (1,915,992)
____________ ____________
Net (Loss) available to Class A Shareholders (1,753,227) (1,400,140)
Pro Forma Basic and Diluted (Loss)Per Share $ (0.65) $ (0.52)
============ ============
Pro Forma Weighted Average Common Shares Outstanding 2,691,580 2,706,961
30
Summary of Assets Acquired and Liabilities Assumed
As of July 23, 2002,
(Unaudited)
Assets
Buildings $ 16,330,088
Land 7,560,231
Accounts receivable 1,105,612
Prepaid expenses 15,757
-------------
TOTAL ASSETS $ 25,011,688
=============
Liabilities $ 132,630
-------------
Net assets acquired $ 24,879,058
=============
Class B common shares issued $ 24,118,648
Subordinated notes issued 760,410
=============
10. DISCONTINUED OPERATIONS
The operations of two properties reported as held for sale at September 30, 2003
have been restated as discontinued operations for 2002 and 2001 as required
by SFAS No. 144. The following is a summary of our discontinued operations:
December 31,
2002 2001
Rental Revenue $301,064 $276,444
Depreciation and amortization (55,223) (50,725)
________ ________
Income from discontinued operations $245,841 $225,719
Basic and diluted income from
discontinued operations per common share $0.10 $0.10
11. COMMITMENT
The Company has a one-year lease agreement for its office facilities through
December 31, 2003. Rental expense for the years ended December 31, 2002 and
2001 was $77 thousand and $71 thousand, respectively.
31
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
AmREIT
By: /s/ Chad C. Braun
---------------------------------------------
Chad C. Braun, Chief Financial Officer
Dated: December 23, 2003