UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 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: 33-70654 AMERICAN ASSET ADVISERS TRUST, INC. MARYLAND CORPORATION IRS IDENTIFICATION NO. 76-0410050 8 GREENWAY PLAZA, SUITE 824 HOUSTON, TX 77046 Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS, THEREFORE, FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. PART I - FINANCIAL INFORMATION Item 1. Financial Statements AMERICAN ASSET ADVISERS TRUST, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 1996 AND DECEMBER 31, 1995 June 30, December 31, 1996 1995 (Unaudited) ASSETS CASH & CASH EQUIVALENTS $ 2,957,500 $ 1,564,961 ACCOUNTS RECEIVABLE 3,700 0 PROPERTY: Escrow deposits 100,000 0 Land 2,152,103 2,152,103 Buildings 4,436,074 4,436,074 6,688,177 6,588,177 Accumulated depreciation (138,419) (81,512) TOTAL PROPERTY 6,549,758 6,506,665 NET INVESTMENT IN DIRECT FINANCING LEASE 581,277 582,753 OTHER ASSETS: Acquisition costs 162,149 77,761 Accrued rental income 46,248 23,845 Organization costs, net of accumulated amortization of $130,024 and $99,130, respectively 365,589 214,638 TOTAL OTHER ASSETS 573,986 316,244 TOTAL ASSETS 10,666,221 8,970,623 LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accounts payable 18,303 67,481 Compensation payable 150,000 150,000 Security deposit 15,050 15,050 TOTAL LIABILITIES 183,353 232,531 MINORITY INTEREST 1,634,396 1,596,169 SHAREHOLDERS' EQUITY Common stock, $.01 par value, 25,000,000 shares authorized, 1,028,253 and 827,876 shares issued and outstanding, respectively 10,283 8,279 Additional paid-in capital 9,233,743 7,438,368 Accumulated distributions in excess of earnings (395,554) (304,724) TOTAL SHAREHOLDERS' EQUITY 8,848,472 7,141,923 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,666,221 $ 8,970,623 See Notes to Consolidated Financial Statements. AMERICAN ASSET ADVISERS TRUST, INC. STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995 (Unaudited) Quarter Year to Date 1996 1995 1996 1995 REVENUES Rental income from operating leases $ 181,131 $ 77,889 $ 362,462 $ 155,777 Earned income from direct financing leases 13,920 14,066 27,858 28,088 Interest income 40,226 37,135 72,529 66,707 TOTAL REVENUES 235,277 129,090 462,849 250,572 EXPENSES Administrative 8,544 0 17,088 0 Amortization 15,447 15,447 30,894 30,576 Depreciation 28,461 11,881 56,907 24,215 Directors' fees 3,000 3,000 7,500 9,000 Filing fees 125 810 375 1,060 Legal & professional fees 3,863 10,157 14,775 19,111 Printing 1,682 3,081 4,004 4,257 Travel 0 863 885 1,330 Other 1,434 763 2,923 1,931 TOTAL EXPENSES 62,556 46,002 135,351 91,480 INCOME BEFORE MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURE 172,721 83,088 327,498 159,092 MINORITY INTEREST IN NET INCOME OF CONSOLIDATED JOINT VENTURE (37,342) (15,953) (74,683) (31,906) NET INCOME $ 135,379 $ 67,135 $ 252,815 $ 127,186 NET INCOME PER SHARE $ 0.13 $ 0.10 $ 0.25 $ 0.21 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 1,028,253 633,601 1,002,281 595,936 See Notes to Consolidated Financial Statements. AMERICAN ASSET ADVISERS TRUST, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) Accumulated Additional Distributions Common Paid in in Excess of Stock Capital Earnings Total Balance at December 31, 1995 $ 8,279 $ 7,438,368 $ (304,724) $ 7,141,923 Issuance of common stock 2,004 2,001,764 2,003,768 Issuance costs (202,498) (202,498) Distributions (162,724) (162,724) Net income 117,436 117,436 Balance at March 31, 1996 $ 10,283 $ 9,237,634 $ (350,012) $ 8,897,905 Issuance costs (3,891) (3,891) Distributions (180,921) (180,921) Net income 135,379 135,379 Balance at June 30, 1996 $ 10,283 $ 9,233,743 $ (395,554) $ 8,848,472 See Notes to Consolidated Financial Statements. AMERICAN ASSET ADVISERS TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995 (Unaudited) Quarter Year to Date 1996 1995 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 135,379 $ 67,135 $ 252,815 $ 127,186 Adjustments to reconcile net income to net cash flows from operating activities: Amortization 15,447 15,447 30,894 30,576 Depreciation 28,461 11,881 56,907 24,215 (Increase) decrease in accounts receivable 103,783 (5,034) (3,700) (10,034) Increase (decrease) in accounts payable (33,083) (357) (49,178) 2,798 Cash receipts from direct financing lease in excess of income recognized 747 601 1,476 1,246 Increase in escrow deposits - - (100,000) (75,000) Escrow refunds from minority interest partners 48,100 - 48,100 - Increase in accrued rental income (11,101) - (22,403) - Increase in organization costs (90,506) - (181,845) (15,530) Increase in minority interest 37,342 15,953 74,683 31,906 NET CASH FLOWS FROM OPERATING ACTIVITIES 234,569 105,626 107,749 117,363 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of real estate: Accounted for under the operating method - (15,883) - (16,947) Acquisition costs (10,382) (25,219) (84,388) (147,638) NET CASH FLOWS FROM INVESTING ACTIVITIES (10,382) (41,102) (84,388) (164,585) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of stock, net of issuance costs (3,891) 586,353 1,797,379 1,424,427 Increase in short-term notes receivable - (287,093) - (793,456) Distributions paid to shareholders (180,921) (97,306) (343,645) (181,806) Distributions to minority interest partners (42,278) (19,252) (84,556) (38,504) NET CASH FLOWS FROM FINANCING ACTIVITIES (227,090) 182,702 1,369,178 410,661 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,903) 247,226 1,392,539 363,439 CASH and CASH EQUIVALENTS at beginning of period 2,960,403 1,401,800 1,564,961 1,285,587 CASH and CASH EQUIVALENTS at end of period $ 2,957,500 $ 1,649,026 $ 2,957,500 $ 1,649,026 See Notes to Consolidated Financial Statements. AMERICAN ASSET ADVISERS TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995 (Unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES American Asset Advisers Trust, Inc. ("the Company") was incorporated on August 17, 1993 as a Maryland corporation. The initial issuance of 20,001 shares of stock for $200,010 was to American Asset Advisers Realty Corporation. Commencing March 17, 1994, the Company offered up to 2,000,000 additional shares of common stock together with 1,000,000 warrants. The warrants are exercisable at $9 per share between April 1997 and April 1998. The offering period terminated on March 15, 1996 with subscriptions having been received for 1,028,253 shares. On June 18, 1996 the Company offered up to 2,853,659 additional shares of its common stock. The offering will terminate June 17, 1998. As of June 30, 1996, subscriptions had been received for 1,028,253 shares. The Company was formed with the intention to qualify and to operate as a real estate investment trust under federal tax laws. The Company will acquire commercial and industrial properties using invested and borrowed funds. The selection, acquisition and supervision of the operation of properties is managed by American Asset Advisers Realty Corporation, ("AAA"), a related party. The consolidated financial statements include the accounts of American Asset Advisers Trust, Inc. and its majority interest in two joint ventures. 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. Rental income is recorded ratably over the life of the lease. For purposes of the statement of cash flows the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. There has been no cash paid for income taxes or interest during 1996 or 1995. 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 method, the properties are recorded at cost. Rental income is recognized ratably over the life of the lease and depreciation is charged as incurred. Under the direct financing 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. Buildings are depreciated using the straight-line method over an estimated useful life of 39 years. Organization costs incurred in the formation of the Company are amortized on a straight-line basis over five years. Syndication costs incurred in the raising of capital through the sale of common stock is 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 accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the disclosures required by generally accepted accounting principles. The financial statements reflect all normal and recurring adjustments which are, in the opinion of management, necessary to present a fair statement of results for the three and six month periods ended June 30, 1996 and June 30, 1995. The financial statements of American Asset Advisers Trust, Inc. contained herein should be read in conjunction with the financial statements included in the Partnership's annual report on Form 10-K for the year ended December 31, 1995. 2. RELATED PARTY TRANSACTIONS 20,001 shares of the Company's stock are owned by American Asset Advisers Realty Corporation ("AAA"). The common stock of AAA is wholly owned by H. Kerr Taylor, President and Director of the Company. In addition, the Company has entered into an Omnibus Services Agreement with AAA whereby AAA provides acquisition, leasing, administrative and management services for the Company. For the three and six months ended June 30, 1996, $8,544 and $17,088 were paid to AAA for administrative services. No such fees were paid to AAA during the six months ended June 30, 1995 for administrative services. Certain costs have been incurred by AAA 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. $3,119 and $54,660 of costs were incurred by AAA for the three and six months ended June 30, 1996 in connection with the issuance and marketing of the Company's stock. These costs are reflected as syndication costs. No reimbursements were paid during the first six months of 1995 for syndication costs. 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. $8,678 and $82,684 of acquisition fees were incurred and paid to AAA for the three and six months ended June 30, 1996. $40,425 and $162,844 of acquisition fees were incurred and paid to AAA for the three and six months ended June 30, 1995. On August 22, 1995, the Board of Directors approved a special compensation payment plan for H. Kerr Taylor in the amount of $150,000 for services provided from August 1993 through August 1995. In connection therewith, the Company executed a demand note payable at the earlier of July 15, 1996 or the receipt of subscriptions of $10,000,000 from the Company's stock offering. The note shall be payable without any interest in cash or stock depending on the availability of cash for such payment. No compensation arrangements were considered by the Board prior to this time because the Company had not raised sufficient funds through its stock offering, as determined by the judgment of the Board, considered necessary for any compensation to be granted. The compensation had not been accrued prior to August 22, 1995 because its payment was uncertain and the level of compensation had not been determined until the August 22, 1995 Board meeting. As of the termination of the initial public offering, the Company had sold in excess of $10,000,000. Although Mr. Taylor can demand payment on the note, such demand has not been made. The decision regarding the nature of the payment, whether in stock or cash, will be made by the Board of Directors at the time Taylor demands payment. No decisions as yet have been made with respect to any additional compensation for any period after August 1995. The Board of Directors has commissioned an external study with respect to the amount and type of compensation which could be paid in the future to officers and/or directors, as well as the contingencies and performance standards on which compensation will be determined. Accordingly, the financial statements do not include any accruals for compensation subsequent to August 1995. 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., affiliated partnerships, for the purchase of a property which will be operated as a Just For Feet retail store in Tucson, Arizona. The Company's interest in the joint venture is 51.9%. This property is now under construction and there will be no income produced until construction is completed and the joint venture purchases the property. On September 12, 1995, the Company entered into a joint venture agreement with AAA Net Realty Fund XI, Ltd. for the purchase of a property which is being operated as a Blockbuster Music Store in Wichita, Kansas. The Company's interest in the joint venture is 51%. 3. MAJOR TENANTS The following schedule summarizes total rental income by lessee for the three and six months ended June 30, 1996 and June 30, 1995: Quarter Year to Date 1996 1995 1996 1995 Tandy Corporation $27,225 $27,225 $54,450 $54,450 America's Favorite Chicken Co. $22,842 $22,099 $45,902 $44,153 Blockbuster Music Retail, Inc. $94,575 $42,631 $189,150 $85,262 One Care Health Industries, Inc. $50,409 $0 $100,818 $0 4. EARNINGS PER SHARE The number of shares used in earnings per share calculations for the three and six months ended June 30, 1996 and June 30, 1995 are based on the weighted average number of shares of common stock outstanding and, if dilutive, common stock equivalents (stock warrants) of the Company using the modified treasury stock method. 5. SUBSEQUENT EVENTS In consideration that no payment has been demanded by Mr. Taylor for the special compensation payment mentioned in Note 2, the Board of Directors approved at its August 1, 1996 meeting the payment of interest at an annual rate of 8% over a six month period. This interest payment will be paid at the end of the six month period in cash or in stock. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. American Asset Advisers Trust, Inc. ("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 to tenants having a minimum net worth of $40 million on a net-lease basis, to hold the properties with the expectation of equity appreciation producing a steadily rising income stream for its shareholders. Liquidity and Capital Resources The Company was organized August 17, 1993 with the intention to qualify and to operate as a real estate investment trust under federal tax laws. Commencing March 17, 1994, the Company offered up to 2,000,000 additional shares of common stock together with 1,000,000 warrants. The offering period terminated on March 15, 1996 with subscriptions having been received for 1,028,253 shares. On June 18, 1996 the Company began a new offering of 2,853,659 shares of its common stock. The offering will terminate on June 17. 1998. As of June 30, 1996, subscriptions had been received for 1,028,253 shares. On August 22, 1995, the Board of Directors approved a special compensation payment for Mr. Taylor in the amount of $150,000. Taylor has received no other compensation from the Company for serving as its President. In connection with the special compensation payment, the Company executed a demand note payable at the earlier of July 15, 1996 or the receipt of $10,000,000 from the Company's stock offering. The note shall be payable in cash or stock depending on the availability of cash for such payment. No compensation arrangements were considered by the Directors prior to August 22, 1995, because in their judgment, the Company had not raised sufficient funds to award such compensation. The compensation had not been accrued prior to August 22, 1995 because its payment was uncertain and the level of compensation had not been determined until the August 1995 meeting of the Board of Directors. As of the termination of the initial public offering, the Company had sold in excess of $10,000,000. Although Mr. Taylor can demand payment on the note, such demand has not been made. The decision regarding the nature of the payment, whether in stock or cash, will be made by the Board of Directors at the time Taylor demands payment. Should the note be paid in cash, such payment would reduce the funds from operations available for distribution and, therefore, would decrease distributions to shareholders. On January 19, 1996, the Company entered into an agreement with Tucson Oracle Limited Partnership for the purchase of a property to be constructed in Tucson, Arizona. The property will be acquired subject to a lease with Just For Feet, Inc. On April 5, 1996, the Company entered into a joint venture with two affiliated partnerships for the purpose of acquiring this property. The Company's interest in the joint venture is 51.9% and the Company's share of the acquisition costs for the property will approximate $1,826,589 plus $84,886 in acquisition fees to affiliates. The property is under construction with an estimated completion date of September 1996. Results of Operations Revenues for the three months ended June 30, 1996 were comprised of $195,051 from the Company's real estate operations and $40,226 from interest income. This represented an increase of $103,096 in rental income over the three months ended June 30, 1995 and an increase of $3,091 in interest income. The Company's rental income was generated from five properties during the first two quarters of 1996 compared to three properties during the first two quarters of 1995. The increase in activity also resulted in a corresponding increase in expenses from $46,002 during the second quarter of 1995 to $62,556 during the second quarter of 1996. The Company recorded net income of $135,379 for the three months ended June 30, 1996 as compared to $67,135 for the three months ended June 30, 1995. For the six months ended June 30, 1996, the Company's total revenues of $462,849 were comprised of $390,320 from real estate operations and $72,529 from interest income. As previously discussed, the Company owned five properties for the first two quarters of 1996 compared to three properties for the same period in 1995. Expenses increased from $91,480 for the six months ended June 30, 1995 to $135,351 for the six months ended June 30, 1996 and net income increased from $127,186 to $252,815 for the same periods. Revenues increased from $13,750 to $129,090 for the second quarter of 1995 as compared to the second quarter of 1994. The Company's real estate operations generated income of $91,955 from three properties in 1995 while $4,840 was earned during the same period in 1994 from one property which was acquired in June of 1994. Interest income also increased from $8,910 to $37,135 primarily because the Company has been operational throughout 1995. Proceeds from the Company's common stock offering were not disbursed from the escrow account until May 9, 1994. Consequently, no significant interest income was earned by the Company until that time. The increased activity of the Company resulted in a corresponding increase in administrative and professional fees of approximately $18,000. The Company's net income for the quarter totaled $67,135 compared to $3,000 for the second quarter of 1994. For the six months ended June 30, 1995, the Company's real estate income was $183,865 compared to $4,840 for the six months ended June 30, 1994. The Company received rental income from three properties which have been leased throughout 1995. As previously discussed the Company acquired its first property in June 1994. Interest income for the six months ended June 30, 1995 totaled $66,707 compared to $9,886 for the six months ended June 30, 1994. The Company recorded net income of $127,186 and $585 for the six months ended June 30, 1995 and June 30, 1994, respectively. PART II - OTHER INFORMATION Item 1. Legal Proceedings 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 Report on Form 8-K: Form 8-K was filed on April 18, 1996 to report the acquisition of a property through a joint venture with two affiliates which will be operated as a Just For Feet retail store upon completion of construction of the property. SIGNATURES Pursuant to the requirements 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. American Asset Advisers Trust, Inc. (Registrant) August 14, 1996 H. Kerr Taylor Date H. Kerr Taylor, President August 14, 1996 H. Kerr Taylor Date H. Kerr Taylor, Chief Financial Officer