UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-QSB
(Mark One)
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended: June 30, 2004
___ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from _______ to _______.
Commission file number: 0-19154.
AMERICAN ASSET MANAGEMENT CORPORATION
(Exact name of small business issuer as specified in its charter)
NEW JERSEY 22-2902677
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1280 Route 46 West, Parsippany, New Jersey 07054
(Address of principal executive offices)
Issuers telephone number, including area code: (973) 299-8713
____________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
Yes _X_ No ___.
State the number of shares outstanding of each of the issuers classes
of common equity, as of the latest practicable date: As of August 16, 2004
there were 1,316,989 shares of the issuers no par value common stock issued
and outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO_X_
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2004 2003
_____________ASSETS________________
Cash & cash equivalents $ 193,913 $ 345,947
Mortgage loans held for sale 172,000 833,828
Prepaid expenses & other current assets 17,222 15,971
Total Current Assets 383,135 1,195,746
Property & Equipment, Net 6,379 8,179
Other Assets 57,968 58,924
Total Assets 447,482 1,262,849
__LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)__
Current Liabilities:
Warehouse line of credit 169,938 813,701
Deferred income 1,720 5,619
Derivative instrument 23,281 21,718
Accounts payable, accrued expenses
and other current liabilities 148,649 156,985
Current maturities of notes payable 106,200 18,005
Total Current Liabilities 449,788 1,016,028
__COMMITMENTS AND CONTINGENCIES__
Stockholders' Equity (Deficit):
Series B Cumulative Convertible Participating
Preferred stock, no par value; 300,000 shares
authorized, 25,000 shares issued and outstanding
(liquidation preference $25,000) 25,000 25,000
Series A Cumulative Convertible Participating
Preferred Stock, no par value; (liquidation
Preference $210,000); 600,000 shares authorized,
210,000 shares issued and outstanding 205,000 205,000
Common stock, no par value; 10,000,000 shares
authorized, 1,316,989 shares issued and
outstanding 3,852,825 3,852,825
Additional paid in capital 171,998 171,998
Accumulated deficit (4,257,129) (4,008,002
Total Stockholders Equity (Deficit) (2,306) 246,821
Total Liabilities and Stockholders Equity (Deficit) 447,482 1,262,849
See Accompanying Notes to Consolidated Financial Statements.
-2-
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
__2004__ __2003__ __2004__ __2003__
Revenues:
Mortgage origination fees $ 97,306 $ 791,903 $ 236,640 $1,317,494
Broker revenue 50,027 - 55,727 -
Land sales - - - 175,000
Application and commitment fees 15,400 19,675 31,825 35,920
Mortgage interest income 17,547 85,984 29,147 172,796
Total revenues 180,280 897,562 353,339 1,701,210
Expenses:
Employee compensation & benefits 144,276 99,752 243,421 181,183
Commissions 29,376 468,600 97,729 748,311
Other expenses 83,329 163,350 180,238 306,105
Land development costs - 20,000 - 186,765
Interest expense 11,983 98,704 30,979 192,957
Loss/(Income)from derivative
Instruments, net (4,219) - 41,563 -
Total expenses 264,745 850,406 593,930 1,615,321
Income/(Loss) from operations (84,465) 47,156 (240,591) 85,889
Other income 1,392 489 3,214 728
Income/(Loss) before provision for
income taxes (83,073) 47,645 (237,377) 86,617
Provision for income taxes - 7,460 - 7,460
Net Income/(Loss) (83,073) 40,185 (237,377) 79,157
Dividends on Preferred Stock 5,875 6,500 11,750 11,750
Earnings/(Loss) Attributable to
Common Stockholders (88,948) 33,685 (249,127) 67,407
Earnings/(Loss) Per Common Share
Basic $(0.07) $ 0.03 $(0.19) $ 0.05
Diluted $(0.07) $ 0.03 $(0.19) $ 0.05
Weighted Average Number of Shares
Of Common Stock outstanding:
Basic 1,316,989 1,295,970 1,316,989 1,295,970
Diluted 1,316,989 1,530,970 1,316,989 1,530,970
See Accompanying Notes to Consolidated Financial Statements.
-3-
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
___Ended June 31,___
____2004__ ____2003__
Cash flows from operating activities:
Net Income/(loss) $(237,377) $ 79,157
Adjustments to reconcile net income/(loss)
to net cash provided by/(used in) operating activities:
Depreciation and amortization 1,800 1,342
Losses on derivative instruments, net 41,563 -
Changes in:
Mortgage loans held for sale 661,828 (2,342,216)
Prepaid expenses &
other current assets (1,251) 25,019
Land development costs - 163,590
Warehouse finance facility (643,763) 2,288,222
Deferred income (3,899) (5,917)
Accounts payable, accrued expenses,
And other current liabilities (8,336) 92,687
Net cash provided by/(used in)operating activities(189,435) 301,884
Cash flows from investing activities:
Change in other assets 956 -
Purchases of fixed assets - (6,802)
Investments in derivative instrument, net (40,000) -
Increase in restricted cash - (39,000)
Net cash used in investing activities (39,044) (45,802)
Cash flows from financing activities:
Proceeds from notes payable, related parties 100,000 -
Payments of notes payable (11,805) (110,446)
Payment of preferred stock dividends (11,750) (5,875)
Net cash provided by/(used in)
financing activities 76,445 (116,321)
Net increase (decrease) in cash and cash equivalents (152,034) 139,761
Cash and cash equivalents at beginning of period 345,947 376,425
Cash and cash equivalents at end of period $ 193,913 $ 516,186
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 30,393 $ 195,845
Income taxes 1,100 3,300
Supplemental schedule of non-cash investing
and financing activities:
Accrued dividend charged to
Accumulated deficit $ 5,875 $ 5,875
See Accompanying Notes to Consolidated Financial Statements.
-4-
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
______________________________________________________________________
1. BACKGROUND AND BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements of American Asset
Management Corporation and subsidiaries (the Company) are unaudited. In the
opinion of management, all adjustments and intercompany eliminations necessary
for a fair presentation of the results of operations have been made and were
of a normal recurring nature. These interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and
related notes thereto contained in the Companys 2003 Annual Report on Form
10-KSB. Reference is made to the Companys annual financial statements for
the year ended December 31, 2003, for a description of the accounting
policies which have been continued without change. Also, refer to the
footnotes within those annual statements for additional details of the
Companys financial condition, results of operations and changes in cash
flows. The details in those notes have not changed except as a result of
normal transactions in the interim. The results of the three and six months
ended June 30, 2004 are not necessarily indicative of the results of the full
year.
Certain reclassifications have been made to the operating statement for
the three and six month periods ended June 30, 2003 to conform with the
current period presentation.
2. EARNINGS/(LOSS) PER SHARE
Basic earnings/(loss) per common share is computed by dividing
earnings/(loss) available to common shareholders by the weighted average
number of shares outstanding for the period.
Diluted earnings/(loss) per common share is computed by dividing
earnings/(loss) available to common shareholders, adjusted for the 2003 period
for the preferred stock dividends for the three and six months ended June 30,
2003, by the weighted average shares outstanding. Since the Company reported
losses for the three and six months ended June 30, 2004, the diluted loss per
share is the same as the basic, as any potentially dilutive securities would
reduce the net loss per share. For the three and six months ended June 30,
2004, diluted earnings per share assumes the outstanding shares of common
stock were increased by the number of shares issuable upon conversion of the
10% Series A and B Preferred Stock.
A reconciliation of the basic and diluted earnings (loss) per common share
for the three and six months ended June 30, 2004 and 2003 was as follows:
-5-
For the Three Months ended June 30,
2004 2003
Loss Weighted- Weighted-
Average Per Share Average Per Share
Shares Amount Earnings Shares Amount
Earnings/(loss)
available to common
shareholders ($88,948) - - 33,685 - -
Basic Earnings/
(loss) per common
share ($88,948) 1,316,989 ($.07) 33,685 1,295,970 $.03
Effect of dilutive
securities:
Preferred stock - - - 6,500 235,000 -
Diluted earnings/
(loss) per common
share ($88,948) 1,316,989 ($.07) 40,185 1,530,970 $.03
For the Six months ended June 30,
2004 2003
Weighted- Weighted-
Average Per Share Average Per Share
Loss Shares Amount Earnings Shares Amount
Earnings/(loss)
available to common
shareholders $(249,127) $ 67,407
Basic Earnings/
(loss) per common
share $(249,127) 1,316,989 $(.19) $ 67,407 1,295,970 $0.05
Effect of dilutive
securities:
Preferred stock - - 11,750 235,000 -
Diluted earnings/
(loss) per common
share $(249,127) 1,316,989 $(.19) $ 79,157 1,530,970 $0.05
3. GAIN ON SALE OF MORTGAGES
Gain on sale of mortgages is comprised of the following for the three and
six month periods ended June 30, 2004 and 2003:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
Origination and premium fees 97,306 791,903 236,640 1,317,494
Application and commitment fees 15,400 19,675 31,825 35,920
Subtotal 112,706 811,578 268,465 1,353,414
Less direct loan origination costs 38,826 523,740 115,332 837,927
Net gain on sale of mortgages 73,880 287,838 153,133 515,487
-6-
4. WAREHOUSE LINE
On March 11, 2004, the Company obtained a new warehouse line of credit
from a commercial bank in the amount of $7,000,000. This line has an
expiration date of March 31, 2005. The line is secured by residential
mortgage loans and a personal guarantee of the Companys President. The
line bears various interest rates from prime plus three-quarters to prime
plus one and a half percent. The percentage is directly related to the type
of loan written. The Company is required to maintain several financial
covenants including: 1) maintaining a minimum adjusted net worth of
$550,000, 2) not exceeding a maximum leverage ratio of 20 to 1, and 3)
maintaining a compensating cash balance of $35,000. The Company did not
meet the minimum adjusted net worth requirement as of March 11,
2004 (the inception date of the agreement) and June 30, 2004. The bank
has informed the Company in writing that they will not consider a net
worth deficiency as an event of default under the line of credit.
5. Notes Payable to Related Parties.
On March 30, 2004, the Company borrowed $100,000 from two board
members in the form of demand notes bearing interest at 10% per annum.
6. Pending litigation
On March 25, 1999, the Company, its President, and the Companys wholly
owned subsidiaries (collectively, The Company Defendants) and one of the
Companys former directors together with other individuals were named in an
action filed in the Superior Court of New Jersey, Chancery Division by two
New Jersey limited liability companies (the LLCs). The plaintiffs allege
that the Companys former director and certain other defendants other than
the Company Defendants (Other Defendants) misappropriated assets and
opportunities of the LLCs for their own use, engaged in self-dealing with
respect to the LLCs, breached the operating agreements of the LLC and
converted and embezzled assets and funds of the LLC. The Company Defendants
are alleged to have aided and abetted the Companys former director in
converting the assets of the LLCs by accepting loans and payments from the
LLCs and the Companys former director and repaying loans to the Company
former director in the form of cash and Company stock.
The LLCs seek declaratory and injunctive relief against the Company
defendants; an accounting of (1) all shares of Company stock purchased by the
Companys former director and Other Defendants and (2) all payments to or from
the Company and the Companys former director and Other Defendants; imposition
of a lien or equitable trust in favor of the LLCs on shares of the Companys
stock issued to the Companys former director and Other Defendants; and certain
unspecified compensatory and punitive damages, attorneys fees and costs.
In April 1999, the Court granted a preliminary injunction, which among
other things, enjoins the Company Defendants from allowing the transfer of
any Company stock held in the name of the Companys former director and Other
Defendants and directs the Company and related Defendants to provide an
accounting of all such stock
-7-
The Company denies any wrongdoing and believes that the claims against
the Company Defendants are without merit, and that it has meritorious
defenses and intends to defend the action vigorously. The trial in this
case is currently scheduled to begin in October 2004. However, at this time
the Company cannot predict its ultimate liability, if any, that may result
from this action. There is no settlement offer currently pending from the
company.
Item 2.
AMERICAN ASSET MANAGEMENT CORPORATION AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS
OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: The statements which are not historical facts contained in this
report on Form 10-QSB are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. Such factors, include, but are
not limited to, those relating to competition, the ability to successfully
market new mortgage products and services, the economic conditions in the
markets served by the Company, the ability to hire and retain key personnel
and other risks detailed in the Companys other filings with the Securities
and Exchange Commission. The words believe, anticipate, expect, intend and
similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward looking statements,
which speak only as of the date the statements were made.
CRITICAL ACCOUNTING POLICIES
Estimates and assumptions are required in the determination of mortgage
loans held for sale. Some of these judgments can be subjective and complex,
and, consequently, actual results may differ from these estimates. For any
individual estimates or assumptions made by the Company, there may be other
reasonable estimates or assumptions. The Company believes, however, that
given facts and circumstances, it is unlikely that applying any such other
reasonable judgment would cause a material adverse effect on the Companys
consolidated results of operations, financial position or cash flows for the
periods represented in this section. The Companys most critical accounting
policy is described below.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale represent mortgage loans originated and
held pending sale to interim and permanent investors. The mortgage is
carried at the lower of cost or market. The Company generally sells whole
loans without servicing rights retained. Gains or losses on such sales are
recognized at the time legal title transfers to the investor based upon the
difference between the sales proceeds from the final investor and the basis of
the loan sold, adjusted for net deferred loan fees and certain direct costs
-8-
and selling costs. The Company defers net loan origination fees as components
of deferred income and prepaid expenses on the balance sheet. Such costs are
not amortized and are recognized into income as a component of the gain or
loss upon sale.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared to the Three Months Ended June 30,
2003.
Total revenues for the three months ended June 30, 2004 were $180,280
compared to $897,562 for the three months ended June 30, 2003, a decrease of
$717,282 or approximately 79.9%. The decrease was primarily attributable to
a decrease in mortgage origination fees of $694,597 or approximately 87.7%
to $97,306 from $791,903 in the comparable 2003 period, and a decrease of
$68,437 or approximately 79.6% in mortgage interest income to $17,547 from
$85,984, from Capital Financial Corp. (Capital), the Companys mortgage
banking subsidiary. The decrease in mortgage origination fees and mortgage
interest income was due to a decrease in mortgage refinance applications and
closings and a reduced amount of closed loans in the warehouse bank pending
sale to institutional investors during the 2004 period. This was primarily due
to an increase in interest rates during the 2004 period. In response to higher
interest rates and decreased mortgage refinancings during the three month
period ended June 30, 2004, the Company is continuing to focus on expanding
its retail sales force by hiring sales personnel with established
sources of non-refinance purchase mortgages who will work on a commission
basis. The traditional sources for purchase mortgages are primarily realtors,
accountants, financial planners and real estate attorneys.
During November 2003, a new New Jersey state law took effect which
limited the amount of compensation mortgage bankers, and, to a greater extent
mortgage brokers could receive on certain mortgage loans. As a direct result
of this new law certain investors the Company sells loans to decided to
suspend doing business within the State of New Jersey. In addition, the
Companys primary wholesale customer determined that it was in its best
interest to transact its mortgage business as bankers instead of as a broker
which has resulted in a reduction of the amount of business the Company
receives from this customer. During July 2004 the new law was amended. The
Company believes that part of this amendment has lessened subsequent lender
liability on certain loans purchased in the secondary market that the original
law had imposed. As a result of this amendment the Company believes, though
there can be no assurance, that certain investors may return to transacting
mortgage business in New Jersey and the return of these investors could be
beneficial to the Company.
The Company hopes that the increase in its own retail sales force will
lessen its dependency on wholesale customers as sources of business. In this
regard, during February 2004, the Company hired a retail sales manager with
over six years of mortgage banking experience and during the quarter ended
June 30, 2004 has added additional experienced retail loan officers to its
sales staff which as of August 10, 2004 totals 7 persons.
-9-
During the first and second quarters of 2004, as part of its efforts to
improve its operating results, the Company instituted strict pricing guidelines
and commission structures to its retail sales force. However, there can be no
assurance that these new guidelines and structures will be favorably received
by the Companys retail sales force or that they will have the intended effect
of improving the Companys operating results.
In addition to having a steady flow of loans from a combined wholesale
and retail source, the Company has a goal of selling pools of mortgages, also
referred to as bulk sales, to institutional and other investors rather than
one mortgage loan at a time sales as it presently conducts its business. The
Company believes it can negotiate greater revenues per mortgage sold by this
pooling method. The Company believes there are numerous entities that it may
make bulk sales to. Further, the Company believes, though there can be no
assurance, that through pooling it can increase its retail sales force,
wholesale customers and overall business volume, as a result of being able to
offer more competitive rates and higher compensation to its origination
sources while still increasing its net revenues per loan on a percentage
basis. The Company has a short term goal of negotiating a forward delivery
contract with an institutional investor. If the Company is successful in
negotiating such an agreement, the Company would deliver to the investor an
agreed upon amount, type and number of mortgage loans within a specified time
period. The agreement would contain lending criteria, such as minimum credit
scores and loan-to-value ratios of acceptable loans to be delivered to and
purchased by the investor. In order to be beneficial to the Company, forward
delivery commitment agreements would have to provide the Company with better
pricing than it currently receives by selling closed loans to investors on an
individual basis. The Company expects, though there can be no assurance,
that if it is able to enter into business relationships with one or more
institutional investors relating to forward contracts it could have a
beneficial short term effect on the Company that could possibly lead to the
Companys ability to sell mortgage pools to that or other institutional
investors.
There can be no assurance the Company will be successful in its
Relationships with wholesale correspondents and retail loan originators
as it faces intense competition from the other lenders it competes with for
this business, many of which have greater resources and experience than the
Company.
As of December 31, 2003, the Company had a $10,000,000 warehouse line of
credit from a mortgage warehouse lender which provided the Company with a
facility to borrow funds secured by originated residential mortgage loans
which were temporarily warehoused and then sold. The warehouse line of credit,
which expired on March 31, 2004, was secured by the personal guarantee of the
Companys President. On March 11, 2004 the Company received approval of a new
$7,000,000 warehouse line of credit with a commercial lending institution at
more favorable terms to the Company than the prior line of credit. Borrowings
under the new line of credit are secured by the personal guarantee of the
Companys President. On March 22, 2004 the Company commenced utilizing this
new warehouse credit line. The Company believes that the amount of this new
credit line will be sufficient to meet the Companys mortgage warehouse needs
at present. The Companys net worth, as of March 31 and June 30, 2004, was
below the minimum net worth covenant agreed upon with the new mortgage
-10-
warehouse lender. The Company has explained the net worth shortage to the
lender which has informed the Company in writing that it will not consider the
net worth deficiency to be an event of default under the line of credit. At
this time the lender has allowed the amount of the credit line to remain at
the $7,000,000 limit. However, the lender has the right to lower the credit
line to a level of 20 times the net worth of Capital but to date has not done
so. In March 2004, Capital increased its net worth in the amount of $100,000
by borrowing $100,000 through the use of demand notes issued to two directors
of the Company. These funds were invested by the Company into Capital in the
form of a reduction in the inter-company loan balance. In the event that the
lender reduces the amount of the credit line to be in-line with its lending
formulas, the Company believes it would not be initially detrimental to its
business. The Company will borrow under its warehouse line of credit only
against takeout commitments issued by qualified investors who have pre-approved
the loans and committed to purchase the closed loan from the Company. By using
the warehouse funds instead of table funding, (funding provided by the investor
who purchases the loan from the Company), the Company has generally been able
to receive more favorable pricing from its investors which the Company believes
has made it more competitive in the market place. The warehouse line has also
allowed the Company to sell loans to investors which do not table fund and only
purchase closed loans from its correspondents, i.e. Capital.
During the three month period ending June 30, 2004, the Company continued
marketing its services to the public through the Internet using its website
home page linked to a major website belonging to a national provider of
mortgage lending statistics. The national providers website provides the
public with the Companys lending programs and interest rates on a daily basis,
in addition to the rates of other lenders that the Company competes with. As
a result of its marketing through the Internet, the Company has received
numerous inquiries which have resulted in mortgage loan applications and
closings from persons seeking mortgage financing.
During March 2004, the Company modified its website to include sub-prime
credit loans on a brokered basis to borrowers with impaired credit and has
increased its Internet exposure to potential borrowers by linking its website
to a sub-prime lender showcase of a national provider of consumer loan
statistics. In addition, during the fourth quarter of 2003 the Company
contracted to purchase borrower inquiry leads from a national internet source
that provides potential borrowers with four mortgage rate quotes from lenders
who compete with each other for the borrowers mortgage. The Company also
began accepting credit cards from borrowers for payment of application and
commitment fees in the first quarter of 2004. The Company continues to be
encouraged with this new source of loan originations and the results of its
Internet marketing. The Company continued to accept credit card payments and
maintained its internet marketing during the second quarter of 2004.
To date, the number of domestic mortgages originated over the Internet,
relative to the total mortgage origination market, while small, is still
growing. Industry wide in recent years, only a small percentage of total
mortgage originations were generated via the Internet. However, according to
certain mortgage banking industry sources, by the year 2005 the Internet could
comprise 25% to 30% of total mortgage originations. The Companys marketing
strategy is to supplement its current wholesale and retail personal
-11-
relationship based origination business with marketing conducted over the
Internet. There can be no assurance that the Company will be successful in
the future in using the Internet as a source of mortgage loan applications.
During the three months ended June 30, 2004 Capital closed 25 residential
mortgage loans in the principal amount of $5,655,270 compared to 129 loans
closed in the principal amount of $28,063,543 in the three months ended
June 30, 2003. At June 30, 2004, the Company had approximately 72 residential
mortgage applications in process in the principal amount of $18,878,228
compared to 107 residential mortgage applications in process in the principal
amount of $23,712,856 at June 30, 2003.
Total expenses for the three months ended June 30, 2004 were $264,745, a
decrease of $585,661 or approximately 68.9% from $850,406 in the comparable
2003 period primarily due to a decrease of $439,224 in the Companys sales
commission from $468,600 in the three month period ended June 30, 2003 to
$29,376 in sales commissions during the period ended June 30, 2004. The
reduction in commissions paid during the 2004 period was directly attributable
to a lesser dollar amount of mortgage loans closings. There was also a
decrease in interest expense of $86,721, or 87.9% due to decreased utilization
of the Companys warehouse line of credit as a result of a lesser amount of
closed mortgage loans, a decrease in other expenses of $80,021, or
approximately 49%, as a result of decreased costs related to certain business
expenses such as rent, equipment, supplies, postage and miscellaneous office
expenses. However there were certain increases in other expenses for
accounting and legal fees. The Companys ongoing litigation costs, while
reduced as compared to previous quarters, are expected to continue for the
foreseeable future and will continue to have a material adverse effect on the
Companys business as well as liquidity. There were no land development costs
incurred during the three month period ended June 30, 2004 as compared to
$20,000 of such expenses during the same period in 2003. The reduction in
expenses was partially offset by increases in employee compensation and
benefits of $44,524. As a percentage of revenues, expenses were approximately
146.9% in the current period compared to approximately 94.8% in the comparable
2003 period.
As a result of the foregoing and the payment of Preferred Stock dividends,
the Companys loss attributable to common stockholders for the three months
ended June 30, 2004 was $88,948 or $0.07 per common share, compared to net
income of $33,685, or $0.03 per common share in the comparable 2003 period.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003.
Total revenues for the six months ended June 30, 2004 were $353,339
compared to $1,701,210 for the six months ended June 30, 2003, a decrease of
$1,347,871 or approximately 79.2%. The decrease was primarily attributable to
a decrease in mortgage origination fees to $236,640 during the 2004 period
from $1,317,494 in the comparable 2003 period, an absence of land sales during
the period as compared to land sales of $175,000 during the comparable 2003
period, a decrease of $143,649 or 83.1% in mortgage interest income to $29,147
from $172,796 in the comparable 2003 period, and a decrease in mortgage
application and commitment fees of $4,095 to $31,825 from $35,920 in the
-12-
comparable 2003 period. The decrease in mortgage applications was primarily
a result of higher interest rates producing a smaller amount of refinance
applications during the 2004 period. The continuation of interest rates at
the current or higher levels is expected to have a negative effect on the
Companys business. During the six months ended June 30, 2004, Capital
closed 55 residential mortgage loans in the principal amount of $13,520,576
compared to 241 loans closed in the principal amount of $51,409,022 in the
six months ended June 30, 2003.
Total expenses for the six months ended June 30, 2004 were $593,930, a
decrease of $1,021,391 or approximately 63.2% from $1,615,321 in the comparable
2003 period due to an absence of land and development costs during the 2004
period as compared to land development costs during the same period in 2003 of
$186,765, a decrease in interest expense of $161,978, or approximately 83.9% to
$30,979 from $192,957 during the same period in 2003, a decrease in commission
of $650,582 or approximately 86.95% to $97,729 from $748,311 during the same
period of 2003 due to a lesser number of mortgage loan closings during the
current period, a decrease in other expenses of $125,867, or approximately
41.1% to $180,238 from $306,105 in the same period of 2003. This was
partially offset by a an increase in employee compensation and benefits of
$62,238 to $243,421 from $181,183 and a loss of $41,563 on derivative
instrument as compared to an absence of loss during the same period of 2003.
As a percentage of revenues, expenses were approximately 168.1% in the current
period compared to 94.9% in the comparable 2003 period.
As a result of the foregoing, the provision for income taxes and Preferred
Stock dividends, the Companys loss attributable to common stockholders for the
six months ended June 30, 2004 was $249,127 or $0.19 per common share, compared
to net income of $67,407 or $0.05 per common share for the comparable 2003
period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004, the Company had cash and cash equivalents of $193,913
compared to $345,947 at December 31, 2003, a decrease of $152,034 or
approximately 44%. This decrease is primarily attributable to net cash used in
operating activities of $189,435 which is comprised of a net loss of $237,377,
offset in part by an add back for a loss on derivatives instruments of $41,563.
The Company also utilized $39,044 in cash for investing activities which
consisted primarily of an investment in a derivative instrument. This was
partially offset by net cash provided by financing activities of $76,445, which
included proceeds from notes payable of $100,000, payment of $11,805 in notes
payable, and preferred stock dividends of $11,750.
The Company utilized one $10,000,000 warehouse line of credit for its
daily mortgage loan funding operations. This line of credit expired on March
31, 2004. On March 22, 2004 the Company commenced utilizing a new $7,000,000
warehouse line of credit. Whenever possible the Company employs its
available cash to fund mortgage loans which generates mortgage interest
income, as well as save interest costs and other fees associated with
utilizing its warehouse credit line. The warehouse line enables the Company
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to borrow funds secured by residential mortgage loans which will be
temporarily accumulated or warehoused and then sold. At June 30, 2004, the
Company had borrowed $169,938 from its warehouse line of credit representing
approximately $172,000 in closed loans ready for sale. Funds from this line
of credit are used for and are secured by residential mortgage loans and a
personal guarantee of the Companys President. The terms of the warehouse
line of credit and the Companys internal control policies require that a
commitment be obtained from the purchaser, prior to the Company closing the
loan with the mortgagor. Accordingly, the Company does not record any
provision for uncollectible mortgage loans held for sale.
The Company estimates that it will require additional capital in order to
successfully implement its operational plans. As a result, the Company is
seeking additional capital through, among other means, an infusion of
noncollateralized loans and the sale of additional equity in the Company or
its subsidiary Capital Financial Corp. However, there can be no assurance
that the Company will be able to obtain additional capital on terms acceptable
to the Company, or at all.
Item 3. Controls and Procedures
At the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) who also serves as
the Chief Financial Officer (CFO), of the effectiveness of the Companys
disclosure controls and procedures. Based on that evaluation, the CEO/CFO
has concluded that the Companys disclosure controls and procedures are
effective to ensure that all information required to be disclosed by the
Company in reports that it files or submits under the Securities and Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
During the quarter ended June 30, 2004, there were no changes in the
Companys internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part 1 - Item 3 contained in the Companys 10-KSB for
the year ended December 31, 2003 for further information relating to the
pending action commenced against, among others, the Company and its President
described below. See also Note 6 to the consolidated financial statements
included in Item 1 of this Form 10-QSB.
The action, which commenced in March 1999 in the Chancery Division of the
Superior Court of New Jersey, Union County, the plaintiffs allege that the
Company aided and abetted a former director in converting the assets of two
New Jersey limited liability companies (the LLCs) by accepting loans and
payments from the LLCs and the former director and repaying the loans to the
former director in the form of cash and Company stock.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Principal Executive Officer and Chief
Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) No Reports on Form 8-K were filed during the quarter ended
June 30, 2004.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN ASSET MANAGEMENT CORPORATION
(Registrant)
Date: August 23, 2004 By:_s/Richard G. Gagliardi________
Richard G. Gagliardi
Chairman, President and Chief
Executive Officer (Principal
Executive and Financial Officer)
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