Item 1. Business
AAA Net Realty Fund IX, Ltd. (the "Registrant" or the "Partnership") is engaged in the business of acquiring, operating and holding real properties for investment. The Partnership was organized to acquire existing real estate income-producing properties as well as land upon which such income-producing properties are to be constructed (the "properties"), to be leased to corporations. The properties will not be leased to franchisees of such corporations (unless a tenant corporation was to fail and in such event a release may involve a franchisee lessee). American Asset Advisers Management Corporation IX (a Nebraska corporation) is the Managing General Partner and H. Kerr Taylor is the Individual General Partner.
Commencing June 6, 1990, the Registrant offered through Securities America, Inc., up to 15,000 Units of limited partnership interest (the "Units") at $1,000 per Unit with a minimum purchase of 5 Units ($5,000) or 2 Units ($2,000) for an Individual Retirement Account. At the termination of the offering on June 5, 1992, subscriptions had been received for 5,390.5 Units ($5,390,500). Limited partners are not required to make any additional capital contributions.
The Units were registered under the Securities Act of 1933 on Registration Statement No. 33-33504 (the "Registration Statement").
The Partnership acquired three properties in 1991, a fourth property in 1992 and a fifth property in 1993 at a total price of $4,436,869 including acquisition fees and certain acquisition expenses. Generally, the Partnership leases properties on a "net lease" basis to corporations having a net worth at the time of acquisition in excess of $40,000,000.
All of the Partnership's business is generated from real estate operations; therefore, presentation of industry segment information is not applicable. Each property is leased to a single tenant. Three of the Partnership's five properties each contributed 15% or more of the total rental income for 1996, 1995 and 1994. A breakdown of rental income by tenant is included in Note 5 to the financial statements.
A further description of the Partnership's business is included in Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K.
The Objectives of the Partnership are:
(1) to preserve and protect the limited partners' original capital contributions by the free and clear "all cash" acquisition of income-producing improved real estate properties;
(2) to utilize initial limited partner equity to purchase income-producing properties at prices that are below appraised values;
(3) to obtain capital appreciation through increases in the value of the Partnership's properties;
(4) to provide the limited partners with quarterly cash distributions;
(5) to realize certain limited tax benefits, principally through depreciation deductions so that taxable income of the Partnership will be offset to some extent by deductible items, with the result that investors may receive distributions generated from the Partnership's operation with a reduced income tax liability associated with the distribution of income.
There can be no assurance that such objectives can be attained. It is not an objective of the Partnership to shelter taxable income of investors that is derived from sources other than the Partnership.
Properties
As of December 31, 1996, the Partnership owned five properties all in fee simple. Four of these properties are located in Texas and one in Tennessee.
Although the specific terms of each lease vary, a summary of the terms of the leases is as follows:
The primary term of the leases ranges from ten to eighteen years. Two of the leases also provide for one to four five-year renewal options. The leases are all "triple-net" leases whereby the tenants are responsible for the property taxes, insurance and operating costs. Annual rental rates range from $8,723 to $182,994. Four of the leases provide for either percentage rents based on sales in excess of certain amounts, periodic escalations in the annual rental rates or both.
During 1996, three of the Partnership's leases each contributed more than 15% of the Partnership's total rental income. Summarized as follows are the significant items pertaining to each of these leases:
Golden Corral Foodmaker Tandy Corporation (1) Inc. Corporation
Lease Term 15 Years 15 Years 10 Years Expiration Date of Primary Term December 2007 May 2002 September 2001 Renewal Options N/A N/A 1 Term of 5 Years Square Footage of Improvements 12,000 4,000 15,000 Base Annual Rental $ 182,994 $ 74,000 $ 164,844
(1) The Partnership owns two properties on lease to Golden Corral Corporation, one directly and one through a joint venture. Information included herein pertains only to the property owned 100% by the Partnership.
All of the Partnership's leases specify a minimum amount of insurance coverage required to be carried by each tenant. Management of the Partnership believes that the insurance policies required to be carried by the tenants will adequately cover the replacement cost of the properties and any personal liability losses which the tenants may sustain.
Property Management
Each property is managed by American Asset Advisers Realty Corporation ("AAA"), an affiliate of the Managing General Partner and not by unaffiliated third parties. Such management includes providing leasing services in connection with identifying and qualifying prospective tenants, assisting in the negotiation of the
leases, providing quarterly financial statements, receiving and depositing monthly lease payments, periodic verification of tenants' payments of real estate taxes and insurance coverage, and periodic inspection of properties and tenants' sales records where applicable. The Managing General Partner or such affiliates are reimbursed for administrative expenses at cost. The tenants are responsible, at their expense, for day-to-day on-site management and maintenance of the properties.
Financing - Borrowing Policies - No Leverage
The General Partners expect that the Partnership will incur no indebtedness in connection with the operation of the properties. However, in the exercise of their fiduciary duties the General Partners may elect to borrow funds on behalf of the Partnership, but only if necessary in their judgment to avoid what would otherwise be substantial adverse consequences to the Partnership. All properties were acquired on a debt-free basis.
The Partnership will not issue any senior securities nor will it invest net proceeds of this offering in junior mortgages, junior deeds of trust or similar obligations.
Sale of Properties
The General Partners expect that most of the properties will be sold eight to twelve years after acquisition. The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of performance of the property and market conditions and will depend, in part, on the economic benefits of continued ownership. In deciding whether to sell properties, the General Partners will consider factors such as potential capital appreciation, cash flow and federal income tax consequences. The General Partners or their affiliates anticipate performing various substantial real estate brokerage functions in connection with the sale of properties by the Partnership. The Partnership will not purchase or lease any property from, or sell or lease any property to, the General Partners or their affiliates.
In connection with the sale of a property owned by the Partnership, purchase money obligations secured by mortgages may be taken as partial payment. The terms of payment to the Partnership will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. To the extent the Partnership receives notes and property other than cash on sales, such proceeds will not be included in net proceeds of sale until and to the extent the notes or other property are actually collected, sold, refinanced or otherwise liquidated. Therefore, the distribution to the partners of the proceeds of a sale may be delayed until the note or other property is collected at maturity, sold, refinanced or otherwise converted to cash. The Partnership may receive payments (cash and other property) in the year of sale in an amount less than the full sales price and subsequent payments may be spread over several years. The entire balance of the principal may be a balloon payment due at maturity. For federal income tax purposes, unless the Partnership elects otherwise, it will report the gain on such sale ratably as principal payments are received under the installment method of accounting.
Competitive Conditions
The properties owned by the Partnership are leased to fast food and family style restaurants or retail businesses. These businesses face competition from similar establishments within the surrounding areas.
At the time a property is sold or otherwise disposed of, the Partnership will be in competition with others who are also seeking buyers for their properties.
Employees
The overall management decisions of the Partnership are made by the Managing General Partner, American Asset Advisers Management Corporation IX, who delegates certain day-to-day functions to the officers of AAA, consultants, and employees of AAA. The Partnership itself has no employees.
Item 2.

Item 2. Properties
As of March 25, 1997, the Partnership owned five properties in fee simple (four directly and one through a joint venture with an affiliated partnership). The properties are located in Texas and Tennessee. They are operated as retail stores and restaurants.
Land - The Partnership's property sites range from approximately 34,000 to 60,000 square feet depending upon building size and local demographic factors. Sites purchased by the Partnership are in high traffic corridors and have been reviewed for traffic and demographic pattern and history.
Buildings - The buildings are all single tenant and generally rectangular. They are positioned for good exposure to traffic flows and constructed from various combinations of stucco, steel, wood, brick and tile. Buildings range from approximately 2,300 to 15,000 square feet. Buildings are suitable for possible conversion to other uses, although modifications may be required prior to use for other operations. There are no plans for renovations or improvements.
Leases - Tenants are companies whose net worth exceed a minimum of $40,000,000. Tenants are diversified by business type and are represented by the following types of businesses: consumer electronics, retail clothing and accessories, full service restaurants and fast food restaurants.
Geographic Location - The properties are located within major metropolitan areas (S.M.S.A.) with populations that exceed 250,000.
A total of $4,436,869 has been invested in properties as of December 31, 1996, for the Partnership. This includes land, building and acquisition costs. A further description of the Partnership properties, including acquisition fees and certain acquisition expenses, is included in Item 1 and in Schedule III-Real Estate Owned and Accumulated Depreciation of this Form 10-K.
Item 3.

Item 3. Legal Proceedings
The Partnership does not have any material legal proceedings pending.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
During the fiscal year ended December 31, 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
As of March 25, 1997, 327 limited partners had subscribed for 5,390.5 Units. No established public trading market currently exists for the Units.
For the years ended December 31, 1996 and 1995, the Partnership paid cash distributions to the Limited Partners (LPs) in the amount of $458,462 and $458,193, respectively and to the General Partners (GPs) in the amount of $3,000 and $3,000, respectively. The distributions were paid entirely from the operating profits of the Partnership. A summary of the distributions by quarter is as follows:
Quarter 1996 1995 Ended GPs LPs GPs LPs March 31 $ 750 $ 114,548 $ 750 $ 114,548 June 30 $ 750 $ 114,548 $ 750 $ 114,548 September 30 $ 750 $ 114,548 $ 750 $ 114,548 December 31 $ 750 $ 114,818 $ 750 $ 114,549
The Partnership intends to continue the payment of regular quarterly distributions. There are currently no material legal restrictions that would limit the Partnership's ability to pay distributions.
Item 7.

Item 7. Management's Discussion and Analysis of the Partnership's Financial Condition and Results of Operations.
The Partnership was organized on February 1, 1990, to acquire, on a debt-free basis, existing and newly constructed commercial properties located in the continental United States and particularly in the Southwest, to lease these properties to tenants under generally "triple net" leases, to hold the properties with the expectation of equity appreciation and eventually to sell the properties.
The Partnership's overall investment objectives are to acquire properties that offer investors the potential for (i) preservation and protection of the Partnership's capital; (ii) partially tax-deferred cash distributions from operations; and (iii) long-term capital gains through appreciation in value of the Partnership's properties realized upon sale.
LIQUIDITY AND CAPITAL RESOURCES
On June 6, 1990, the Partnership commenced an offering to the public of up to $15,000,000 (15,000 Units) of limited partnership interests. The proceeds of the offering, lease income from the Partnership's properties and interest income are the Partnership's source of capital. The Partnership closed its offering on June 5, 1992, having raised $5,390,500. Limited partners are not required to make any additional capital contributions.
The Partnership's investment strategy of acquiring properties for all cash and leasing them under net leases to corporations minimizes the Partnership's operating expenses. The General Partners believe that net rental income from the leases will generate cash flow in excess of Partnership operating expenses. Since the leases generally have initial or remaining terms of at least 10 years and provide for specified rental increases in excess of the initial base rent, it is anticipated that Partnership income will increase over time. Approximately $145,000 has been set aside for working capital reserves. Because of the low operating expenses and ongoing cash flow, the General Partners do not believe that other working capital reserves are necessary at this time. Because all leases of the Partnership's properties are on a net-lease basis, it is not anticipated that a large reserve for maintenance and repairs will be necessary. The Partnership intends to distribute a significant portion of its cash available for distribution unless it becomes necessary to maintain additional reserves.
As of December 31, 1996, the Partnership had acquired five properties and had invested $4,436,869 including certain acquisition expenses related to the Partnership's investment in these properties. These expenditures resulted in a corresponding decrease in the Partnership's liquidity.
The Partnership made cash distributions from operations to the limited partners during each quarter of 1996, 1995 and 1994, distributing a total of $458,462, $458,193 and $452,802 to the limited partners, respectively.
Inflation has had very little effect on income from operations. Management expects that increases in store sales volumes due to inflation as well as increases in the Consumer Price Index (C.P.I.) may contribute to capital appreciation of the Partnership properties. These factors, however, also may have an adverse impact on the operating margins of the tenants of the properties.
RESULTS OF OPERATIONS
Years Ended December 31, 1996, and 1995:
Rental income remained unchanged from 1995. Interest income declined from $6,417 in 1995 to $5,303 in 1996 as a result of the decline in interest rates. Expenses declined by $65,568 primarily from reductions in administrative fees paid to an affiliate of the general partner and amortization expenses. The Partnership recorded net income in 1996 of $270,175 as compared to $205,721 in 1995. Each of the four properties owned 100% by the Partnership contributed more than 10% of the total rental income for 1996.
Years Ended December 31, 1995, and 1994:
Rental income increased slightly in 1995 from $492,608 to $494,299 from an increase in the rental income received on one property. Interest income increased from $3,754 to $6,417 as the result of the investment of Partnership funds in higher yielding instruments. Net income for 1995 increased from $203,515 to $205,721. Each of the four properties owned 100% by the Partnership contributed more than 10% of the total rental income for 1995.
Item 8.

Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in Item 14(a) of this report and is incorporated herein by reference.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant
The Registrant has no officers or directors. The individual and Managing General Partners are as follows:
H. Kerr Taylor, age 46, is the Individual General Partner of the Partnership. Mr. Taylor has been an attorney since 1979, has earned an M.B.A. at Southern Methodist University, is a real estate broker and has over a decade of experience as a specialist in acquiring and operating income-producing real properties. He has been involved in the development, analysis, marketing and management of private investment programs investing in properties since 1975. Mr. Taylor is the president, the sole director and sole shareholder of American Asset Advisers Realty Corporation ("AAA"), a real estate operating company he founded in 1988. Mr. Taylor has served in this capacity since the company's formation.
Mr. Taylor is currently a general partner or principal of a general partner of eleven affiliated limited partnerships. Mr. Taylor is a member of the National Board of Realtors, Texas Association of Realtors and Texas Bar Association and a former member of the American Bar Association. Mr. Taylor holds the Series 7, 22, 24, 39, and 63 securities licenses.
American Asset Advisers Management Corporation IX is a Nebraska corporation which was organized for the sole purpose of acting as the Managing General Partner of the Partnership. The Managing General Partner has a nominal net worth. The two initial voting shareholders of American Asset Advisers Management Corporation IX are Mr. Taylor and Realty Assets, Inc., a Nebraska corporation. Mr. Taylor's ownership interest is 65% of the stock of the Managing General Partner; Realty Assets, Inc. owns the remaining 35%. Realty Assets, Inc. received its 35% interest as consideration for agreeing to assume the risks associated with advancing a portion of the organization and offering costs relating to this offering.
The President and Treasurer of the Managing General Partner is Mr. Taylor who is also a Director. Stephen K. Wild, a resident of Omaha, Nebraska, has been named Vice President, Secretary and a Director of the Managing General Partner. Messrs. Taylor and Wild are the two Directors of the Managing General Partner.
Mr. Wild, age 47, is the Chairman and President of Securities America, Inc., a registered broker/dealer, which was also the dealer/manager of the Partnership during the offering period. Mr. Wild has served as the Chairman of the Board of Securities America, Inc. since 1984 and also as its President since February 1991. Mr. Wild has also been the Chairman and President of Financial Dynamics, Inc., the holding company for Securities America, Inc. and certain other financial service companies since September 1985. Realty Assets, Inc., which owns 35 percent of the common stock of the Managing General Partner, is an affiliate of the Dealer/Manager. Realty Assets, Inc. is controlled by Mr. Wild.
The affairs of the Partnership are conducted by AAA. In addition to Mr. Taylor as president, other officers of AAA include:
Joe Mayer, age 41, is the Chief Operating Officer of AAA. Mr. Mayer has over twenty years of experience in business, accounting, investments and real estate transactions. Mr. Mayer is a certified public accountant and worked for a national public accounting firm. Mr. Mayer received his B.B.A. degree in accounting from the University of Kentucky.
L. Larry Mangum, age 32, serves as Vice President of Finance of AAA. Mr. Mangum is responsible for the financial accounting and reporting relating to the AAA-sponsored partnerships and their properties. He has over 9 years of accounting experience, including four years with a public accounting firm. He previously worked for American General Corporation, a national insurance company, from 1991-1996 as part of a team responsible for supervising their reporting activities. Mr. Mangum received a B.B.A. degree in accounting from Stephen F. Austin State University and subsequently earned the CPA designation.
Other individuals who are specialists in their respective fields are periodically employed by AAA and are engaged on an as-needed basis to perform services on behalf of the Partnership or the Managing General Partner or both. These individuals are not employees of the Partnership or the Managing General Partner nor are they employees of other AAA-sponsored partnerships, although they do perform various services and activities for those partnerships.
These individuals are:
Phil P. Moss, age 66, is the Executive Vice President of AAA. Mr. Moss has been involved as a real estate investor in owning, operating and managing shopping centers, office buildings, apartment projects, retail outlets and various other properties for over 26 years. Specifically in his capacity with AAA, Mr. Moss has been involved in leasing and property acquisitions for various companies since 1988. He received his B.B.A. degree from and did graduate work at the University of Texas. He is a retired Major in the United States Air Force.
Jane Costello, age 40, is a certified public accountant and is responsible for the tax accounting related to the Taylor-sponsored partnerships and their properties. She has over 17 years experience as an accountant including over 4 years with a national public accounting firm and the last seven years with her own accounting practice. Ms. Costello received a B.B.A. degree in accounting from the University of Texas.
Based on a review of Forms 3 and 4 and amendments thereto furnished to Registrant pursuant to Rule 16A-3(e) under the Securities Exchange Act of 1934 (the "Exchange Act") during its most recent fiscal year and Form 5 and amendments thereto furnished to Registrant with respect to its most recent fiscal year and written representations received pursuant to Item 405(b)(2)(i) of Regulation S-K, none of the Individual or Managing General Partners of Registrant or beneficial owners of more than 10% of the Units failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year.
Item 11.

Item 11. Executive Compensation
Other than as discussed in Item 13, neither the Individual General Partner nor any of the directors and officers of the Managing General Partner received any remuneration from the Registrant. The Individual General Partner and his affiliates received fees and reimbursements of expenses from the Partnership as discussed in Note 7 in the accompanying financial statements.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 1996, no person was known by the Registrant to be the beneficial owner of more than 5% of the Units of the Registrant.
Neither General Partner owns any Units nor does any director or officer of the Managing General Partner own any Units.
Item 13.

Item 13. Certain Relationships and Related Transactions
The Individual General Partner and the Managing General Partner received cash distributions from operations during, or with respect to, the fiscal years ended December 31, 1996, 1995 and 1994 of $3,000, $3,000 and $3,000, respectively. For a description of the share of cash distributions from operations, if any, and fees to which the General Partners are entitled, reference is made to the material contained in the Prospectus under the headings CASH DISTRIBUTIONS AND TAX ALLOCATIONS and COMPENSATION TO GENERAL PARTNERS AND AFFILIATES.
The Registrant has entered into arrangements with AAA pursuant to which AAA has assumed direct responsibility for day-to-day management of the Partnership's properties. This service includes the supervision of leasing, rent collection, maintenance, budgeting, employment of personnel, payment of operating expenses, etc. AAA is reimbursed for its actual costs associated with performing the foregoing services, but does not receive a property management fee. In connection with administrative services rendered to the Partnership, $16,200, $22,196 and $24,000 was paid to AAA in 1996, 1995 and 1994, respectively. See Note 7 of the Financial Statements.
Mr. Taylor, President of AAA, receives compensation from AAA for services performed for AAA, which may include services rendered in connection with the Registrant. However, the Managing General Partner believes that any compensation relating to such services is not material.
PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements
Independent Auditors' Report Balance Sheets December 31, 1996 and 1995 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Statements of Partnership Equity for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements for the Years Ended December 31, 1996, 1995 and 1994
(2) Financial Statement Schedules: See (d) below
(3) Exhibits: See (c) below
(b) Reports on Form 8-K filed after September 30, 1996:
None
(c) Exhibits
3 See Exhibit 4 (a)
4 (a) Amended and Restated Certificate and Agreement of Limited Partnership (Incorporated by reference to Exhibit A to the Prospectus of Registrant dated October 27, 1990, contained in Registration Statement No. 33-33504 of Registrant ("the Prospectus")).
(b) Subscription Agreement and Signature Page (Incorporated by reference to Exhibit D to the Prospectus).
10 (a) (1) Lease Agreement between Registrant and Foodmaker, Inc., dated July 2, 1991. (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10 (a) (2) Assignment of Lease between Registrant and Lads Commercial Real Estate Developers dated October 4, 1991. (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10 (a) (3) Assignment of Rents and Leases between Registrant and Northwend Center LP dated November 8, 1991. (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10 (a) (4) Lease Agreement between Registrant and Golden Corral Corporation dated July 14, 1992. (Incorporated by reference to the exhibit filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10 (a) (5) Joint Venture Agreement between Registrant and AAA Net Realty Fund X, Ltd. dated March 15, 1993. {Incorporated by reference to the exhibit filed with the (Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.)
27 Financial Data Schedule
(d) Financial Statement Schedules
Schedule III - Real Estate Owned and Accumulated Depreciation
SIGNATURES
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.
AAA Net Realty Fund IX, Ltd.
March 25, 1997 /s/ H. Kerr Taylor Date H. Kerr Taylor, Individual General Partner
American Asset Advisers Management Corporation IX, Managing General Partner
March 25, 1997 By /s/ H. Kerr Taylor Date H. Kerr Taylor President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.
March 25, 1997 /s/ H. Kerr Taylor Date H. Kerr Taylor President (Chief Executive Officer and Chief Financial Officer) and Director
March 25, 1997 /s/ Stephen K. Wild Date Stephen K. Wild, Director
March 25, 1997 /s/ L. Larry Mangum Date L. Larry Mangum (Principal Accounting Officer)
ANNUAL REPORT ON FORM 10-K ITEMS 8, 14 (a)(1) AND (2) AND 14(d)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND FINANCIAL STATEMENT SCHEDULE
FOR THE YEAR ENDED DECEMBER 31, 1996
AAA NET REALTY FUND IX, LTD.
AAA NET REALTY FUND IX, LTD.
Page
FINANCIAL STATEMENTS
Independent Auditors' Report Balance Sheets, December 31, 1996 and 1995 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 Statements of Partnership Equity (Deficit) for the Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Notes to Financial Statements for the Years Ended December 31, 1996, 1995 and 1994 to
FINANCIAL STATEMENT SCHEDULE: Schedule III Real Estate Owned and Accumulated Depreciation for the Year Ended December 31, 1996
All other financial statement schedules are omitted as the required information is either inapplicable or is included in the financial statements or related notes.
INDEPENDENT AUDITORS' REPORT
AAA Net Realty Fund IX, Ltd.
We have audited the accompanying balance sheets of AAA Net Realty Fund IX, Ltd. as of December 31, 1996 and 1995, and the related statements of operations, partnership equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index. These financial statements and the Financial Statement Schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of AAA Net Realty Fund IX, Ltd. as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Houston, Texas February 14, 1997
AAA NET REALTY FUND IX, LTD. (A LIMITED PARTNERSHIP)
BALANCE SHEETS December 31, 1996 AND 1995
1996 1995
ASSETS CASH AND CASH EQUIVALENTS $ 180,142 $ 181,359
ACCOUNTS RECEIVABLE 1,050 1,050
PROPERTY: Land 1,490,494 1,490,494 Building 2,946,375 2,946,375 4,436,869 4,436,869 Accumulated depreciation (453,030) (359,494)
NET PROPERTY 3,983,839 4,077,375
OTHER ASSETS: Organization costs, net of accumulated amortization of $242,575 and $211,352, respectively - 31,223 Syndication costs, net of accumulated amortization of $566,003 and $493,157, respectively - 72,845
TOTAL OTHER ASSETS - 104,068
TOTAL ASSETS $ 4,165,031 $ 4,363,852
LIABILITIES AND PARTNERSHIP EQUITY
LIABILITIES: Accounts payable $ 12,953 $ 20,487
TOTAL LIABILITIES 12,953 20,487
PARTNERSHIP EQUITY (DEFICIT): General partners (4,886) (4,588) Limited partners 4,156,964 4,347,953 TOTAL PARTNERSHIP EQUITY 4,152,078 4,343,365
TOTAL LIABILITIES AND PARTNERSHIP EQUITY $ 4,165,031 $ 4,363,852
See Notes to Financial Statements
AAA NET REALTY FUND IX, LTD. (A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 REVENUES Rental income $ 494,299 $ 494,299 $ 492,608
TOTAL REVENUES 494,299 494,299 492,608
EXPENSES Administrative expenses 16,200 22,196 24,000 Accounting fees 7,410 7,781 7,800 Legal & professional fees 6,727 9,282 2,755 Other 1,485 485 3,042 Amortization 104,069 161,715 161,715 Depreciation 93,536 93,536 93,535
TOTAL EXPENSES 229,427 294,995 292,847
INCOME FROM OPERATIONS 264,872 199,304 199,761
OTHER INCOME Interest income 5,303 6,417 3,754
TOTAL OTHER INCOME 5,303 6,417 3,754
NET INCOME $ 270,175 $ 205,721 $ 203,515
ALLOCATION OF NET INCOME: General partners $ 2,702 $ 2,057 $ 2,035 Limited partners 267,473 203,664 201,480
$ 270,175 $ 205,721 $ 203,515
NET INCOME PER UNIT $ 50.12 $ 38.16 $ 37.75
UNITS OUTSTANDING 5,390.5 5,390.5 5,390.5
See Notes to Financial Statements
AAA NET REALTY FUND IX, LTD. (A LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERSHIP EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Limited Partners Partners Total
PARTNERSHIP EQUITY (DEFICIT) December 31, 1993 $ (2,680) $4,853,804 $4,851,124
DISTRIBUTIONS ($84.00 per Limited Partnership Unit) (3,000) (452,802) (455,802)
NET INCOME 2,035 201,480 203,515
PARTNERSHIP EQUITY (DEFICIT) December 31, 1994 (3,645) 4,602,482 4,598,837
DISTRIBUTIONS ($85.00 per Limited Partnership Unit) (3,000) (458,193) (461,193)
NET INCOME 2,057 203,664 205,721
PARTNERSHIP EQUITY (DEFICIT) December 31, 1995 (4,588) 4,347,953 4,343,365
DISTRIBUTIONS ($85.05 per Limited Partnership Unit) (3,000) (458,462) (461,462)
NET INCOME 2,702 267,473 270,175
PARTNERSHIP EQUITY (DEFICIT) December 31, 1996 $ (4,886) $4,156,964 $4,152,078
See Notes to Financial Statements
AAA NET REALTY FUND IX, LTD. (A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 270,175 $ 205,721 $ 203,515
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation 93,536 93,536 93,535 Amortization 104,069 161,716 161,715 Decrease in accounts receivable - - 12,370 Increase (decrease) in accounts payable (7,535) 4,268 16,219
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 460,245 465,241 487,354
CASH FLOWS FROM FINANCING ACTIVITIES Distributions (461,462) (461,193) (455,802)
NET CASH FLOW USED IN FINANCING ACTIVITIES (461,462) (461,193) (455,802)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,217) 4,048 31,552
CASH AND CASH EQUIVALENTS, Beginning of year 181,359 177,311 145,759
CASH AND CASH EQUIVALENTS, End of year $ 180,142 $ 181,359 $ 177,311
See Notes to Financial Statements
AAA NET REALTY FUND IX, LTD. (A LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AAA Net Realty Fund IX, Ltd. (the "Partnership") is a limited partnership formed February 1, 1990, under the laws of the State of Nebraska. The Partnership commenced operations as of June 6, 1990. American Asset Advisers Management Corporation IX (a Nebraska corporation) is the Managing General Partner and H. Kerr Taylor is the Individual General Partner. The offering period for subscriptions terminated June 5, 1992, with a total of 5,390.5 Units having been subscribed at an offering price of $1,000 per Unit.
The Partnership was formed to acquire commercial properties for cash. The Partnership will own, lease, operate, manage and eventually sell the properties. The supervision of the operations of the properties is managed by American Asset Advisers Realty Corporation ("AAA"), a related party.
BASIS OF ACCOUNTING
The financial records of the Partnership 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 statement of cash flows, the Partnership 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 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 lease method under which the properties are recorded at cost. Rental income is recognized ratably over the life of the lease and depreciation is charged based upon the estimated useful life of the property.
The Partnership's lease agreements do not provide for contingent rentals.
The Partnership obtains an appraisal on each property prior to a property's acquisition and also performs an annual valuation update to evaluate potential impairment for each property for which an appraisal is older than twelve months. This valuation is based on capitalization of income for each property, a review of current market conditions and any significant events or factors which would indicate a potential impairment to the value of a property.
DEPRECIATION
Buildings are depreciated using the straight-line method over an estimated useful life of 31.5 years.
ORGANIZATION COSTS
Organization costs incurred in the raising of capital through the sale of partnership Units are amortized on a straight-line basis over five years.
SYNDICATION COSTS
Syndication costs incurred in the raising of capital through the sale of partnership Units are amortized on a straight-line basis over five years.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL INFORMATION
No cash was paid for income taxes or interest during 1996, 1995 or 1994.
FEDERAL INCOME TAXES
All income and expense items flow through to the partners for tax purposes. Consequently, no provisions for federal or state income taxes is provided in the accompanying financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments, consisting of cash, cash equivalents, accounts receivable and liabilities approximate their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. PARTNERSHIP EQUITY
The Managing General Partner, American Asset Advisers Management Corporation IX, and the Individual General Partner, H. Kerr Taylor, have made capital contributions in the amounts of $990 and $10, respectively. All other contributions have been made by the limited partners. The General Partners shall not be obligated to make any other contributions to the capital of the Partnership, except that, in the event that the General Partners have negative balances in their capital accounts after dissolution and winding up of, or withdrawal from, the Partnership, the General Partners will contribute to the Partnership an amount equal to the lesser of the deficit balances in their capital accounts or 1.01% of the total capital contributions of the limited partners over the amount previously contributed by the General Partners.
3. ALLOCATIONS AND DISTRIBUTIONS
All income, profits, gains and losses of the Partnership for each fiscal year, other than any gain or loss realized upon the sale, exchange or other disposition of any of the Partnership properties, shall be allocated as follows: (a) net loss shall be allocated 99% to the limited partners, .99% to the Managing General Partner and .01% to the Individual General Partner; and (b) net income will be allocated first in the ratio, and to the extent, net cash flow is distributed to the partners for such year and any additional income for such year will be allocated 99% to the limited partners, 1% to the General Partners.
For income tax purposes, the gain realized upon the sale, exchange or other disposition of any property will be allocated as follows:
a. first, to and among the partners in an amount equal to the negative balances in their respective capital accounts (pro rata based on the relative amounts of such negative balances);
b. then, to each limited partner until the balance in such limited partner's capital account equals the amount to be distributed to such limited partner in the first tier of the distributions of net proceeds of sale;
c. then, to the General Partners, until the balance in their capital accounts equals the amounts to be distributed to the General Partners in the second tier of distributions of net proceeds of sale;
d. then, 85% to the limited partners and 15% to the General Partners; and,
e. thereafter, the Partners shall be allocated gain or loss in order to meet Treasury Regulation regarding qualified income offset requirements.
Any loss on the sale, exchange, or other disposition of any property shall be allocated 99% to the limited partners and 1% to the General Partners.
4. OPERATING LEASES
A summary of minimum future rentals, exclusive of any renewals, under noncancellable operating leases in existence at December 31, 1996 are as follows:
1997 $ 495,299 1998 $ 496,299 1999 $ 496,299 2000 $ 496,299 2001 $ 455,085 2002-2009 $ 1,652,994
5. MAJOR TENANTS
The Partnership's operations are all related to the acquisition and leasing of commercial real estate properties. The following schedule summarizes rental income by lessee for 1996, 1995 and 1994:
1996 1995 1994 Foodmaker (Texas) $ 63,735 $ 63,735 $ 62,044 Tandy Corporation (Tennessee) $ 164,844 $ 164,844 $ 164,844 Payless ShoeSource/ WaldenBooks (Texas) $ 74,000 $ 74,000 $ 74,000 Golden Corral Corporation (Texas) $ 191,720 $ 191,720 $ 191,720 Total $ 494,299 $ 494,299 $ 492,608
6. INCOME RECONCILIATION
A reconciliation of net income for financial reporting purposes to income for federal income tax purposes is as follows for the year ended December 31:
1996 1995 1994
Net income for financial reporting purposes: $ 270,175 $ 205,721 $ 203,515
Amortization for financial reporting purposes not deductible for tax purposes: 72,844 113,200 113,200
Income for tax reporting purposes: $ 343,019 $ 318,921 $ 316,715
7. RELATED PARTY TRANSACTIONS
The Partnership Agreement provides for the reimbursement for administrative services necessary for the prudent operation of the Partnership and its assets with the exception that no reimbursement is permitted for rent, utilities, capital equipment, salaries, fringe benefits or travel expenses allocated to the Individual General Partner or to any controlling persons of the Managing General Partner. In connection with administrative services rendered to the Partnership, $16,200, $22,196 and $24,000 was incurred and paid to AAA in 1996, 1995 and 1994, respectively.


ITEM 1. Business.
The Company was incorporated under the laws of Utah on April 11, 1986 and subsequently reorganized under the laws of Nevada on December 30, 1993. The Company's reorganization plan was formulated for the purpose of changing the state of domicile and provided that the Company form a new corporation in Nevada which acquired all of the contractual obligations, shareholder rights and identity of the Utah corporation, and then the Utah corporation was dissolved. The Company is in the developmental stage, and its operations to date have been limited to the sale of shares to Capital General Corporation and the gifts of shares to the giftees. The Company is in the process of investigating potential business ventures which, in the opinion of management, will provide a source of eventual profit to the Company. Such involvement may take many forms, including the acquisition of an existing business or the acquisition of assets to establish subsidiary businesses. The Company's management does not expect to remain involved as management of an acquired business; presently unidentified individuals would be retained for such purposes.
As an unfunded venture, the Company will be extremely limited in its attempts to locate potential business situations for investigation. However, the Company's officers, directors and major shareholder have undertaken to make loans to the Company in amounts sufficient to enable it to satisfy its reporting and other obligations as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates, and that the Company's status as a publicly-held corporation will enhance its ability to locate such potential business ventures.
No assurance can be given as to when the Company may locate suitable business opportunities and such opportunities may be difficult to locate; however, the Company intends to actively search for potential business ventures for the next five years. The Company intends not to allocate any incoming funds specifically, should there be any in the future, to general use for the purpose of seeking, investigating and acquiring or becoming engaged in a business opportunity. Decisions concerning these matters may be made by management without the participation or authorization of the shareholders.
Management anticipates that due to its lack of funds, and the limited amount of its resources, the Company may be restricted to participation in only one potential business venture. This lack of diversification should be considered a substantial risk because it will not permit the Company to offset potential losses from one venture against gains from another.
Business opportunities, if any arise, are expected to become available to the Company principally from the personal contacts of its officers and directors. While it is not expected that the Company will engage professional firms specializing in business acquisitions or reorganizations, such firms may be retained if funds become available in the future, and if deemed to be advisable. Opportunities may thus become available from professional advisers, securities broker-dealers, venture capitalists, members of the financial community, and other sources of unsolicited proposals. In certain circumstances, the Company may agree to pay a finder's fee or other form of compensation, including perhaps one-time cash payments, payments based upon a percentage of revenues or sales volume, and/or payments involving the issuance of securities, for services provided by persons who submit a business opportunity in which the Company shall decide to participate, although no contracts or arrangements of this nature presently exist. The Company is unable to predict at this time the costs of locating a suitable business opportunity.
The Company will not restrict its search to any particular business, industry or geographical location, and reserves the right to evaluate and to enter into any type of business opportunity, in any stage of their development (including the "start up" stage), in any location. In seeking a business venture, Management will not be influenced primarily by an attempt to take advantage of the anticipated or perceived appeal of a specific industry, management group, or product or industry, but rather will be motivated by the Company's business objective of seeking long term capital appreciation in their real value. In addition, the Exchange Act reporting requirements require the filing of the Form 8-K disclosing any businesses acquired and requires certified financial statements of such companies. These reporting requirements may substantially limit the businesses which may be available for possible acquisition candidates.
The analysis of business opportunities will be undertaken by or under the supervision of the Company's management, none of whom is a professional analyst and none of whom have significant general business experience. Among the factors which management will consider in analyzing potential business opportunities are the available technical, financial and managerial resources; working capital and financial requirements; the history of operation, if any; future prospects; the nature of present and anticipated competition; potential for further research, development or exploration; growth and expansion potential; profit potential; the perceived public recognition or acceptance of products or services; name identification, and other relevant factors.
It is not possible at present to predict the exact manner in which the Company may participate in a business opportunity. Specific business opportunities will be reviewed and, based upon such review, the appropriate legal structure or method of participation will be decided upon by management. Such structures and methods may include, without limitation, leases, purchase and sale agreements, license, joint ventures; and may involve merger, consolidation or reorganization. The Company may act directly or indirectly through an interest in a partnership, corporation or other form of organization. However, it is most likely that the Company will acquire a business venture by conducting a reorganization involving the issuance of the Company's restricted securities. Such a reorganization may involve a merger (or combination pursuant to state corporate statutes, where one of the entities dissolves or is absorbed by the other), or it may occur as a consolidation, where a new entity is formed and the Company and such other entity combine assets in the new entity. A reorganization may also occur, directly or indirectly, through subsidiaries, and there is no assurance that the Company would be the surviving entity. Any such reorganization could result in additional dilution to the book value of the shares and loss of control of a majority of the shares. The Company's present directors may be required to resign in connection with a reorganization.
A reorganization may be structured in such a way as to take advantage of certain beneficial tax consequences available in business reorganizations, in accordance with provisions of the Internal Revenue Code of 1986 (as amended). Pursuant to such a structure, the number of shares held prior to the reorganization by all of the Company's shareholders might be less than 20% of the total shares to be outstanding upon completion of the trans action. Substantial dilution of percentage equity ownership may result to the giftees, in the discretion of management.
Generally, the issuance of securities in a reorganization transaction would be undertaken in reliance upon one or more exemptions from the registration provisions of applicable federal securities laws, including the exemptions provided for non-public or limited offerings, distributions to persons resident in only one state and similar exemptions provided by state law. Shares issued in a reorganization transaction based upon these exemptions would be considered "restricted" securities under the 1933 Act, and would not be available for resale for a period of two years, in accordance with Rule 144 promulgated under the 1933 Act. However, the Company might undertake, in connection with such a reorganization transaction, certain registration obligations in connection with such securities.
The Company may choose to enter into a venture involving the acquisition of or merger with a company which does not need substantial additional capital but desires to establish a public trading market for its securities. Such a company may desire to consolidate its operations with the Company through a merger, reorganization, asset acquisition, or other combination, in order to avoid possible adverse consequences of undertaking its own public offering. (Such consequences might include expense, time delays or loss of voting control.) In the event of such a merger, the Company may be required to issue significant additional shares, and it may be anticipated that control over the Company's affairs may be transferred to others. It should also be noted that this type of business venture might have the effect of depriving the giftee shareholders of the protection of federal and state securities laws, which normally affect the process of a company's becoming publicly held.
It is likely that the investigation and selection of business opportunities will be complex, time-consuming and extremely risky. However, management believes that even though the Company will have limited capital, the fact that its securities will be publicly-held will make it a reasonably attractive business prospect for other firms.
As part of their investigation of acquisition possibilities, the Company's management may meet with executive officers of the business and its personnel; inspect its facilities; obtain independent analysis or verification of the information provided, and conduct other reasonable measures, to the extent permitted by the Company's limited resources and management's limited expertise. Generally, the Company intends to analyze and make a determination based upon all available information without reliance upon any single factor as controlling.
In all likelihood, the Company's management will be inexperienced in the areas in which potential businesses will be investigated and in which the Company may make an acquisition or investment. Thus, it may become necessary for the Company to retain consultants or outside professional firms to assist management in evaluating potential investments, and to hire managers to run or oversee the operations of its acquisitions or investments. The Company can give no assurance that it will be able to find suitable consultants or managers. The Company intends not to employ any of its affiliates, officers, directors or principal shareholders as consultants. The Company has no policy regarding the use of consultants, however, if management, in its discretion, determines that it is in the best interests of the Company, management may seek consultants to review potential merger or acquisition candidates. It is anticipated that the total amount of fees paid to any consultant would not exceed $5,000.00 per transaction. The fee, it is anticipated, would be paid by Capital General Corporation or by the potential target company. There are currently no contracts or agreements between any consultant and any companies that are searching for "shell" companies with which to merge. There have been no preliminary discussions or understandings between the Company and any market maker regarding the participation of any such market maker in the aftermarket for the Company's securities inasmuch as no market for the securities is expected to arise due to the lack of transferability on the Company's shares until an acquisition is made and a Form 8-K is filed with the Commission.
It may be anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention, and substantial costs for accountants, attorneys and others. Should a decision thereafter be made not to participate in a specific business opportunity, it is likely that costs already expended would not be recoverable. It is also likely, in the event a transaction should eventually fail to be consummated, for any reason, that the costs incurred by the Company would not be recoverable. The Company's officers and directors are entitled to reimbursement for all expenses incurred in their investigation of possible business ventures on behalf of the Company, and no assurance can be given that if the Company has available funds they will not be depleted in such expenses.
In addition to the severe limitations placed upon the Company by virtue of its unfunded status, the Company will also be limited, in its investigation of possible acquisitions, by the reporting requirements of the Securities Exchange Act of 1934, pursuant to which certain information must be furnished in connection with any significant acquisitions. The Company would be required to furnish, with respect to any significant acquisition, certified financial statements for the acquired company, covering one, two or three years (depending upon the relative size of the acquisition). Consequently, acquisition prospects which do not have the requisite certified financial statements, or are unable to obtain them, may be inappropriate for acquisition under the present reporting requirements of the 1934 Act.
The Company does not intend to take any action which would render it an investment company under The Investment Companies Act of 1940 (the "1940 Act"). The 1940 Act defines an investment company as one which (1) invests, reinvests or trades in securities as its primary business, (2) issues face-amount certificates of the installment type or (3) invests, reinvests, owns, holds or trades securities or owns or acquires investment securities having a value exceeding 40 percent of the value of its total assets (exclusive of Government securities and cash items) on an unconsolidated basis. The above 40 percent limitation may be exceeded so long as a company is primarily engaged, directly or through wholly-owned subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities. A wholly-owned subsidiary is defined as one which is at least 95% owned by the company.
Neither the Company nor any of its officers or directors are registered as investment advisers under the Investment Advisers Act of 1940 (the "Advisers Act"), and so there is no authority to pursue any course of business or activities which would render the Company or its management "investment advisers" as defined in the Advisers Act. Management believes that registration under the Advisers Act is not required and that certain exemptions are available, including the exemptions for persons who may render advice to a limited number of other persons and who may advise other persons located in one state only.
The Company expects to encounter intense competition in its efforts to locate suitable business opportunities in which to engage. The primary competition for desirable investments may come from other small companies organized and funded for similar purposes, from small business development corporations and from public and private venture capital organizations. As the Company will be completely unfunded, it can fairly be said that all of the competing entities will have significantly greater experience, resources, facilities, contacts and managerial expertise than the Company and will, consequently, be in a better position than the Company to obtain access to, and to engage in, business opportunities. Due to its lack of funds, the Company may not be in a position to compete with larger and more experienced entities for business opportunities which are low-risk. Business opportunities in which the Company may ultimately participate are likely to be highly risky and extremely speculative.
ITEM 2.

ITEM 2. Properties.
The Company owns no properties and utilizes space on a rent-free basis in the office of its principal shareholder, Capital General Corporation. This arrangement is expected to continue until such time as the Company becomes involved in a business venture which necessitates its relocation, as to which no assurances can be given. The Company has no agreements with respect to the maintenance or future acquisition of office facilities, however, if a successful merger/acquisition is negotiated, it is anticipated that the office of the Company will be moved to that of the acquired company.
ITEM 3.

ITEM 3. Legal Proceedings.
On January 7, 1994, the Bureau of Securities of the State of New Jersey filed a complaint in the matter of Capital General Corporation, David R. Yeaman and 74 other named defendants, Nevada and Utah corporations including the Company, which complaint proposes that civil monetary penalties totalling $30,000.00 be assessed against Capital General Corporation for alleged violations of the Uniform Securities Law (1967), N.J.S.A. 49:3-47 et. seq. by (1) selling to 24 New Jersey residents between April 1986 and May 1991, securities in 25 of the 74 above referred to respondent corporations named in the proceeding, including the Company, which were neither registered nor exempt from registration, and (2) making untrue statements of material fact and omitting to state material facts in connection with said New Jersey sales in 6 of the 74 above referred to resident corporations named in the proceeding, not including the Company. Also on January 7, 1994, the Bureau of Securities of the State of New Jersey, based on substantially similar allegations as in the above referred complaint, issued its Order Denying Exemptions and to Cease and Desist. This order summarily denied the exemptions contained in N.J.S.A. 49:3- 50(b), (1), (2), (3), (9), (11) and (12) of the securities of Capital General Corporation and the other 74 respondent corporations, including the Company, except that excluded from the summary denial of the exemption contained in N.J.S.A. 49-3-50(b)(12) is the Offer of Rescission by Capital General Corporation to 24 New Jersey residents pursuant to the offer of rescission which began about April 28, 1993. This order also ordered Capital General Corporation and David Yeaman to Cease and Desist from offering or selling any securities in blind pool corporations into, or from the State of New Jersey.
Capital General and David Yeaman filed answers denying the material allegations of said complaint and resisting the imposition of said civil monetary penalties, and the said Order Denying Exemptions and to Cease and Desist. Subsequently the issues raised in said complaint and order were settled by agreement between the said Bureau of Securities and Mr. Yeaman and Capital General Corporation in a consent order dated July 11, 1994 and approved by an administrative law judge of the State of New Jersey Office of Administrative Law September 2, 1994. Under the terms of said consent order, all claims in the complaint against all named respondents were settled by the payment of $3,000 civil penalty, and the order was modified so that it does not apply to 27 of the respondent companies; however said order does still apply to the Company.
During 1986 and 1987, Capital General gifted very small percentages of stock (usually 100 shares to each giftee) in the following companies, which includes the Company, to approximately 1,000 persons or entities: Amenity, Inc., Dogmatic, Inc., Mystic Industries, Inc., Highland Mfg., Inc., Kowtow, Inc., Noble Industries, Inc., Oryan Capital Corporation, Pegasus Star Enterprise, Inc., Showstoppers, Inc., Hightide, Inc., Grandeur, Inc., Fantastic Industries, Inc., Jugglar, Inc., Xebec Galleon, Inc., Golden Home Health Care Equipment Centers, Inc., Nighthawk Capital, Inc., Instrument Development Corporation, Panther Industries, Inc., Owl Enterprises, Inc., Quail, Inc., GBS Technologies Corporation, H & B Carriers, Inc., Florida Growth Industries, Inc., Macaw, Inc., Longhorn Enterprise, Inc., Koala Corporation, Yahwe Corporation, Star Dolphin, Inc., Jackal, Inc., Hyena Capital, Inc., Gopher, Inc., Flamingo Capital, Inc., Egret, Inc., Cetacean Industries, Inc., Bonito, Inc., Alpaca, Inc., Zeus Enterprise, Inc., Tamarind, Inc., Saber, Inc., Radar, Inc., Quiescent Corporation, Vanadium, Inc., Upsilon, Inc., Why Not?, Inc., Bestmark, Inc., Missouri Illinois Mining Co., Inc.
Capital General did not register the gifts of shares in these companies with the Securities Division of the State of Utah or with the Securities Exchange Commission because it believed these gifts to be outside the scope of the Utah Uniform Securities Act and the Securities Act of 1933 in as much as such acts require registration for sales and do not require registration of gifts. Nevertheless, in connection with the distribution of shares of its subsidiaries, Capital General was found by the Utah Securities Advisory Board, in two decisions affirmed by the Utah State Courts, to have violated the
registration provisions of the Utah Uniform Securities Act. See In re Amenity Inc., No. SD-86-11 (Utah Sec. Adv. Bd. February 18, 1987) aff'd C87-2625 (3d Dist. Ct. September 18, 1987) aff'd sub nom Capital General Corp. v. Utah Dep't of Business Reg., 777 P.2d 494, 498 (Utah Ct. App.) cert. denied, 781 P.2d 873 (Utah S.Ct. 1989); In re H&B Carriers Inc., No. 87-09-28-01 (Utah Sec. Adv. Bd., Apr. 15, 1988) aff'd No. 88-5900053 (3d Dist. Ct. Sept 10, 1990) aff'd sub nom Capital General Corp. v. Utah Dep't of Business Reg., Case No 91-196 (Utah Ct. App. February 10, 1992. All of the remaining companies listed above were parties to the H&B Carriers order.
Both of these actions sought suspension of transactional exemptions respecting the shares of these companies pursuant to Section 14 (3) of the Utah Uniform Securities Act. Capital General defended both actions on the grounds that the Utah Uniform Securities Act did not apply to gifts of securities, that the gifts were good faith gifts specifically exempted by the Act, and that in any event even if it had "sold" shares in violation of the Act, suspension of transactional exemptions was not an authorized remedy under the statute. These defenses were rejected at the administrative agency level, and upon judicial review at the District Court level and by the Utah Court of Appeals.
See also Item 10 regarding legal proceedings against officers and directors.
ITEM 4.

ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the Company's security holders for a vote during the fiscal year ending December 31, 1996.
PART II
ITEM 5.

ITEM 5. Market for Registrant's Common Equity and Related Stockholders Matters.
There currently is not a trading market for the Company's $.001 par value common stock nor has there been a trading market for the Company's stock since its inception.
As of February, 1997, there were 749 record holders of the Company's common stock. The Company has not previously declared or paid any dividends on its common stock and does not anticipate declaring any dividends in the foreseeable future.
ITEM 6.

ITEM 6. Selected Financial Data.
ITEM 7.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The Company has had no operational history and has yet to engage in business of any kind. All risks inherent in new and inexperienced enterprises are inherent in the Company's business. The Company has not made a formal study of the economic potential of any business. At the present, the Company has not identified any assets or business opportunities for acquisition.
As of February, 1997, the Company has no liquidity and no presently available capital resources, such as credit lines, guarantees, etc. and should a merger or acquisition prove unsuccessful, it is possible that the Company may be dissolved by the State of Nevada for failing to file reports, at which point the Company would no longer be a viable corporation under Nevada law and would be unable to function as a legal entity. Should management decide not to further pursue its acquisition activities, management may abandon its activities and the shares of the Company would become worthless. However, the Company's officers, directors and major shareholder, have made an oral undertaking to make loans to the Company in amounts sufficient to enable it to satisfy its reporting requirements and other obligations incumbent on it as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates. The Company's status as a publicly-held corporation may enhance its ability to locate potential business ventures. The loans will be interest free and are intended to be repaid at a future date, if or when the Company shall have received sufficient funds through any business acquisition. The loans are intended to provide for the payment of filing fees, professional fees, printing and copying fees and other miscellaneous fees.
Based on current economic and regulatory conditions, Management believes that it is possible, if not probable, for a company like the Company, without assets or liabilities, to negotiate a merger or acquisition with a viable private company. The opportunity arises principally because of the high legal and accounting fees and the length of time associated with the registration process of "going public". However, should any of these conditions change, it is very possible that there would be little or no economic value for anyone taking over control of the Company.
ITEM 8.

ITEM 8. Financial Statements and Supplementary Data.
See Item 14.
ITEM 9.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
ITEM 10.

ITEM 10. Directors and Executive Officers of the Registrant.
The following table shows the positions held by the Company's officers and directors. The directors were appointed at inception and will serve until the next annual meeting of the Company's stockholders, and until their successors have been elected and have qualified. The officers were appointed to their positions, and continue in such positions, at the discretion of the directors.
Name Age Position Krista Nielson 34 President, Director
David R. Yeaman 50 Secretary/Treasurer, Director
KRISTA NIELSON, has been Director of the Company since inception. In addition to her management position with the Company, she has been since 1986 an officer and director of Capital General Corporation, a Utah-based financial consulting firm, and has been involved in the organization and promotion of various shell companies. Ms. Nielson received a Business degree from Salt Lake Community College in 1987. She serves as an officer and/or director in the following private corporations: Yeaman Enterprises, Inc. and Universal Associates, Inc., family holding companies, Yeaman Auto Sales, Inc., an automobile dealership company, Four Star Ranch, Inc., a farmland development company, Creative Financial Corporation and Visual Impact Corporation, financial consulting companies, and National Stock Transfer, Inc., a stock transfer agency company. Ms. Nielson devotes her time primarily to her role as Vice President of Capital General and to the financial consulting activities in which Capital General engages.
DAVID R. YEAMAN, has been Director of the Company since inception, and, in addition to his management position with the Company, has been President of Capital General Corporation since its inception in 1971 to the present. Mr. Yeaman has been involved in numerous development stage companies since he assisted in organizing Capital General. During the last five years, in connection with Capital General, he has been primarily involved in the organization and promotion of various shell companies. Mr. Yeaman serves as an officer and/or director in the following private corporations: Yeaman Enterprises, Inc., a family holding company, Four Star Ranch, Inc., a farmland development company, Yeaman Auto Sales, Inc., an automobile dealership company, Financial Connections, Inc. and Peak Experience, Inc., financial consulting companies. Mr. Yeaman devotes his time primarily to his role as President of Capital General and to the financial consulting activities in which Capital General engages.
The management of Capital General is essentially the same as that of the Company and, as the Company's largest shareholder, Capital General exerts considerable influence in the election of the Company's officers and directors. Capital General is a private venture capital and financial consulting firm, incorporated in Utah in 1971. Capital General is a closely held corporation with eight shareholders and is not an investment company under The Investment Companies Act of 1940. A majority of the stock of Capital General is owned by Yeaman Enterprises, Inc., a private corporation which is, in turn, owned by certain members of the family of David R. Yeaman; Krista Nielson is also an officer and director of Yeaman Enterprises, Inc.
Management of the Company have, in their various capacities at Capital General over the past ten years, assisted in the organization of approximately 75 corporations similar to the Company which are in varying stages of development and approximately 50 of such corporations have completed a merger/ acquisition transaction. In merger/acquisition transactions similar to those contemplated by the Company, present management would be replaced by new management and additional shares would be issued in consideration for the assets being transferred into the Company. Present management does not anticipate operating the business of the Company subsequent to any acquisition and therefore the future success of the Company will be primarily dependent on new management which is now unknown.
Each of the above directors of the Company is a director of Arrow Management, Inc., Saber Capital, Inc., Vicuna, Inc., Why Not?, Inc., Grandeur, Inc., Kowtow, Inc., Alpaca, Inc., Bonito Industries, Inc., Cetacean Industries, Inc., Star Dolphin, Inc., Flamingo Capital, Inc., Gopher, Inc., Hyena Capital, Inc., Jackal Industries, Inc., Longhorn Inc., Macaw Capital, Inc., Environmental Development Corporation, Ultronics Corporation, Bioethics, Ltd., Quantitative Methods Corporation, and Bio-Chem, Inc. which are companies subject to the requirements of Section 15(d) of the Exchange Act. None of the directors are directors or officers of any other company with a class of securities registered pursuant to Section 12 of the Exchange Act or the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
On February 8, 1996, David R. Yeaman was charged in the United States District Court for the Eastern District of Pennsylvania with conspiracy, wire fraud and fraud in the offer, purchase and sale of securities, in violation of 18 U.S.C. Sections 2, 371 and 1343; 15 U.S.C. Sections 77q(a), 77x, 78j(b), and 78ff; and Rule 10b-5 promulgated by the Securities and Exchange Commission, Title 17, Code of Federal Regulations, Section 240.10b-5 (1986).
On February 22, 1996, Mr. Yeaman entered his not guilty plea to all charges. The allegations against Mr. Yeaman are based on the government's claims that he and five of the other defendants named in the proceeding violated the aforesaid laws by inflating the apparent worth of certain reinsurance companies by leasing them alleged worthless securities. Specifically, it is alleged that Mr. Yeaman, with other defendants, engaged in practices which falsely increased the quoted prices of the securities and misrepresented restricted securities as free trading securities. Based on these allegations, the charges against Mr. Yeaman include one count of conspiracy, seven counts of wire fraud, six counts of securities fraud, and aiding and abetting with respect to each count. This matter is scheduled for trial on March 10, 1997.
The U.S. Securities and Exchange Commission, Securities Act of 1933 Release No. 7008 and Securities Exchange Act of 1934 Release No. 32669 announced that on July 23, 1993, it ordered David R. Yeaman and Capital General Corporation to permanently cease and desist from committing or causing further violations of Section 5(a) and (c) and 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(g) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 and 13d-1(c) thereunder.
Krista Nielson was ordered to permanently cease and desist from committing or causing further violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 12b-20 thereunder. In addition, the Commission ordered the revocation of the registration of the common stock of Altara International, Inc., Arrow Management, Inc., Atlas Equity, Inc., Dynamic Associates, Inc., Energy Systems, Inc., Four Star Ranch, Inc., Panorama Industries, Inc., Partisan Corporation, Quiescent Corporation, Saber, Inc., Upsilon, Inc., Vicuna, Inc., Why Not?, Inc., Xebec Galleon, Inc., Zebu, Inc., and Zeus Enterprises, Inc. pursuant to Section 12(j) of the Exchange Act. The Commission found that each of the issuers had filed a registration statement on Form 10 that contained materially false and misleading statements in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Each of the respondents had submitted an Offer of Settlement consenting to the entry of the Order without admitting or denying the allegations in the Order. Prior to the submission of the Offers of Settlement, Capital General, on behalf of the above mentioned companies, except for Panorama Industries, Inc., filed a registration statement on Form S-1 during December of 1992 to register the common stock of those companies under the Securities Act of 1933. Concurrently with the signing of the Offers of Settlement, the Registration Statement was declared effective on June 30, 1993. A Post Effective Amendment was filed and declared effective September 2, 1993. Although the registration of the common stock under Section 12(g) of the 1934 Act was revoked on July 23, 1993, the companies are now registered and reporting under the Securities Act of 1933 by virtue of the filing of Form S-1 as indicated by Commission File No. 33-55254.
ITEM 11.

ITEM 11. Executive Compensation.
The Company has made no arrangements for the remuneration of its officers and directors, except that they will be entitled to receive reimbursement for actual, demonstrable out-of-pocket expenses, including travel expenses if any, made on the Company's behalf in the investigation of business opportunities. No remuneration has been paid to the Company's officers or directors prior to the filing of this form. There are no agreements or understandings with respect to the amount or remuneration that officers and directors are expected to receive in the future. Management takes no salaries from the Company and does not anticipate receiving any salaries in the foreseeable future. No present prediction or representation can be made as to the compensation or other remuneration which may ultimately be paid to the Company's management, since upon the successful consummation of a business opportunity, substantial changes may occur in the structure of the Company and its management. At such time, contracts may be negotiated with new management requiring the payment of annual salaries or other forms of compensation which cannot presently be anticipated. Use of the term "new management" is not intended to preclude the possibility that any of the present officers or directors of the Company might be elected to serve in the same or similar capacities upon the Company's decision to participate in one or more business opportunities.
Capital General and the Company's management may benefit directly or indirectly by payments of consulting fees, payment of finders fees to others from Capital General's consulting fees, sales of insiders' stock positions in whole or in part to the private company, the Company or management of the Company, or through the payment of salaries, or any other methods of payments through which insiders or current investors receive funds, stock, other assets or anything of value whether tangible or intangible. There are no plans, proposals, arrangements or understandings with respect to the sale of additional securities to affiliates, current shareholders or others prior to the location of a business opportunity.
ITEM 12.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 1996, information regarding the beneficial ownership of shares by each person known by the Company to own five percent or more of the outstanding shares, by each of the directors and by the officers and directors as a group.
(1)Capital General Corporation, Yeaman Enterprises, Inc., Krista Nielson and David R. Yeaman may be deemed to be the Company's "parents" and "promoters," pursuant to the Rules and Regulations promulgated under the 1933 Act.
(2)Capital General Corporation is a private corporation. The majority of its shares (80%) are owned by another private corporation, Yeaman Enterprises, Inc. The stockholders of Yeaman Enterprises are members of the family of David R. Yeaman, who is also an officer and director of the Company and Capital General. Mr. Yeaman's beneficial ownership of the securities of the Company includes shares directly owned by Capital General and Yeaman Enterprises. Although Yeaman Enterprises is nominally owned by Mr. Yeaman's children, Mr. Yeaman beneficially owns shares nominally owned by Yeaman Enterprises in that he has the power to vote or direct the voting of the shares and the power to dispose of or to direct the disposition of the shares. Other owners of the stock of Capital General include Krista Nielson, the Company's president. Mr. Yeaman and Ms. Nielson control and have beneficial ownership of the shares owned by Capital General and Yeaman Enterprises and exercise shared voting power and shared investment power over those shares.
ITEM 13.

ITEM 13. Certain Relationships and Related Transactions.
No officer, director, nominee for election as a director, or associate of such officer, director or nominee is or has been in debt to the Company during the last fiscal year. However, the Company's officers, directors and major shareholder, have made an oral undertaking to make loans to the Company in amounts sufficient to enable it to satisfy its reporting requirements and other obligations incumbent on it as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates. The Company's status as a publicly-held corporation may enhance its ability to locate potential business ventures. The loans will be interest free and are intended to be repaid at a future date, if or when the Company shall have received sufficient funds through any business acquisition. The loans are intended to provide for the payment of filing fees, professional fees, printing and copying fees and other miscellaneous fees.
PART IV
ITEM 14.

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Financial Statements and Financial Statement Schedules.
Financial Statements - December 31, 1996, 1995 and 1994.
Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal year ending December 31, 1996.
SIGNATURES
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.
RADAR RESOURCES, INC.
Date: February 25, 1997 By: s\Krista Nielson ------------------------------------------- Krista Nielson, President, CEO and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 25, 1997 By: s\Krista Nielson ------------------------------------------- Krista Nielson, President, CEO and Director
Date: February 25, 1997 By: s\David R. Yeaman ------------------------------------------- David R. Yeaman, Secretary/Treasurer, CFO and Director
SMITH & COMPANY CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS OF: CRANDALL BUILDING SUITE 700 AMERICAN INSTITUTE OF 10 WEST 100 SOUTH CERTIFIED PUBLIC ACCOUNTANTS SALT LAKE CITY, UTAH 84101 UTAH ASSOCIATION OF TELEPHONE: (801) 575-8297 CERTIFIED PUBLIC ACCOUNTANTS FACSIMILE: (801) 575-8306 - - --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
Board of Directors RADAR RESOURCES, INC. (A Development Stage Company)
We have audited the accompanying balance sheets of RADAR RESOURCES, INC. (a development stage company) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period of April 11, 1986 (date of inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RADAR RESOURCES, INC. (a development stage company) as of December 31, 1996 and 1995 and the results of its operations, changes in stockholders' equity and its cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period of April 11, 1986 (date of inception) to December 31, 1996 in conformity with generally accepted accounting principles.
s\Smith & Company CERTIFIED PUBLIC ACCOUNTANTS
Salt Lake City, Utah February 28, 1997
RADAR RESOURCES, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS December 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting Methods The Company recognizes income and expenses based on the accrual method of accounting.
Dividend Policy: The Company has not yet adopted any policy regarding payment of dividends.
Organization Costs: The Company amortized its organization costs over a five year period.
Income Taxes: The Company records the income tax effect of transactions in the same year that the transactions enter into the determination of income, regardless of when the transactions are recognized for tax purposes. Tax credits are recorded in the year realized. Since the Company has not yet realized income as of the date of this report, no provision for income taxes has been made.
In February, 1992, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which supersedes substantially all existing authoritative literature for accounting for income taxes and requires deferred tax balances to be adjusted to reflect the tax rates in effect when those amounts are expected to become payable or refundable. The Statement was applied in the Company's financial statements for the fiscal year commencing January 1, 1993.
At December 31, 1996 a deferred tax asset has not been recorded due to the Company's lack of operations to provide income to use the net operating loss carryover of $2,000 which expires as follows:
Year Ended Expires Amount
December 31, 1986 December 31, 2001 $ 1,950 December 31, 1987 December 31, 2002 10 December 31, 1988 December 31, 2003 10 December 31, 1989 December 31, 2004 10 December 31, 1990 December 31, 2005 10 December 31, 1991 December 31, 2006 10 ---------- $ 2,000 ==========
NOTE 2: DEVELOPMENT STAGE COMPANY The Company was incorporated under the laws of the State of Utah on April 11, 1986 and has been in the development stage since incorporation. On December 30, 1993, the Company was dissolved as a Utah corporation and reincorporated as a Nevada corporation.
NOTE 3: CAPITALIZATION On the date of incorporation, the Company sold 1,000,000 shares of its common stock to Capital General Corporation for $2,000 cash for an average consideration of $.002 per share. The Company's authorized stock includes 100,000,000 shares of common stock at $.001 par value.
NOTE 4: RELATED PARTY TRANSACTIONS The Company neither owns or leases any real property. Office services are provided, without charge, by Capital General Corporation. Such costs are immaterial to the financial statements, and, accordingly, have not been reflected therein. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.