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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2002 Commission file number 33-11459
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CORNERSTONE MORTGAGE INVESTMENT GROUP II, INC.
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(Exact name of registrant as specified in its Articles of Incorporation)
DELAWARE 43-1432378
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 Progress Parkway
Maryland Heights, Missouri 63043
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(Address and principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
------------------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of filing date:
COMMON STOCK, $1.00 Par Value - 500 Shares
The Registrant meets the conditions set forth in General Instruction J(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
CORNERSTONE MORTGAGE INVESTMENT GROUP II, INC.
TABLE OF CONTENTS
PART I Page
----
Item 1. Business................................................. 3
Item 2. Properties............................................... 3
Item 3. Legal Proceedings........................................ 3
Item 4. Submission of Matters to a Vote of Security Holders...... 3
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters...................................... 4
Item 6. Selected Financial Data.................................. 4
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 4
Item 8. Financial Statements and Supplementary Data.............. 5
Item 9. Change in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 9
PART III
Item 10. Directors and Executive Officers of the Registrant.......10
Item 11. Executive Compensation...................................10
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................10
Item 13. Certain Relationships and Related Transactions...........10
Item 14. Controls and Procedures..................................10
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................11
SIGNATURES.................................................................12
INDEX TO EXHIBITS..........................................................15
2
PART I
Item 1. BUSINESS
Cornerstone Mortgage Investment Group II, Inc. (the "Company") was incorporated
in the state of Delaware on December 22, 1986, as a wholly owned, limited
purpose subsidiary of Edward D. Jones & Co., L.P. ("EDJ" or the "Partnership"),
a Missouri limited partnership.
The Company was organized for the purpose of structuring and selling
Mortage-Backed Securities collateralized by Federal agency mortgage-backed
securities. EDJ organized the Company and currently owns all the issued and
outstanding capital stock of the Company. The Company does not intend to engage
in any business or investment activities other than issuing and selling
Mortgage-Backed Securities and acquiring, owning, holding and assigning
collateral and investing cash balances on an interim basis in high quality,
short-term securities, some or all of which may be purchased from or through
EDJ. Article 3 of the Company's Certificate of Incorporation limits the
Company's business and investment activities to the above purposes and to any
activities incidental and necessary or convenient for such purposes. Article 7
of the Company's Certificate of Incorporation prohibits the Company, without the
consent of the trustee under any indenture pursuant to which Mortgage-Backed
Securities are issued, from (1) dissolving or liquidating, in whole or in part;
(2) merging or consolidating with another corporation other than a corporation
wholly owned, directly or indirectly, by EDJ or (3) amending Articles 3 or 7 of
the Company's Certificate of Incorporation.
Item 2. PROPERTIES
The Company has no physical properties appropriate for description herein.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of filing date, all outstanding shares of the Company's common stock are
owned by EDJ and are not traded on any stock exchange or in the over-the-counter
market.
Item 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cornerstone II has not issued Mortgage-Backed Securities since 1991.
Cornerstone II's operations are directed toward maintenance of the remaining
Cornerstone Mortgage-Backed securities. The outstanding principal balance for
series 5 is $1,402,000 at December 31, 2002.
Cornerstone II has the option to repurchase collateral for any series which had
a current collateral principal balance that is less than 10% of the original
collateral principal balance. No such options were exercised during 2002.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Financial Data
Page No.
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Report of Independent Accountants................................... 6
Balance Sheets as of December 31, 2002 and 2001..................... 7
Notes to Balance Sheets............................................. 8
All schedules are omitted because they are not required, inapplicable or the
information is included in the balance sheets or notes thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To Cornerstone Mortgage Investment Group II, Inc.:
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Cornerstone Mortgage Investment Group II,
Inc. (the Company) at December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. This financial
statement is the responsiblity of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of this statement in accordance with auditing standards
generally accepted in the United States of America, which required that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion. The
financial statement of the Company as of December 31, 2001 was audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion of that statement in their report
dated February 22, 2002.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2003
6
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CORNERSTONE MORTGAGE INVESTMENT GROUP II, INC.
BALANCE SHEETS
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AS OF DECEMBER 31, 2002 AND 2001
--------------------------------
2002 2001
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ASSETS
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CASH $ 500 $ 500
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STOCKHOLDER'S EQUITY
--------------------
COMMON STOCK - $1.00 par value, 150,000 shares
authorized, 500 issued and outstanding $ 500 $ 500
========== ==========
The accompanying notes are an integral part of these balance sheets.
7
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
CORNERSTONE MORTGAGE INVESTMENT GROUP II, INC.
NOTES TO BALANCE SHEETS
-----------------------
DECEMBER 31, 2002 AND 2001
--------------------------
1. GENERAL
-------
Cornerstone Mortgage Investment Group II, Inc. ("Cornerstone II") is a Delaware
corporation and a wholly owned subsidiary of Edward D. Jones & Co., L.P.
("EDJ"), a Missouri limited partnership. Cornerstone II was incorporated on
December 22, 1986, for the limited purpose of structuring and selling
mortgage-backed securities (the "Certificates"), which are backed by Government
National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC) and Federal National Mortgage Association (FNMA) Securities
(collectively, the "Collateral").
All costs related to the organization of Cornerstone II have been absorbed by
EDJ. In addition, EDJ has paid all offering expenses and assumed all future
revenues and expenses in connection with prior security transactions. Due to the
absence of revenue or expense generating transactions, no income statement is
presented. The balance of stockholder's equity consists solely of common stock
issued on December 30, 1986; therefore, no statement of stockholder's equity is
presented. All funds were obtained from capital transactions; therefore, no
statement of cash flows is presented.
8
2. SECURITIES TRANSACTIONS
-----------------------
Cornerstone II last offered mortgage-backed securities in 1991. Series 7 was
repurchased during 2001.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
Since Cornerstone II has surrendered control of the future economic benefit in
the collateral, the underlying certificates and the associated collateral are
not recorded on Cornerstone II's balance sheet. In addition any transactions
relating to selling of certificates does not impact Cornerstone II's income
statement. The outstanding principal balance and remaining collateral value
relating to series 5 issued by Cornerstone II are $1,402,000 and $1,465,510 as
of December 31, 2002.
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 11, 2002, the Company dismissed Arthur Andersen LLP ("Arthur Andersen")
as its independent accountants. The reports of Arthur Andersen on the financial
statements for the past two years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with its audits for the two most recent
years and through July 11, 2002 there have been no disagreements with Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Arthur Andersen would have caused them to make
reference thereto in their report on the financial statements for such years.
During the two most recent years and through July 11, 2002, there have been no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)). The Company
has provided Arthur Andersen a copy of the foregoing disclosure.
The Company requested that Arthur Andersen furnish it with a letter addressed to
the Securities and Exchange Commission stating whether or not it agrees with the
foregoing statements as reported in the Company's July 11, 2002 Form 8-K. The
Company was notified by Arthur Andersen that they are no longer issuing such
acknowledgements.
The Company engaged PricewaterhouseCoopers LLP ("PwC") as its new independent
accountants as of July 11, 2002. During the two most recent fiscal years and
through July 11, 2002, the Company had not consulted with PwC regarding either
(i) the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Registrant's financial statements, and either a written report was provided
to the Company or oral advice was provided that PwC concluded was an
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important factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K, or a reportable event, as that term is defined
in Item 304(a)(1)(v) of Regulation S-K.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 14. CONTROLS AND PROCEDURES
Based upon an evaluation performed within 90 days of the date of this report,
the registrant's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective.
There have been no signifciant changes in internal controls or other factors
that significantly affect these controls subsequent to the date of the
evaluation.
10
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
1. Financial Statements:
--------------------
Report of Independent Accountants
Balance Sheets as of December 31, 2002 and 2001
Notes to Balance Sheets
2. Financial Statement Schedules:
-----------------------------
All schedules are omitted because they are not required,
inapplicable, or the information is included in the balance
sheets or notes thereto.
3. Exhibits:
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Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3(a) to Registration
Statement on Form S-11, as amended, File No. 33-11459).
Bylaws of the Company as amended (incorporated by
reference to Exhibit 3(b) to Registration Statement on Form
S-11, as amended, File No. 33-11459).
Deposit Agreement dated as of February 20, 1987, between
the Company, as Depositor, and The Bank of New York, as
Custodian (incorporated by reference to Exhibit 2 to the
Current Report on Form 8-K filed on March 6, 1987).
Trust Agreement dated as of February 20, 1987, between
the Company, as Depositor, and The Bank of New York, as
Successor Trustee (incorporated by reference to Exhibit 3 to
the Current Report on Form 8-K filed on March 6, 1987).
Trust Agreement dated as of February 20, 1987, between
the Company, as Depositor, Bank of New York, as Successor
Trustee (incorporated by reference to Exhibit 4 to the
Current Report on Form 8-K filed on March 6, 1987).
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley act of 2002
(incorporated by reference to Exhibit 99)
Reports on Form 8-K
Change in certifying accountants, incorporated herein by
reference to the 8-K filed July 16, 2002.
11
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, on this 28th day of
March, 2003.
CORNERSTONE MORTGAGE INVESTMENT GROUP II, INC.
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(Registrant)
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.
/s/ John C. Heisler Chairman of the Board,
- -------------------------------- Chief Financial Officer,
John C. Heisler Chief Accounting
Officer and Director March 28, 2003
--------------
/s/ Philip R. Schwab President, Chief
- -------------------------------- Executive Officer
Philip R. Schwab and Director March 28, 2003
--------------
/s/ John Beuerlein Secretary and Director March 28, 2003
- -------------------------------- --------------
John Beuerlein
12
Chief Executive Officer Certification
I, Philip R. Schwab, certify that:
1. I have reviewed this annual report on Form 10-K of the Cornerstone Mortage
Investment Group II, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition and results of operations of the Company as of, and for, the
periods presented in this annual report.
4. The Company's other certifying officer and I are respnsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and have;
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to us by others
within the Company, particularly during the period in which this report is
prepared;
b) evaluated the effectiveness of the Company's disclsoure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of our disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Company's other certifying officer and I have dislosed, based on our most
recent evaluation, to the company's auditors and the Executive Comittee:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize, and report financial data and have identified for the Company's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant roll in the Company's internal controls.
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ Philip R. Schwab
--------------------
Philip R. Schwab
Chief Executive Officer
March 28, 2003
13
Chief Financial Officer Certification
I, John C. Heisler, certify that:
1. I have reviewed this annual report on Form 10-K of the Cornerstone Mortage
Investment Group II, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in the report, fairly present in all material respects the
financial condition and results of operations of the Company as of, and for, the
periods presented in this annual report.
4. The Company's other certifying officer and I are respnsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and have;
a)designed such disclosure controls and procedures to ensure that
material information relating to the Company is made known to us by others
within the Company, particularly during the period in which this report is
prepared;
b) evaluated the effectiveness of the Company's disclsoure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of our disclosure controls and procedures based on our evaluation
as of the Evaluation Date.
5. The Company's other certifying officer and I have dislosed, based on our most
recent evaluation, to the company's auditors and the Executive Comittee:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize, and report financial data and have identified for the Company's
auditors any material weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other associates who have a significant roll in the Company's internal controls.
6. The Company's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ John C. Heisler
-------------------
John C. Heisler
Chief Financial Officer
March 28, 2003
14
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit Page
- ------ ---------------------- ----
3.1 Certificate of Incorporation of the Company, as amended
(incorporated by reference to Exhibit 3(a) to Registration
Statement on Form S-11, as amended, File No.
33-11459)...........................................................*
3.2 Bylaws of the Company as amended (incorporated by
reference to Exhibit 3(b) to Registration Statement on
Form S-11, as amended, File No. 33-11459)...........................*
4.1 Deposit Agreement dated as of February 20, 1987,
between the Company, as Depositor, and Bank of New York,
(incorporated by reference to Exhibit 2 to the Current Report
on Form, 8-K filed on March 6, 1987)................................*
4.2 Trust Agreement dated as of February 20, 1987, between
the Company, as Depositor, and Bank of New York
as Trustee (incorporated by reference to
Exhibit 3 to the Current Report on Form 8-K filed on
March 6, 1987)......................................................*
4.3 Trust Agreement dated as of February 20, 1987, between
the Company, as Depositor, and Bank of New York,
as Successor Trustee (incorporated by reference to
Exhibit 4 to the Current Report on Form 8-K filed
on March 6, 1987....................................................*
- ----------
*Incorporated by reference
15