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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, 2003 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 of principal executive office) (Zip Code)
Registrant's telephone number, including area code (314) 515-2000
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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
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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
Item 9a. Controls and Procedures........................................................10
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.................................11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.......................................................................11
SIGNATURES.......................................................................................13
INDEX TO EXHIBITS................................................................................14
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 of 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.
3
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
As of the 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
The Company has not issued Mortgage-Backed Securities since 1991.
The Company's operations are directed toward maintenance of the remaining
Cornerstone Mortgage-Backed securities.
EDJ and the Company exercised the option to repurchase collateral for
Series 5 during the twelve months ended December 31, 2003. Since the Company
has surrendered control of the future economic benefit in the collateral,
the underlying certificates and the associated collateral are not recorded
on the Company's balance sheet. In addition, any transactions relating to
selling of certificates do not impact the Company's income statement.
There is no outstanding principal balance or remaining collateral value as
of December 31, 2003. EDJ plans to liquidate the Company during 2004.
4
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Financial Data
Page
----
Report of Independent Auditors............................. 6
Balance Sheets as of December 31, 2003 and 2002............ 7
Notes to Balance Sheets.................................... 8
All schedules are omitted because they are either not required, or
inapplicable, or the information is included in the balance sheets or notes
thereto.
5
REPORT OF INDEPENDENT AUDITORS
------------------------------
To Cornerstone Mortgage Investment Group II, Inc.:
In our opinion, the accompanying balance sheets present fairly, in all
material respects, the financial position of Cornerstone Mortgage Investment
Group II, Inc. (the "Company") at December 31, 2003 and 2002, in conformity
with accounting principles generally accepted in the United States of
America. 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 of these statements
in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audits 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 19, 2004
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, 2003 AND 2002
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2003 2002
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ASSETS
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CASH $ 500 $ 500
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STOCKHOLDER'S EQUITY
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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
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DECEMBER 31, 2003 AND 2002
--------------------------
1. GENERAL
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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.
2. SECURITIES TRANSACTIONS
-----------------------
Cornerstone II last offered mortgage-backed securities in 1991. Series 5,
the last oustanding series, was repurchased during 2003. The Company's
common stock will be redeemed by EDJ during 2004.
8
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 sheets. In addition any
transactions relating to selling of the Certificates do not impact
Cornerstone II's income statements.
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 two years ended December 31, 2001 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 years prior to and through July 11,
2002 there were 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. Prior to
and through July 11, 2002, there were 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.
9
The Company engaged PricewaterhouseCoopers LLP ("PwC") as its new
independent accountants as of July 11, 2002. Prior to 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 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.
Item 9a. CONTROLS AND PROCEDURES
Based upon an evaluation performed as of the end of the period covered by
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.
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.
10
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction J(2)(c) of Form 10-K.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
There were no fees paid to PricewaterhouseCoopers LLP in 2003 or 2002.
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 Auditors
Balance Sheets as of December 31, 2003 and 2002
Notes to Balance Sheets
2. Financial Statement Schedules:
-----------------------------
All schedules are omitted because they are either not
required, or 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).
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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.
12
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
29th day of March, 2004.
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 29, 2004
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/s/ Philip R. Schwab President, Chief
- ----------------------------------- Executive Officer
Philip R. Schwab and Director March 29, 2004
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/s/ John Beuerlein Secretary and Director March 29, 2004
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John Beuerlein
13
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit Page
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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
14