UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period Ended September 30, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Transition Period From
________________to_______________.
Commission file number 000-22847
AMEN Properties, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 54-1831588
---------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
303 W. Wall Street, Suite 2300
Midland, TX 79701
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(Address of Principal Executive Offices)
(432-684-3821)
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter periods 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
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Applicable Only to Corporate Issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: Common Stock, $ .01 Par Value:
2,206,215 shares outstanding as of October 31, 2005.
Transitional Small Business Disclosure Format (check one):
Yes No X
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INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Balance Sheet at September 30, 2005 (Unaudited) 1
Consolidated Statement of Operations--for the three and nine months ended
September 30, 2005 and 2004 (Unaudited) 2
Consolidated Statement of Cash Flows-- for the nine months ended
September 30, 2005 and 2004 (Unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 21
Item 3. Controls and Procedures 30
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 31
Item 6. Exhibits 31
Signatures 33
Exhibits
11. Computation of Earnings Per Share. 31.1 Certification of Chief
Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer Pursuant to 18 USC ss. 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC ss. 1350.
AMEN Properties, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes A4, D and F) $ 2,326,453
Accounts receivable (notes A7 and A14) 1,634,476
Other current assets 105,129
-------------
Total current assets $ 4,066,058
RESTRICTED CERTIFICATE OF DEPOSIT (note G) 2,100,000
PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated
depreciation of $1,149,916 (notes A8, A9 and I) 8,186,545
ROYALTY INTERESTS, at cost net of accumulated depletion
of $ 22,992 (notes A8, A9 and E) 139,862
LONG-TERM INVESTMENTS (notes A5 and F) 62,350
OTHER ASSETS
Note receivable (note H) 150,000
Deferred costs (note A10) 36,108
Deposits 1,124,533
Other assets 71,999
-------------
Total other assets 1,382,640
-------------
TOTAL ASSETS $ 15,937,455
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,089,865
Accrued liabilities (note J) 476,040
Current portion of long-term obligations (note M) 254,564
Accrued interest payable 51,858
Deferred revenue 95,862
-------------
Total current liabilities $ 1,968,189
LONG-TERM OBLIGATIONS, less current portion (note M) 7,282,626
DEFERRED REVENUE 40,503
MINORITY INTEREST (note A12) 331,146
COMMITMENTS AND CONTINGENCIES (note O) -
STOCKHOLDERS' EQUITY (note C)
Convertible preferred stock, $.001 par value, 5,000,000 shares authorized;
80,000 Series "A" shares issued and outstanding, convertible into
a total of 616,447 shares of common stock at the option of the holders (note A13) 80
80,000 Series "B" shares issued and outstanding, convertible into
a total of 233,317 shares of common stock at the option of the holders (note A13) 80
125,000 Series "C" shares issued and outstanding, convertible into
a total of 500,000 shares of common stock at the option of the holders (note A13) 125
Common stock, $.01 par value, 20,000,000 shares authorized;
2,206,215 shares issued and outstanding 22,063
Additional paid-in capital 44,633,448
Accumulated deficit (38,340,805)
----------
Total stockholders' equity 6,314,991
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,937,455
============
The accompanying summary of accounting policies and footnotes are an
integral part of these consolidated financial statements.
1
AMEN Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three and Nine Months Ended September 30,
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
------------- ---------------- --------------- ----------------
Operating revenue
Rental revenue $ 894,749 $ 627,426 $ 2,237,068 $ 1,807,135
Retail electricity revenue 2,545,563 - 3,981,948 -
------------- ---------------- --------------- ----------------
Total operating revenue 3,440,312 627,426 6,219,016 1,807,135
------------- ---------------- --------------- ----------------
Operating expense
Cost of goods and services 2,453,362 - 3,876,737 -
Rental property operations 554,428 439,479 1,412,537 1,072,851
General and administrative 329,312 77,562 759,877 291,102
Depreciation, amortization and depletion 106,284 76,650 302,790 222,075
------------- ---------------- --------------- ----------------
Total operating expenses 3,443,386 593,691 6,351,941 1,586,028
------------- ---------------- --------------- ----------------
(Loss) income from operations (3,074) 33,735 (132,925) 221,107
------------- ---------------- --------------- ----------------
Other (expense) income
Interest income 14,037 2,641 41,574 8,695
Interest expense (130,748) (146,518) (393,243) (427,110)
Loss on sale of investments - - - (509)
Other income 11,218 15,987 37,632 48,973
------------- ---------------- --------------- ----------------
Total other (expense) income (105,493) (127,890) (314,037) (369,951)
------------- ---------------- --------------- ----------------
Loss from continuing operations before income taxes
and minority interest (108,567) (94,155) (446,962) (148,844)
Income taxes (note A11) - - - -
Minority interest (41,899) (28,404) (78,492) (90,323)
------------- ---------------- --------------- ----------------
Net (loss) from continuing operations (150,466) (122,559) (525,454) (239,167)
Net income from discontinued business component (note K) - 109,191 - 347,499
------------- ---------------- --------------- ----------------
NET (LOSS) INCOME $ (150,466) $ (13,368) $ (525,454) $ 108,332
============= ================ =============== ================
Net (loss) income per common share (basic)
Net loss from continuing operation $ (.07) $ (.06) $ (.24) $ (.11)
Net income from discontinued business component - .05 - .15
------------- ---------------- --------------- ----------------
Net (loss) income $ (.07) $ (.01) $ (.24) $ .04
============= ================ =============== ================
Net (loss) income per common share (diluted)
Net loss from continuing operation $ (.07) $ (.04) $ (.24) $ (.08)
Net income from discontinued business component - .03 - .11
------------- ---------------- --------------- ----------------
Net (loss) income $ (.07) $ (.01) $ (.24) $ .03
============= ================ =============== ================
Weighted average number of common shares outstanding -
basic 2,203,310 2,201,356 2,202,015 2,201,356
============= ================ =============== ================
Weighted average number of common shares outstanding -
diluted 2,203,310 3,051,120 2,202,015 3,051,120
============= ================ =============== ================
The accompanying summary of accounting policies and footnotes are an
integral part of these consolidated financial statements.
2
AMEN Properties, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30,
(Unaudited)
2005 2004
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Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net (loss) income $ (525,454) $ 108,332
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation, depletion and amortization 302,790 222,075
Impairment of note receivable 86,555 -
Loss on sale of investments - 520
Minority interest 78,492 90,323
Changes in operating assets and liabilities:
Accounts receivable (1,561,741) 2,974
Other assets - (14,630)
Deferred costs (27,730) -
Accounts payable 974,761 26,631
Accrued and other liabilities (78,402) 70,403
Deferred revenue 66,237 14,952
Discontinued operations (note K) - 203,171
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Net cash (used in) provided by operating activities (684,492) 724,751
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (475,979) (484,396)
Deposits (1,124,533) -
Sales and maturity of investments - 50,000
Purchase of royalty interests - (162,854)
Acquisition of limited partnership interest (note B) - (208,346)
Repayments of notes receivable 13,000 5,556
Purchases of discontinued property and equipment - (906)
------------- -------------
Net cash used in investing activities (1,587,512) (800,946)
------------- -------------
Cash flows from financing activities:
Repayments of notes payable (1,573,898) (156,831)
Net proceeds from issuance of common and preferred stock 2,024,455 -
Minority interest distributions - (129,905)
------------- -------------
Net cash provided by (used in) financing activities 450,557 (286,736)
------------- -------------
Net decrease in cash and cash equivalents (1,821,447) (362,931)
Cash and cash equivalents at beginning of period 4,147,900 2,741,527
------------- -------------
Cash and cash equivalents at end of period $ 2,326,453 $ 2,378,596
============= =============
Non - cash investing and financing activities:
In January 2004, the Company acquired additional
interest with a note payable to the sellers (see note B) $ - $ 250,778
============= =============
The accompanying summary of accounting policies and footnotes are an
integral part of these consolidated financial statements.
3
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
Effective October 2002, AMEN formed NEMA Properties, LLC ("NEMA"), a
Nevada limited liability company; AMEN Minerals, LP ("Minerals"), a
Delaware limited partnership; and AMEN Delaware, LP ("Delaware"), a
Delaware limited partnership, to pursue acquisitions as authorized by
stockholders on September 19, 2002. AMEN Properties, Inc. and
Subsidiaries is a self-administered and self-managed Delaware
corporation. Effective July 2004, AMEN Properties, Inc. and
Subsidiaries and affiliates (collectively referred to as the "Company")
formed W Power and Light, LP ("W Power"), a Delaware limited
partnership to enter into the retail electricity market in Texas.
The Company's business purpose is to acquire investments in commercial
real estate, oil and gas royalties, retail electricity operations and
stabilized cash flowing businesses or assets. As of September 30, 2005,
the Company, through Delaware's investment in a limited partnership,
has a commercial real estate portfolio consisting of majority ownership
in two office properties located in Midland, Texas comprising an
aggregate of approximately 428,560 square feet of gross leasable area.
The investment was obtained through Delaware's acquisitions of a
partnership interest in TCTB Partners, Ltd. ("TCTB") a Texas limited
partnership, totaling approximately 71.3%. Through its investment in
Minerals, AMEN has acquired an investment interest in an oil and gas
royalty trust and other oil and gas royalties. Through the Company's
investment in W Power, Amen entered the retail electricity market in
the state of Texas. The real estate operations of the Company are
primarily conducted through Delaware of which AMEN is the sole general
partner and the retail electricity operations are primarily conducted
through W Power of which Amen is the sole general partner.
2. Restatement of Previously Issued Financial Statements
During the third quarter of 2005, the Company received a letter from
the Securities and Exchange Commission, dated August 31, 2005,
concerning the Company's previous reporting of the December 31, 2004
distribution and sale of the Company's Lubbock, Texas real estate
property. As a result, the Company has restated its consolidated
financial statements for the three months and nine months ended
September 30, 2004, to reflect reclassification of the operations of
the Lubbock, Texas real estate property as a discontinued business
component, see Note K.
4
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
The effects of the restatement on the Consolidated Statement of
Operations for the three months and nine months ended September 30,
2004 are as follows:
Three months ended September 30, 2004 As previously
reported As restated
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Revenue $ 1,107,570 $ 627,426
Operating expenses 919,986 593,691
----------- -------------
Income from operations 187,584 33,735
Other income (expense) (127,890) (127,890)
Minority interest (73,062) (28,404)
----------- -------------
Net loss from continuing operations (13,368) (122,559)
Net income from discontinued business component - 109,191
----------- -------------
Net (loss) $ (13,368) $ (13,368)
=========== =============
Nine months ended September 30, 2004 As previously
reported As restated
------------- -------------
Revenue $ 3,255,452 $ 1,807,135
Operating expenses 2,544,871 1,586,028
----------- -------------
Income from operations 710,581 221,107
Other income (expense) (369,952) (369,951)
Minority interest (232,297) (90,323)
----------- -------------
Net income (loss) from continuing operations 108,322 (239,167)
Net income from discontinued business component - 347,499
----------- -------------
Net income $ 108,322 $ 108,322
=========== =============
3. Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its majority-owned/controlled subsidiaries and affiliates.
Intercompany balances and transactions have been eliminated.
Management uses estimates and assumptions in preparing the consolidated
financial statements in accordance with accounting principles generally
accepted in the United States of America. Those estimates and
assumptions affect the reported amounts of assets, liabilities,
revenues and expenses in the consolidated financial statements, and the
disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
4. Cash Equivalents
The Company considers cash on hand, cash on deposit in banks, money
market mutual funds and highly liquid debt instruments purchased with a
maturity of three months or less to be a cash equivalent.
5. Investments
The Company invests in U.S. government bonds and treasury notes,
municipal bonds, certificates of deposit and corporate bonds.
Investments with original maturities greater than three months but less
than twelve months from the balance sheet date are short-term
investments. Those investments with original maturities greater than
twelve months from the balance sheet date are long-term investments.
5
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
The Company's marketable securities are classified as
available-for-sale as of the balance sheet date, and are reported at
fair value with unrealized gains and losses, net of tax, recorded in
stockholders' equity. Realized gains or losses and permanent declines
in value, if any, on available-for-sale investments are reported in
other income or expense as incurred.
6. Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, investments, accounts
receivable, notes receivable, and accounts payable approximate fair
value because of the relatively short maturity of these instruments.
The fair value of the fixed rate debt, based upon current interest
rates for similar debt instruments with similar payment terms and
expected payoff dates, would be approximately $6,873,031 as of
September 30, 2005. Disclosure about fair value of financial
instruments is based on pertinent information available to management
as of September 30, 2005.
7. Accounts Receivable
Management regularly reviews tenant and electricity accounts receivable
and estimates the necessary amounts to be recorded as an allowance for
uncollectibility. These reserves are established on a individual basis
and are based upon, among other factors, the period of time an amount
is past due and the financial condition of the obligor.
Unbilled revenue is accrued based on the estimated amount of unbilled
power delivered to customers using the average customer billing rates.
Unbilled revenue also includes accruals for estimated Transmission and
Distribution Service Provider ("TDSP") charges and monthly service
charges applicable to the estimated usage for the period.
At September 30, 2005, accounts receivable consisted of the following:
Tenant receivables $ 239,180
Billed electricity receivables 646,058
Unbilled electricity receivables 665,015
Other receivables 93,155
Allowance for doubtful accounts (8,932)
-------------
Accounts receivable, net $ 1,634,476
=============
8. Depreciation, Amortization and Depletion
Property, plant and equipment are stated at cost. Depreciation is
determined using the straight-line method over the estimated useful
lives ranging from three to forty years. Leasehold improvements are
amortized over the shorter of the life of the asset or the remaining
lease term. Intangible assets are amortized over the useful lives of
five to ten years using the straight-line method. Costs for the repair
and maintenance of property and equipment are expensed as incurred.
Royalty acquisitions are stated at cost. Depletion is determined using
the units-of-production method based on the estimated oil and gas
reserves.
6
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
9. Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying
value of its long-lived assets and identifiable intangibles by
monitoring and evaluating changes in circumstances that may indicate
that the carrying amount of the asset may not be recoverable. Examples
of events or changes in circumstances that indicate that the
recoverability of the carrying amount of an asset should be assessed
include but are not limited to the following: a significant decrease in
the market value of an asset, a significant change in the extent or
matter in which an asset is used or a significant physical change in an
asset, a significant adverse change in legal factors or in the business
climate that could affect the value of an asset or an adverse action or
assessment by a regulator, an accumulation of costs significantly in
excess of the amount originally expected to acquire or construct an
asset, and/or a current period operating or cash flow loss combined
with a history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with an asset
used for the purpose of producing revenue. The Company considers
historical performance and anticipated future results in its evaluation
of potential impairment. Accordingly, when indicators or impairments
are present, the Company evaluates the carrying value of these assets
in reaction to the operating performance of the business and future
discounted and nondiscounted cash flows expected to result from the use
of these assets. Impairment losses are recognized when the sum of
expected future cash flows are less than the assets' carrying value.
10. Deferred Costs
Deferred costs primarily consist of deferred financing costs. Deferred
financing costs are amortized as interest expense over the life of the
related debt.
11. Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under this method, deferred tax assets
and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
12. Minority Interest
Minority interest represents the interest of unit holders of TCTB,
other than the Company, in the net earnings and net equity of TCTB. The
unit holder minority interest is adjusted at the end of each period to
reflect the ownership at that time. The unit holder minority interest
in TCTB was approximately 28.7% at September 30, 2005 and 2004.
13. Contingently Convertible Securities
The Company has outstanding Series A Preferred Stock ("Series A"),
Series B Preferred Stock ("Series B") and Series C Preferred Stock
("Series C") whose terms enable the holder, under certain conditions,
to convert such securities into 1,349,764 shares of the Company's
Common Stock as shown in the following table.
7
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Number of Purchase Conversion Number of
Series of Shares Price Rate Common Shares
------ --------- ------------- --------- -------------
A 80,000 $ 2,000,000 $ 3.2444 616,447
B 50,000 500,000 3.2444 154,111
B 10,000 100,000 3.424 29,206
B 20,000 200,000 4.000 50,000
C 125,000 2,000,000 4.000 500,000
Conversion of Series A, Series B and Series C is at the option of the
holder thereof, at any time and from time to time, into such number of
fully paid and nonassessable shares of Common Stock as is determined by
dividing the original Series A, Series B and Series C issue price by
the conversion price in effect at the time of conversion. The
contingently convertible securities have not been included in the
calculation of diluted earnings per share where their effect is
antidilutive.
14. Revenue and Cost Recognition
Leases with tenants are accounted for as operating leases. Minimum
annual rentals are recognized on a straight-line basis over the terms
of the respective leases. As of September 30, 2005, there were no
deferred tenant receivables.
The Company records electricity sales under the accrual method and
these revenues are recognized upon delivery of electricity to the
customers' meters. Electric services not billed by month-end are
accrued based upon estimated deliveries to customers as tracked and
recorded by the Electric Reliability Council of Texas ("ERCOT")
multiplied by the Company's average billing rate per kilowatt hour
("kwh") in effect at the time.
The flow technique of revenue calculation relies upon ERCOT settlement
statements to determine the estimated revenue for a given month. Supply
delivered to our customers for the month, measured on a daily basis,
provides the basis for revenues. ERCOT provides net electricity
delivered data in three frames. Initial daily settlements become
available approximately 17 days after the day being settled.
Approximately 45 days after the day being settled, a resettlement is
provided to adjust the initial settlement to the actual supply
delivered based on subsequent comparison of prior forecasts to actual
meter reads processed. A final resettlement is provided approximately
180 days after power is delivered, marking the last routine settlement
adjustment to the power deliveries for that day.
Sales represent the total proceeds from energy sales, including pass
through charges from the TDSPs billed to the customer at cost. Cost of
goods and services ("COGS") include electric power purchased, sales
commissions, and pass through charges from the TDSPs in the areas
serviced by the Company. TDSP charges are costs for metering services
and maintenance of the electric grid. TDSP charges are determined by
regulated tariffs established by the Public Utility Commission of Texas
("PUCT").
Bilateral wholesale costs are incurred through contractual arrangements
with wholesale power suppliers for firm delivery of power at a fixed
volume and fixed price. The Company is typically invoiced for these
wholesale volumes at the end of each calendar month for the volumes
purchased for delivery during the month, with payment due 10 to 20 days
after the end of the month.
8
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Balancing/ancillary costs are based on the aggregate customer load and
are determined by ERCOT through a multiple step settlement process.
Balancing costs/revenues are related to the differential between supply
provided by the Company through its bilateral wholesale supply and the
supply required to serve the Company's customer load. The Company
endeavors to minimize the amount of balancing/ancillary costs through
its load forecasting and forward purchasing programs.
15. Earnings Per Share
There were no preferred stock dividends for the periods ended September
30, 2005 or 2004. The effects of Series A, Series B and Series C
Convertible Preferred Stock is not included in the computation of
diluted earnings per share for any periods in which their effect is
antidilutive.
16. Environmental
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws regulate asbestos in
buildings that require the Company to remove or mitigate the
environmental effects of the disposal of the asbestos at the buildings.
Environmental costs that relate to current operations are expensed or
capitalized as appropriate. Costs are expensed when they relate to an
existing condition caused by past operations and will not contribute to
current or future revenue generation. Liabilities related to
environmental assessments and/or remedial efforts are accrued when
property or services are provided or can be reasonably estimated.
17. New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board (FASB)
issued a revised Interpretation No. 46, Consolidation of Variable
Interest Entities, replacing the original Interpretation issued in
January 2003. The revised Interpretation provides guidance on when
certain entities should be consolidated or the interests in those
entities should be disclosed by enterprises that do not control them
through majority voting interest. Under the revised Interpretation,
entities are required to be consolidated by enterprises that lack
majority voting interest when equity investors of those entities have
insignificant capital at risk or they lack voting rights, the
obligation to absorb expected losses, or the right to receive expected
returns. Entities identified with these characteristics are called
variable interest entities and the interests that enterprises have in
these entities are called variable interests. These interests can
derive from certain guarantees, leases, loans or other arrangements
that result in risks and rewards that are disproportionate to the
voting interests in the entities. The provisions of the revised
Interpretation must be immediately applied for variable interest
entities created after January 31, 2003 and for variable interests in
entities commonly referred to as "special purpose entities." For all
other variable interest entities, implementation is required by March
31, 2004.
9
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
In July 2003, the FASB issued SFAS No. 149, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 improves financial reporting of derivatives by
requiring contracts with comparable characteristics be accounted for
similarly. This Statement also incorporates clarifications of the
definition of a derivative. SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. Management will consider
the impact of this Statement on its financial statements for future
periods.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability. Many of those
instruments were previously classified as equity such as common or
preferred shares that are mandatorily redeemable-that embody an
unconditional obligation requiring the issuer to redeem the shares by
transferring its assets at a specified date or upon an event that is
certain to occur. The provisions of this Statement shall be effective
for the first fiscal period beginning after December 15, 2004.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS
No. 151 amends the guidance in Accounting Research Bulletin (ARB) No.
43, Chapter 4, Inventory Pricing, to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that those items be
recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, the Statement requires
that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. The provisions of this Statement are effective for
inventory costs incurred during fiscal years beginning after June 15,
2005, with early application encouraged.
In December 2004, the FASB issued Statement No. 123 (revised),
Accounting for Stock-Based Compensation. This Statement eliminates the
alternative to use Accounting Principles Board (APB) Opinion No. 25's
intrinsic value method of accounting. This Statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also
addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of
those instruments. An entity will measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant date fair value of those instruments, except in certain
circumstances. The provisions of this Statement become effective as of
the beginning of the first annual reporting period that begins after
December 15, 2005.
In December 2004, the FASB issued SFAS No. 152, Accounting for Real
Estate Time-Sharing Transactions. This Statement amends SFAS No. 66 and
SFAS No. 67 to state the guidance for (a) incidental operations and (b)
costs incurred to sell real estate projects does not apply to real
estate time-sharing transactions. The accounting for those operations
and costs is subject to the guidance in Statement of Position (SOP)
04-2, Accounting for Real Estate Time-Sharing Transactions. This
Statement is effective for financial statements for fiscal years
beginning after June 15, 2005.
10
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets. This Statement amends APB Opinion No. 29, to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The
provisions of this Statement shall be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
In May 2004, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. This Statement replaces APB Opinion 20 and FASB Statement
No.3 and changes the requirements for the accounting for and reporting
of a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. It also applies to changes
required by an accounting pronouncement in the unusual instance that
the pronouncement does not include specific transition provisions. When
a pronouncement includes specific transition provisions, those
provisions should be followed. The provisions of this Statement shall
be effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005.
Management does not believe the new pronouncements will have a material
impact on its financial statements.
18. Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the 2005 presentation.
NOTE B - BUSINESS COMBINATIONS
In January 2004, the Company purchased an additional 6.485% limited
partnership interest in TCTB by issuing debt of $250,778 (see note M)
and a cash payment of $208,346. The allocation of the purchase price
resulted in the Company recording an increase in property, plant and
equipment of $269,843 and reducing the minority interest investment by
$189,281.
NOTE C - ISSUANCE OF SERIES C PREFERRED STOCK AND COMMON STOCK
On February 3, 2005, the Company finalized an agreement involving a
private placement under Regulation D for the new Series C Preferred
Stock and common stock purchase warrants (the "Warrants") to accredited
investors (the "Purchase Agreement"). The Company closed the sale and
issuance of 125,000 Series C Preferred Stock and 250,000 Warrants
pursuant to the Purchase Agreement, as amended by the Second Amendment
(the "Amended Purchase Agreement"), on March 1, 2005. The purchase
price consisted of a total of $2 million in cash and limited guaranties
from the investors in favor of Western National Bank covering the
credit facility described in Note M. No underwriting discounts or
commissions were paid in connection with this issuance. Certain facts
related to the exemption from registration of the issuance of the
securities under securities law are set forth in the Amended Purchase
Agreement as representations of the investors, including without
limitation their investment intent, their status as accredited
investors, the information provided to them, the restricted nature of
the securities, and similar matters.
11
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
The Series C ranks equally to the Company's outstanding Series A and
the outstanding Series B and prior to the Common Stock, par value $.01
per share, of the Company (the "Common Stock") upon liquidation of the
Company. The Series A, Series B, Series C and the Common Stock are
equal as to the payment of dividends. Each share of Series C is
convertible into four shares of Common Stock, for a total of 500,000
shares, subject to adjustment pursuant to anti-dilution provisions. The
Warrants are exercisable into a total of 250,000 shares of Common Stock
at an initial exercise price of $4.00 (also subject to adjustment
pursuant to anti-dilution provisions), and expire three years from the
date of issuance.
On July 29, 2005, the Company issued 4,859 shares of common stock for
$24,455 upon the exercise of certain stock options covering 341 and
4,518 shares with a strike price of $3.88 and $5.12, respectively.
NOTE D - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at three financial institutions,
which at times may exceed federally insured limits. At September 30,
2005, the Company had approximately $1,756,158 of uninsured cash and
cash equivalents. The Company has not experienced any losses in such
accounts and believes that it is not exposed to any significant credit
risks on such accounts.
The Company's revenues are derived principally from uncollateralized
rents from tenants and retail power customers. The concentration of
credit risk in two industries affects its overall exposure to credit
risk because tenants/customers may be similarly affected by changes in
economic and other conditions.
NOTE E - ROYALTY INTERESTS
In 2004, the Company, through its wholly-owned subsidiary Amen
Minerals, LP, completed the acquisition of two separate royalty
interests, one in the state of Texas and one in the state of Oklahoma.
The total consideration paid by the Company for the royalty interests
was $162,854. Under accounting principles generally accepted in the
United States of America, revenues and expenses are recognized on an
accrual basis. Royalty income is generally received one to two months
following the month of production and the Company used estimates to
accrue royalty income for the quarters ended September 30, 2005 and
2004. For the three months and nine months ended September 30, 2005,
royalty income was $15,644 and $47,925, respectively.
NOTE F - CASH, CASH EQUIVALENTS AND INVESTMENTS
At September 30, 2005, the Company's cash and cash equivalents
consisted of cash in banks of approximately $2,326,453.
Securities available-for-sale in the accompanying consolidated balance
sheet at September 30, 2005 total $62,350. The aggregate market value,
cost basis, and unrealized gains and losses of securities
available-for-sale, by major security type as of September 30, 2005 are
as follows:
12
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Gross
Market Cost Unrealized
Value Basis Losses
------------- ------------ ------------
As of September 30, 2005:
Other securities $ 62,350 $ 62,350 $ -
============= ============ ============
NOTE G - RESTRICTED CERTIFICATE OF DEPOSIT
The Company holds a $2,100,000 certificate of deposit with a financial
institution which bears interest of 1.98% and matures on December 28,
2005. The certificate of deposit collateralizes the term note with a
financial institution (see note M) and is restricted. The certificate
of deposit is recorded at cost, which approximates market value. The
certificate is non-negotiable and non-transferable, and may incur
substantial penalties for withdrawal prior to maturity.
NOTE H - NOTE RECEIVABLE
On December 13, 2002, the Company received a note receivable in the
amount of $275,000, with an annual interest rate of 6.00%, from a
third-party for the sale of substantially all assets associated with a
direct mail advertising service. The note receivable is due in
quarterly installments, beginning April 10, 2003, equal to 20% of the
gross profit from operations for the prior calendar quarter period,
with all remaining unpaid principal and interest due on January 10,
2010. As of September 30, 2005, the note receivable was valued at
$150,000, net of an impairment allowance of $86,555. Because the
current maturities are not reasonably estimable at September 30, 2005,
the entire principal balance is reported as a non-current asset.
NOTE I - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September
30, 2005:
Buildings $ 8,467,366
Furniture, fixtures and equipment 141,999
Tenant improvements 568,099
Land 158,997
-------------
9,336,461
Less: accumulated depreciation (1,149,916)
-------------
$ 8,186,545
Depreciation expense for nine months ended September 30, 2005
and 2004, was $276,032 and $197,365, respectively.
13
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
NOTE J - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at September 30, 2005:
Accrued property taxes $ 139,008
Accrued TDSP charges 141,866
Other accrued liabilities 195,166
-------------
$ 476,040
=============
NOTE K - DISCONTINUED BUSINESS COMPONENT
On January 4, 2004, the Company announced that, effective December 31,
2004, the TCTB partners agreed to distribute its Lubbock, Texas office
building to the TCTB partners and simultaneously sell their interest in
the asset to an entity partially owned by certain TCTB Partners.
Accordingly, as discussed in note A2, the operations of the Lubbock,
Texas office building have been restated to reflect the Lubbock, Texas
building as a discontinued business component.
In accordance with an Agreement to Distribute Assets, effective
December 31, 2004, the Lubbock office building (the `Property") was
distributed to the TCTB partners according to their partnership sharing
ratios. The Property and two other Midland, Texas office properties
owned by TCTB were subject to a lien securing TCTB's note payable to
Wells Fargo Bank Texas, N.A., (see note M). The Bank agreed to release
its lien on the Property in exchange for a $2,100,000 restricted
certificate of deposit, (see note G), pledged by TCTB to the Bank as
additional collateral. Immediately following the Property distribution,
the Company and the selling minority interest partners agreed to sell
their undivided interest in the Property in accordance with a Purchase
Agreement, to 1500 Broadway Partners, Ltd., a limited partnership, in
which certain TCTB limited partners are partners and are tenants in one
of TCTB's Midland office buildings.
NOTE L - OPERATING SEGMENTS
On July 30, 2004, the Company formed and initiated the development of W
Power. W Power was established to enter into the retail electricity
market in Texas. The formation of W Power resulted in the
diversification of the Company's business activities into two
reportable segments: real estate operations and a retail electricity
provider (REP). The real estate operations consist of two office
properties located in Midland, Texas and comprise an aggregate of
approximately 428,560 square feet of gross leaseable area. The REP
segment will sell electricity and provide the related billing, customer
service, collection and remittance services to both residential and
commercial customers.
Each segment's accounting policies are the same as those described in
the summary of significant accounting policies and the following tables
reflect totals for the three and nine months ended September 30, 2005
and 2004, respectively.
14
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Three months ended September 30, 2005:
--------------------------------------
Continuing Discontinued Inter-Company
Real Estate Real Estate Other and Transaction Consolidated
REP Operations Component Corporate Eliminations Total
---------------- --------------- --------------- ------------- -------------- --------------
Revenues from external
customers $ 2,545,563 $ 894,749 $ - $ - $ - $ 3,440,312
================ =============== =============== ============= ============== ==============
Revenues from other
operating segments $ 299,519 $ 4,987 $ - $ - $ (304,506) $ -
================ =============== =============== ============= ============== ==============
Depreciation,
amortization and
depletion $ 3,160 $ 76,168 $ - $ 26,956 $ - $ 106,284
================ =============== =============== ============= ============== ==============
Interest expense $ 23,862 $ 130,692 $ - $ - $ (23,806) $ 130,748
================ =============== =============== ============= ============== ==============
Segment net income
(loss) $ (71,240) $ 146,233 $ - $ (201,708) $ (23,751) $ (150,466)
================ =============== =============== ============= ============== ==============
Segment assets $ 2,975,936 $ 7,614,249 $ - $ 5,816,485 $ (469,215) $ 15,937,455
================ =============== =============== ============= ============== ==============
Expenditures for
segment assets $ 17,167 $ 33,139 $ - $ 1,325 $ - $ 51,631
================ =============== =============== ============= ============== ==============
Three months ended September 30, 2004:
--------------------------------------
Continuing Discontinued Inter-Company
Real Estate Real Estate Other and Transaction Consolidated
REP Operations Component Corporate Eliminations Total
---------------- --------------- --------------- ------------- -------------- --------------
Revenues from external
customers $ - $ 627,426 $ 480,144 $ - $ - $ 1,107,570
================ =============== =============== ============= ============== ==============
Revenues from other
operating segments $ - $ - $ - $ - $ - $ -
================ =============== =============== ============= ============== ==============
Depreciation,
amortization and
depletion $ - $ 49,117 $ 36,058 $ 27,533 $ - $ 112,708
================ =============== =============== ============= ============== ==============
Interest expense $ - $ 114,322 $ - $ 32,196 $ - $ 146,518
================ =============== =============== ============= ============== ==============
Segment net income
(loss) $ (80,578) $ 145,806 $ 109,191 $ (187,787) $ - $ (13,368)
================ =============== =============== ============= ============== ==============
Segment assets $ 84,344 $ 6,274,523 $ 4,218,587 $ 4,514,027 148,492 $ 15,239,973
================ =============== =============== ============= ============== ==============
Expenditures for segment
assets $ - $ 454,802 $ - $ - $ - $ 454,802
================ =============== =============== ============= ============== ==============
15
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Nine months ended September 30, 2005:
-------------------------------------
Continuing Discontinued Inter-Company
Real Estate Real Estate Other and Transaction Consolidated
REP Operations Component Corporate Eliminations Total
---------------- --------------- --------------- ------------- -------------- --------------
Revenues from external
customers $ 3,981,948 $ 2,237,068 $ - $ - $ - $ 6,219,016
================ =============== =============== ============= ============== ==============
Revenues from other
operating segments $ 572,345 $ 18,287 $ - $ - $ (590,632) $ -
================ =============== =============== ============= ============== ==============
Depreciation,
amortization and
depletion $ 6,640 $ 214,930 $ - $ 81,400 $ - $ 302,790
================ =============== =============== ============= ============== ==============
Interest expense $ 46,757 $ 353,263 $ - $ 91,184 $ (97,961) $ 393,243
================ =============== =============== ============= ============== ==============
Segment net income
(loss) $ (335,867) $ 273,948 $ - $ (416,941) $ (46,594) $ (525,454)
================ =============== =============== ============= ============== ==============
Segment assets $ 2,975,936 $ 7,614,249 $ - $ 5,816,485 $ (469,215) $ 15,937,455
================ =============== =============== ============= ============== ==============
Expenditures for
segment assets $ 32,662 $ 436,510 $ - $ 6,807 $ - 475,979
================ =============== =============== ============= ============== ==============
Nine months ended September 30, 2004:
-------------------------------------
Continuing Discontinued Inter-Company
Real Estate Real Estate Other and Transaction Consolidated
REP Operations Component Corporate Eliminations Total
---------------- --------------- --------------- ------------- -------------- --------------
Revenues from external
customers $ - $ 1,807,135 $ 1,448,317 $ - $ - $ 3,255,452
================ =============== =============== ============= ============== ==============
Revenues from other
operating segments $ - $ - $ - $ - $ - $ -
================ =============== =============== ============= ============== ==============
Depreciation,
amortization and
depletion $ - $ 139,184 $ 108,134 $ 82,891 $ - $ 330,209
================ =============== =============== ============= ============== ==============
Interest expense $ - $ 344,300 $ - $ 80,810 $ - $ 427,110
================ =============== =============== ============= ============== ==============
Segment net income
(loss) $ (80,578) $ 463,256 $ 347,498 $ (621,844) $ - $ 108,332
================ =============== =============== ============= ============== ==============
Segment assets $ 84,344 $ 6,274,523 $ 4,218,587 $ 4,514,027 $ 148,492 $ 15,239,973
================ =============== =============== ============= ============== ==============
Expenditures for
segment assets
$ - $ 481,483 $ 906 $ 2,913 $ - $ 485,302
================ =============== =============== ============= ============== ==============
NOTE M - LONG-TERM OBLIGATIONS
On June 5, 2002, TCTB entered into a loan agreement (the "TCTB Note")
with Wells Fargo Bank Texas, N.A. ("Wells Fargo") for a term note of
$6,800,000. The term note bears interest at a fixed rate per annum of
7.23%. TCTB is making monthly payments of principal and interest in the
amount of $53,663 for the term note until maturity of the note on May
31, 2009. The loan agreement is secured by substantially all of the
assets of TCTB. The loan agreement restricts cash distributions to
TCTB's owners. TCTB shall not declare or pay any distributions in
excess of tax liability due annually (but in any event, no more than
40% of net income), either in cash or any property to any owners. The
loan agreement also contains other customary conditions and events of
default, the failure to comply with, or occurrence of, would prevent
any further borrowings and would generally require the repayment of any
outstanding borrowings along with accrued interest under the loan
agreement. Such events of default include (a) non-payment of loan
agreement debt and interest thereon, (b) non-compliance with the terms
of the credit agreement covenants, (c) cross-default with other debt in
certain circumstances, (d) bankruptcy and (c) a final judgment or order
for the payment of money in excess of $100,000. Effective December 31,
2004, TCTB partners agreed to distribute its Lubbock, Texas office
building to the TCTB partners and simultaneously sell their interest in
the asset to an entity partially owned by certain TCTB minority owners.
The Lubbock building was subject to a lien securing TCTB's note payable
to Wells Fargo. In connection with the sale, Wells Fargo agreed to
release its lien on the Lubbock building in exchange for a $2,100,000
restricted certificate of deposit (see note G) pledged by TCTB as
additional collateral.
16
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Delaware entered into nine promissory notes (the "Delaware Notes"),
certain of which are with related parties, in an aggregate amount of
$2,789,087, to purchase the 64.9% ownership interest in TCTB. The notes
are due in annual payments of principal and interest beginning April 1,
2005 with a final maturity of May 31, 2009. The interest rate is
currently 4.9% and is adjusted each October 1 to equal the Wall Street
Journal Prime Lending Rate (4.75% at October 31, 2004) plus .15%. The
annual payments are equal to a set percentage, ranging from 1% to 16%
of the future net operating loss benefit of the Company. The net
operating loss benefits are calculated as the dollar value of the
federal income tax benefit to the Company of the net operating loss
calculated in accordance with the Internal Revenue Code, for the
calendar year preceding the date of each annual payment. Due to the
distribution and sale of the Lubbock building on December 31, 2004, the
Company elected to forgo the payment as described above and paid one
half of the principal balance along with the entire accrued interest
balance during January 2005.
Delaware entered into a promissory note (the "Hexagon Note") in January
2004 in the amount of $250,778 to purchase an additional 6.485%
ownership interest in TCTB (note B). The note is due in quarterly
installments of principal and interest beginning on March 1, 2004, with
a final maturity of January 1, 2010. The term note bears interest at a
fixed rate per annum of 5%.
On February 28, 2005 the Company entered into a loan agreement (the
"WNB Note") with Western National Bank, Midland, Texas. The Note is a
certain Revolving Line of Credit in an amount of $5,000,000. Under the
Note, the Bank may, but is not obligated to advance more than
$2,500,000. Borrowings under the Note are subject to a borrowing base
equal to the lesser amount of: (a) $5,000,000 or (b) seventy-five
percent (75%) of the eligible customer receivables of the Company and
its subsidiary W Power. The Note bears a variable interest rate equal
to the Prime Rate, defined as the prime rate in the money rate table of
The Wall Street Journal, a Dow Jones publication, as of each business
day (6.75% at September 30, 2005). Interest is computed on the unpaid
principal balance of the Note and is due and payable as it accrues
monthly, commencing March 31, 2005, and thereafter on the last day of
each and every succeeding month until maturity, March 31, 2008, when
the entire amount of the Note, principal and accrued, unpaid interest,
shall be due and payable. The Note is secured by a security agreement
to all of the accounts receivable of W Power. In addition, the Note is
guaranteed by certain accredited investors which guarantees are
partially secured by letters of credit. The loan agreement also
contains other customary conditions and events of default, the failure
to comply with, or occurrence of, would prevent any further borrowings
and would generally require the repayment of any outstanding borrowings
along with accrued interest under the loan agreement. The proceeds from
the Note are intended to be used to fund potential capital requirements
in order to facilitate the growth of the Company's retail electric
provider subsidiary, W Power, and for general corporate purposes.
17
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
Long-term debt consisted of the following as of September 30, 2005:
Long-term Current
Portion Portion Total
-------------- ------------ --------------
TCTB Note $ 5,743,019 $ 214,441 $ 5,957,460
Delaware Notes 1,394,543 - 1,394,543
Hexagon Note 145,064 40,123 185,187
WNB Note - - -
-------------- ------------ --------------
Total $ 7,282,626 $ 254,564 $ 7,537,190
============== ============ ==============
Maturities of long-term debt at September 30, 2005 are as follows:
2005 $ 254,564
2006 272,867
2007 291,367
2008 5,311,793
2009 1,406,599
------------
Total 7,537,190
Less current portion 254,564
------------
Long-term portion $ 7,282,626
============
NOTE N - RELATED PARTY TRANSACTIONS
At September 30, 2005 and 2004, related parties leased from TCTB,
office space of approximately 32,000 and 29,000 square feet,
respectively. TCTB received rental income from these related parties of
approximately $77,388 and $65,834 during the three months then ended,
respectively, and $233,386 and $198,451 during the nine months then
ended, respectively.
Prior to Amen Properties, Inc. acquiring a limited partnership interest
in TCTB, TCTB had entered into an agreement with Priority Power
Management, Ltd to provide aggregation and consulting services in the
management of TCTB's electricity use and costs. This agreement expired
on December 31, 2004. The Company's Chief Operating Officer has an
indirect 18% ownership in Priority Power Management, Ltd. During
January 2005, TCTB began purchasing electricity through W Power.
During 2004, the Company, through its subsidiary Minerals, purchased a
percentage of two certain royalty interests with certain individuals
and related parties acquiring the remaining percentages. Effective
April 1, 2004, the Company purchased a 25% interest in a Texas oil and
gas royalty for a purchase price of $102,519 along with the Chief
Operating Officer directly acquiring a 10.625% interest and the Chief
Executive Officer indirectly acquiring 22.5% interest. Effective April
2, 2004, the Company purchased a 20% interest in an Oklahoma oil and
gas royalty for a purchase price of $60,335 along with the Chief
Operating Officer directly acquiring a 8.5% interest and the Chief
Executive Officer acquiring an indirect 20% interest (see note E).
18
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
September 30, 2005
(Unaudited)
The Company closed the sale and issuance of 125,000 shares of Series C
Preferred Stock and 250,000 Warrants (see note C) pursuant to a
Purchase Agreement, as amended by the Second Amendment on March 1, 2005
between the Company and certain accredited investors, including the
Company's President and Chief Operating Officer, Jon M. Morgan, the
Company's Chief Executive Officer, Eric Oliver and Bruce Edgington, one
of the Company's Directors.
The following table reflects the Series C issuance to the Company's
Officers and Directors.
Number of Common Preferred C
Preferred C Stock Voting Purchase
Shares Equivalent Equivalent Price
--------------- ----------------- ---------------- -------------
Eric Oliver 14,063 56,252 52,877 $ 225,008
Jon M. Morgan 14,062 56,248 52,873 224,992
Bruce Edgington 3,125 12,500 11,750 50,000
--------------- ----------------- ---------------- -------------
Total 31,250 125,000 117,500 $ 500,000
=============== ================= ================ =============
The following table reflects the issuance of Warrants to the Company's
Officers and Directors.
Number of Common Stock
Warrants Equivalent
--------------- -----------------
Eric Oliver 28,126 28,126
Jon M. Morgan 28,124 28,124
Bruce Edgington 6,250 6,250
--------------- -----------------
Total 62,500 62,500
=============== =================
NOTE O - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company is subject to claims and lawsuits which arise primarily in
the ordinary course of business. It is the opinion of management that
the disposition or ultimate resolution of such claims and lawsuits will
not have a material adverse effect on the consolidated financial
position of the Company.
19
Power Purchase Contracts
Certain contracts to purchase electricity provide for capacity payments
to ensure availability and provide for adjustments based on the actual
power taken under the contracts. Expected annual future capacity
payments under existing agreements are estimated as follows as of
September 30, 2005:
2005 $ 1,738,604
2006 965,474
2007 684,604
2008 148,960
2009 -
----------------
Total $ 3,537,642
================
20
ITEM 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
Company's unaudited consolidated financial statements for the three and nine
month periods ended September 30, 2005 and 2004, and related footnotes presented
in Item 1 and the Company's December 31, 2004 Form 10-KSB/A, as amended.
Overview
AMEN Properties, Inc., (the "Company") is a real estate and energy company
engaged in owning and managing real estate, oil and gas royalties, and energy
related business properties. The Company is a holding company and conducts its
operations through Amen Delaware, LP ("Delaware"); Amen Minerals, LP
("Minerals") and W Power and Light, LP ("W Power"), each being a wholly owned
subsidiary of the Company. The Company owns its present real estate holdings
through Delaware. Delaware owns an approximate 71.35% limited interest in TCTB
Partners, Ltd., which currently owns two commercial office buildings in Midland,
TX. The Company's present oil and gas royalty holdings are through Minerals,
which owns two oil and gas royalty properties, one in Nowata County, Oklahoma
and the other in Hemphill County, Texas. In July 2004, the Company entered the
retail electricity market as a retail electric provider serving both retail and
wholesale customers within the state of Texas through W Power.
Application of Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, and
contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
assumptions and estimates on an ongoing basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. These estimates form the basis for making
judgments about the carrying values of assets and liabilities where that
information is available from other sources. Certain estimates are particularly
sensitive due to their significance to the financial statements. Actual results
may differ significantly from management's estimates.
We believe that the most significant accounting policies that involve the use of
estimates and assumptions as to future uncertainties and, therefore, may result
in actual amounts that differ from estimates are the following:
- Acquisition of operating properties,
- Revenue and cost recognition,
- Allowance for doubtful accounts
21
Acquisition of Operating Properties
We allocate the purchase price of acquired properties to tangible and identified
intangible assets acquired based on their fair values in accordance with SFAS
No. 141, "Business Combinations." We initially record the allocation based on a
preliminary purchase price allocation with adjustments recorded within one year
of the acquisition.
In making estimates of fair value for purposes of allocating purchase price,
management utilizes sources, including, but not limited to, independent value
consulting services, independent appraisals that may be obtained in connection
with financing the respective property, and other market data. Management also
considers information obtained about each property as a result of its
pre-acquisition due diligence, marketing and leasing activities in estimating
the fair value of the tangible and intangible assets acquired.
The aggregate value of the tangible assets acquired is measured based on the sum
of (i) the value of the property and (ii) the present value of the amortized
in-place tenant improvement allowances over the remaining term of each lease.
Management's estimates of the value of the property are made using models
similar to those used by independent appraisers. Factors considered by
management in its analysis include an estimate of carrying costs such as real
estate taxes, insurance, and other operating expenses and estimates of lost
rentals during the expected lease-up period assuming current market conditions.
The value of the property is then allocated among building, land, site
improvements, and equipment. The value of tenant improvements is separately
estimated due to the different depreciable lives.
The aggregate value of intangible assets acquired is measured based on the
difference between (i) the purchase price and (ii) the value of the tangible
assets acquired as defined above. This value is then allocated among
above-market and below-market in-place lease values, costs to execute similar
leases (including leasing commissions, legal expenses and other related
expenses), in-place lease values and customer relationship values.
Above-market and below-market in-place lease values for acquired properties are
calculated based on the present value (using a market interest rate which
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) management's estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of the lease for above-market leases and the initial term plus the term of
the below-market fixed rate renewal option, if any, for below-market leases. We
perform this analysis on a lease by lease basis. The capitalized above-market
lease values are amortized as a reduction to rental income over the remaining
non-cancelable terms of the respective leases. The capitalized below-market
lease values are amortized as an increase to rental income over the initial term
plus the term of the below-market fixed rate renewal option, if any, of the
respective leases.
Management estimates costs to execute leases similar to those acquired at the
property at acquisition based on current market conditions. These costs are
recorded based on the present value of the amortized in-place leasing costs on a
lease by lease basis over the remaining term of each lease.
The in-place lease values and customer relationship values are based on
management's evaluation of the specific characteristics of each customer's lease
and our overall relationship with that respective customer. Characteristics
considered by management in allocating these values include the nature and
extent of our existing business relationships with the customer, growth
prospects for developing new business with the customer, the customer's credit
quality, and the expectation of lease renewals, among other factors. The
in-place lease value and customer relationship value are both amortized to
expense over the initial term of the respective leases and projected renewal
periods, but in no event does the amortization period for the intangible assets
exceed the remaining depreciable life of the building.
22
Should a tenant terminate its lease, the unamortized portion of the in-place
lease value and the customer relationship value and above-market and
below-market lease values would be charged to expense.
Revenue and Cost Recognition
Leases with tenants are accounted for as operating leases. Minimum annual
rentals are recognized on a straight-line basis over the terms of the respective
leases. As of June 30, 2005 there were no such deferred tenant receivables.
The Company records electricity sales under the accrual method and these
revenues are recognized upon delivery of electricity to the customers' meters.
Electric services not billed by month-end are accrued based upon estimated
deliveries to customers as tracked and recorded by the Electric Reliability
Council of Texas ("ERCOT") multiplied by the Company's average billing rate per
kilowatt hour ("kwh") in effect at the time.
The flow technique of revenue calculation relies upon ERCOT settlement
statements to determine the estimated revenue for a given month. Supply
delivered to our customers for the month, measured on a daily basis, provides
the basis for revenues. ERCOT provides net electricity delivered data in three
frames. Initial daily settlements become available approximately 17 days after
the day being settled. Approximately 45 days after the day being settled, a
resettlement is provided to adjust the initial settlement to the actual supply
delivered based on subsequent comparison of prior forecasts to actual meter
reads processed. A final resettlement is provided approximately 180 days after
power is delivered, marking the last routine settlement adjustment to the power
deliveries for that day.
Because flow data for resettlements and final resettlements are not available in
sufficient time to be booked to the appropriate period, the effect of such
resettlements are booked in the month in which the cost of goods sold ("COGS")
effect of those resettlements are realized.
Sales represent the total proceeds from energy sales, including pass through
charges from the TDSPs billed to the customer at cost. COGS include electric
power purchased, sales commissions, and pass through charges from the TDSPs in
the areas serviced by the Company. TDSP charges are costs for metering services
and maintenance of the electric grid. TDSP charges are determined by regulated
tariffs established by the Public Utility Commission of Texas ("PUCT").
Allowance for Doubtful Accounts
Management regularly reviews tenant and electricity accounts receivable and
estimates the necessary amounts to be recorded as an allowance for
uncollectibility. These reserves are established on a tenant-specific basis and
are based upon, among other factors, the period of time an amount is past due
and the financial condition of the obligor.
23
At the end of each quarter, revenue is accrued to unbilled receivables based on
the estimated amount of power delivered to customers using the flow technique.
Unbilled revenue also includes accruals for estimated Transmission and
Distribution Service Provider ("TDSP") charges and monthly service charges
applicable to the estimated usage for the period.
All charges that were physically billed to customers in the calendar month are
recorded from the unbilled account to the customer receivables account. Accounts
receivables are customer obligations billed at the conclusion of a month's
electricity usage and due within 15 days of the date of the invoice. Balances
past due are subject to a late fee that is assessed on the succeeding month's
billing.
The large number of customers and significant volume of transactions create a
challenge to manage receivables as well as to estimate the account balances that
ultimately will not be paid by the customers ("bad debt write-offs). The Company
uses a variety of tools to estimate and provide an accurate and adequate
allowance for doubtful accounts reserve; the allowance for doubtful accounts is
expensed each month as a percentage of revenue based on the historical bad debt
write-off trends that will result from that month's gross revenues.
Results of Operations
Overview
For the nine months ended September 30, 2005, the Company has generated a net
loss of $525,454 or a net loss of $.24 per share as compared to net income of
$108,332, or net income of $.04 per share for the same period ended September
30, 2004, for a net decrease of $633,876. This decrease is mainly due to
start-up and other costs associated with the Company's newly created, wholly
owned subsidiary W Power and the sale of the Company's undivided interest in a
commercial real estate property in Lubbock, Texas on December 31, 2004. For the
nine months ended September 30, 2005, the operations of W Power incurred a net
operating loss of approximately $336,000. This loss is mainly due to W Power's
general and administrative costs, a decrease in W Power's gross profit margin
due to an increase of balancing costs that are based on the aggregate customer
load and are determined by ERCOT through a multiple step settlement process, and
an increase in wholesale electricity due to the rising costs of energy.
Balancing costs/revenues are related to the differential between the supply
provided by the company through its bilateral wholesale supply and the supply
required to serve the Company's customer load. The sale of the Company's
undivided interest in a commercial real estate property in Lubbock, Texas on
December 31, 2004, reduced the Company's income from its limited partnership
interest in TCTB for the nine months ended September 30, 2005 as compared to
September 30, 2004 by approximately $347,000. During the nine months ended
September 30, 2005, the Company showed an increase of approximately $33,000 in
interest income over the same period ended September 30, 2004. The increase in
interest income is mainly related to the restricted certificate of deposit in
the amount of $2,100,000 that TCTB has deposited with Wells Fargo Bank N.A. This
certificate of deposit is pledged by TCTB to the Bank as additional collateral
for the Bank's agreement to release its lien on the commercial real estate
building in Lubbock, Texas in order for TCTB to distribute and sell the Lubbock
building on December 31, 2004.
24
Restatement of Previously Issued Financial Statement Information
During the third quarter of 2005, the Company received a letter from the
Securities and Exchange Commission, dated August 31, 2005, concerning the
Company's previous reporting of the December 31, 2004 distribution and sale of
the Company's Lubbock, Texas real estate property. As a result, the Company has
restated its Consolidated Financial Statements for the three months and nine
months ended September 30, 2004, to reflect reclassification of the operations
of the Lubbock, Texas real estate property as a discontinued business component,
see Notes A2 and K to the Consolidated Financial Statements included herein. The
restatement did not change the Company's previously reported 2004 net income
(loss). The following analysis reflects the restated 2004 operating results.
Revenues
For the three months ended September 30, 2005
For the three months ended September 30, 2005 the Company experienced an
increase in rental revenue of approximately $267,000 as compared to the same
period ending September 30, 2004. The increase is mainly due to an increase in
billings to the tenants of the Midland, Texas commercial real estate buildings
for the pass through of operational expense increases as provided for in the
tenant lease agreements. For the three months ended September 30, 2004, the
Company accrued rental revenue for operational expense increases for the nine
months ended September, 30, 2005. Due to W Power not being in operations during
the three months ended September 30, 2004, comparative information for retail
electricity revenue is not available. For the three months ended September 30,
2005, as compared the three months ended June 30, 2005, retail electricity
revenue increased approximately $1,420,000. This increase is mainly due to W
Power acquiring approximately 1,000 new billable meters during the middle of May
2005, and has now completed a full quarter of billings for electricity revenue.
For the nine months ended September 30, 2005
For the nine months ended September 30, 2005, the Company experienced an
increase in rental revenue of approximately $430,000 as compared to the same
period ending September 30, 2004. The increase is mainly due to the Company's
purchase, on July 30, 2004, of a twelve floor multi-tenant office building in
downtown Midland, Texas through its 71.348013% limited partnership interest in
TCTB. Additionally during the three months ended September 30, 2005, the
Company, through its 71.348013% limited partnership interest in TCTB, has begun
to pass through operational expense increases as provided for in the tenant
lease agreements. For the three months ended September 30, 2004, the Company
accrued rental revenue for operational expense increases for the nine months
ended September, 30, 2005. Due to W Power not being in operations during the
nine months ended September 30, 2004, comparative information for retail
electricity revenue is not available.
Operating expenses
For the three months ended September 30, 2005
Total operating expenses for the three months ended September 30, 2005 and 2004
were $3,443,386 and $593,691 respectively. The increase of approximately
$2,850,000 in operating expense is mainly related to W Power's purchase of
wholesale electricity of approximately $2,450,000. The remaining increase of
operating expenses is related to the increase in general and administrative
costs associated with W Power and an increase in rental property operations
associated with the July 30, 2004 acquisition of a twelve floor multi-tenant
office building in downtown Midland, Texas.
25
W Power's cost of goods and services were $2,453,362 or approximately 96.4% of
retail sales for the period ending September 30, 2005. During the three months
ended September 30, 2005, W Power has been able to minimize the increasing costs
of wholesale power provided by whole sale electricity providers by increasing
the amount of energy purchased through the ERCOT balancing market. Balancing
costs/revenues are related to the difference between the energy provided by the
company through its bilateral wholesale contracts and the energy required to
serve the Company's aggregate customer load, as determined by ERCOT through a
multiple step settlement process. The balancing market is a real-time spot
market operated by ERCOT in order to match aggregate customer load to system
generation. For the quarter, W Power purchased approximately 14% of its energy
volume from the balancing market. Currently, W Power plans to maintain the
amount of energy purchased through the balancing market. W Power will require
both customer growth and possibly a dynamic bilateral supply agreement in order
to decrease the amount of wholesale electricity purchased from the balancing
market as a percentage of its total power purchases. Due to W Power not being in
operations during the three months ended September 30, 2004, comparative
information is not available.
Rental property operations and depreciation expense increased approximately
$115,000 and $30,000, respectively, for the three months ending September 30,
2005 as compared to September 30, 2004. The increase for property operations is
attributable to the newly acquired twelve floor multi-tenant office building in
downtown Midland, Texas coupled with an increase in utility expense due to the
rising costs of energy. The increase in depreciation expense is also
attributable to the July 30, 2004 acquisition of a twelve floor multi-tenant
office building in downtown Midland, Texas and by additional depreciation
associated with buildout cost incurred by TCTB during the first quarter of 2005.
For the three months ended September 30, 2005 as compared to the same period
ending September 30, 2004, general and administrative costs increased
approximately $252,000. This increase is mainly due to W Power beginning
operations in January 2005. Additionally, during the three months ending
September 30, 2005 the Company recorded an impairment allowance of approximately
$88,000 of a noncurrent note receivable.
For the nine months ended September 30, 2005
Total operating expense for the nine months ended September 30, 2005 as compared
to same period ended September 30, 2004 increased approximately $4,765,000. This
increase is mainly related to W Power's purchase of wholesale electricity of
approximately $3,875,000. The remaining increase of approximately $890,000 in
operating expenses is related to the increase in general and administrative
costs associated with W Power and an increase in rental property operations
associated with the July 30, 2004 twelve floor multi-tenant office building in
downtown Midland, Texas.
W Power's cost of goods and services were $3,876,737 or approximately 97.4% of
retail electricity sales for the nine months ended September 30, 2005. W Power's
gross profit was approximately $105,000 or approximately 2.6% of retail
electricity sales for the nine months ending September 30, 2005. Due to W Power
not being in operations during the nine months ended September 30, 2004,
comparative information is not available. Due to W Power's ability to minimize
the increasing costs of wholesale power provided by whole sale electricity
providers by increasing the amount of energy purchased through the ERCOT
balancing market, W Power has been able to generate a gross profit of
approximately 2.6% during the nine months ended September 30, 2005.
26
Rental property operations and depreciation expense increased approximately
$340,000 and $81,000 respectively, for the nine months ended September 30, 2005,
as compared to nine months ended September 30, 2004. The increase for property
operations is attributable to the July 20, 2004 acquisition of a twelve floor
multi-tenant office building in downtown Midland, Texas coupled with an increase
in utility expense due to the rising costs of energy. The increase in
depreciation expense is also attributable to the July 30, 2004 building
acquisition in downtown Midland, Texas and by additional depreciation associated
with build-out cost incurred by TCTB during the first quarter of 2005
For the nine months ended September 30, 2005 as compared to the same period
ending September 30, 2004, general and administrative costs increased
approximately 469,000. This increase is mainly due to W Power beginning
operations in January 2005. Additionally, the Company wrote off approximately
$88,000 of a note receivable during the three months ending September 30, 2005.
The Company received a note receivable in the amount of $275,000 on December 13,
2002, for substantially all of the assets associated with a direct mail
advertising service.
Other (expense) income
For the three months ended September 30, 2005
For the three months ended September 30, 2005, the Company experienced an
increase of approximately $11,000 in interest income as compared to the three
months ended September 30, 2004. This increase in mainly due to the interest
income the Company received on the $2,100,000 certificated of deposit with the
Wells Fargo, Bank N.A. This certificate of deposit is pledged by TCTB to the
Bank as additional collateral for the Bank's agreement to release its lien on
the commercial real estate building in Lubbock, Texas in order for TCTB to
distribute and sell the Lubbock building on December 31, 2004.
For the nine months ended September 30, 2005
For the nine months ended September 30, 2005, as compared to the same period
ended September 30, 2004, the Company experienced an increase of approximately
$33,000 in interest income. This increase is mainly due to the interest income
the Company received on the $2,100,000 certificate of deposit with Wells Fargo
Bank N.A.
For the nine months ended September 30, 2005 and 2004, the Company experienced a
net decrease in other income of approximately $11,300. The decrease in mainly
associated with the Company expensing all legal expenses related to the issuance
of the Company's Series C Preferred Stock during the first quarter of 2005 which
is partially offset with the Company's Board foregoing the 2004 restricted stock
compensation accrued on December 31, 2004, in the amount of approximately
$33,000. The Board intends to begin using the issuance of stock options as
compensation for the Board of Directors
27
Minority interest
For the three months ended September 30, 2005
Minority interest expense for the three months ended September 30, 2005 and
2004, was $41,899 and $28,404, respectively, and reflects the minority interest
owner's share of the net income of TCTB. The increase in minority interest is
related to an increase income at TCTB for the three months ended September 30,
2005, as compared to the three months ended September 30, 2004. This increase in
income at TCTB is mainly related to an increase in billings to the tenants of
the Midland, Texas commercial real estate buildings for the pass through of
operational expense increases as provided for in the tenant lease agreements.
For the three months ended September 30, 2004, the Company accrued rental
revenue for operational expense increases for the nine months ended September,
30, 2005 For the nine months ended September 30, 2005
For the nine months ended September 30, 2005 and 2004, minority interest expense
decreased approximately $12,000. This decrease in minority interest expense is
mainly due to a decrease in income for the nine months ended September 30, 2005,
as compared to the nine months ended September 30, 2004, for TCTB.
Liquidity and capital resources
Though we have not abandoned the 2002 business model, our focus is to support W
Power for the immediate future. Our immediate objectives are to actively monitor
TCTB, assess opportunities as they present themselves, and support W Power in
building a strong customer base.
W Power continues to focus on its credit needs for the next 12 to 24 months, and
effective methods to minimize its exposure to the ERCOT balancing energy spot
market. As with any exponential growth business model, W Power is also
attempting to manage its growth prudently, and not outpace its credit capacity
nor ability to provide high quality service to its customers.. We continue
incremental development of our computing systems and business processes to
minimize the time and effort associated with performing certain core retail
electric provider business activities such as pricing, contracting, scheduling,
and billing. With efficiency in these processes, strong internal controls and
procedures, and sufficient credit, W Power will accelerate its acquisition of
customers through aggressive marketing and sales efforts later this year. We
think maintaining sufficient credit availability and managing gross profit
margins in a hyper-growth business model during the current period of
historically high wholesale energy prices and price volatility are the biggest
risks facing W Power. W Power hopes to achieve break even by the fourth quarter
of this year. We are confident W Power can attain its market share benchmarks,
adjusted for the sharp increase in wholesale energy costs which require a
proportionately larger amount of available credit sources.
28
Though we think 2005 will be a banner year in regards to building intrinsic
value with the development of the brand and customer base of W Power, we are not
as optimistic with regards to projected earnings. With the absence of our
Lubbock building and with the majority of the year dedicated to establishing W
Power, we anticipate negative to neutral earnings this year in our quest to
finalize this start up phase.
During the nine months ended September 30, 2005 and 2004 net cash (used in)
provided by operating activities was $(684,492) and $724,751, respectively. The
net decrease of approximately $1,409,000 used in operating activities is related
to several items. During the nine months ended September 30, 2005 the Company
paid the balance, approximately $286,800, of accrued interest on the nine
promissory notes, certain of which are related parties, entered into by Delaware
in October 2002 to purchase the original 64.9% ownership in TCTB. The remaining
decrease in net cash provided by operating activities is due to an increase in
accounts receivable of approximately $1,560,000 and the operating expenses
associated with W Power. Additionally, the Company experienced a decline in net
operating cash provided by the Company's limited partnership interest in TCTB
due to the sale of the commercial real estate building in Lubbock, Texas on
December 31, 2004.
Net cash used in investing activities was $1,587,512 and $800,946 for the nine
months ended September 30, 2005 and 2004, respectively, for a net change of
approximately $787,000. The increase in cash used in investing activities is
mainly due to the Company's cash outlays of approximately $1,125,000 for the
required collateral deposits with W Power's wholesale electricity providers and
ERCOT. During the nine months ended September 2005, the Company used
approximately $424,000 on remodeling lease space for new tenants as compared to
using approximately 47,000 for tenant improvements during the same period ended
September 30, 2004, and purchasing a twelve floor multi-tenant office building
in downtown Midland, Texas through its 71.348013% limited partnership interest
in TCTB on July 30, 2004, for approximately $437,000. For the nine months ending
September 30, 2004, the Company acquired an additional 6.485533% limited
partnership interest from certain limited partners (see note B to the
Consolidated Financial Statements for further discussion) and purchased two
separate royalty interests (see note E to the Consolidated Financial Statements
for further discussion). Additionally, the Company received $13,000 in
repayments of notes receivable (see note H to the Financial Statements for
further discussion).
Net cash provided by (used in) financing activities was $450,557 and $(286,736)
for the nine months ended September 30, 2005 and 2004, respectively, for a net
change of approximately $737,000. During the nine months ended September 30,
2005, the Company paid approximately $1,395,000 representing one half of the
outstanding principal balance on the nine promissory notes entered into by
Delaware in October 2002 to purchase the original 64.9% limited interest in
TCTB. Additionally, the Company received $2,000,000 from the issuance of the
Company's Series C Preferred Stock on March 1, 2005 and $24,455 on the exercise
of 4,859 common stock options on July 29, 2005. During the nine months ended
September 30, 2004, minority interest distributions were $129,905 and were
related to the minority interest owners in TCTB. For the nine months ended
September 30, 2005, minority interest owners in TCTB did not receive a
distribution
Currently, the Company has a net operating tax loss ("NOL") carry forward in
excess of $29 million. This NOL is related to the Company's operations prior to
the Company presenting the 2002 business plan to shareholders. Management
believes the present value of this NOL is between $2.5 and $5 million and has
been diligent in its efforts to ensure its preservation and utilization.
29
ITEM 3. Controls and Procedures
The Company has carried out an evaluation under the supervision of management,
including the Chairman and Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
Chairman and Chief Executive Officer and Chief Financial Officer have concluded
that, and have reported to the Audit Committee of the Company's Board of
Directors that, as of September 30, 2005, management has identified certain
deficiencies in the disclosure controls and procedures. The deficiencies noted
were (a) a lack of documented control procedures (b) the lack of segregation of
duties and (c) the accounting procedures resulting in the restatement described
below. The Company believes such deficiencies were primarily attributable to the
transition the Company went through during the end of 2002 and 2003, changes in
personnel within the accounting department, the growth and development of the
Company's new start up subsidiary W Power, and the Company currently having only
one full time employee at the corporate level. Management believes that the
deficiencies noted above do not materially interfere with the Company's timely
disclosure of information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act 1934, as amended, because accounting
personnel and a member of management have first-hand knowledge of the daily
transactions of the Company and that first-hand knowledge enables such personnel
to accumulate and communicate such information to the Company's management,
including its principal executive and principal financial officers as
appropriate to allow timely decisions regarding disclosure. Therefore, the
Company believes that its disclosure controls and procedures are sufficient to
provide reasonable assurance that the information required to be disclosed by
the Company in reports filed or submitted by it under the Securities Exchange
Act of 1934, as amended is recorded, processed, summarized and reported with the
time period specified in the rules and forms of the SEC, notwithstanding the
deficiencies noted above.
There have not been changes in the disclosure controls and procedures during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's disclosure controls and procedures
over financial reporting.
As described in notes A2 and K to the Company's Consolidated Financial
Statements included in this report, the Company has restated its previously
issued consolidated financial statements for the three months and nine month
periods ended September 30, 2004, to reflect the reclassification of the
operations of a discontinued business component related to its real estate
operations. Previously, management of the Company did not consider its Lubbock,
Texas real estate operations to be clearly distinguishable from the remainder of
its real estate operations as defined by SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" or as an asset group as
defined in SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". Management of the Company believes that such a determination
requires substantial judgment based on interpretations of various accounting
standards. In response to a letter from the Securities and Exchange Commission,
dated August 31, 2005, concerning our reporting of the discontinued Lubbock,
Texas operations in our previously issued Form 10-KSB for the year ended
December 31, 2004, and Form 10-QSB for the periods ended March 31, 2005 and June
30, 2005, the Company has restated its previously issued financial statements to
reclassify the discontinued Lubbock, Texas operations as a discontinued business
component. The reclassification had no effect on the Company's previously
reported total assets, working capital, stockholders' equity, net income (loss),
and net cash flow (used in) provided by operating activities, investing
activities or financing activities.
30
The Company's management and Audit Committee have discussed the restatement
issue with Johnson, Miller & Co., its independent registered public accounting
firm. After reviewing the restatement issue, the Company's management and Audit
Committee believes that, although the restatement may be considered to be a
deficiency in the Company's disclosure process, the circumstances leading to the
restatement of the discontinued business component are isolated and rare and do
not constitute a continuing deficiency in the Company's diclosure controls and
procedures. Accordingly, management of the Company does not plan to implement
any further changes in its disclosure controls and procedures with respect to
the restatement of the discontinued business component.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Information related to this Item has been previously included in Current Reports
on Form 8-K filed during the period covered by this Report.
ITEM 3. Defaults Upon Senior Securities
None to report.
ITEM 4. Submission of Matters to a Vote of Security Holders
None to report
ITEM 5. Other Information
None to report.
ITEM 6. Exhibits
(a) EXHIBITS:
31
Exhibit
Number Description
3.1 Certificate of Designation of Series and Determination of Rights
and Preferences of Series C Convertible Preferred Stock of Amen
Properties, Inc. (Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on March 4, 2005).
4.1 Form of Warrant Certificate dated March 1, 2005 (Incorporated by
reference to the Company's Report on Form 8-K filed with the
Secrurities and Exchange Commission on March 4, 2005).
10.1 Consent, Waiver and Amendment of the holders of Series A
Preferred Stock dated January 2005 (identical copy executed by
each holder) (Incorporated by reference to the Company's Report
on Form 10-KSB filed with the Securities and Exchange
Commission on March 31, 2005).
10.2 Consent, Waiver and Amendment of the holders of Series B
Preferred Stock dated January 2005 (identical copy executed by
each holder) (Incorporated by reference to the Company's Report
on Form 10-KSB filed with the Securities and Exchange
Commission on March 31, 2005).
10.3 Securities Purchase Agreement between the Company and certain
investors dated January 18, 2005, as amended by a First Amendment
dated January 28, 2005 and a Second Amendment dated February 28,
2005 (Incorporated by reference to the Company's Report on
Form 8-K filed with the Securities and Exchange Commission on
March 4, 2005)
10.4 Loan Agreement Between Amen Properties, Inc. and Western
National Bank (Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on March 4, 2005).
10.5 Western National Bank Revolving Line of Credit Note
(Incorporated by reference to the Company's Report on
Form 8-K filed with the Securities and Exchange
Commission on March 4, 2005).
11 Computation of Earnings Per Share
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer Pursuant to 18 USC ss.
1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC ss.
1350.
99.1 Press release Third Quarter 2005 Form 10-QSB
32
SIGNATURES
In accordance with the requirements of Securities Act of 1934, AMEN Properties,
Inc., the registrant, has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMEN Properties, Inc.
November 14, 2005 By: /s/ Eric Oliver
---------------
Eric Oliver
Chairman and Chief Executive Officer
November 14, 2005 By: /s/ John M. James
-----------------
John M. James
Chief Financial Officer and Secretary
33
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Certificate of Designation of Series and Determination of Rights and
Preferences of Series C Convertible Preferred Stock of Amen
Properties, Inc. (Incorporated by reference to the Company's Report
on Form 8-K filed with the Securities and Exchange Commission on
March 4, 2005).
4.1 Form of Warrant Certificate dated March 1, 2005 (Incorporated by
reference to the Company's Report on Form 8-K filed with the
Secrurities and Exchange Commission on March 4, 2005).
10.1 Consent, Waiver and Amendment of the holders of Series A
Preferred Stock dated January 2005 (identical copy executed by each
holder) (Incorporated by reference to the Company's Report on
Form 10-KSB filed with the Securities and Exchange Commission
on March 31, 2005).
10.2 Consent, Waiver and Amendment of the holders of Series B
Preferred Stock dated January 2005 (identical copy executed by each
holder) (Incorporated by reference to the Company's Report on
Form 10-KSB filed with the Securities and Exchange Commission
on March 31, 2005).
10.3 Securities Purchase Agreement between the Company and certain
investors dated January 18, 2005, as amended by a First Amendment
dated January 28, 2005 and a Second Amendment dated February 28,
2005 (Incorporated by reference to the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on March 4, 2005)
10.4 Loan Agreement Between Amen Properties, Inc. and Western
National Bank (Incorporated by reference to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on March 4, 2005).
10.5 Western National Bank Revolving Line of Credit Note (Incorporated by
reference to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on March 4, 2005).
11 Computation of Earnings Per Share
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification of Chief Executive Officer Pursuant to 18 USC ss.
1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC ss.
1350.
99.1 Press release Third Quarter 2005 Form 10-QSB
34