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 March 31, 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.
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(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 [ ]
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: 2,201,356 shares outstanding as of May 3, 2005.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheet at March 31, 2005 (Unaudited) 1
Consolidated Statement of Cash Operations -- for the three months ended
March 31, 2005 and 2004 (Unaudited) 2
Consolidated Statement of Cash Flows -- for the three months ended
March 31, 2005 and 2004 (Unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis or Plan of Operation 18
Item 3. Controls and Procedures 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3-6 Exhibits 25
Signatures 27
Exhibits 28
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 Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section 1350.
AMEN Properties, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents (notes A3, D and F) $ 3,749,877
Accounts receivable (notes A6 and A13) 296,609
Other current assets 151,651
-------------
Total current assets 4,198,137
RESTRICTED CERTIFICATE OF DEPOSIT (note G) 2,100,000
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $956,529 (notes A7, A8 and I) 8,265,082
ROYALTY INTERESTS, at cost net of accumulated depletion
of $ 16,257 (notes A7 and E) 146,597
LONG-TERM INVESTMENTS (notes A4 and F) 62,350
OTHER ASSETS
Note receivable (note H) 241,555
Deferred costs (note A9) 46,941
Deposits and other assets 228,000
-------------
Total other assets 516,496
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TOTAL ASSETS $ 15,288,662
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 258,520
Accrued liabilities (note J) 275,770
Current portion of long-term obligations (note L) 244,578
Accrued interest payable 17,598
Deferred revenue 79,610
-------------
Total current liabilities 876,076
LONG-TERM OBLIGATIONS, less current portion (note L) 7,411,604
DEFERRED REVENUE 55,163
MINORITY INTEREST (note A11) 293,479
COMMITMENTS AND CONTINGENCIES (note N) --
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 A12) 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 A12) 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 A12) 125
Common stock, $.01 par value, 20,000,000 shares authorized;
2,201,356 shares issued and outstanding 22,014
Common stock warrants 127,660
Additional paid-in capital 44,481,382
Accumulated deficit (37,979,001)
Accumulated other comprehensive income --
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Total stockholders' equity 6,652,340
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 15,288,662
=============
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 Months Ended March 31,
(Unaudited)
2005 2004
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Rental revenue $ 670,182 1,074,301
Retail electricity revenue 310,789 --
------------- -------------
Total operating revenue 980,971 1,074,301
Operating expenses:
Cost of goods and services 277,688 --
Rental property operations 407,622 564,995
General and administrative 206,986 114,355
Depreciation and amortization 91,835 106,453
------------- -------------
Total operating expenses 984,131 785,803
Net (loss) income from operations (3,160) 288,498
Other (expense) income
Interest income 11,844 3,451
Interest expense (114,346) (133,409)
Loss on sale of investments -- (509)
Other (expense) / income (17,164) 17,391
------------- -------------
Total other (expense) income (119,666) (113,076)
------------- -------------
Net (loss) income before income taxes and minority interest (122,826) 175,422
Income taxes (note A10) -- --
Minority interest (40,824) (82,815)
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NET (LOSS) INCOME $ (163,650) 92,607
============= =============
Net (loss) income per common share (basic) $ (.07) .04
============= =============
Net (loss) income per common share (diluted) $ (.07) .03
============= =============
Weighted average number of common shares outstanding - basic 2,201,356 2,201,356
Weighted average number of common shares outstanding - diluted 2,201,356 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 Three Months Ended March 31,
(Unaudited)
2005 2004
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net (loss) income $ (163,650) 92,607
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation, amortization 91,835 106,453
Loss on sale of investments -- 520
Minority interest 40,824 82,815
Changes in operating assets and liabilities:
Accounts receivable (223,874) 15,153
Deposits and other assets (156,000) --
Deferred costs (74,253) (23,503)
Accounts payable 143,416 (10,707)
Accrued and other liabilities (312,931) (167,970)
Deferred revenue 64,646 (9,440)
------------- -------------
Net cash (used in) provided by operating activities (589,987) 85,928
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (361,129) (25,055)
Sales and maturity of investments -- 50,000
Purchase of investments -- (102,519)
Acquisition of limited partnership interest (note B) -- (208,346)
Repayments of notes receivable 8,000 5,555
------------- -------------
Net cash used in investing activities (353,129) (280,365)
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Cash flows from financing activities:
Repayments of notes payable (1,454,907) (46,201)
Net proceeds from issuance of preferred stock 2,000,000 --
Partner distributions -- (129,905)
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Net cash provided by (used in) financing activities $ 545,093 (176,106)
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Net decrease in cash and cash equivalents $ (398,023) (370,543)
Cash and cash equivalents at beginning of period 4,147,900 2,741,527
------------- -------------
Cash and cash equivalents at end of period $ 3,749,877 2,370,984
============= =============
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
March 31, 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 and stabilized cash flowing businesses
or assets. As of March 31, 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. 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.
3. 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.
4. Investments
4
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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.
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.
5. 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 $7,387,223 as of March 31, 2005. Disclosure
about fair value of financial instruments is based on pertinent
information available to management as of March 31, 2005.
6. Accounts Receivable
Management regularly reviews tenant 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.
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.
As of March 31, 2005 the Company's billed accounts receivables were less
than forty five days old and the Company did not have adequate historical
data to determine the allowance for doubtful accounts. The Company
considers accounts receivable to be fully collectible; accordingly, no
allowance for doubtful accounts is required. If amounts become
uncollectible they will be charged to operations when that determination
is made.
At March 31, 2005, accounts receivable consisted of the following:
Tenant receivables $ 28,850
Billed electricity receivables 118,100
Unbilled electricity receivables 88,127
Other receivables 61,532
Allowance for doubtful accounts --
----------
Accounts receivable, net $ 296,609
==========
5
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
7. 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.
8. 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.
9. 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.
10. 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.
6
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
11. 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 March 31, 2005.
12. 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.
Number 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.
13. 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 March 31, 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
7
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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. 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.
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.
14. Earnings Per Share
There were no preferred stock dividends for the quarters ended March, 31,
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.
Disclosures regarding shares and share price have been adjusted to reflect
the 1-for-4 reverse stock split dated February 3, 2003 in accordance with
accounting principles generally accepted in the United States of America.
15. 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.
8
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
16. 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.
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 a revised Statement No. 123, Accounting
for Stock-Based Compensation. This Statement eliminates the alternative to
use Accounting
9
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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 interpretation 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.
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.
Management does not believe the new pronouncements will have a material
impact on its financial statements.
17. 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 L) 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
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 above. No underwriting
10
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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.
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.
To assure that the Company is in full compliance with Nasdaq marketplace
rules, (i) the conversion of the Series C and the exercise of the Warrants
are subject to a cap in the number of shares of Common Stock issuable upon
such conversion or exercise equal to twenty percent (20%) of the number of
shares of Common Stock outstanding on March 1, 2005 unless and until the
issuance and sale of the Series C and the Warrants are approved by the
stockholders of the Company under such rules of the Nasdaq Stock Market,
(ii) the officers and directors purchasing securities under the Amended
Purchase Agreement (being Eric Oliver, Jon Morgan and Bruce Edgington) are
further restricted from converting or exercising the purchased securities
until the transaction is approved by the stockholders of the Company or
they exchange the purchased securities for similar securities with a
greater conversion/exercise price, and (iii) the voting rights of the
Series C are limited and restricted as set forth in the Certificate of
Designation.
NOTE D - CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances at three financial institutions, which
at times may exceed federally insured limits. At March 31, 2005, the
Company had approximately $3,221,958 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
11
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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 March 31, 2005 and 2004.
NOTE F - CASH, CASH EQUIVALENTS AND INVESTMENTS
At March 31, 2005 the Company's cash and cash equivalents consist of cash
in banks of approximately $3,749,877.
Securities available-for-sale in the accompanying balance sheet at March
31, 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 March 31, 2005 are as follows:
Gross
Market Cost Unrealized
Value Basis Losses
---------- --------- -----------
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 L) 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 March 31, 2005, the
outstanding principal balance on the note receivable was $241,555. Because
the current maturities are not reasonably estimable at March 31, 2005, the
entire principal balance is reported as non-current.
NOTE I - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
March 31, 2005:
Buildings $ 8,447,862
Tenant improvements 514,713
Furniture, fixtures and equipment 100,038
Land 158,998
------------
12
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
9,221,611
Less: accumulated depreciation (956,529)
------------
$ 8,265,082
============
Depreciation expense for the quarters ended March 31, 2005 and
2004 was $91,835 and $106,453, respectively.
NOTE J - ACCRUED LIABILITIES
Accrued liabilities consisted of the following at March 31:
Accrued property taxes $ 42,865
Accrued TDSP charges 24,935
Accrued tithing 89,028
Other liabilities 118,942
------------
$ 275,770
============
NOTE K - 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 quarter ending March 31, 2005 and 2004,
respectively.
March 31, 2005:
---------------
Inter-Company
Real Estate Other and Transaction
REP Operations Corporate Eliminations Total
------------ ---------------- ------------ ------------- -----------
Revenues from external
customers $ 406,273 678,495 -- (103,797) 980,971
============ ================ ============ ============= ===========
Depreciation, amortization
and depletion 1,522 62,985 27,328 -- 91,835
============ ================ ============ ============= ===========
Interest expense 11,228 94,061 82,267 (73,210) 114,346
============ ================ ============ ============= ===========
Segment net income (loss) (85,018) 142,481 (150,642) (70,471) (163,650)
============ ================ ============ ============= ===========
Segment assets 972,650 7,371,158 7,068,636 (123,782) 15,288,662
============ ================ ============ ============= ===========
Expenditures for segment
assets $ 7,125 351,412 2,592 -- 361,129
============ ================ ============ ============= ===========
13
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
March 31, 2004:
---------------
Inter-Company
Real Estate Other and Transaction
REP Operations Corporate Eliminations Total
------------ ---------------- ------------ ------------- -----------
Revenues from external
customers $ -- 1,074,301 -- -- 1,074,301
============ ================ ============ ============= ===========
Depreciation, amortization
and depletion -- 80,902 25,551 -- 106,453
============ ================ ============ ============= ===========
Interest expense -- 114,788 18,621 -- 133,409
============ ================ ============ ============= ===========
Segment net income (loss) -- 289,038 (196,431) -- 92,607
============ ================ ============ ============= ===========
Segment assets -- 9,857,605 5,072,275 -- 14,929,880
============ ================ ============ ============= ===========
Expenditures for segment
assets $ -- 23,594 1,461 -- 25,055
============ ================ ============ ============= ===========
NOTE L - LONG-TERM OBLIGATIONS
On June 5, 2002, TCTB entered into a loan agreement with a financial
institution 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 Bank Texas, N.A. The Bank 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 to the Bank as additional collateral.
Delaware entered into nine promissory 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 equal to the Wall Street Journal Prime
Lending Rate plus .15% (4.9% at March 31, 2005). The annual payments
14
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
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 in January 2004 in the amount of
$250,778 to purchase an additional 6.485% ownership interest in TCTB. 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
"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 (5.75% at March 31, 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.
Maturities of long-term debt at March 31, 2005 are as follows:
2005 $ 244,578
2006 262,304
2007 281,226
2008 302,596
2009 6,565,478
------------
Total 7,656,182
Less current portion 244,578
------------
Long-term portion $ 7,411,604
============
15
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
NOTE M - RELATED PARTY TRANSACTIONS
At March 31, 2005 and 2004, related parties leased from TCTB, office space
of approximately 32,000 and 29,000 square feet, respectfully. TCTB
received rental income from these related parties of approximately $75,279
and $67,256 during the quarters 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 Office
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).
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. To ensure that the Company is in full compliance with Nasdaq
marketplace rules, (i) the conversion of the Series C and the exercise of
the Warrants are subject to a cap in the number of shares of Common Stock
issuable upon such conversion or exercise equal to twenty percent (20%) of
the number of shares of Common Stock outstanding on March 1, 2005 unless
and until the issuance and sale of the Series C and the Warrants are
approved by the stockholders of the Company under such rules of the Nasdaq
Stock Market, (ii) the officers and directors purchasing securities under
the Amended Purchase Agreement (being Eric Oliver, Jon Morgan and Bruce
Edgington) are further restricted from converting or exercising the
purchased securities until the transaction is approved by the stockholders
of the Company or they exchange the purchased securities for similar
securities with a greater conversion/exercise price, and (iii) the voting
rights of the Series C are limited and restricted as set forth in the
Certificate of Designation.
The following table reflects the Series C issuance to the Company's
Officers and Directors.
16
AMEN Properties, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
March 31, 2005
(Unaudited)
Preferred C
Number of Common 20% Limited
Preferred C Stock Voting Purchase
Shares Equivalent Equivalent Price
------------ ------------ ------------ ----------
Eric Oliver 14,063 56,252 48,430 $ 225,008
Jon M. Morgan 14,062 56,248 48,430 224,992
Bruce Edgington 3,125 12,500 13,208 50,000
------------ ------------ ------------ ----------
Total 31,250 125,000 110,068 $ 500,000
============ ============ ============ ==========
The following table reflects the issuance of Warrants to the Company's
Officers and Directors.
Number of Common
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 N - COMMITMENTS AND CONTINGENCIES
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.
17
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 and related footnotes
presented in Item 1 and the Company's December 31, 2004 Form 10-KSB.
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
Acquisition of Operating Properties
-----------------------------------
We allocate the purchase price of acquired properties to tangible and identified
intangible assets
18
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
19
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.
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 March 31, 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 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.
20
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
will be 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. As
of March 31, 2005 the Company's billed accounts receivables were less than forty
five days old and the Company did not have adequate historical data to determine
the allowance for doubtful accounts. The Company considers accounts receivable
to be fully collectible; accordingly, no allowance for doubtful accounts is
required. If amounts become uncollectible they will be charged to operations
when that determination is made.
Results of Operations
Overview
--------
For the quarter ended March 31, 2005 the Company showed a net loss of $163,650
or a net loss $.07 per share as compared to net income of $92,607, or $.04 per
share for the same period ended March 31, 2004 for a net change of approximately
$256,000. This change is mainly due to the Company's newly created, wholly owned
subsidiary W Power. For the quarter ending March 31, 2005, the operations of W
Power incurred a net operating loss of approximately $85,018. This loss is due
to management restraining the customer growth of W Power to ensure that adequate
credit was available to meet W Power's growth. Additionally, the Company has
experienced a decrease in net income from it's investment in TCTB due to the
distribution and sale of the Company's undivided interest in a commercial real
estate property in Lubbock, Texas on December 31, 2004. This sale reduced the
Company's income from its limited partnership interest in TCTB for the quarter
ending March 31, 2005 as compared to March 31, 2004 by approximately $146,500
(approximately $104,500, net to the Company's interest in TCTB of 71.348%).
Additionally, during the quarter ending March 31, 2005 the Company incurred
additional legal fees and other general and administrative costs of
approximately $34,500 associated with the issuance the Company's Series C
Preferred Stock.
Revenues
--------
Rental revenue declined for the period ending March 31, 2005 over the same
period ending March 31, 2004, by approximately $404,000. The decline is mainly
due to the sale of the commercial real estate building in Lubbock, Texas and a
decrease in parking permits issued to tenants in the surrounding buildings in
downtown Midland.
21
Retail electricity sales for the period ending March 31, 2005 were $310,789. As
of March 31, 2005, W Power has served approximately 785 meters and W Power's
customers have consumed approximately 4,807 megawatt hours ("mwh"). Management
believes that W Power's growth will be seen in the following months as W Power
sees an increase in meters served as well as an increase in the average size of
the customer being served. Due to W Power not being in operations during the
three months ended March 31, 2004, comparative information is not available.
Operating expenses
------------------
Total operating expenses for the quarters ended March 31, 2005 and 2004 were
$984,131 and $785,803, respectively. The increase of approximately $198,000 in
operating expense is mainly related to W Power's purchase of whole sale
electricity of $277,688, which is partially offset by the decrease in the rental
property operations.
W Power's cost of goods and services were 277,688 or 89% of retail electricity
sales for the period ending March 31, 2005. W Power's gross profit was $33,101
or 11% of retail electricity sales for the three months ending March 31, 2005.
Due to W Power not being in operations during the three months ended March 31,
2004, comparative information is not available.
Rental property operations and depreciation expense experienced a decrease of
approximately $157,000 and 14,600, respectively, for the three months ending
March 31, 2005 as compared to March 31, 2004. The decrease for property
operations and depreciation is attributable to the sale of the commercial real
estate building in Lubbock, Texas on December 31, 2004.
For the three months ended March 31, 2005 general and administrative costs
increased approximately $92,600 as compared to the same period ending March 31,
2004. This increase is due to W Power beginning operations in January of 2005.
Other (expense) income
----------------------
For the three months ended March 31, 2005, the Company experienced an increase
of approximately $8,000 in interest income as compared to the three months ended
March 31, 2004. This increase is due the interest income the Company received on
the $2,100,000 certificate 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 the TCTB to distribute and sell the
Lubbock Building.
For the three months ended March 31, 2005 and 2004 the Company incurred a net
change in other expense of approximately $34,500. This change is related
entirely to the Company expensing all legal expenses associated with the
issuance of the Company's Series C Preferred Stock and bank fees associated with
the limited guarantees the Company received from the Series C Preferred Stock
investors in favor of Western National Bank.
Minority interest
-----------------
22
Minority interest expense for the three months ended March 31, 2005 and 2004 was
$40,824 and $82,815, respectively, and reflects the minority interest owners of
TCTB. The decrease in minority interest is related to the Company's purchase of
an additional 6.485533% interest in TCTB effective January 1, 2004 and the
decrease in the Minority Interest's income from its limited partnership interest
in TCTB for the quarter ending March 31, 2005 as compared to March 31, 2004.
Liquidity and capital resources
-------------------------------
Though we have not abandoned the 2003 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.
As a retail electric provider, W Power will have to focus on its credit needs
over the next 12 to 18 months. As with any exponential growth business model, W
Power is also attempting to manage its growth prudently. They must also continue
incremental development of their 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 a hyper-growth
business model are the two biggest risks facing W Power. W Power hopes to
achieve break even by the third quarter of this year. We are confident W Power
can attain its market share benchmarks during 2005.
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 three months ended March 31, 2005 and 2004, net cash (used in)
provided by operating activities was $(589,987) and $85,928, respectfully. The
net decrease of approximately $675,900 used in operating activities is related
to several items. During the three months ending March 31, 2005, the Company
paid the balance, approximately $286,800, of the accrued interest on the nine
promissory notes, certain of which are with related parties, entered into by
Delaware in October 2002 to purchase the original 64.9% ownership interest in
TCTB. With W Power's increased operations in January 2005, the Company incurred
additional cash outlays of approximately $156,000 for the required collateral
deposits with W Power's wholesale electricity providers and ERCOT. The remaining
decrease is mainly due to an increase in operating expenses associated with the
W Power's operating expensing during the three months ending March 31, 2005, and
comparative information is not available for the period ending March 31, 2004.
Net cash used in investing activities was $353,129 and $280,365 for the three
months ended March 31, 2005 and 2004, respectively. For the three months ending
March 31, 2005, the Company used approximately $350,000 on remodeling lease
space for new tenants which was approximately $73,000 more than the three months
ended March 31, 2004. During the first three months ending March 31, 2005 the
Company did not purchase or sale any investments.
23
Net cash provided by (used in) financing activities was $545,093 and ($176,106)
for the three months ending March 31, 2005 and 2004, respectively, for a net
change of approximately $721,000. During the three months ending March 31, 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. Additionally, the Company received $2,000,000 from the
issuance of the Company's Series C Preferred Stock on March 1, 2005. During the
three months ending March 31, 2004, minority interest distributions were
$129,905 and were related to the minority interest owners in TCTB. For the three
months ending March 31, 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 at $2.5 to $5 million and has
been diligent in its efforts to ensure its preservation and utilization. The
Company anticipates being able to offset 2005's taxable income against the NOL.
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, as of March 31, 2005, except as discussed below with respect to internal
control over financial reporting, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC,
and include controls and procedures designed to ensure that information required
to be disclosed by the Company in such reports is assembled and reported to the
Company's management, including the Chairman and Chief Executive Officer and the
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
There have not been changes in internal control over financial reporting during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Management has identified and has reported to the Audit
Committee of the Company's Board of Directors certain matters involving internal
control deficiencies. The deficiencies noted were (a) a lack of documented
control procedures (b) the lack of segregation of duties and (c) insufficient
supervision of the Company's accounting personnel. 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. Except as noted above the Company believes that its
internal control over financial reporting are sufficient to provide reasonable
assurance that the consolidated financial statements are fairly
24
presented in conformity with accounting principles generally accepted in the
United States of America.
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:
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
25
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 Section.
1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section.
1350.
99.1 Press release First Quarter 2005 Form 10-QSB
26
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.
May 15, 2005 By: /s/ Eric Oliver
---------------
Eric Oliver
Chairman and Chief Executive Officer
May 15, 2005 By: /s/ John M. James
-----------------
John M. James
Chief Financial Officer and Secretary
27
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 Section.
1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 USC Section.
1350.
99.1 Press release First Quarter 2005 Form 10-QSB
28