U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ending June 30, 2003
Or
/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ____________
Commission File No. 333-93475
CORNERSTONE MINISTRIES INVESTMENTS, INC.
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(Exact name of small business issuer as specified in its charter)
Georgia 58-2232313
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
2450 Atlanta Highway, Suite 904, Cumming, GA 30040
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (678)-455-1100
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Former name, address and former fiscal year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by the
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
Yes__X_ No___
As of June 30, 2003, there were issued and outstanding 531,529 shares of the
common stock of the issuer.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Cornerstone Ministries Investments, Inc.
Index
Page
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Form 10-QSB Title Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Accountant's Review Report F-1
Consolidated Balance Sheet as of June 30, 2003 F-2
Consolidated Statements of Income (Loss) and Retained Earnings
(Deficit) for the Six Months ended June 30, 2002 and 2003 F-3
Consolidated Statements of Changes in Stockholders Equity
For the Six Months ended June 30, 2002 and 2003 F-4
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2002 and 2003 F-5
Notes to Financial Statements F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 3
Item 3. Controls and Procedures 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 5
Item 2. Changes in Securities and Use of Proceeds 5
Item 3. Defaults on Senior Securities 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Item 5. Other Information 5
Item 6. Exhibits and Reports on Form 8-K 5
Signatures 5
Certifications 6
2
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 & 2003
06/30/02 06/30/03
ASSETS
Cash in banks $ 4,122,876 $ 6,773,656
Loans in process 335,229 824,227
Real estate loans, net 37,506,146 77,191,845
Bond holdings & accrued interest 5,339,199 2,701,600
Fixed assets, net 290,212 900,998
Deferred tax asset, net 556,371 538,443
Goodwill 450,997 450,997
Deferred financing costs, net 699,628 1,694,439
Real estate held for sale 333,864 340,000
Other assets 65,425 45,376
------------ ------------
TOTAL ASSETS $ 49,699,947 $ 91,461,581
============ ============
LIABILITIES & SHAREHOLDER'S EQUITY
Investor certificates & accrued interest $ 45,570,202 $ 83,946,739
Mortgage participation agreements &
accrued interest 0 4,183,323
Accounts and other payables 1,093,168 305,871
Building mortgage 193,336 184,660
Dividends payable 172,232 169,085
Capital lease obligation 0 16,146
------------ ------------
TOTAL LIABILITIES 47,028,938 88,805,824
------------ ------------
SHAREHOLDER'S EQUITY
Series A Convertible Preferred Stock,
no par value; 235,000 shares authorized,
no shares issued & outstanding 0 0
Common Stock, $0.01 Par Value, 10 million
shares authorized; 529,943 & 531,529 shares
issued & outstanding 5,299 5,315
Paid in capital 3,287,149 3,297,435
Retained earnings (deficit) (621,439) (573,744)
Treasury Stock 0 (73,249)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,671,009 2,655,757
------------ ------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 49,699,947 $ 91,461,581
============ ============
SEE ACCOMPANYING NOTES F-1
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) & RETAINED EARNINGS (DEFICIT)
FOR THE THREE MONTHS & SIX MONTHS ENDED JUNE 30, 2002 & 2003
3 Months 6 Months 3 Months 6 Months
Ended 06/30/02 Ended 06/30/02 Ended 06/30/03 Ended 06/30/03
INCOME
Loan interest & fees earned $ 946,691 $ 2,108,391 $ 2,032,829 $ 3,908,037
Real estate & other income 153,089 287,928 110,959 174,233
----------- ----------- ----------- -----------
TOTAL INCOME 1,099,780 2,396,319 2,143,788 4,082,270
----------- ----------- ----------- -----------
Investor interest expense 942,072 1,785,364 1,797,058 3,354,375
Marketing expenses 121,737 228,734 180,738 287,225
Salaries, wages, payroll taxes and benefits 207,478 346,769 256,714 471,215
Operating expenses 91,116 270,644 142,277 456,386
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,362,403 2,631,511 2,376,787 4,569,201
----------- ----------- ----------- -----------
Operating income (loss) (262,623) (235,192) (232,999) (486,931)
Income tax (provision) benefit 215,716 174,701 107,805 221,751
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (46,907) $ (60,491) $ (125,194) $ (265,180)
=========== =========== =========== ===========
Retained earnings as previously reported $ (402,300) $ (30,744) $ (279,465) $ (139,479)
Correction of error, Note 2 0 (357,972) 0 0
----------- ----------- ----------- -----------
Beginning retained earnings (deficit)
as restated (402,300) (388,716) (279,465) (139,479)
Net income (loss) (46,907) (60,491) (125,194) (265,180)
Dividends declared (172,232) (172,232) (169,085) (169,085)
----------- ----------- ----------- -----------
Ending retained earnings (deficit) $ (621,439) $ (621,439) $ (573,744) $ (573,744)
=========== =========== =========== ===========
Basic & Diluted Earnings (Loss) per
Common Share $ (0.09) $ (0.11) $ (0.24) $ (0.51)
SEE ACCOMPANYING NOTES F-2
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 & 2003
RETAINED
COMMON STOCK: PAID-IN PREFERRED EARNINGS TREASURY TOTAL
SHARES AMOUNT CAPITAL STOCK (DEFICIT) STOCK EQUITY
BALANCE, DECEMBER 31, 2001 528,721 $ 5,287 $3,279,491 $ 0 $ (388,716) $ 0 $2,896,062
Net income (loss) (60,491) (60,491)
Capital contributed 1,222 12 7,658 7,670
Dividend declared (172,232) (172,232)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2002 529,943 $ 5,299 $3,287,149 $ 0 $ (621,439) $ 0 $2,671,009
========== ========== ========== ========== ========== ========== ==========
BALANCE, DECEMBER 31, 2002 530,944 $ 5,309 $3,293,641 $ 0 $ (139,479) $ 0 $3,159,471
Net income (loss) (265,180) (265,180)
Capital contributed 585 6 3,794 3,800
Dividend declared (169,085) (169,085)
Treasury shares acquired (73,249) (73,249)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 2003 531,529 $ 5,315 $3,297,435 $ 0 $ (573,744) $ (73,249) $2,655,757
========== ========== ========== ========== ========== ========== ==========
SEE ACCOMPANYING NOTES F-3
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 & 2003
06/30/02 06/30/03
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (60,491) $ (265,180)
Adjustments to reconcile net income to cash
from operations-
Depreciation & amortization 157,734 227,699
Changes in-
Loans in process (130,645) (465,207)
Accrued bond interest, net (81,085) 1,312
Accrued loan interest & deferred loan fees 284,088 (147,528)
Deferred taxes (312,893) (264,210)
Deferred financing costs (266,451) (893,058)
Investor interest payable (1,096,453) 1,006,288
Accounts & other payables 960,990 23,747
Other (4,738) (7,184)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS (549,944) (783,321)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (7,387,265) (20,235,814)
Loan principal payments received 276,077 7,946,195
Bonds redeemed 62,000 31,250
Fixed assets purchased (37,998) (587,326)
Treasury stock acquired 0 (73,249)
Real estate costs capitalized (2,351) 0
------------ ------------
NET CASH (USED) BY INVESTING (7,089,537) (12,918,944)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 12,263,123 17,975,412
Investor certificates matured and/or redeemed (3,240,201) (2,844,132)
Mortgage participation agreements sold 0 4,015,112
Building mortgage principle payments (3,858) (4,566)
Capital lease principle payments 0 (1,564)
Common stock issued 7,670 3,800
Dividends paid (171,834) (168,640)
------------ ------------
NET CASH PROVIDED BY FINANCING 8,854,900 18,975,422
------------ ------------
Net Change in cash 1,215,419 5,273,157
Cash at beginning of period 2,907,457 1,500,499
------------ ------------
CASH AT END OF PERIOD $ 4,122,876 $ 6,773,656
============ ============
Supplemental Information-
Interest paid during the period $ 2,907,083 $ 2,299,445
Income taxes paid during the period $ 0 $ 0
Non-cash transactions-
Fixed asset lease financing $ 17,710
SEE ACCOMPANYING NOTES F-4
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying Consolidated Financial Statements include the accounts of
Cornerstone Ministries Investments, Inc., Wellstone Communities, Inc. and
Wellstone Financial Group, LLC (collectively "The Company"). The Company
originates and purchases mortgage loans made to faith-based organizations. The
Company offers specialized programs for churches, not-for-profit sponsors of
senior housing and affordable housing programs. The Company also invests in
similar real estate projects for the purpose of selling at a profit, or leasing.
Substantially all of the Company's loans and investments are in projects located
in the Southeastern United States. On February 12, 2003 the Board of Directors
approved amending the Articles of Incorporation and changed the name of the
Corporation from "PIF/Cornerstone Ministries Investments, Inc." to "Cornerstone
Ministries Investments, Inc.".
Loans are stated at unpaid principal balances, less an allowance for loan losses
and net deferred loan fees and unearned discounts. Interest income is recognized
monthly as it is earned, in accordance with loan terms. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance. Interest income on other impaired
loans is recognized only to the extent of interest payments received. Loan
origination fees are deferred and amortized as a yield adjustment over the lives
of the related loans using the interest method. Amortization of deferred loan
fees is discontinued when a loan is placed on nonaccrual status.
Loans in process are amounts advanced or expended on behalf of borrowers prior
to completion of the loan documentation. Generally, interest is not accrued on
these amounts until the loan documentation is complete and the borrower
acknowledges the debt and associated interest. Substantially all of these
expenditures are converted to loans within one year or less.
Deferred financing costs subject to amortization include the costs and
commissions associated with issuing investor certificates. These costs are being
amortized on a straight-line basis over the term of the debt, principally 5
years.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions, and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change could
occur in the allowance for loan losses in the near term. However, the amount of
the change that is reasonably possible cannot be estimated. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses. As of
the balance sheet dates no loans were in arrears; therefore, no allowance for
loan losses is reflected in the accompanying statements.
Cash and cash equivalents include checking accounts and short term certificates
with original maturities of 90 days or less.
Bond holdings consist of tax-free local government securities and local church
bonds that management has the positive intent and ability to hold to maturity.
They are reported at cost, adjusted for amortization of premiums and accretion
of discounts that are recognized in interest income using methods approximating
the interest method over the period to maturity. Declines in the fair value of
individual securities below their cost that are other than temporary, result in
write- downs of the individual securities to their fair value. The related
write-downs are included in earnings as realized losses.
Property and equipment are valued at cost when purchased. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets, which are generally three to five years for furnishings and equipment,
and 40 years for the Company's owned offices.
Interest on Investor Certificates is accrued from the date of issuance, and may
be paid semi-annually. Investors holding five year certificates in multiples of
$10,000 may receive interest monthly. Interest on Mortgage Participation
Agreements is accrued from the date of issuance and is paid monthly.
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to the difference between the methods of accounting for
depreciation and loan fees for financial and tax-reporting purposes. The
deferred taxes represent the estimated future tax consequences of those
F-5
differences, which will be either taxable or deductible when the assets and
liabilities are recovered or settled. Accelerated depreciation methods and
shorter asset lives are used for tax reporting, and straight-line depreciation
is used for financial statement reporting. The Company calculates deferred taxes
under the provisions of SFAS No. 109 which provides for deferred tax assets and
liabilities to be carried on the balance sheet at current tax rates.
Basic earnings (loss) per common share are calculated by dividing net income or
net loss by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) per common share are calculated by adjusting
weighted average outstanding shares, assuming conversion of all potentially
dilutive shares of Series A Convertible Preferred Stock.
The Financial Accounting Standards Board has issued several recent
pronouncements, none of which are expected to materially affect the financial
statements of the Company:
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
effective for fiscal years beginning after December 15, 2001. The Statement
establishes a single accounting model, based on the framework established in
Statement 121, for long-lived assets to be disposed of by sale. The Statement
also resolves significant implementation issues related to Statement 121. The
Statement retains the requirements of Statement 121 to recognize an impairment
loss only if the carrying amount of a long-lived asset is not recoverable from
its undiscounted cash flows and measure an impairment loss as the difference
between the carrying amount and fair value of the asset.
SFAS No. 145, Recision of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections, effective for fiscal years beginning
after May 15, 2002. The Statement eliminates an inconsistency between the
required accounting for sale-leaseback transactions and the required accounting
for certain lease modifications that have economic effects that are similar to
sale-leaseback transactions.
SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities,
effective for transactions initiated after December 31, 2002. This Statement
improves financial reporting by requiring that a liability for a cost associated
with an exit or disposal activity be recognized and measured initially at fair
value only when the liability is incurred. The accounting for similar events and
circumstances will be the same, thereby improving the comparability and
representational faithfulness of reported financial information.
SFAS No. 147, Acquisition of Certain Financial Institutions, effective for
transactions after October 1, 2002. The Statement removed acquisitions of
financial institutions from the scope of Statement No. 72, "Accounting of
Certain Acquisitions of Banking or Thrift Institutions," which permitted the
recognition and subsequent amortization of any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset. For a transaction that is
a business combination, the Statement requires that the unidentifiable
intangible asset acquired be recognized as goodwill and accounted for under
Statement No. 142. The Statement also amended Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," to include in its scope
long-term borrower-relationship intangible assets of financial institutions such
as depositor-and-borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that Statement No. 144 requires of other long-lived
assets that are held and used.
SFAS No. 148, Accounting for Stock-Based Compensation, effective for fiscal
years ending after December 15, 2002. The Statement amends Statement No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. The Company has no stock-based
compensation.
SFAS 149, Amendment of Statement on Derivative Instruments and Hedging
Activities, effective for contracts entered into after June 30, 2003 and for
hedging relationships designated after June 30, 2003. This statement improves
financial reporting by requiring that contracts with comparable characteristics
be accounted similarly.
SFAS 150, Accounting for Certain Financial Instruments with Characteristics of
both Liability and Equity establishes standards for how an issuer classifies and
measures certain financial instruments, including those that embody obligations
to issue equity shares. The statement is effective for financial instruments
entered into or modified after May 31, 2003.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirement
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
recognition and measurement is effective for transactions after December 31,
2002 and disclosure requirements are effective for fiscal years ending after
December 15, 2002. The Interpretation improves disclosures to be made by a
guarantor about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, is
effective in all financial statements issued after January 31, 2003. The
interpretation addresses conditions when consolidation may be required for
variable interest entities where the equity investment is not sufficient to
finance its activities without additional financial support from other parties,
or the equity investors lack one or more of a controlling financial interest
F-6
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that are used.
Certain report classifications used in prior year financial statements have been
reclassified to conform to current year presentation.
NOTE 2 - CORRECTION OF PREVIOUS FINANCIAL STATEMENTS
The Company has retroactively restated prior period's financial statements for
corrections to its method of recognizing fees associated with mortgage loans. As
of December 31, 2000 the Company deferred unearned loan fees of $442,373 less
related taxes of $166,933, together aggregating $275,440. Restatement prior to
December 31, 2000 was not required as fees were recognized generally in the same
periods that the loans were outstanding. Additionally, costs associated with its
stock offerings ($152,183 with $0 income tax effect) have been reclassified from
deferred financing costs to a reduction of the associated paid-in capital
account.
NOTE 3 - FIXED ASSETS
As of June 30, the Company's fixed assets are composed of:
2003 2002
--------- ---------
Office Condominiums $ 792,659 $ 252,922
Office Computers, Furnishings, Software & Equipment 116,054 26,173
Vehicles 37,730 37,730
Capital Lease - phone system 17,710 -0-
Less: Accumulated Depreciation (63,155) (26,613)
--------- ---------
Fixed Assets, net $ 900,998 $ 290,212
Depreciation expense was $24,375 and $8,462 for the six months ending June 30,
2003 and 2002, respectively.
NOTE 4 - COMMITMENTS
As of June 30, 2003, the Company has a capital lease for the phone system at the
Company's headquarters. The lease was recorded at the asset's fair value and is
being amortized over three years using the straight-line method. Interest
expense is calculated based on the implied interest rate in the lease. The lease
payment, including principal and interest, is $628 per month.
Future minimum lease payments as of June 30, 2003:
July, 2003 - June, 2004 $ 7,531
July, 2004 - June, 2005 7,531
July, 2005 - June, 2006 6,905
--------
21,967
Less: interest portion (5,821)
--------
Capital lease obligation $ 16,146
The Company has entered into an Administrative Services Agreement with
Cornerstone Capital Advisors, Inc. (CCA) to provide loan administration,
including the application and closing process and loan accounting; investor
relations; marketing collateral; administration of computers, computer networks
and management information systems; photo copying; and, maintenance of records,
record keeping, bookkeeping and accounting after June, 2003. The Company is
obligated to pay directly or reimburse actual expenses to be billed monthly by
CCA. The base for good performance is expected to be that all bond interest and
other obligations are current and the common stock shareholders have received
dividends equal to an annual rate of at least 10% on the price paid in a public
offering for all the time the shares were outstanding. The factors above that
base, and the amount of incentive compensation will relate to the director's
judgment on the extent to which CCA's services will have contributed to the
results. The agreement is for renewable one-year terms and it may be terminated
by either party upon 60 days' written notice. It is anticipated that after 2003,
the Company will not have any employees of its own and accordingly, CCA will be
subject to the supervision of the Board of Directors. As of June 30, 2003, CCA
had not incurred any material expenses to be billed to the Company.
F-7
NOTE 5 - REAL ESTATE LOANS RECEIVABLE
At March 31, 2003 the Company had Real Estate Loans on church and other
not-for-profit properties as follows:
Mortgage Loans $ 78,260,212
Accrued Interest 642,833
Unearned Loan Fees (1,711,200)
------------
Total Real Estate Loans $ 77,191,845
These loans mature over a period beginning in 2003 and ending in 2006. Loan
maturity may be accelerated in accordance with loan terms, generally upon
certain events of default such as non-payment of scheduled payments or
bankruptcy.
NOTE 6 - GOODWILL & DEFERRED FINANCING COSTS
The Company has adopted SFAS 142 "Goodwill and Other Intangible Assets"
effective January 1, 2002. Goodwill associated with the Company's acquisition of
Presbyterian Investor's Fund, Inc. (PIF) is carried at $450,997. Management does
not believe impairment of this asset has occurred and accordingly, no provision
for impairment loss has been recorded. Deferred financing costs consist of costs
incurred to register the company's debt securities and commissions paid or
accrued on the sale of debt securities. The costs are amortized on a
straight-line basis over the period the securities are outstanding, generally
five years.
At June 30, Deferred Financing Costs consist of: 2003 2002
----------- -----------
Costs incurred to register the Company's debt securities $ 544,926 $ 406,790
Commissions paid on the sale of debt securities 1,894,202 632,304
Less: Accumulated Amortization, generally over 5 years (744,689) (339,466)
----------- -----------
$ 1,694,439 $ 699,628
NOTE 7 - BOND HOLDINGS Bond holdings at June 30:
2003 2002
----------- -----------
St. Lucie Co., FL Subordinated Revenue Bonds
Maturity 7/1/2036 $ 2,325,000 $ 2,325,000
Maturity 10/1/2036 2,700,000 2,700,000
Undivided 50% interest sold to investor (2,512,500) -0-
Local Church Bonds, maturing 2003 27,500 85,500
Accrued Interest Receivable 161,600 228,699
----------- -----------
Totals $ 2,701,600 $ 5,339,199
The bonds are not traded on an exchange, however management estimates that the
fair value of the individual securities approximate their original cost.
Accordingly, no loss provision has been recorded in the accompanying financial
statements.
NOTE 8 - INCOME TAXES
The deferred tax asset results from a difference in reporting income from loan
fees and represents taxes already paid, reduced by a small amount of tax
depreciation in excess of book depreciation. As such, no valuation allowance has
been provided since the Company will realize the benefit of the prepaid taxes by
reducing its federal and state taxable income in the future. The Company has
pending with the Department of the Treasury, a request to change its accounting
method with respect to loan fees which would approximate the book treatment
under SFAS Nos. 65 and 91.
Income tax expense (benefit) consists of estimated federal and state income
taxes on the company's taxable income, and the change in components of deferred
tax assets and liabilities. The deferred tax asset is comprised of provisions
for deductible temporary differences, principally depreciation and amortization
methods and accelerated lives, and reporting of loan fees earned.
Components of income tax benefit for the period ended June 30 are:
2003 2002
--------- ---------
Current: Federal $ 36,090 $ -0-
State 6,369 -0-
Deferred: Federal (224,578) (161,345)
State (39,632) (13,356)
--------- ---------
$(221,751) $(174,701)
F-8
NOTE 9 - CASH CONCENTRATION
A cash concentration risk arises when the Company has more cash in a financial
institution than is covered by insurance. At June 30, 2003, the Company had cash
in excess of insured limits totaling $6,545,186.
NOTE 10 - INVESTOR CERTIFICATES
During 2001, the Company filed two Form SB-2 Registration Statements under the
Securities Act of 1933. Under these Registration Statements, the Company issued
3 separate securities. Under the first of the SB-2 filings the Company issued
securities identified as "Access Certificates". These certificates have no
stated maturity, are purchased in $100 increments and bear a rate of interest as
determined by the Company's board of directors on the first of each January,
April, July and October. The directors may also change the rates between these
dates if market conditions warrant such a change. Under this same filing the
Company issued 5 year "Graduated Certificates" which require a minimum
investment of $500. Under the terms of the offering as filed, these certificates
carry a graduated interest rate based on how long the certificate is held by the
investor, up to 5 years. These certificates are not collateralized and no
sinking fund is required for paying the certificates upon maturity. Also during
the year ended December 31, 2001 the Company offered up to $17,000,000 of Series
B Certificates of Indebtedness. Of the $17,000,000 offered, $3,000,000 has a
March 13, 2003 maturity date and bears an interest rate of 7%. The remaining
$14,000,000 will have a March 15, 2005 maturity date and bear interest at 9%.
These certificates are not collateralized and no sinking fund for paying the
certificates on maturity is required. Listed below are the certificates
outstanding as of June 30, 2003 by interest rate and date of maturity:
5.0% $ 2,774,458 2003 $ 6,599,644
7.0% 5,273,376 2004 4,145,056
7.5% 2,580,589 2005 4,862,921
8.0% 469,532 2006 10,857,455
9.0% 69,097,609 2007/Beyond 53,730,488
On February 21, 2003 Wellstone Communities, Inc., a wholly owned subsidiary,
filed a Form SB-2 Registration Statement under the Securities Act of 1933 with
the Securities and Exchange Commission to sell up to $50,000,000 of its Series A
Preferred Stock. Net proceeds from the offering are expected to be used to make
and purchase loans secured by properties, start or acquire a bank and add to
working capital.
On April 29, 2003 the Company filed a Form SB-2 Registration Statement under the
Securities Act of 1933 with the Securities and Exchange Commission to sell up to
$50,000,000 of its Certificates of Indebtedness along with $1,625,000 of its
Common Stock.
NOTE 11 - MORTGAGE PARTICIPATION AGREEMENTS
In 2003, the Company started issuing Mortgage Participation ("MP") Agreements.
MP Agreements have not been registered and therefore, are only available to
accredited investors with a $100,000 minimum investment. The agreements are
collateralized by specific senior housing real estate loans owned by the Company
and entitle the investor to a proportionate share of the interest earned on the
collateral. Interest is paid monthly to the MP investors after the Company
receives interest payments on the related collateralized loans. The agreements
have no maturity date. Principal payments are made when the Company receives
principal payments on the collateralized loans. Losses that the Company may
incur on the collateralized loans are shared pro-rata with the MP Agreement
holders. The Company has the right, but not the obligation, to redeem the MP
agreements at any time. Interest expense related to MP Agreements was $27,020
for the six months ended June 30, 2003. Principal and interest outstanding and
related collateral as of June 30, 2003:
Collateral Description MP Amount Outstanding
- ---------------------- ---------------------
Loan to Senior Housing Services; senior
housing facility, Lewisville, TX $2,490,113
Loan to Senior Housing Services; senior
housing facility, Garland, TX 1,669,842
----------
Total principal 4,159,955
Accrued interest payable 23,368
----------
$4,183,323
F-9
NOTE 12 - LOAN GUARANTEES
At June 30, 2003 the Company was guarantor for potential total of $34,776,000 of
loans secured by retirement facilities owned by not-for-profit entities. Certain
acquisition and development loans in which we choose to secure outside financing
may require a CMI guarantee as a condition of the extension of the loan by the
financial institution. The guarantee is solely limited to amounts drawn under
credit facilities and only cover outstanding principal and accrued interest and
terminate upon maturity and principal repayment. At June 30, 2003, actual
amounts drawn and therefore guaranteed to a commercial bank total $28,531,778.
Only upon an uncured payment default and upon demand by the financial
institution would CMI be required to perform under its guarantee obligations.
CMI's recourse would be limited to repossession of the underlying collateral and
subsequent resale of the facilities. As of June 30, 2003, all loans which had a
guarantee were current and accordingly no obligation is recognized in the
financial statements.
NOTE 13 - PROFIT SHARING PLAN
During 2001, the Company established a Profit Sharing Plan for its employees.
The Plan allows for entry into the plan after one year of service, and immediate
vesting of contributed amounts. All contributions are to be made at the
discretion of the Company after approval by the board of directors. For the six
months ended June 30, 2003 the Company has not elected to contribute.
NOTE 14 - BUILDING MORTGAGE
In connection with the acquisition of office space, the Company obtained a
mortgage and pledged the real estate as collateral. The mortgage requires
monthly payments of principle and interest totaling $2,068 including principal
reductions and interest at 8.5%. The loan matures March 1, 2006 at which time a
balloon payment of $158,637 will be required. Estimated principle reductions
are-Year 2003- $3,708; Year 2004- $9,791; Year 2005- $10,658; Year 2006-
$160,503.
NOTE 15 - SERIES A CONVERTIBLE PREFERRED STOCK
In 2001, the Company amended its Articles of Incorporation to provide for the
issuance of up to 235,000 shares of Series A Convertible Preferred Stock. The
shares do not accrue dividends unless such dividends are declared by the Board
of Directors. The shares entitle the preferred shareholder to have one vote per
share, presently equal to the voting rights of Common shareholders. Each share
is convertible, after 3 years, into shares of Common Stock based on an
adjustable formula. Shares with a value of $500,000 were issued to Wellstone
Financial Group, LLC (WFG) during 2001. As WFG is included in these consolidated
financial statements, the shares have been eliminated in consolidation.
Accordingly, if the shares were converted at the balance sheet date herein, an
additional 76,923 shares of Common Stock could be issued, however those shares
would be eliminated in consolidation.
NOTE 16 - EARNINGS PER SHARE
Basic earnings (loss) per share have been calculated as follows:
Current Quarter Year-to-Date
--------------- ------------
2002 Net Income (Loss) $ (46,907) $ (60,491)
Average Common Shares Outstanding 529,629 572,166
Earnings (Loss) per Common Share $ (0.09) $ (0.11)
2003 Net Income (Loss) $ (125,194) $ (265,180)
Average Common Shares Outstanding 519,965 523,088
Earnings (Loss) per Common Share $ (0.24) $ (0.51)
Diluted earnings per share are the same as basic earnings per share because
there are no shares of Series A Convertible Preferred Stock outstanding after
elimination of the shares owned by Wellstone Financial Group, LLC (a 100% owned
subsidiary) in these consolidated financial statements. Other than the Series A
Convertible Preferred Stock, there are no other potentially dilutive securities,
stock options or warrants outstanding.
F-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the accompanying
unaudited consolidated financial statements and related notes This discussion
contains certain forward-looking statements with respect to the Company's
operations, industry, financial condition and liquidity that involve risks and
uncertainties. These statements, which are typically introduced by phrases such
as "the Company believes", "anticipates", "estimates" or "expects" certain
conditions to exist, reflect management's best current assessment of a number of
risks and uncertainties. The Company's actual results could differ materially
from the results anticipated in these forward-looking statements as a result of
certain risk factors described in this report, including those set forth in the
Form 10-KSB for the year ended December 31, 2002.
Overview
Since its inception, the Company has focused on serving only faith-based
organizations, principally churches and non-profit sponsors of senior housing,
affordable housing, and school and daycare programs.
The Company generates revenue primarily from origination and renewal fees on
loans, interest on these loans, gains on the sale of property and interest on
bonds and money market accounts. It currently charges a 10% fee on new loans and
renewal fees of as much as 5% of the outstanding balance of the renewing loan.
The interest rate on all new loans is currently from 10% to 12%. Some loans are
participating loans, enabling the Company to receive income from the gains on
the sale of property for which it has provided financing. The participation
percentage varies between 25% and 33% of the gains on the sale of real estate.
Comparison of Periods Ending June 30, 2002 and June 30, 2001 Income
General. Assets increased from $49,699,947 at June 30, 2002 to $91,461,581 at
June 30, 2003 for a net increase of $41,761,634 or 84.0%. This increase was as a
result of the sale of investment certificates and the subsequent origination of
new loans. Total revenue increased for the six months ending June 30 by
$1,685,951 or 70.4% from $2,396,319 in 2002 to $4,082,270 in 2003. The net loss
for the six months ending June 30, 2003 was $265,180 compared to a net loss of
$60,491 for the same period ending June 30, 2002.
Total investment in loans outstanding on June 30, 2003 was $77,191,845 compared
to $37,506,146 as of June 30, 2002 for an increase of $39,685,699 or 105.8%.
This increase was a result of higher sales of investment certificates and the
subsequent origination or renewal of loans. All other assets, composed primarily
of cash, bond investments, fixed assets and deferred financing costs were
$14,269,736 as of June 30, 2003. Principal and interest payable on Investor
Certificates and Mortgage Participation ("MP") Agreements increased $42,559,860
or 93.4% from $45,570,202 as of June 30, 2002 to $88,130,062 as of June 30,
2003.
Loan interest and fees Earned. Interest income and fees earned increased by
$1,799,646 or 85.4% from $2,108,391 for the six months ended June 30, 2002 to
$3,908,037 for the same period ending June 30, 2003. The increase was due to the
following:
Increase in average outstanding loan principal
($70,242,776 in 2003 and $33,438,042 in 2002) $ 1,724,730
Decrease in weighted average interest rate
(9.45% in 2003 and 10.01% in 2002) (89,724)
Increase in loan fees recognized 164,640
-----------
$ 1,799,646
The increase in average outstanding loan principal is due to the addition of 14
new loans with outstanding principal of $29,641,731 and the refinancing of
existing loans of $7,163,003.
Real estate and other income. The Company currently owns two office
condominiums, one that was acquired during the first six months of 2003 and is
utilized as corporate offices and the other is leased to a third party. No other
real estate is owned but the Company does engage in participating loans where
future gains and losses could be realized. Most of the Company's investment
income is from the purchase of bonds used as permanent financing for projects
funded during their development and initial operations. The Company owned
$2,540,000 of bonds at June 30, 2003, down from $5,110,500 at June 30, 2002.
This decrease was driven by the sale on September 30, 2002, of an undivided
interest totaling $2,512,500 in 8% and 10% certificate bonds. Accordingly,
investment interest decreased by $114,946 or (41.8%) from $274,693 for the first
six months of 2002 to $159,747 for the first six months of 2003.
3
Investor interest expense. Investor interest expense increased $1,569,011 or
87.9% from $1,785,354 to $3,354,375 for the six months ending June 30, 2002 and
2003, respectively. The increase is due to the following:
Increase in average outstanding loan principal, including
Interest payable subject to compounding
($76,542,002 in 2003 and $40,440,452 in 2002) $ 1,570,042
Decrease in weighted average interest cost
(8.77% in 2003 and 8.90% in 2002) (28,051)
Increase in average outstanding Mortgage Participation 27,020
-----------
Agreement principal
($544,878 in 2003 and $0 in 2002) $ 1,569,011
Marketing expenses. CMI has not committed substantial resources for marketing
its lending capabilities because of the continuing backlog of projects. Total
expenses for the marketing of certificates during the first six months of 2003
were $287,225 versus $228,734 in 2002. Selling commissions paid to brokers for
selling certificates are paid in cash and charged as an expense over the term of
the certificates they sold. The unamortized balance is on the Balance Sheet as
part of "Deferred Financing Costs." This account balance was $1,403,570 as of
June 30, 2003.
Operating and personnel expenses. Operating and personnel expenses were $927,601
for the six months ending June 30, 2003, which was $310,188 or 50.2% over the
$617,413 in expense for the same period ending June 30, 2002. This increase
reflects additional employees and compensation added to handle the Company's
growth, as well as the support facilities for the increased number of employees.
Starting in July 2003, the Company has contracted with Cornerstone Capital
Advisors ("CCA") to provide all administrative services. The Company will
reimburse CCA for its expenses which are expected to be similar to the expenses
incurred by the Company had it continued its administrative support under
previous arrangements. There is no fee schedule but the Company may elect to pay
fees for good performance.
Income tax (provision) benefit. The income tax benefit for the six months ending
June 30, 2003 was $221,751, compared to a benefit of $174,701 for the same
period ending June 30, 2002. This change resulted from an increase in the
Company's pre-tax loss and a decrease in tax exempt bond interest received. The
effective tax benefit rate for 2003 was 45.5% compared to 74.3% for the same
period in 2002. During the 1st quarter of 2002, the Company did not record a tax
benefit associated with its estimated year-to-date tax loss. A tax benefit was
recorded, however, for the taxes associated with the current period change in
its deferred loan fees; thus, the net tax benefit exceeds the expected tax rates
through June 30, 2002.
Dividends
Dividends declared on June 30, 2003 and 2002 were $169,085 and $172,232,
respectively and were paid during the subsequent quarters ending September 30,
2003 and 2002.
Liquidity and Capital Resources
Cash flows from operations. Net cash used by the Company's operations for the
six months ending June 30, 2003 was $783,321, which compares to $549,944 net
cash used from operations for the same period ending June 30, 2002 for a net
cash use increase of $233,377. This difference was driven primarily by an
increase in the company's net loss and from changes in deferred finance costs,
real estate loan interest and fees, and accounts payable, partially offset by
increases in Investor Certificate and MP Agreement interest payable and
depreciation and amortization expense.
Cash flows from investing activities. The Company used $12,918,944 in cash from
investing activities which is an increase of $5,829,407 from $7,089,537 for the
same period ending June 30, 2002. This increase was driven by an increase in
Real Estate loans made during the first six months of 2003, net of scheduled
principal payments received. The company increased its loan portfolio by
$12,437,147 for the six months ending June 30, 2003. This compares to a net
increase in loans of $6,827,100 for the same six months ending June 30, 2002, an
82.2% increase. The Company currently has commitments and applications
sufficient to invest its excess cash on hand.
Additionally, during the first six months of 2003, the Company purchased an
office condominium for $532,040 to house its corporate offices and to provide
additional office space for future growth.
Cash from financing activities. During the first six months of 2003, the Company
raised $19,146,392 from the sale of new Investor Certificates and MP Agreements,
net of redemptions on existing certificates. This represented an increase of
$10,123,470 from net certificate sales of $9,022,922 for the same period ending
June 30, 2002. The ratio of Investor Certificates and MP Agreements redeemed for
cash to Investor Certificates and MP Agreements sold for the six months ending
June 30, 2003 was 12.9%.
4
We believe that additional sales of new investments from the current and planned
offerings, as well as cash on hand, expected refinancings and sales of existing
loans, will be sufficient to meet our capital needs for the next quarter. The
amount and timing of our future capital requirements will depend on factors such
as the origination and funding of new investments, the costs of additional
underwriting and marketing efforts, and general expenses of operations.
Effects of Inflation or Deflation
Inflation, which has been limited during the course of our operating history,
has had little effect on operations and we do not believe it will have a
significant effect on our cost of capital or on the rates that we charge on our
loans. Inflation resulting in increased prices for real estate could potentially
decrease the ability of some potential clients to purchase, finance, or lease a
property. There is very limited experience with a period of declining prices,
deflation. It could make it more difficult for our borrowers to obtain long-term
financing on their properties, so that the periods of our loans could be
extended.
Item 3. Controls and Procedures
The principal executive officer and the principal financial officer of the small
business issuer, Cornerstone Ministries Investments, Inc., have, as of October
31, 2002, evaluated the small business issuer's disclosure controls and
procedures, as defined by Sections 13a-14(C) and 15d-14(C) of the Securities
Exchange Act of 1934. Based on their evaluation, they have concluded that those
disclosure controls and procedures are designed and implemented effectively to
ensure that information required to be disclosed by the small business issuer in
the reports that it files or submits under that Act is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) (1) Exhibit 15, Letter on unaudited interim financial information.
(2) Exhibit 99.1, certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
Signatures
In accordance with the requirements of the Securities and Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: June 13, 2003 Cornerstone Ministries Investments, Inc. (Registrant)
By: S/John T. Ottinger
------------------------------
John T. Ottinger
Vice President and Chief Financial
Officer
5
Certifications
I, Cecil A. Brooks, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cornerstone
Ministries Investments, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003 s/Cecil A. Brooks
------------------
Cecil A. Brooks,
Chairman of the Board,
President, Chief Executive Officer
I, John T. Ottinger, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Cornerstone
Ministries Investments, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003 s/John T. Ottinger
-------------------
John T. Ottinger, Vice President,
Chief Operating Officer and Chief
Financial Officer
6