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 September 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.
----------------------------------------
(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 September 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
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 September 30, 2003 F-2
Consolidated Statements of Income (Loss)
for the Nine Months ended September 30, 2003 and 2002 F-3
Consolidated Statements of Changes in Stockholders Equity
for the Nine Months ended September 30, 2003 and 2002 F-4
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2003 and 2002 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 6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 6
Item 2. Changes in Securities and Use of Proceeds 6
Item 3. Defaults on Senior Securities 6
Item 4. Submission of Matters to a Vote of Security Holders 6
Item 5. Other Information 6
Item 6. Exhibits and Reports on Form 8-K 6
Signatures 6
Certifications 7 & 8
2
ROBERT N. CLEMONS, CPA, PA
PO BOX 1670
DELAND, FLORIDA 32721-1670
To The Board of Directors
Cornerstone Ministries Investments, Inc.
We have reviewed the accompanying balance sheets of Cornerstone Ministries
Investments, Inc. as of September 30, 2003 & 2002 and the related statements of
income & retained earnings, and cash flows for the three months and nine months
then ended in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All
information included in these financial statements is the representation of the
management of Cornerstone Ministries Investments, Inc.
A review consists principally of inquiries of Company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements and supplementary information
in order for them to be in conformity with generally accepted accounting
principles.
/s/ Robert N. Clemons, CPA, PA
DeLand, Florida
November 5, 2003
F-1
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
Restated
9/30/03 9/30/02
ASSETS
Cash in banks $ 5,566,854 $ 8,341,494
Loans in process 881,996 465,114
Loans receivable-
Real estate loans, net 46,894,107 30,567,879
Joint venture loans, net 32,461,754 16,495,205
Bond holdings and accrued interest 5,197,333 2,870,438
Fixed assets, net 887,381 302,187
Refundable income taxes 286,953 116,400
Deferred tax asset, net -- 227,660
Goodwill 450,997 450,997
Unamortized debt issue costs 1,853,470 811,364
Real estate held for sale 340,000 336,215
Other assets 118,746 96,933
------------ ------------
TOTAL ASSETS $ 94,939,591 $ 61,081,886
============ ============
LIABILITIES
Investor certificates and accrued interest $ 84,122,059 $ 57,854,451
Mortgage participations and accrued interest 6,512,197 --
Accounts and other payables 235,762 80,648
Building mortgage 182,450 191,312
Capital lease obligation 14,915 --
Deferred taxes payable 292,545 --
------------ ------------
TOTAL LIABILITIES 91,359,928 58,126,411
------------ ------------
SHAREHOLDER'S EQUITY
Series A Convertible Preferred Stock, no par
value; 235,000 shares authorized, no
shares issued and outstanding -- --
Common Stock, $0.01 par value; 10 million shares
authorized, 531,529 and 529,943 shares issued
and outstanding 5,315 5,299
Paid in capital 3,297,435 3,287,149
Retained earnings (deficit) 350,161 (336,973)
Treasury stock (73,248) --
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 3,579,663 2,955,475
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 94,939,591 $ 61,081,886
============ ============
SEE ACCOMPANYING NOTES F-2
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the three and six months ended September 30, 2003 and 2002
Restated Restated
3 Mo. Ended 3 Mo. Ended 9 Mo. Ended 9 Mo. Ended
9/30/03 9/30/02 9/30/03 9/30/02
REVENUES
Loan interest and fees $ 2,711,757 $ 1,425,316 $ 6,619,794 $ 3,533,707
Real estate gains and other income 1,306,658 499,200 1,480,891 787,128
----------- ----------- ----------- -----------
TOTAL REVENUES 4,018,415 1,924,516 8,100,685 4,320,835
----------- ----------- ----------- -----------
EXPENSES
Investor interest expense 1,930,656 1,035,063 5,285,031 2,820,427
Marketing expenses 161,370 113,883 448,595 342,617
Salaries, payroll taxes, and benefits 225,504 165,172 696,719 511,941
Operating expenses 287,151 203,421 743,537 474,065
----------- ----------- ----------- -----------
TOTAL EXPENSES 2,604,681 1,517,539 7,173,882 4,149,050
----------- ----------- ----------- -----------
Income Before Provision For Income Taxes 1,413,734 406,977 926,803 171,785
Provision (Benefit) for Income Taxes 489,829 122,511 268,078 (52,190)
----------- ----------- ----------- -----------
NET INCOME $ 923,905 $ 284,466 $ 658,725 $ 223,975
=========== =========== =========== ===========
Basic and Diluted Earnings
per Common Share $ 1.78 $ 0.54 $ 1.26 $ 0.42
SEE ACCOMPANYING NOTES F-3
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the nine months ended September 30, 2003 and 2002
RETAINED
COMMON STOCK: PAID-IN PREFERRED EARNINGS TREASURY TOTAL
SHARES AMOUNT CAPITAL STOCK (DEFICIT) STOCK EQUITY
BALANCE, DEC. 31, 2001 528,721 $ 5,287 $3,279,491 $ -- $ (388,716) $ -- $2,896,062
Net income 223,975 223,975
Common stock issued 1,222 12 7,658 7,670
Dividend declared (172,232) (172,232)
---------- ---------- ---------- ---------- ---------- --------- ----------
BALANCE, SEPT. 30, 2002, RESTATED 529,943 $ 5,299 $3,287,149 $ -- $ (336,973) $ -- $2,955,475
========== ========== ========== ========== ========== ========= ==========
BALANCE, DEC. 31, 2002 530,944 $ 5,309 $3,293,641 $ -- $ (139,479) $ -- $3,159,471
Net income 658,725 658,725
Common stock issued 585 6 3,794 3,800
Dividend declared (169,085) (169,085)
Treasury shares acquired (73,248) (73,248)
---------- ---------- ---------- ---------- ---------- --------- ----------
BALANCE, SEPT. 30, 2003 531,529 $ 5,315 $3,297,435 $ -- $ 350,161 $ (73,248) $3,579,663
========== ========== ========== ========== ========== ========= ==========
SEE ACCOMPANYING NOTES F-4
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2003 and 2002
Restated
9/30/03 9/30/02
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 658,725 $ 223,975
Adjustments to reconcile net income to cash
from operations-
Depreciation and amortization 378,938 229,402
Changes in-
Loans in process (522,976) (10,530)
Accrued bond interest, net (21,921) (151,574)
Accrued loan interest and deferred loan fees (928,472) (509,917)
Deferred taxes 566,778 48,970
Unamortized debt issue costs (1,187,624) (443,990)
Refundable income taxes (286,953) (116,400)
Investor and mortgage participation interest payable 1,687,786 (929,740)
Accounts and other payables (46,358) (84,682)
Other assets (80,558) (36,246)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS 217,365 (1,780,732)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate and joint venture loans made (26,284,926) (19,423,498)
Real estate and joint venture loan principal payments received 12,612,235 3,299,377
Bonds purchased (2,500,000) --
Bonds redeemed or sold 58,750 2,601,250
Fixed assets purchased (589,413) (55,838)
Real estate costs capitalized -- (4,702)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (16,703,354) (13,583,411)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 18,163,253 23,339,403
Investor certificates redeemed (3,449,495) (2,198,945)
Mortgage participation agreements sold 6,255,330 --
Building mortgage principal payments (6,776) (5,882)
capital lease principal payments (2,795) --
Common stock issued 3,800 7,670
Dividends paid (337,725) (344,066)
Treasury stock acquired (73,248) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,552,344 20,798,180
------------ ------------
Net change in cash 4,066,355 5,434,037
Cash at beginning of period 1,500,499 2,907,457
------------ ------------
CASH AT END OF PERIOD $ 5,566,854 $ 8,341,494
============ ============
Supplemental Information-
Interest paid during the period $ 3,604,215 $ 3,763,000
Income taxes paid during the period $ -- $ --
Non-cash transactions-
Fixed asset lease financing $ 17,710 $ --
Investor certificates matured and re-issued $ 3,793,364 $ 12,918,252
Loan interest included in principal $ 1,023,478 $ 649,223
SEE ACCOMPANYING NOTES F-5
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."
Cash and cash equivalents include bank accounts and short term certificates with
original maturities of 90 days or less.
Loans receivable include unpaid principal and accrued interest balances net of
deferred loan fees and unearned discounts, less an allowance for loan losses.
Interest income is recognized monthly as it is earned, in accordance with loan
terms. Interest income is recognized on the cash basis for loans with a recorded
impairment loss (other than restructured loans) and the possibility of future
loss considered remote. If the possibility of future loss is not remote, then
interest income is not recognized and interest payments are credited to
outstanding loan principal. 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 non-accrual status.
Senior housing mortgage loans are classified as joint venture loans if the
company participates in the residual profits from the sale or refinancing of the
collateralized property and all of the following exist at the inception of the
loan:
o The borrower does not have a substantial equity investment in the
property.
o The Company does not have recourse to substantial tangible, saleable
assets of the borrower other than the underlying collateral of the
loan.
o The facility does not have lease commitments which will provide
sufficient cash flow to service normal principal and interest loan
amortization.
The Company normally provides all or substantially all of the funding (directly
or through loan guarantees) for the acquisition and development of the senior
housing facilities which are owned by non-profit entities.
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.
Unamortized debt issue costs 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, restructured loans with interest rate reductions, economic conditions,
and other risks inherent in the portfolio. Allowances for specific impaired
loans are generally determined based on collateral values or the present value
of estimated cash flows. A loan is considered impaired if more than six months
interest is past due. 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
F-6
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.
Bond holdings consist of tax-free local government securities and church bonds.
The Company accounts for these investments using SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and classifies the bonds as
"available for sale" securities. The bonds are recorded at cost and adjusted for
unrealized holding gains and losses. Temporary unrealized holding gains and
losses are reported, net of deferred taxes, as a separate component of
shareholder's equity until realized. If an unrealized holding loss is judged to
be other than temporary, the cost basis of the security is written down to fair
value and included in earnings.
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.
Certificate holders choose, at the time of purchase, to have interest paid
semi-annually or upon redemption. Investors holding five year certificates in
multiples of $10,000 may receive interest monthly. Unpaid interest is compounded
semi-annually. 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, amortization, start-up costs and installment sales for financial
and tax-reporting purposes. The deferred taxes represent the estimated future
tax consequences of those 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. 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
F-7
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
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 - ACCOUNTING ENTITY CHANGE
The accompanying Consolidated Financial Statements for September 30, 2002 and
the nine month period then ended include the accounts of Cornerstone Ministries
Investments, Inc. and Wellstone Financial Group, LLC ("WFG"). The comparative
statements for September 30, 2002 and the three and nine month periods then
ended have been restated to include WFG as a wholly owned subsidiary rather than
as an equity investment in an unconsolidated LLC. The effect of this change in
reporting entity is to reduce net income by $101,154 (net of taxes) or $(.19)
per share for the nine months ended September 30, 2002.
NOTE 3 - FIXED ASSETS
As of September 30, fixed assets are composed of: 2003 2002
---- ----
Office Condominiums $ 792,659 $ 252,922
Office Computers, Furnishings, Software & Equipment 118,141 44,013
Vehicles 37,730 37,730
Capital Lease - phone system 17,710 -0-
Less: Accumulated Depreciation (78,859) (32,478)
--------- ---------
Fixed Assets, net $ 887,381 $ 302,187
F-8
Depreciation expense - third quarter $ 15,704 $ 11,844
year-to-date $ 40,079 $ 20,306
NOTE 4 - COMMITMENTS AND RELATED PARTY TRANSACTIONS
Leases:
During 2003, the Company entered into a capital lease for a new 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. Amortization
expense was $1,476 and $0 for the three months, and $3,444 and $0 for the nine
months ended September 30, 2003 and 2002, respectively. Interest expense was
$652 and $0 for the three months, and $1,598 and $0 for the nine months ended
September 30, 2003 and 2002, respectively.
Future minimum lease payments as of September 30, 2003:
October, 2003 - September, 2004 $ 7,531
October, 2004 - September, 2005 7,531
October, 2005 - September, 2006 3,139
-------
18,201
Less: interest portion (3,286)
-------
Capital lease obligation $14,915
Related Party Transactions:
Effective July 1, 2003, the Company entered into a Personnel Services Agreement
with Cornerstone Capital Advisors, Inc. ("CCA") to provide loan management,
administration and accounting; investor relations; marketing; administration of
computers and management information systems; photo copying and record
maintenance; and, record keeping, bookkeeping and accounting after June, 2003.
The Company is obligated to pay directly or reimburse actual expenses to be
billed bi-weekly 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 maximum that the incentive
compensation can be is 10% of the actual expenses billed to CCA for the prior 12
months. 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. Two of the Company's
directors serve on CCA's Board of Directors. For the three month period ended
September 30, 2003, the Company paid cash of $157,114 to CCA for personnel
services, which is included in salaries, payroll taxes and benefits expenses on
the accompanying Consolidated Statements of Income & Retained Earnings
(Deficit). No amounts are due to CCA by the Company as of September 30, 2003.
During 2003, the Company entered into a service agreement with Cornerstone
Direct Public Offerings, LLC ("CDPO") to provide legal and administrative
services for the Company's filing of two SB-2 Registration Statements with the
Securities and Exchange Commission (see Note 11 for further details on the
filings). Two of the Company's directors serve on the Board of Directors of
CDPO's majority owner, Cornerstone Group Holdings, LLC. The service fee is
$75,000 per filing payable in installments during the filing process. The final
10% is due when the registration is completed. For the three and nine month
period ended September 30, 2003, the company paid cash of $135,000 to CDPO which
is included in unamortized debt issue costs in the accompanying Consolidated
Balance Sheets. An additional $15,000 will be payable to CDPO when the
registration statements are completed.
F-9
NOTE 5 - LOANS RECEIVABLE
At September 30, 2003 and 2002, the Company had Real Estate Loans on church and
other not-for-profit properties as follows:
2003 2002
---- ----
Family housing development loans $ 24,033,592 $ 10,235,347
Church mortgage loans
13,977,012 14,587,361
Senior housing mortgage loans 9,093,501 5,127,529
------------ ------------
Total principal outstanding 47,104,105 29,950,237
Accrued interest 247,600 902,672
Unearned loan fees (457,598) (285,030)
Allowance for loan losses 0 0
------------ ------------
Total real estate loans, net $ 46,894,107 $ 30,567,879
The loans mature as follows: 2003 - $19,302,347; 2004 - $26,600,317; 2005 - $0;
2006 - $0; 2007 - $0; 2008 & thereafter - $1,201,441. 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.
As of September 30, 2003 and 2002, the Company had a significant concentration
of credit risk in the following states:
2003 2002
---- ----
Georgia $22,989,858 $14,455,844
Florida $ 9,325,140 $ 4,699,779
As of September 30, 2003, two loans, with a total carrying amount of $627,875
were considered impaired due to non payment of interest. No allowance for
impairment loss has been recorded because the carrying amount of the loans are
less than or equal to the present value of expected future cash flows or the
fair value of the related collateral on the loans. No loans were considered
impaired as of September 30, 2002. The weighted average investment in impaired
loans for the nine month periods ended September 30, 2003 and 2002 was $632,274
and $0, respectively. Interest income recognized on impaired loans was $5,539
and $0 for the three months, and $15,203 and $0 for the nine months ending
September 30, 2003 and 2002, respectively.
Certain of the Company's mortgage loans on senior housing facilities are
classified as joint venture loans, as follows:
Location 2003 2002
- -------- ---- ----
McKinney, TX $ 3,033,191 $ 2,312,982
Largo, FL 0 2,795,454
St. Petersburg, FL 3,609,620 3,492,469
Lewisville, TX 10,091,529 8,473,618
Garland, TX 5,471,827 0
Chattanooga, TN 3,448,256 0
San Antonio, TX 8,314,718 0
------------ ------------
Total principal outstanding 33,969,141 17,074,523
Accrued interest 254,483 63,182
Unearned loan fees (1,761,870) (642,500)
Allowance for loan losses 0 0
------------ ------------
Total joint venture loans, net $ 32,461,754 $ 16,495,205
The loans mature as follows: 2003 - $8,858,447; 2004 - $25,110,694. 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.
All loans accrue interest at 10% per year with `interest only' payments due
monthly. The original loan terms are for one year with two, one year extensions
at the Company's option. The Company receives a 10% loan origination fee which
is
F-10
included in the loan principal balance. The Company receives 30% of the net
profit from the sale or refinancing of the collateralized properties.
In September, 2003, the Company recognized a $1,220,277 mortgage participation
gain from the sale of a senior housing facility in Largo, FL in which the
Company held a joint venture mortgage loan.
No joint venture loans were considered impaired as of September 30, 2003 and
2002.
In 2003, the Company began selling Mortgage Participation ("MP") Agreements. The
agreements are collateralized by specific senior housing joint venture loans
owned by the Company and entitle the investor to a proportionate share of
interest earned on the collateral. Refer to Note 12 for additional details.
Summarized financial information for loans which are greater than 10% of the
Company's total assets:
Lewisville, TX senior housing facility-
Balance sheet (as of Income statement (for the nine months
September 30, 2003): ended September 30, 2003):
Current assets $ 62,785 Total revenues $2,138,632
Fixed and other assets $ 9,751,514 Net loss $ (300,056)
Current liabilities $ 176,389
Non-current liabilities $10,091,529
NOTE 6 -GOODWILL
The Company uses SFAS 142, "Goodwill and Other Intangible Assets". Goodwill
associated with the Company's acquisition of Presbyterian Investor's Fund, Inc.
("PIF") is carried at $450,997 and is not subject to further amortization.
Goodwill is tested for impairment at the end of each calendar year using a
present value of expected future cash flows analysis to determine the fair value
of Goodwill. As of December 31, 2002, Goodwill's fair value exceeded its
carrying cost; therefore, no provision for impairment loss has been recorded as
of September 30, 2003 and 2002. No additional goodwill was acquired or sold in
2003 and 2002.
NOTE 7 - UNAMORTIZED DEBT ISSUE COSTS
Unamortized debt issue 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 September 30, Unamortized debt issue costs consist of: 2003 2002
---- ----
Costs incurred to register the Company's debt securities $ 545,171 $ 427,697
Commissions paid on the sale of debt securities 2,188,522 788,936
Less: Accumulated Amortization, generally over 5 years (880,223) (405,269)
---------- ---------
$1,853,470 $ 811,364
Amortization expense was $135,535 and $65,803 for the three months, and $338,859
and $209,096 for the nine months ended September 30, 2003 and 2002,
respectively, and is included in marketing expenses in the accompanying
Consolidated Statements of Income. Estimated amortization expense for the next
five years:
Oct. 1, 2003 through Sept. 30, 2004 - $581,972
Oct. 1, 2004 through Sept. 30, 2005 - $444,213
Oct. 1, 2005 through Sept. 30, 2006 - $384,911
Oct. 1, 2006 through Sept. 30, 2007 - $334,267
Oct. 1, 2007 through Sept. 30, 2008 - $108,107
F-11
NOTE 8 - BOND HOLDINGS
Bond holdings at September 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) (2,512,500)
---------- -----------
Net investment in St. Lucie Co., FL Bonds 2,512,500 2,512,500
Largo, FL Subordinated Revenue Bonds - matures 10/1/2033 2,500,000 0
Local Church Bonds, maturing 2003 0 58,750
---------- -----------
Cost basis of bond holdings $ 5,012,500 $ 2,571,250
Unrealized holding gains (losses) 0 0
---------- ----------
Book value and fair value of bond holdings $ 5,012,500 $ 2,571,250
Accrued Interest Receivable 184,833 299,188
----------- -----------
Totals $ 5,197,333 $ 2,870,438
The bonds are not traded on an exchange; however, management estimates, based on
discounted expected cash flows, that the fair value of the individual securities
approximated their original cost. Accordingly, no unrealized holding gains
(losses) have been recorded.
Proceeds from the sale or maturity of bonds were $58,750 and $2,601,250 for the
nine months ending September 30, 2003 and 2002, respectively. No realized gains
or losses were recognized in 2003 and 2002. The Company uses the specific
identification method to determine realized gains and losses.
In 2002, the Company transferred all of its bond holdings, with a cost of
$5,110,500, from "held to maturity" to "available for sale" securities. No
realized or unrealized holding gains or losses were recognized as, when
transferred, the cost of the bonds approximated their fair value. An opportunity
to utilize a major investor's funds resulted in the sale of an undivided 50%
interest in the St. Lucie County, Florida bonds for $2,512,500. The Company
reinvested the funds from the sale in a joint venture loan, which management
believes will provide greater long-term returns than the bonds.
Tax-free interest income was $60,334 and $116,125 for the three months ended,
and $175,372 and $349,179 for the nine months ended September 30, 2003 and 2002,
respectively.
NOTE 9 - INCOME TAXES
The net deferred tax (liability) asset in the accompanying balance sheet
includes the following components:
2003 2002
---- -----
Net deferred tax assets $ 69,219 $ 358,417
Net deferred tax liabilities (361,764) (130,757)
Valuation allowance 0 0
--------- ---------
Net deferred tax (liability) asset $(292,545) $ 227,660
The deferred tax liabilities result from the use of accelerated depreciation
methods for property and equipment and from sales using the installment method
for tax accounting. The deferred tax asset results from tax versus financial
reporting differences in the amortization of debt issue and start-up costs. The
Company estimates that future taxable income will be sufficient to realize the
net deferred tax asset; therefore, no valuation allowance was provided for as of
September30, 2003 or 2002. During 2003, the Company's request with the
Department of the Treasury to change its accounting method for loan fees to
approximate its book treatment under SFAS Nos. 65 and 91was approved. As a
result of this change, the Company amended its 2000 and 2001 federal and state
income tax returns. The $286,953 in refunds requested is classified as
refundable income taxes in the accompanying Consolidated Balance Sheets. In
addition, the Company has a federal net operating loss carry forward of $481,154
and a Georgia net operating loss carry forward of $82,025. These net operating
losses are generally available to offset future taxable income through December
31, 2017.
F-12
Components of income tax expense (benefit) for the period ended September 30:
Current Quarter Year-to-Date
2003 2002 2003 2002
---- ---- ---- ----
Current: Federal $($310,296) $($102,811) $(274,206) $(102,811)
State (30,863) 1,651 (24,494) 1,651
Deferred: Federal 738,428 205,467 513,850 44,122
State 92,560 18,204 52,928 4,848
--------- --------- --------- ---------
$ 489,829 $ 122,511 $ 268,078 $ (52,190)
Reconciliation of the Company's income tax expense (benefit) rate to statutory
federal rates:
2003 2002
---- ----
Statutory federal rate 35.0% 35.0%
Effect of graduated federal tax rates (1.0%) (1.0%)
State taxes, net of federal benefit 3.7% 3.7%
Effect of non-taxable bond interest income (6.4%) (68.5%)
Other, net (2.4% .5%
----- ------
Effective tax expense (benefit) rate 28.9% (30.3%)
The effect of non-taxable bond interest income decreased due to a decrease in
non-taxable interest income (see Note 8) and an increase in the Company's
pre-tax income.
NOTE 10 - CASH CONCENTRATION
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalent accounts in
financial institutions. At September 30, 2003, the Company had cash in excess of
insured limits totaling $5,110,747.
NOTE 11-INVESTOR CERTIFICATES
The Company has three types of investor certificates outstanding:
Access certificates have no stated maturity and are due on demand. The minimum
investment amount is $100. The interest rate is determined by the board of
directors on a quarterly basis. The directors may change the rate between
quarters if market conditions warrant such a change. The current interest rate
is 5%.
Graduated certificates can be redeemed yearly and have a five year maximum
maturity. The minimum investment amount is $500. The interest rate is graduated
based on the length of time that the certificate remains outstanding. Currently,
the rate starts at 7% and is increased .5% for each year the certificate is
outstanding with a 9% maximum rate.
Five year certificates have a five year term and a $500 minimum investment. The
interest rate is 9%.
The certificates are not collateralized and no sinking fund for paying the
certificates at maturity is required. All of the certificates have been
registered with the Securities and Exchange Commission under the Securities Act
of 1933. Listed below are the certificates outstanding as of September 30, 2003
by interest rate and date of maturity:
5.0% $ 2,539,071 2003 and on demand $ 4,376,508
7.0% 4,422,368 2004 5,671,876
7.5% 3,196,519 2005 4,862,921
8.0% 218,379 2006 10,815,667
9.0% 69,337,761 2007/Beyond 53,987,126
-----------
Total principal $79,714,098
As of September 30, 2003 and 2002, accrued interest payable was $4,407,961 and
$2,109,038, respectively.
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
F-13
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
$40,000,000 of its Certificates of Indebtedness along with $11,375,000 of its
Common Stock.
NOTE 12-MORTGAGE PARTICIPATION AGREEMENTS
In 2003, the Company began selling Mortgage Participation ("MP") Agreements.
These 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 joint venture 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 $134,688
for the three months ended and $161,748 for the nine months ended September 30,
2003. The loans which collateralize MP Agreements earn 10% annual interest and
'interest only' payments are due monthly. MP Agreement principal and interest
outstanding and related collateral as of September 30, 2003:
Collateral Description MP Amount Outstanding
- ----------------------- ---------------------
Loan to Senior Housing Services; senior housing facility,
Lewisville, TX; matures 10/1/04 with a 1 year extension
at the Company's option $3,690,000
Loan to Senior Housing Services; senior housing facility,
Garland, TX; matures 12/1/03 with two, 1 year extensions
at the Company's option 1,990,500
Loan to Senior Housing Alternatives; senior housing facility,
Chattanooga, TN; matures 6/30/04 with two, 1 year extensions
at the Company's option 783,617
----------
Total principal 6,464,117
Accrued interest payable 48,080
----------
$6,512,197
NOTE 13-LOAN GUARANTEES
At September 30, 2003 the Company was guarantor for a potential total of
$31,689,000 of loans secured by retirement facilities owned by not-for-profit
entities. Certain joint venture and real estate acquisition and development
loans in which the borrower chooses to secure outside financing may require a
Company 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 covers outstanding principal and accrued interest and
terminates upon maturity and principal repayment. At September 30, 2003, actual
amounts drawn and therefore guaranteed to a commercial bank totaled $26,859,176.
The guaranteed loans will mature between May 31 and November 18, 2004. Only upon
an uncured payment default and upon demand by the financial institution would
the Company be required to perform under its guarantee obligations. The
Company's recourse would be limited to repossession of the underlying collateral
and subsequent resale of the facilities. As of September 30, 2003, all loans
which had a guarantee were current and accordingly no loan guarantee obligation
has been recognized in the financial statements.
NOTE 14 - 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 nine
months ended September 30, 2003 the Company has not elected to contribute.
F-14
NOTE 15 - 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- 2003- $1,498; 2004- $9,791; 2005- $10,658; 2006- $160,503.
NOTE 16 - 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.
During 2001, as part of the Company's formation and initial capitalization of
Wellstone Financial Group, LLC ("WFG"), shares with a value of $500,000 were
issued to WFG in return for a 100% ownership interest in WFG. Since WFG is
included in these consolidated financial statements, the shares have been
eliminated in consolidation. 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.
Subsequent to September 30, 2003, the Company's Board of Directors approved an
agreement to redeem all of the outstanding Series A Convertible Preferred Stock
from WFG in exchange for the Company's ownership interest in WFG. The fair value
of the Preferred Stock and the Company's ownership interest in WFG are both
estimated at $500,000; therefore, no cash will be exchanged. After the plan is
consummated, WFG will no longer be included in the Company's consolidated
financial statements. This transaction will not have a material affect on the
Company's financial position.
NOTE 17 - EARNINGS PER SHARE
Basic earnings per share have been calculated as follows: Current Quarter Year-to-Date
--------------- ------------
2002 Net Income $284,466 $223,975
- ---- Average Common Shares Outstanding 529,943 529,499
Earnings per Common Share $0.54 $0.42
2003 Net Income $923,905 $658,725
- ---- Average Common Shares Outstanding 520,260 522,240
Earnings per Common Share $1.78 $1.26
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.
NOTE 18 - MAJOR CUSTOMERS
The Company received more than 10% of its total revenue for the three and nine
months ended September 30, 2003 from the following customers:
Current Quarter Year-to-Date
Amount % Amount % Description of Revenue Received
------ --- ------ --- -------------------------------
Senior housing facility owner $2,558,812 63.7% $4,198,007 51.8% Interest, fees and mortgage participation
gains - joint venture sr. housing loans
Non-profit community developer 491,667 12.2% 1,431,698 17.7% Interest and fees from family housing
---------- ----- ---------- ----- and development loans
$3,050,479 75.9% $5,629,705 69.5%
F-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Periods Ending September 30, 2002 and September 30, 2003
General. Assets increased from $61,081,886 at September 30, 2002 to $94,939,591
at September 30, 2003 for a net increase of $33,857,705 or 55%. This increase
was as a result of the sale of investment certificates and the subsequent
origination of new loans. Total revenue increased for the nine months ended
September 30 by $3,779,850 or 87% from $4,320,835 in 2002 to $8,100,685 in 2003.
Net income for the nine months ended September 30, 2003 was $658,725 compared to
$223,975 for the same period ended September 30, 2002.
Total investment in loans outstanding on September 30, 2003 was $79,355,861
compared to $47,063,084 as of September 30, 2002 for an increase of $32,292,777
or 69%. This increase was a result of sales of investment certificates and the
subsequent origination or refinancing of loans, as follows: new loan
originations - $24,749,238; refinances on existing loans, net of principal
payments received - $7,543,539. All other assets, composed primarily of cash,
bond investments, fixed assets and unamortized debt issue costs were $15,583,730
as of September 30, 2003. Principal and interest payable on Investor
Certificates and Mortgage Participation ("MP") Agreements increased $32,779,805
or 57% from $57,854,451 as of September 30, 2002 to $90,634,256 as of September
30, 2003. The Company has filed a registration statement with the Securities and
Exchange Commission to sell up to $40,000,000 in additional Investor
Certificates and $11,375,000 in Common Stock, which if approved, should continue
the substantial increase in outstanding certificates and the subsequent
investment in new loans.
Loan interest and fees earned. Interest income and fees earned increased by
$3,086,087 or 87% from $3,533,707 for the nine months ended September 30, 2002
to $6,619,794 for the same period ended September 30, 2003. The increase was due
to the following:
Increase in average outstanding loan principal $2,739,998
($74,001,979 in 2003 and $35,399,582 in 2002)
Decrease in weighted average interest rate (92,887)
(9.49% in 2003 and 9.84% in 2002)
Increase in loan fees recognized 438,976
----------
$3,086,087
The increase in average outstanding loan principal is due to the addition of 15
new loans with average outstanding principal of $29,569,432 and the refinancing
of existing loans with average outstanding principal of $9,032,960.
Real estate and other income. For the nine months ended September 30, real
estate and other income increased $693,763 or 88% from $787,128 in 2002 to
$1,480,891 in 2003. The increase is due to the following:
Investment income $(169,606)
Real estate and loan participation income 870,227
Office condominium rental and other income (6,858)
---------
$ 693,763
The Company's investment income is from the purchase of bonds used as permanent
financing for projects the Company funded during their development and initial
operations. The decrease in investment income is due to the September 30, 2002
sale of an undivided 50% interest in the Company's St. Lucie Co., FL bonds for
$2,512,500. In September, 2003, the Company purchased $2,500,000 in bonds, which
will cause future investment income to increase substantially compared to its
current level.
Real estate and loan participation income increased due to a loan participation
gain (realized in September, 2003) from the sale of a senior housing facility in
Largo, FL in which the Company held a participating mortgage loan.
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. Office condominium rental income for the first nine
months of 2003 and 2002 was $21,435 and $19,035, respectively. Other income
decreased $9,258 in 2003 versus 2002.
3
Investor interest expense. Investor interest expense increased $2,464,604 or 87%
from $2,820,427 to $5,285,031 for the nine months ended September 30, 2002 and
2003, respectively. The increase is due to the following:
Increase in average outstanding loan principal, including $2,314,746
interest payable subject to compounding
($78,358,925 in 2003 and $42,949,231 in 2002)
Decrease in weighted average interest cost (11,890)
(8.74% in 2003 and 8.78% in 2002)
Increase in average outstanding Mortgage Participation 161,748
----------
Agreement principal
($2,162,565 in 2003 and $0 in 2002)
$2,464,604
Marketing expenses. Total expenses for the marketing of investor certificates
during the first nine months of 2003 were $448,595 versus $342,617 in 2002. The
increase is due to an increase in debt issue cost amortization of $129,763, an
increase in compliance and registration costs of $11,496, a decrease in legal
fees of $18,000, and a decrease in other marketing costs of $5,785. Debt issue
cost amortization expense increased due to investor certificates and mortgage
participations sold since September 30, 2002. Marketing expenses will continue
to increase as new investor certificates are sold.
Selling commissions paid to brokers for selling investor certificates and costs
incurred to register investor certificates are paid in cash and charged as an
expense over the term of the related certificates. The unamortized balance is
classified as an asset on the Balance Sheet as "Unamortized debt issue costs".
The balance was $1,853,470 and $811,364 as of September 30, 2003 and 2002,
respectively. Debt issue cost amortization expense was $338,859 and $209,096 for
the nine months ended September 30, 2003 and 2002, respectively.
Operating and personnel expenses. Personnel expenses (salaries, payroll taxes,
and benefits) were $696,719 for the nine months ended September 30, 2003, which
was $184,778 or 36% over the $511,941 in expense for the same period ended
September 30, 2002. This increase is due to additional employees hired to handle
the Company's growth. As a percentage of total revenues, personnel expenses were
8.6% and 11.8% for the nine months ending September 30, 2003 and 2002,
respectively. Starting in July 2003, the Company contracted with Cornerstone
Capital Advisors ("CCA") to provide all personnel services. The Company will
reimburse CCA for its expenses (estimated at $750,000 over the next 12 months),
which are expected to be similar to the expenses incurred by the Company had it
continued its personnel support under previous arrangements. There is no fee
schedule but the Company may elect to pay fees for good performance, which if
paid, would be no more than 10% of the reimbursed expenses for the previous 12
months. The Company has paid $157,114 to CCA during 2003, which is included in
the personnel expense amount listed above.
Operating expenses increased $269,472 or 57% from $474,065 to $743,537 for the
nine months ended September 30, 2002 and 2003, respectively. The increase is due
to an increase in occupancy costs and recruiting fees related to the increase in
the number of employees and legal, trust service/paying agent fees, and
consulting expenses which increased as a result of the Company's growth in
operations. Overall, operating expenses decreased from 11.0% of total revenues
for the nine months ended September 30, 2002 to 9.2% of total revenues for the
nine months ended September 30, 2003.
Income tax provision (benefit). The income tax provision for the nine months
ended September 30, 2003 was $268,078, compared to a benefit of $52,190 for the
same period ended September 30, 2002. The effective tax rate for 2003 was 28.9%
compared to tax benefit rate 30.3% for the same period in 2002. This change
resulted from an increase in the Company's pre-tax income and a decrease in
tax-exempt bond interest income. A reconciliation of the Company's effective tax
provision (benefit) rate to the federal statutory rate is included in the
attached "Notes to Consolidated Financial Statements" (Note 9).
Dividends. Dividends declared on June 30, 2003 and 2002 were $169,085 and
$172,232, respectively and were paid during the subsequent quarters ended
September 30, 2003 and 2002. The Company does not intend to declare future
dividends that will create negative retained earnings.
Liquidity and Capital Resources
Cash flows from operations. Net cash provided by the Company's operations for
the nine months ended September 30, 2003 was $217,365, which compares to
$1,780,732 in net cash used by operations for the same period ended September
30, 2002 for an increase in net cash provided by operations of $1,998,097. This
difference was driven by increases in net income, depreciation and amortization
expense, deferred taxes, and investor and mortgage participation interest
payable, partially offset by changes in loans in process, accrued loan interest
and deferred loan fees, and unamortized debt issue costs.
4
During 2003 and 2002, accrued loan interest decreased net cash from operations
by $1,023,478 and $649,223, respectively, due to the capitalization of loan
interest on the following types of loans: (1) development loans that are in the
pre-construction phase of the project; (2) senior housing facility loans. Most
of the senior housing facilities are in need of renovation when purchased by the
respective borrowers. The Company develops a loan budget when the loan is
originated which includes the original purchase price, capital improvements and
short-term working capital needs (which includes interest capitalization). As
part of the Company's regular loan management process, current loan balances are
compared to the original budgets and the renovation progress and facility's
operating results are analyzed to ensure the loan is properly valued. No loans
were over their respective loan budgets as of September 30, 2003 and 2002. The
Company will receive the capitalized interest when the facilities are sold or
re-financed to an outside lender; normally from two to three years after the
loans are originated.
Cash flows from investing activities. The Company used $16,703,354 in cash from
investing activities which is an increase of $3,119,943 from $13,583,411 for the
same period ended September 30, 2002. The increase was due to the following:
Increase in real estate and joint venture loans made $ 6,861,428
Increase in real estate and joint venture loan
principal payments received (9,312,858)
Increase in bonds purchased 2,500,000
Decrease in bonds redeemed or sold 2,542,500
Increase in fixed asset and real estate purchases 528,873
-----------
$ 3,119,943
The increase in loan principal payments received in 2003 was due to the pay-off
of the Largo, FL senior housing loan and large pay-downs on senior housing loans
in Palm Bay, FL and St. Petersburg, FL.
The Company currently has commitments and applications sufficient to invest its
excess cash on hand.
During 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 nine months of 2003, the
Company raised $20,969,088 from the sale of new Investor Certificates and MP
Agreements, net of redemptions on existing certificates. This represents a
decrease of $171,370 from net certificate sales of $21,140,458 for the same
period ended September 30, 2002. The percentage of Investor Certificates and MP
Agreements redeemed for cash compared to Investor Certificates and MP Agreements
sold for the nine months ended September 30, 2003 and 2002 was 14.1% and 9.4%,
respectively. Historically, over 80% of Investor Certificate maturities are
re-issued as new certificates; however, until the new registration statement
with the Securities and Exchange Commission is approved and we have new
certificates to issue, all maturities will be paid in cash, which has increased
the percentage for 2003.
5
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 September
30, 2003, 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: November 11, 2003 Cornerstone Ministries Investments, Inc. (Registrant)
By: S/John T. Ottinger
------------------
John T. Ottinger
Vice President and Chief Financial Officer
6