U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB/A
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ending March 31, 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
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
6030 Bethelview Rd, #203, Cumming, GA 30040
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (678)-455-1100
--------------
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 February 28, 2003, there were issued and outstanding 531,136 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/A Title Page 1
Index 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Accountant's Review Report F-1
Consolidated Balance Sheets as of March 31, 2002 and 2003 F-2
Consolidated Statements of Income and Retained Earnings (Deficit)
for the three months ended March 31, 2002 and 2003 F-3
Consolidated Statements of Changes in Shareholder's Equity
for the three months ended March 31, 2002 and 2003 F-4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 and 2003 F-5
Notes to Consolidated 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
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 March 31, 2003 & 2002 and the related statements of
income, retained earnings, and cash flows for the three 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
May 13, 2003
F-1
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and 2002
Restated
3/31/2003 3/31/2002
ASSETS
Cash in banks $ 4,159,125 $ 3,695,015
Loans in process 1,042,325 596,326
Real estate loans, net 71,655,754 34,226,079
Bond holdings, net 2,629,250 5,287,592
Fixed assets, net 877,349 285,055
Deferred tax asset, net 387,915 250,855
Goodwill 450,997 450,997
Unamortized debt issue costs 1,340,094 599,220
Real estate held for sale 340,000 333,864
Other assets 75,740 10,714
------------ ------------
TOTAL ASSETS $ 82,958,549 $ 45,735,717
============ ============
LIABILITIES
Investor certificates and accrued interest $ 79,156,351 $ 42,066,164
Accounts and other payables 667,849 590,065
Building mortgage 186,863 195,359
------------ ------------
TOTAL LIABILITIES 80,011,063 42,851,588
------------ ------------
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, 531,136 and 528,975 shares issued
and outstanding 5,311 5,290
Paid in capital 3,294,889 3,281,139
Retained earnings (deficit) (279,465) (402,300)
Treasury stock (73,249) --
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,947,486 2,884,129
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $ 82,958,549 $ 45,735,717
============ ============
SEE ACCOMPANYING NOTES F-2
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the three months ended March 31, 2003 and
2002
Restated
3/31/2003 3/31/2002
REVENUES
Loan interest and fees $ 1,875,208 $ 1,161,700
Real estate gains and other income 63,274 134,839
----------- -----------
TOTAL REVENUES 1,938,482 1,296,539
----------- -----------
EXPENSES
Investor interest expense 1,557,317 843,292
Marketing expenses 106,487 106,997
Salaries, payroll taxes, and benefits 214,501 139,291
Operating expenses 314,109 179,528
----------- -----------
TOTAL EXPENSES 2,192,414 1,269,108
----------- -----------
Income (Loss) Before Provision For Income Taxes (253,932) 27,431
Income Tax (Provision) Benefit 113,946 (41,015)
----------- -----------
NET INCOME (LOSS) $ (139,986) $ (13,584)
=========== ===========
Basic and Diluted Earnings (Loss)
per Common Share $ (0.26) $ (0.03)
SEE ACCOMPANYING NOTES F-3
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the three months
ended March 31, 2003 and 2002
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 $ -- $ (388,716) $ -- $2,896,062
Net income (loss), as restated (13,584) (13,584)
Common stock issued 254 3 1,648 1,651
------- ---------- ---------- -------- ---------- ---------- ----------
BALANCE, MARCH 31, 2002, RESTATED 528,975 $ 5,290 $3,281,139 $ -- $ (402,300) $ -- $2,884,129
======= ========== ========== ======== ========== ========== ==========
BALANCE, DECEMBER 31, 2002 530,944 $ 5,309 $3,293,641 $ -- $ (139,479) $ -- $3,159,471
Net income (loss) (139,986) (139,986)
Common stock issued 192 2 1,248 1,250
Treasury shares acquired (73,249) (73,249)
------- ---------- ---------- -------- ---------- ---------- ----------
BALANCE, SEPTEMBER 30, 2003 531,136 $ 5,311 $3,294,889 $ -- $ (279,465) $ (73,249) $2,947,486
======= ========== ========== ======== ========== ========== ==========
SEE ACCOMPANYING NOTES F-4
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2003
and 2002
Restated
3/31/2003 3/31/2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (139,986) $ (13,584)
Adjustments to reconcile net income to cash
from operations-
Depreciation and amortization 21,162 36,785
Changes in-
Loans in process (433,305) (141,742)
Accrued bond interest, net 14,312 (19,439)
Accrued loan interest and deferred loan fees (318,873) (501,927)
Deferred taxes (113,682) (7,377)
Unamortized debt issue costs (347,741) (72,708)
Investor interest payable 444,945 (170,308)
Accounts and other payables 442,729 457,887
Other assets (58,476) 44,746
------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS (488,915) (387,667)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (9,908,231) (3,368,430)
Real estate loan principal payments received 3,078,398 86,785
Bonds redeemed or sold 31,250 38,500
Fixed assets purchased (544,898) --
Real estate costs capitalized -- (2,351)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (7,343,481) (3,245,496)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 11,290,675 4,925,737
Investor certificates redeemed (556,651) (332,998)
Building mortgage principal payments (2,363) (1,835)
Common stock issued 1,250 1,651
Dividends paid (168,640) (171,834)
Treasury stock acquired (73,249) --
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,491,022 4,420,721
------------ ------------
Net change in cash 2,658,626 787,558
Cash at beginning of period 1,500,499 2,907,457
------------ ------------
CASH AT END OF PERIOD $ 4,159,125 $ 3,695,015
============ ============
Supplemental Information-
Interest paid during the period $ 1,122,675 $ 1,018,072
Income taxes paid during the period $ -- $ --
Non-cash transactions-
Investor certificates matured and re-issued $ 995,206 $ 2,916,201
Loan interest included in principal $ 523,508 $ 216,408
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.".
Loans are stated at unpaid principal balances, less an allowance for loan losses
and net of deferred loan fees and unearned discounts. 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
if the possibility of future loss is considered remote. If the possibility of
future loss is not remote, then interest income is not recognized and interest
payments are credited to the loan principal balance. 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.
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, 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
F-6
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. Cash and cash equivalents include checking accounts and short
term certificates with original maturities of 90 days of less.
Bond holdings consist of tax-free local government securities and local 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.
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, start-up costs, and loan fees 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. 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
F-7
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.
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.
F-8
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, principally to it's method of recognizing fees associated with
mortgage loans. Additionally, the Company corrected its failure to provide
certain amortization and miscellaneous expenses. The following table reconciles
previously reported amounts with the restated amounts presented in these
financial statements: 3 months ended
03/31/02
------------
Interest & fees earned as previously reported $ 1,010,084
Effect of deferral of fees 151,616
------------
Loan interest & fees earned as restated $ 1,161,700
Income tax expense as previously reported $ (-0-)
Tax effect of corrections 41,015
------------
Income tax expense as restated $ 41,015
Loss as previously reported $ (106,909)
Correction of miscellaneous income items, net (17,276)
Effect of deferral of fees 151,616
Income tax effect (41,015)
------------
Net Income (Loss) as restated $ (13,584)
Earnings per share, basic & diluted as previously reported $ (0.20)
Deferred fees & corrections noted above, net of taxes 0.17
------------
Earnings per share, basic & diluted as restated $ (0.03)
Loans & accrued interest as previously reported $ 34,943,278
Reclassify bond and other interest receivable (126,515)
Deferral of previously recognized fees, cumulative (590,684)
------------
Real estate loans, net as restated $ 34,226,079
Deferred taxes as previously reported $ (33,941)
Refundable income taxes 48,392
Taxes from Wellstone Financial Group consolidation 16,199
Tax effect of fee deferral, cumulative 220,205
------------
Deferred tax asset as restated $ 250,855
F-9
Additionally, costs associated with its stock offerings ($152,183 with $0 income
tax effects) have been reclassified as of December 31, 2000 from an intangible
asset classification on the balance sheet to a reduction of the associated
paid-in capital account. There was no income statement effect. The following
table reconciles previously reported amounts with the restated amounts and
accounts presented in these financial statements:
03/31/02
-----------
Intangible assets, net as previously reported $ 1,252,358
Reclassification to Goodwill (gross) (500,955)
Stock offering costs reclassified (152,183)
-----------
Unamortized debt issue costs as restated $ 599,220
Paid in capital as previously reported $ 3,433,322
Stock offering costs reclassified (152,183)
-----------
Paid in capital, as restated $ 3,281,139
NOTE 3 - FIXED ASSETS
As of March 31, the Company's fixed assets are composed of:
2003 2002
--------- ---------
Office Condominiums $ 792,659 $ 252,922
Office Computers, Furnishings, Software & Equipment 88,570 17,529
Vehicles 37,730 30,351
Less: Accumulated Depreciation (41,610) (15,747)
--------- ---------
Fixed Assets, Net $ 877,349 $ 285,055
Depreciation expense $ 8,810 $ 3,577
NOTE 4 - COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company has no material lease commitments at March 31, 2003. The Company has
entered into a Personnel 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 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 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
F-10
Company's directors serve on CCA's Board of Directors. As of March 31, 2003, CCA
had not incurred any material expenses to be billed to the Company.
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 $ 71,595,884
Accrued Interest 573,180
Unearned Loan Fees (513,310)
------------
Total Real Estate Loans $ 71,655,754
The loans mature as follows: 2003- $46,575,454; 2004- $23,132,414; 2005- $0;
2006- $19,114; 2007 - $183,391; 2008 and thereafter - $1,685,511. 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 March 31, 2003, one loan, with a carrying amount of $134,458 was
considered impaired due to non-payment of interest. No allowance for impairment
loss has been recorded because the carrying amount of the loan is less than or
equal to the present value of expected future cash flows or the fair value of
the related collateral. No loans were considered impaired as of March 31, 2002.
The weighted average investment in impaired loans for the period ended March 31,
2003 was $133,044. Interest income recognized on impaired loans was $2,832 and
$0 for the three months ended March 31, 2003 and 2002, respectively.
NOTE 6 -GOODWILL
The Company 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 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 its fair value. As of December 31, 2002, goodwill's fair value
exceeded its carrying cost; therefore, no provision for impairment loss has been
recorded as of March 31, 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 March 31, unamortized debt issue costs
consist of:
F-11
2003 2002
----------- -----------
Costs incurred to register the Company's debt securities $ 431,215 $ 362,390
Commissions paid on the sale of debt securities 1,454,079 361,273
Less: Accumulated Amortization, generally over 5 years (545,200) (124,443)
----------- -----------
$ 1,340,094 $ 599,220
Amortization expense was $93,681 and $64,221 for the three months ended March
31, 2003 and 2002, respectively, and is included in marketing expenses in the
accompanying Consolidated Statements of Income (Loss). Estimated amortization
expense for the next five years:
April, 2003 through March, 2004 - $420,765
April, 2004 through March, 2005 - $321,166
April, 2005 through March, 2006 - $278,291
April, 2006 through March, 2007 - $241,675
April, 2007 through March, 2008 - $ 78,197
NOTE 8 - BOND HOLDINGS
Bond holdings at March 31:
St. Lucie Co., FL Subordinated Revenue Bonds: 2003 2002
----------- -----------
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 116,750 262,592
----------- -----------
Totals $ 2,629,250 $ 5,287,592
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 $31,250 and $38,500 for the
three months ended March 31, 2003 and 2002, respectively. No realized gains or
losses were recognized in 2003 or 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 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 real estate loan, which management believes will provide
greater long-term returns than the bonds.
F-12
Tax-free interest income was $55,982 and $117,434 for the three months ended
March 31, 2003 and 2002, respectively.
NOTE 9 - INCOME TAXES
The net deferred tax asset includes the following components:
2003 2002
--------- ---------
Net deferred tax assets $ 400,162 $ 224,224
Refundable taxes -0- 48,392
Net deferred tax liabilities (12,247) (21,761)
Valuation allowance -0- -0-
--------- ---------
Net deferred tax asset $ 387,915 $ 250,855
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. The Company estimates that future
taxable income will be sufficient to realize the net deferred tax asset;
therefore, no valuation allowance has been provided for as of March 31, 2003 and
2002. 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.
Components of income tax expense (benefit) for the period ended March 31 are:
2003 2002
--------- --------
Current: Federal $ (8,993) $ -0-
State (1,834) -0-
Deferred: Federal (87,651) 34,863
State (15,468) 6,152
--------- --------
$(113,946) $ 41,015
Reconciliation of the Company's income tax rate to statutory federal rates:
2003
----
Statutory federal rate 35.0%
Effect of graduated federal rates (1.0%)
State taxes, net of federal benefit 3.7%
Effect of non-taxable bond interest (7.5%)
Other, net (.3%)
----
Effective tax rate 44.9%
The effective tax rate for the period ending March 31, 2003 is not meaningful
because, in lieu of recording a valuation allowance, the Company did not record
a tax benefit for the estimated net operating loss for the period.
F-13
The effect of non-taxable bond interest income decreased in 2003 as a result of
the sale of the undivided 50% interest in the St. Lucie County, Florida bonds in
September, 2002.
NOTE 10 - CASH CONCENTRATION
A cash concentration risk arises when the Company has more cash in a financial
institution than is covered by insurance. At March 31, 2003, the Company had
cash in excess of insured limits totaling $3,465,605.
NOTE 11-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 March 31, 2003 by interest
rate and date of maturity-
5.0% $ 2,814,430 2003 $ 6,757,563
7.0% 6,045,969 2004 812,814
7.5% 1,448,558 2005 4,931,264
8.0% 1,240,878 2006 11,274,694
9.0% 64,393,316 2007/Beyond 52,166,816
-------------
75,943,151
As of March 31, 2003 and 2002, accrued interest payable was $3,213,200 and
$2,868,470, 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 Series A
Preferred Stock. Net proceeds from the offering are expected to be used to make
and purchase loans secured by properties, start or
F-14
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-LOAN GUARANTEES
At March 31, 2003 the Company was guarantor for a 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 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 the credit facilities and only covers outstanding
principal and accrued interest and terminates upon maturity and principal
repayment. At March 31, 2003, actual amounts drawn and therefore guaranteed to a
commercial bank totaled $23,766,451. 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 March 31, 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
three months ended March 31, 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% per year. The loan matures March 1, 2006 at
which time a balloon payment of $158,637 will be required. Estimated principle
reductions are-Year 2003 - $8,274; 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.
F-15
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. 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 follow-
2002 Net Income (Loss) $ (13,584)
- ----
Average Common Shares Outstanding 528,906
Earnings (Loss) per Common Share ($0.03)
2003 Net Income (Loss) ($139,986)
- ----
Average Common Shares Outstanding 531,040
Earnings (Loss) per Common Share ($0.26)
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.
F-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Periods Ending March 31, 2002 and March 31, 2003
General. Assets increased from $45,735,717 at March 31, 2002 to $82,958,549 at
March 31, 2003 for a net increase of $37,222,832 or 81%. This increase was as a
result of the sale of investment certificates and the subsequent origination of
new loans. Total revenue increased for the three months ended March 31 by
$641,943 or 50% from $1,296,539 in 2002 to $1,938,482 in 2003. The net loss for
the three months ended March 31, 2003 was $139,936 compared to a net loss of
$13,584 for the same period ended March 31, 2002.
Total investment in loans outstanding on March 31, 2003 was $71,655,754 compared
to $34,226,079 as of March 31, 2002 for an increase of $37,429,675 or 109%. This
increase was a result of sales of investment certificates and the subsequent
origination or refinancing of loans, as follows: new loan originations -
$18,414,646; refinances on existing loans, net of principal payments received -
$19,015,029. All other assets, composed primarily of cash, bond investments,
fixed assets and unamortized debt issue costs were $11,302,795 as of March 31,
2003. Principal and interest payable on Investor Certificates increased
$37,090,187 or 88% from $42,066,164 as of March 31, 2002 to $79,156,351 as of
March 31, 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
$713,508 or 61% from $1,161,700 for the three months ended March 31, 2002 to
$1,875,208 for the same period ended March 31, 2003. The increase was due to the
following:
Increase in average outstanding loan principal $843,406
($68,038,006 in 2003 and $31,765,660 in 2002)
Decrease in weighted average interest rate (46,861)
(9.43% in 2003 and 10.13% in 2002)
Decrease in loan fees recognized (83,037)
--------
$713,508
The increase in average outstanding loan principal is due to the addition of 8
new loans with average outstanding principal of $17,845,633 and the refinancing
of existing loans with average outstanding principal of $18,426,713.
Real estate and other income. For the three months ended March 31, real estate
and other income decreased $71,565 from $134,839 in 2002 to $63,274 in 2003. The
decrease was due to the September 30, 2002 sale of an undivided 50% interest in
the Company's St. Lucie County, FL bonds for $2,512,500, which subsequently
decreased investment income. Other income also includes office condominium
rental income of $7,836 and $6,335 for the three months ended March 31, 2003 and
2002, respectively.
Investor interest expense. Investor interest expense increased $714,025 or 85%
from $843,292 to $1,557,317 for the three months ended March 31, 2002 and 2003,
respectively. The increase is due to the following:
Increase in average outstanding loan principal, including
interest payable subject to compounding
($72,050,983 in 2003 and $38,471,034 in 2002) $726,155
Decrease in weighted average interest cost
(8.77% in 2003 and 8.89% in 2002) (12,130)
--------
$714,025
Marketing expenses. Due to the continuing backlog of projects, the Company
continues to commit substantial resources for marketing its investor
certificates. Total expenses for the marketing of investor certificates during
the first three months of 2003 were $106,487 versus $106,997 in 2002. Marketing
expenses will increase in the future 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 $1,340,094 and $599,220 as of March 31, 2003 and 2002,
respectively. Debt issue cost amortization expense was $93,681 and $64,221 for
the three months ended March 31, 2003 and 2002, respectively.
3
Operating and personnel expenses. Personnel expenses (salaries, payroll taxes,
and benefits) were $214,501 for the three months ended March 31, 2003, which was
$75,210 or 54% over the $139,291 in expense for the same period ended March 31,
2002. This increase is due to additional employees hired to handle the Company's
growth. As a percentage of total revenues, personnel expenses were 11.1% and
10.7% for the three months ended March 31, 2003 and 2002, respectively. Starting
in July 2003, the Company has 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. As of March
31, 2003, CCA had not incurred any material expenses to be billed to the
Company.
Operating expenses increased $134,581 or 75% from $179,528 to $314,409 for the
three months ended March 31, 2002 and 2003, respectively. The increase was due
to an increase in occupancy costs and recruiting fees related to the increase in
the number of Company employees and accounting services, consulting fees, and
trust service fees, which increased due to the Company's growth in operations.
Income tax provision (benefit). The income tax benefit for the three months
ended March 31, 2003 was $113,946, compared to a provision of $41,015 for the
same period ended March 31, 2002. The effective tax rate for 2003 was 44.9%
compared to 149.5% for the same period in 2002. This change resulted from an
increase in the Company's pre-tax loss 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 December 31, 2002 and 2001 were $168,640 and
$171,834, respectively and were paid during the subsequent quarters ended March
31, 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 used by the Company's operations for the three months ended March 31,
2003 was $488,915, which compares to $387,667 in net cash used by operations for
the same period ended March 31, 2002 for an increase in net cash used by
operations of $101,248. This difference was driven by increases in the Company's
net loss, loans in process, unamortized debt issue costs, and other assets,
partially offset by changes in investor interest payable, and accrued loan
interest and deferred loan fees.
During 2003 and 2002, accrued loan interest decreased net cash from operations
by $523,508 and $216,408, 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 two to three years after the loans
are originated.
Cash flows from investing activities.
The Company used $7,343,481 in cash from investing activities which is an
increase of $4,097,985 from $3,245,496 for the same period ended March 31, 2002.
The increase was driven by an increase in real estate loans made during 2003,
net of principal payments received. The Company increased its loan portfolio by
$6,829,833 for the three months ended March 31, 2003. This compares to a net
increase of $3,281,645 for the same period ended March 31, 2002, or a 108%
increase.
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 three months of 2003, the
Company raised $10,734,024 from the sale of new Investor Certificates, net of
redemptions on existing certificates. This represents an increase of $6,141,285
from net certificate sales of $4,592,739 for the same period ended March 31,
2002. The percentage of Investor Certificates redeemed for cash compared to
Investor Certificates sold for the three months ended March 31, 2003 and 2002
was 5% and 7%, respectively.
4
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 March 31,
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) Exhibit 32.1, 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 12, 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: November 12, 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 factos 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: November 12, 2003 s/John T. Ottinger
------------------
John T. Ottinger, Vice President, Chief
Operating Officer and Chief Financial Officer
6