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 ended March 31, 2004
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
of incorporation or organization) Identification Number)
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 March 31, 2004, there were issued and outstanding 531,528 shares of the
common stock of the issuer.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
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 Sheets as of March 31, 2004 and 2003 F-2
Consolidated Statements of Operations
for the Three Months ended March 31, 2004 and 2003 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Three Months ended March 31, 2004 and 2003 F-4
Consolidated Statements of Cash Flows
for the Three Months ended March 31, 2004 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 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities and Use of Proceeds 8
Item 3. Defaults on Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 8
Certifications 9
2
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Selected financial data.
Please read the following selected financial data in conjunction with the rest
of this "Management's Discussion and Analysis or Plan of Operation" and with our
financial statements and related notes in this filing.
Quarter-ended
March 31,
------------------------------
2004 2003
----------- -----------
Revenues $ 2,796,253 $ 1,938,482
----------- -----------
Investor interest expense 1,962,490 1,557,317
Loan loss expense 20,000 -0-
Marketing expenses 204,536 106,487
Salaries, payroll taxes, benefits 320,220 241,099
Operating expenses 158,164 287,511
----------- -----------
Total expenses 2,665,410 2,192,414
----------- -----------
Operating income (loss) 130,843 (253,932)
Income tax provision (benefit) 22,121 (113,946)
----------- -----------
Net income (loss) $ 108,722 ($ 139,986)
Overview of operations.
We have always focused on serving only faith-based organizations, mostly
churches and their related schools. We also offer specialized programs for
church and other non-profit sponsors of senior housing and affordable/moderate
income housing programs. Nearly all of our earnings in the past came from
financing church facilities. During the last quarter of 2000, we began to
realize revenues from investment in senior and affordable/moderate income
housing projects. We generate revenue from:
o interest on loans
o origination and renewal fees on loans
o loan participation income
o interest on securities
o consulting fees
We currently charge a 5% to 10% fee on new loans, based upon expected terms, and
renewal fees of as much as 5% of the outstanding balance of the renewing loan.
Our interest rate on all new loans is currently from 9% to 10%. Some loans are
participating loans, which enable us to receive income from the borrower when
the borrower sells or refinances (with another lender) the property in which we
provided the financing. The participation percentage varies between 25% and 33%
of the borrower's gain.
Participating loans (all related to senior housing facilities) are classified as
real estate joint venture investments if 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 and there
is no irrevocable letter of credit for a substantial amount of the loan.
o There is no take-out commitment for the full amount of the loan from a
creditworthy, independent third-party.
o The facility does not have lease commitments which will provide sufficient
cash flow to service normal principal and interest loan amortization.
Comparison of Periods Ended March 31, 2003 and March 31, 2004
General. Assets increased from $82,958,550 at March 31, 2003 to $94,360,462 at
March 31, 2004 for an increase of $11,401,912 or 14%. This increase was a result
of the sale of Investor Certificates and Mortgage Participations, net of
redemptions of $11,205,357 and cash generated from operations since March 31,
2003, decreased by dividends paid to shareholders. With the additional net cash
from these items and from cash already on hand, we originated new real estate
loans and joint venture investments, net of principal payments received, of
$12,434,266 and invested an additional $1,275,000 in bond holdings. Total
revenue increased for the quarter ended March 31, 2004 by $857,771 or 44% from
$1,938,482 in 2003 to $2,796,253 in 2004. Net income (loss) for the quarter
ended March 31, 2004 was $108,722 compared to ($139,986) in 2003.
Total real estate loans and joint venture investments outstanding on March 31,
2004 was $84,090,020 compared to $71,655,754 on March 31, 2003 for an increase
of $12,434,266 or 17%. This increase was a result of sales of investment
certificates and mortgage participation agreements and the subsequent
origination or refinancing of real estate loans and joint venture investments,
as follows:
3
New loan originations $ 3,247,659
Refinances on existing loans, net of principal received (2,481,955)
New real estate joint venture investments made 13,917,311
Decrease in existing real estate joint venture investments (2,248,749)
------------
$ 12,434,266
============
All other assets composed primarily of cash, bond holdings, property and
equipment, and unamortized debt issue costs were $10,270,442 as of March 31,
2004. Principal and interest payable on Investor Certificates and Mortgage
Participation ("MP") Agreements increased $11,205,357 or 14% from $79,156,351 as
of March 31, 2003 to $90,361,708 as of March 31, 2004. In 2003, the Company
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. The registration statement was approved on March 26, 2004 which
will allow us to start selling new Investor Certificates in the second quarter
of 2004 and continue the substantial increase in outstanding certificates and
the subsequent investment in new real estate loans and joint venture
investments.
Real estate loan and joint venture interest and fees earned. Interest income and
fees from real estate loans and joint venture investments for the quarter ended
March 31 increased $839,304 (+45%) from $1,858,193 in 2003 to $2,697,497 in
2004. The increase was due to the following items:
Increase in average outstanding principal $423,159
($84,529,125 - 2004; $68,038,006 - 2003)
Increase in weighted average interest rate 49,451
(9.77% - 2004; 9.43% - 2003)
Increase in loan fees recognized 366,694
--------
$839,304
========
The increase in average outstanding principal is due to the addition of 8 new
real estate loans and joint venture investments with average outstanding
principal of $17,164,970, net of a decrease in existing loan principal (due to
loan pay-offs) with an average net outstanding principal decrease of $673,851.
Loan participation and other income. For the quarter ended March 31, 2004, loan
participation and other income increased $18,467 or 23% from $80,289 in 2003 to
$98,756 in 2004. The increase is due to the following:
2004 2003 Change
-------- -------- --------
Investment income $ 91,431 $ 72,453 $ 18,978
Loan participation and other income 7,325 7,836 (511)
-------- -------- --------
Total $ 98,756 $ 80,289 $ 18,467
The Company's investment income is from the purchase of tax-free bonds used as
permanent financing for projects the Company funded during their development and
initial operations and from interest income on the Company's excess cash. The
increase in investment income is due to the September, 2003 purchase of new
tax-free bonds, which increased the balance in our bond holdings portfolio.
Investor interest expense. Investor interest expense for the quarter ended March
31, 2004 was $1,962,490, an increase of $405,173 or 26% compared to 2003's
expense of $1,557,317. The increase is due to:
Increase in average outstanding certificate principal, including $235,310
interest payable subject to compounding
($81,783,612 - 2004; $72,050,983 - 2003)
Change in weighted average interest percentage 16,008
(8.90% - 2004; 8.77% - 2003)
Increase in average outstanding Mortgage Participation 153,755
--------
Agreement principal ($6,150,200 - 2004; $0 - 2003) $405,173
========
Loan loss expense and allowance for loan losses. In the fourth quarter of 2003,
as part of our regular loan grading and risk assessment process, we charged
$375,000 to loan loss expense and increased our allowance for real estate loan
losses to $375,000 from $0 as of December 31, 2002. In the first quarter of
2004, we charged an additional $20,000 to loan loss expense. Prior to the fourth
quarter of 2003, we had never recognized an allowance for loan loss. Even though
we have not incurred a loan write-off, we increased our loan loss allowance in
the fourth quarter of 2003 because of an increase in our family housing
development loan portfolio's relative credit risk. The increased credit risk was
caused by slower than expected new home sales in the fourth quarter of 2003,
which is a result of slower than expected growth in the U.S. economy.
4
The loan loss expense in 2004 was due to an increase in the family housing
development loan portfolio's outstanding principal.
The allowance for loan loss increases that we made in 2003 and 2004 are
classified as collective loan loss allowances. A collective loan loss allowance
is recognized when the characteristics of a group of loans indicate that it is
probable that a loss exists even though the loss cannot be identified with a
specific loan. The allowance for loan losses is reviewed quarterly and increases
or decreases will be made based on the results of these reviews.
As of March 31, 2004, no loans were considered impaired. As of March 31, 2003,
one church loan with a carrying amount of $134,458 was considered impaired due
to non-payment of interest. No specific impaired loan loss allowance was
recorded because the carrying amount of the loan was less than the present value
of the loan's expected future cash flows.
As of March 31, 2004, allowance for loan losses as a percent of outstanding loan
principal by loan type:
Loan Loss Outstanding
Allowance Principal %
--------- ----------- ---
Family Housing Development Loans $395,000 $26,423,822 1.5%
Church Mortgage Loans -0- 11,631,542 0%
Senior Housing Mortgage Loans -0- 9,135,836 0%
Real Estate Joint Venture Investments -0- 37,491,355 0%
-------- ----------- ---
Total $395,000 $84,682,555 .5%
Marketing expenses. Total expenses for the marketing of investor certificates
for the quarter ended March 31, 2004 were $204,536 compared to $106,487 in 2003.
The increase is due to:
2004 2003 Change
-------- -------- --------
Debt issue cost amortization $162,728 $ 93,681 $ 69,047
Management & Consulting 19,749 -0- 19,749
Printing 7,267 2,162 5,105
Other marketing costs 14,792 10,644 4,148
-------- -------- --------
Total $204,536 $106,487 $ 98,049
Debt issue cost amortization expense increased due to Investor Certificates and
Mortgage Participations sold since March 31, 2003. This expense will continue to
increase as new Investor Certificates and Mortgage Participations are sold.
Consulting expense is up due to the hiring of a full-time marketing manager who
is designing and implementing new marketing strategies for our Investor
Certificates, new investments and general corporate programs. Printing costs are
up due to the printing of prospectuses and marketing brochures for our new
certificates, which we will begin to sell in the second quarter of 2004.
Selling commissions paid to brokers for selling Investor Certificates and
Mortgage Participations and costs incurred to register Investor Certificates are
paid in cash and charged as an expense over the term of the related debt. The
unamortized balance is classified as an asset on the Balance Sheet as
"Unamortized debt issue costs". The balance was $1,744,336 and $1,340,094 as of
March 31, 2004 and 2003, respectively.
Operating and personnel expenses. Personnel expenses (salaries, payroll taxes,
and benefits) for the quarter ended March 31 increased $79,121 or 33% from
$241,099 in 2003 to $320,220 in 2004. The increase is due to additional
employees hired to handle the Company's growth in operations.
Starting in July 2003, the Company contracted with Cornerstone Capital Advisors
("CCA") to provide all administrative personnel services. The Company is paying
CCA for its expenses (estimated at $1,200,000 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 paid $324,222 to CCA during the first quarter of 2004, of
which $310,472 is included in personnel expenses and $13,750 is included in
marketing expenses. Prior to July 1, 2003, the employees were paid directly by
the Company. On July 1, 2003, CCA hired all of our employees and has billed us
for the time spent on Company operations.
5
For the quarters ended March 31, 2004 and 2003, operating expenses were as
follows:
2004 2003 Change
--------- --------- ---------
a) Trust service/paying agent fees $ 26,303 $ 36,445 ($ 10,142)
b) Consulting fees 6,200 63,200 (57,000)
c) Audit, accounting & tax services 19,872 31,606 (11,734)
d) Employee recruiting costs -0- 39,653 (39,653)
e) Depreciation & amortization 16,020 9,302 6,718
f) Office expenses 15,467 24,163 (8,696)
g) Legal expenses 25,286 21,934 3,352
h) Other operating expenses 49,016 61,208 (12,192)
--------- --------- ---------
Total operating expenses $ 158,164 $ 287,511 ($129,347)
The changes are due to the following:
a) Trust service/paying agent fees decreased due to a decrease in
transaction activity for our Investor Certificates. The decreased
activity was due to not having certificates available to sell in the
first quarter of 2004. Since our registration statement was approved
on March 26, 2004, we expect the number of transactions related to
Investor Certificates to increase substantially for the remainder of
2004.
b) Consulting fees - In 2003, we hired financial consultants to set up
the mortgage participation program, set-up cash flow and financing
models which we are using to manage our cash and loan investments, and
to explore possible new industries and strategies for our loan
business. We have not used consultants for any material projects in
2004, which has caused the large decrease in consulting fees.
c) Audit, accounting & tax services - Decreased due to the hiring of a
full-time accountant in the middle of 2003 which has decreased our
need for outside accounting services.
d) Employee recruiting costs - decreased in 2004 because we are no longer
using outside recruiting firms to hire our employees.
e) Depreciation & amortization - increased due to the purchase of an
office building, office furnishings and computers.
f) Office expenses - In February, 2003, we moved into our new office
building and incurred a number of one-time moving and set-up costs.
Since we have not incurred similar costs this year, our office
expenses have decreased significantly in 2004.
g) Legal expenses - increased due to an increase in our size and
complexity of operations.
h) Other operating expenses - decreased due to economies of scale that we
have benefited from as our operations have increased.
Income tax provision (benefit). The income tax provision (benefit) for the
quarter ended March 31, 2004 was $22,121, compared to ($113,946) for the quarter
ended March 31, 2003. The net increase in income taxes is due to an increase in
pre-tax income, partially offset by an increase in tax-exempt bond interest. The
Company's effective tax provision (benefit) rate for the quarters ended March
31, 2004 and 2003 was 16.9% and (44.9%), respectively. A reconciliation of the
Company's effective tax provision rate to the federal statutory rate is included
in the attached "Notes to Consolidated Financial Statements" (Note 10).
Dividends. Dividends of $169,087 and $168,640 were declared on December 31, 2003
and 2002, respectively and paid during the first quarter of 2004 and 2003,
respectively.
Liquidity and Capital Resources
Cash flows from operations. Net cash provided by the Company's operations for
the quarter ended March 31, 2004 was $7,616, which compares to $59,846 in net
cash used by operations for the quarter ended March 31, 2003 for an increase in
net cash provided by operations of $67,462. This difference was driven by
increases in net income, depreciation and amortization expense, deferred taxes,
allowance for loan losses, and investor and mortgage participation interest
payable, partially offset by a decrease in accounts and other payables and
changes in accrued real estate loan and joint venture interest and deferred loan
fees.
Investor and mortgage participation interest payable increased $648,933 in the
first quarter of 2004 due to an increase in outstanding debt and because
approximately 25% of the Investor Certificate holders who purchased certificates
in 2003 have elected to reinvest the interest due to them each year and not
receive the interest in cash until maturity.
Included in the 2004 and 2003 changes in accrued real estate loan and joint
venture interest and deferred loan fee amounts is $397,137 and $523,508 in
interest which was financed as part of loan principal. We receive monthly
interest payments on our loans except when the terms of certain loans allow
borrowers to finance interest payments while the collateralized property is
under development or construction. A summary (by loan type) of the amount of net
financed interest for the quarters ended March 31, 2004 and 2003 is as follows:
2004 2003
-------- --------
Family Housing Development $193,588 $224,671
Church Construction 37,514 8,684
Real Estate Joint Venture 166,035 290,153
-------- --------
$397,137 $523,508
6
The amount for 2004 represents interest accrued and financed in 2004, net of
payments received in 2004 that were financed in previous years. 2003's amount
represents interest accrued and financed in 2003, net of payments received in
2003 that were financed in previous years.
The 2004 decrease in family housing net financed interest is due to a major
project in Mableton, Georgia moving out of the development phase and into the
sales phase of the project offset by five smaller new projects that are now in
the development phase.
The decrease in real estate joint venture net financed interest is due to the
origination of the Lewisville, TX loan in the latter part of 2002. We financed
as part of the loan's principal the first three months' interest in 2003 because
the facility was being renovated. We have received monthly interest payments
thereafter. The McKinney, TX loan started its development phase and financed its
interest payments during the first quarter of 2004. Since the McKinney, TX loan
balance is significantly less than the Lewisville, TX loan balance, the financed
interest amount decreased in 2004. Also, the San Antonio, TX loan financed one
months' interest in the first quarter of 2004 while undergoing renovations to
its facility.
Cash flows from investing activities. For the quarter ended March 31, 2004, the
Company used $523,407 in cash from investing activities which is a decrease of
$6,820,074 from $7,343,481 for the quarter ended March 31, 2003. The decrease
was due to the following:
Decrease in real estate loans and joint venture investments made ($6,270,307)
Increase in real estate loan and joint venture investment
principal payments received (39,238)
Decrease in bonds redeemed or sold 31,250
Decrease in fixed asset and real estate purchases (541,779)
-----------
($6,820,074)
===========
The decrease in real estate loans and joint venture investments made in 2004 is
due to fewer sales of investor certificates during the quarter ended March 31,
2004 versus the quarter ended March 31, 2003. Please refer to the "cash flows
from financing activities" section for additional information on the decrease in
investor certificate sales.
During the quarter ended March 31, 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 flows from financing activities. For the quarter ended March 31, 2004, the
Company raised $441,368 from the sale of Mortgage Participation Agreements and
the resale of Investor Certificates that were redeemed early. This represents a
decrease of $10,849,307 from new certificate sales of $11,290,675 for the
quarter ended March 31, 2003. The decrease was due to the sale of all available
registered Investor Certificates by May, 2003; therefore, no new certificates
were available to sell during the first three months of 2004. In the second
quarter of 2003, the Company filed a new registration statement with the
Securities and Exchange Commission which was approved on March 26, 2004. This
will significantly increase our sales of Investor Certificates for the remainder
of 2004.
Investor Certificates redeemed increased from $556,651 for the quarter ended
March 31, 2003 to $1,424,047 for the quarter ended March 31, 2004. Historically,
over 80% of Investor Certificate maturities are re-invested as new certificates;
however, because the new registration statement with the Securities and Exchange
Commission was not approved until March 26, 2004, all maturities from the first
quarter of 2004 were paid in cash, which increased 2004's cash redemptions.
We have $8,623,950 in Investor Certificates coming due or redeemable upon demand
in 2004. $6,379,277 of this amount is for graduated certificates, which allow an
investor to redeem their certificate each year on the anniversary date of the
purchase. Based on our historical experience, we expect that less than 20% of
the graduated certificates will be redeemed for cash in 2004.
Among the measures we take to mitigate any demands for cash are:
o Maintain a minimum cash balance, currently $2,650,000.
o Have readily marketable loans that can be sold for par or a premium.
o Ask investors about their intentions at least 30 days before their bonds
mature.
o Have a bank willing to extend credit lines if needed.
o Spread maturity dates throughout the year.
o Limit each investor to not more than $500,000 maturing in any three-month
period.
We believe that cash on hand, cash generated by operations and expected
refinancing and pay-offs of existing loans, will be sufficient to meet our
financing and capital needs for the coming year. The amount and timing of our
future capital requirements will depend on factors such as the origination and
funding of new investments, any opportunities for acquisitions of related
businesses and the overall success of our marketing efforts for certificates,
shares and any other securities.
7
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,
2004, 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 99.1, Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(2) Exhibit 15, Letter on un-audited interim financial information.
(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: May 10, 2004 Cornerstone Ministries Investments, Inc. (Registrant)
By: /S/ John T. Ottinger
------------------------------------------
John T. Ottinger
Vice President and Chief Financial Officer
8
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 consolidated balance sheets of Cornerstone
Ministries Investments, Inc. and Subsidiaries as of March 31, 2004, March 31,
2003 and December 31, 2003 and the related statements of operations, changes in
shareholder's equity, and cash flows for the three month periods ended March 31,
2004 and 2003 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.
The financial statements for the year ended December 31, 2003, including the
balance sheet as of December 31, 2003 was audited by us and we expressed an
unqualified opinion on them in our report dated March 18, 2004, but we have not
performed any auditing procedures since that date.
/s/ Robert N. Clemons, CPA, PA
- ------------------------------
DeLand, Florida
April 29, 2004
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2004, March 31, 2003 and December 31, 2003
Unaudited Unaudited Audited
3/31/2004 3/31/2003 12/31/2003
------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 2,654,606 $ 4,159,125 $ 4,389,851
Loans in process 170,402 1,042,325 118,504
Real estate loans, net 46,939,081 46,173,377 47,877,277
Real estate joint venture investments, net 37,150,939 25,482,377 34,846,223
Bond holdings and accrued interest 3,985,667 2,629,250 4,001,333
Property and equipment, net 860,200 877,349 873,101
Refundable income taxes 42,617 -- 42,617
Deferred tax asset, net -- 387,915 --
Goodwill 450,997 450,997 450,997
Unamortized debt issue costs 1,744,336 1,340,094 1,772,631
Real estate held for investment 340,000 340,000 340,000
Other assets 21,617 75,741 15,813
------------ ------------ ------------
TOTAL ASSETS $ 94,360,462 $ 82,958,550 $ 94,728,347
============ ============ ============
LIABILITIES
Investor certificates and accrued interest $ 84,149,566 $ 79,156,351 $ 84,562,645
Mortgage participations and accrued interest 6,212,142 -- 6,132,809
Accounts and other payables 232,473 667,849 267,806
Common dividends payable -- -- 169,087
Building mortgage 177,844 186,863 180,194
Capital lease obligation 12,296 -- 13,632
Deferred taxes payable 166,257 -- 171,443
------------ ------------ ------------
TOTAL LIABILITIES 90,950,578 80,011,063 91,497,616
------------ ------------ ------------
SHAREHOLDERS' 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;
531,528, 531,135 and 531,528 shares issued and outstanding 5,315 5,311 5,315
Paid in capital 3,297,435 3,294,889 3,297,435
Retained earnings (deficit) 109,951 (279,465) 1,229
Treasury stock (2,817) (73,248) (73,248)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,409,884 2,947,487 3,230,731
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 94,360,462 $ 82,958,550 $ 94,728,347
============ ============ ============
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-2
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2004 and 2003
2004 2003
----------- -----------
REVENUES
Real estate loan and joint venture interest and fees $ 2,697,497 $ 1,858,193
Loan participation and other income 98,756 80,289
----------- -----------
TOTAL REVENUES 2,796,253 1,938,482
----------- -----------
EXPENSES
Investor interest expense 1,962,490 1,557,317
Loan loss expense 20,000 --
Marketing expenses 204,536 106,487
Salaries, payroll taxes, and benefits 320,220 241,099
Operating expenses 158,164 287,511
----------- -----------
TOTAL EXPENSES 2,665,410 2,192,414
----------- -----------
Income (Loss) Before Provision For Income Taxes 130,843 (253,932)
Income Tax Provision (Benefit) 22,121 (113,946)
----------- -----------
NET INCOME (LOSS) $ 108,722 $ (139,986)
=========== ===========
Basic and Diluted Earnings (Loss)
per Common Share $ 0.21 $ (0.26)
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-3
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2004 and 2003
RETAINED
COMMON STOCK: PAID-IN PREFERRED EARNINGS TREASURY STOCK: TOTAL
SHARES AMOUNT CAPITAL STOCK (DEFICIT) SHARES STOCK EQUITY
-------- -------- ----------- ---------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2002 530,943 $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 stock acquired (11,269) (73,248) (73,248)
-------- -------- ----------- ---------- ---------- ---------- ---------- -----------
BALANCE, MARCH 31, 2003 531,135 $5,311 $3,294,889 $ -- $ (279,465) (11,269) $ (73,248) $2,947,487
======== ======== =========== ========== ========== ========== ========== ===========
BALANCE, DECEMBER 31, 2003 531,528 $5,315 $3,297,435 $ -- $ 1,229 (11,269) $ (73,248) $3,230,731
Net income (loss) 108,722 108,722
Common stock issued - - - -
Treasury stock sold 10,836 70,431 70,431
-------- -------- ----------- ---------- ---------- ---------- ---------- -----------
BALANCE, MARCH 31, 2004 531,528 $5,315 $3,297,435 $ -- $109,951 (433) $ (2,817) $3,409,884
======== ======== =========== ========== ========== ========== ========== ===========
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-4
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2004 and 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 108,722 $ (139,986)
Adjustments to reconcile net income (loss) to
cash from operations-
Depreciation and amortization 178,748 102,491
Changes in-
Loans in process (51,898) (433,305)
Accrued bond interest, net 15,666 14,312
Accrued real estate loan/joint venture interest and deferred loan fees (866,232) (318,873)
Allowance for loan losses 20,000 --
Deferred taxes (5,186) (113,682)
Investor and mortgage participation interest payable 648,933 444,945
Accounts and other payables (35,333) 442,729
Other assets (5,804) (58,477)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS 7,616 (59,846)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (2,045,317) (9,186,543)
Real estate loan principal payments received 3,117,636 3,078,398
Real estate joint venture investments made (1,592,607) (721,688)
Bonds redeemed or sold -- 31,250
Property and equipment purchased (3,119) (544,898)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (523,407) (7,343,481)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 363,118 11,290,675
Investor certificates redeemed (1,424,047) (556,651)
Mortgage participation agreements sold 78,250 --
Debt issue costs paid (134,433) (429,070)
Building mortgage principal payments (2,350) (2,363)
Capital lease principal payments (1,336) --
Common stock issued -- 1,250
Dividends paid (169,087) (168,640)
Treasury stock sold (acquired) 70,431 (73,248)
------------ ------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,219,454) 10,061,953
------------ ------------
Net change in cash and cash equivalents (1,735,245) 2,658,626
Cash and cash equivalents at beginning of period 4,389,851 1,500,499
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,654,606 $ 4,159,125
============ ============
Supplemental Information-
Interest paid during the period $ 1,311,493 $ 1,122,675
Income taxes paid during the period $ 62,500 $ --
Non-cash transactions-
Investor certificates matured and re-invested $ -- $ 995,206
Loan interest financed and included in loan principal $ 397,137 $ 523,508
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-5
</FN>
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 and for non-profit sponsors of
senior housing and affordable housing programs. The Company also invests in
other 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 Southeast and Southwestern United States.
Cash and cash equivalents include bank accounts and investments with original
maturities of 90 days or less.
Real estate loans and senior housing loans classified as real estate joint
venture investments 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 on the accrual basis 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 is 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. Interest income and loan fees recognized from
real estate loans and senior housing loans classified as real estate joint
venture investments are reported as "real estate loan and joint venture interest
and fees" in the accompanying Consolidated Statements of Income.
The Company receives monthly interest payments on its real estate loans and
senior housing loans (classified as real estate joint venture investments)
except when the terms of a loan allow a borrower to finance interest payments.
Interest is financed in the following circumstances:
o Family housing loans may finance interest while the project is in the
development and pre-sales phase, which normally lasts six to 18 months
depending on the size of the project. The Company receives the financed
interest as the borrower sells homes in the development.
o Church construction loans may finance interest while the church building is
under construction. This takes three to nine months, depending on the size
of the building. When the building is operational, the financed interest
from the construction phase is included in the loan's principal amount and
the Company begins receiving monthly interest payments from the borrower.
o Senior housing loans may finance interest during the
construction/renovation stage of the borrower's operations. This takes two
to six months, depending on the size of the project. When the facility is
operational, the financed interest from the construction/renovation stage
is included in the loan's principal amount and the Company begins receiving
monthly interest payments from the borrower.
Senior housing loans are classified as real estate joint venture investments if
the Company participates in a property's residual profits and all of the
following exist at the inception of the loan:
o The borrower has title but not 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 and there
is no irrevocable letter of credit for a substantial amount of the loan.
o There is no take-out commitment for the full amount of the loan from a
creditworthy, independent third-party.
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 these
facilities, which are owned by non-profit entities. The Company participates in
the residual profits of these properties through loan participation agreements,
which enable the Company to receive income from the borrower when the property
in which the Company provided financing is sold or refinanced with another
lender. The participation is between 25% and 33% of the borrower's gain. Loan
participation income is recognized when the borrower's sale or refinancing is
completed and the Company receives payment from the borrower.
F-6
Loansin process are amounts advanced or expended on behalf of borrowers prior to
completion of the loan documentation. 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 and Mortgage Participation Agreements. These costs
are being amortized on a straight-line basis over the term of the associated
debt, principally five years.
The allowance for loan losses for real estate loans and senior housing loans
classified as real estate joint venture investments 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 determined in accordance with
SFAS No. 5 (collective loan losses) and SFAS No. 114 (specific impaired loan
losses). A collective loan loss is recognized when the characteristics of a
group of loans indicate that it is probable that a loss exists even though the
loss cannot be identified with a specific loan. The collective loan loss
allowance amount is based on observable data that management believes is
reflective of the underlying credit losses inherent in the portfolio. The
components of this evaluation include trends in the Company's historical loss
experience, changes in credit risk and credit quality, credit concentrations,
economic conditions, collateral values, and other risks inherent in the
portfolio. Specific impaired loan loss allowances are made when it is determined
that a loan is impaired and the loan's carrying amount exceeds the present value
of estimated future cash flows, or, if the loan is considered collateral
dependant, the loan's collateral value. A loan is considered impaired if it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. 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 loss and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to specific impaired loans are
charged or credited to loan loss expense. Loans are charged-off to the extent
the loan's carrying amount exceeds the net realizable value of the collateral,
with the charge-off occurring when it is likely that the loan is uncollectible
and foreclosure will occur.
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 three to five years for furnishings and equipment, and 40
years for office buildings.
Real estate held for investment includes land which the Company owns and intends
to hold as an investment for more than one year. The assets are carried at the
lesser of cost or fair value as required by SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets". Impairment losses are recognized
when the carrying amount of a long-lived asset is determined not to be
recoverable and the carrying amount exceeds fair value. Profit from real estate
sales is recognized when the collectibility of the sales price is reasonably
assured and the Company is not obligated to perform significant activities after
the sale to earn the profit. If either of these conditions exists, all or part
of the profit is deferred and recognized using the installment sale method or
cost recovery method as prescribed by SFAS No. 66, "Accounting for Sales of Real
Estate".
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.
F-7
Mortgage Participation Agreements are accounted for as secured borrowings with
pledges of collateral because the agreements do not meet the definition of a
sale of a financial asset under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities".
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, allowance for loan losses, 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 per common share are calculated by adjusting weighted
average outstanding shares, assuming conversion of all potentially dilutive
shares of Series A Convertible Preferred Stock.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. The
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.
New Accounting Pronouncements:
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities, an interpretation of ARB (Accounting Research
Bulletin) No. 51. This interpretation requires the consolidation of entities in
which an enterprise absorbs a majority of the entities expected losses, receives
a majority of the expected residual gains, or both, as a result of ownership,
contractual or other financial interests in the entity. In October 2003, the
FASB delayed the effective date of FIN 46 for variable interest entities (VIE's)
or potential VIE's created before February 2003. In December, the FASB issued a
revised version of FIN 46, which delayed the effective date of FIN 46 for all
VIE's until March 2004. FIN 46 and its various interpretations are not expected
to have a material impact on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. This standard, which amends the
transition and disclosure issues associated with SFAS No. 123, became effective
for the years ending after December 31, 2002. The requirements of this standard
do not impact the Company's financial position or results of operations.
During the last three years, the FASB has issued a number of accounting
pronouncements with various effective dates: SFAS No. 141, Business
Combinations; SFAS No. 142, Goodwill and Other Intangible Assets; SFAS No. 143,
Accounting for Asset Retirement Obligations; SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets; SFAS No. 145, Rescission of SFAS
No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections; SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities; SFAS No.
147, Acquisition of Certain Financial Institutions - an Amendment of SFAS No. 72
and 144 and FASB Interpretation No. 9; SFAS No. 149, Amendment of SFAS No. 133
on Derivative Instruments and Hedging Activities; SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity; and Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. These pronouncements do not have a material effect of the Company's
financial statements.
F-8
NOTE 2 - PROPERTY AND EQUIPMENT
At March 31, property and equipment is composed of:
2004 2003
--------- ---------
Office Condominiums $ 792,659 $ 792,659
Office Computers, Furnishings,
Software & Equipment 123,596 88,570
Vehicles 37,730 37,730
Capital lease - phone system 17,710 -0-
Less: Accumulated Depreciation (111,495) (41,610)
--------- ---------
Property and equipment, net $ 860,200 $ 877,349
Depreciation expense $ 16,020 $ 9,302
NOTE 3 - COMMITMENTS AND RELATED PARTY TRANSACTIONS
Leases:
During the second quarter of 2003, the Company entered into a capital lease for
a new telephone 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, interest and
sales tax, is $672 per month. Amortization expense was $1,476 and interest
expense was $546 for the quarter ended March 31, 2004. Future yearly minimum
lease payments as of March 31, 2004:
Year Amount
- ---- ------
2004 $ 5,648
2005 7,531
2006 1,256
--------
Total 14,435
Less interest portion (2,139)
--------
Capital lease obligation $ 12,296
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; computer and
management information systems administration; record maintenance; and
bookkeeping and accounting after June 30, 2003. The Company is obligated to pay
directly or reimburse actual expenses to be billed bi-weekly. CCA can earn
incentive compensation of up to 10% of the actual expenses billed to the Company
for the prior 12 months. The base for good performance includes being current on
all bond interest and other obligations, and that 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. Factors
above the base and the exact amount of incentive compensation will be determined
by the Board of Director's judgment on the extent to which CCA's services 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. The Company does
not have any employees of its own and CCA is subject to the supervision of the
Board of Directors. Two of the Company's directors serve on CCA's Board of
Directors. For the quarter ended March 31, 2004, the Company paid $324,222 to
CCA for personnel services.
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 12 for further details on these
filings). Two of the Company's directors serve on the Board of Directors of
CDPO's majority owner, Cornerstone Group Holdings, Inc. The service fee is
$75,000 per filing payable in installments during the filing process. All
amounts due under these agreements were paid in 2003. In 2004, Cornerstone
Ministries Investments, Inc. amended its service agreement and paid an
additional $25,000 to CDPO for cost over-runs related to the length of time that
it has taken for the registration statement to become effective.
F-9
NOTE 4 - REAL ESTATE LOANS
At March 31, the Company had Real Estate Loans on church and other non-profit
properties as follows:
2004 2003
------------ ------------
Family housing development loans $ 26,423,822 $ 20,459,136
Church mortgage loans 11,631,542 15,225,367
Senior housing mortgage loans 9,135,836 10,215,455
------------ ------------
Total principal 47,191,200 45,899,958
Accrued Interest 385,143 360,062
Unearned Loan Fees (242,262) (86,643)
Allowance for loan losses (395,000) -0-
------------ ------------
Total Real Estate Loans $ 46,939,081 $ 46,173,377
These loans mature as follow: 2004 - $28,573,125; 2005 - $14,055,200; 2006 - $0;
2007 - $0; 2008 - $106,497; beyond 2008 - $4,456,378. 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.
Based on the terms of the loans, the Company allows borrowers with loans related
to certain family housing and church properties to finance interest payments
while the properties are in the development and construction phase of
operations. For the quarters ended March 31, the net interest payments financed
were:
2004 2003
--------- ---------
Current year interest financed $ 234,197 $ 233,355
Previous years' financed interest received (3,095) -0-
--------- ---------
Net financed interest $ 231,102 $ 233,355
On March 31, 2004, the Company had significant credit risk concentrations in the
following states:
Georgia $23,516,903
Florida $ 9,380,265
Texas $ 6,112,986
Impaired loan disclosures for the quarter ended March 31 are as follows:
2004 2003
------- --------
Number of impaired loans -0- 1
Carrying amount at March 31 $-0- $134,458
Weighted average investment - current quarter $-0- $133,044
Interest income from impaired loans - current quarter $-0- $ 2,832
No allowance for specific impaired loan loss has been recorded because the
carrying amount of the impaired loan as of March 31, 2003 was less than the
present value of the loan's expected future cash flows.
NOTE 5 - REAL ESTATE JOINT VENTURE INVESTMENTS
As of March 31, certain of the Company's mortgage loans on senior housing
facilities are classified as real estate joint venture investments, as follows:
Location 2004 2003
- -------- ------------ ------------
McKinney, TX $ 3,192,665 $ 2,807,482
Largo, FL -0- 5,166,623
St. Petersburg, FL 3,832,820 4,295,910
Lewisville, TX 10,473,304 9,122,111
Garland, TX 6,075,255 4,303,800
Chattanooga, TN 3,995,123 -0-
San Antonio, TX 9,922,188 -0-
------------ ------------
Total principal outstanding 37,491,355 25,695,926
Accrued interest 315,491 213,118
Unearned loan fees (655,907) (426,667)
Allowance for loan losses -0- -0-
------------ ------------
Real estate joint venture investments, net $ 37,150,939 $ 25,482,377
F-10
All of the loans mature in 2004. 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.
The Company participates in the residual profits of these properties through
loan participation agreements, which enable the Company to receive income from a
borrower when a property in which the Company provided financing is sold or
refinanced with another lender. The participation percentage for each property
varies between 25% and 33% of the borrower's gain.
All loans accrue interest at 10% per year and except as noted below,
`interest-only' payments are received monthly. The original loan terms are for
one year with two, one year extensions at the Company's option. The Company
charges a 10% loan origination fee which is financed and included in the loan's
principal balance.
In accordance with loan terms, the Company allows certain borrowers to finance
interest payments while their facilities are in the construction or renovation
phase of operations. For the quarters ended March 31, the net interest payments
financed were as follows:
2004 2003
-------- --------
Current year interest financed $166,035 $290,153
Previous years' financed interest received -0- -0-
-------- --------
Net financed interest $166,035 $290,153
The Company analyzes the underlying operations and collateral of each facility
in which there is an outstanding loan by requiring independent appraisals every
12 to 18 months, reviewing loan balances and comparing them to the established
loan budgets, and by analyzing income and cash flow statements that are
submitted by the borrowers. If it is determined that it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of a loan, the loan is considered impaired and a loan loss will be
recognized to the extent the collateral's fair value is less than the current
loan carrying amount. No real estate joint venture investments were considered
impaired as of March 31, 2004 and 2003.
Summarized un-audited financial information for individual real estate joint
venture investments which are greater than 10% of the Company's total assets:
Lewisville, TX senior housing facility-
Balance Sheet (as of December 31, 2003): Income Statement (for the year ended December 31, 2003):
Current assets $ 39,200 Total revenues $2,905,894
Fixed and other assets $ 9,479,433 Net loss ($757,795)
Current liabilities $ 204,400
Non-current liabilities $10,286,004
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
Prior to the fourth quarter of 2003, the Company had no allowance for loan loss
activity. For the quarter ended March 31, 2004, a summary of changes in the
allowance for loan losses by loan type was:
F-11
Real Estate
Family Senior Joint Venture
Church Housing Housing Investments Total
---------- ------------ ----------- -------------- -------------
Balance - beginning of year $ -0- $375,000 $ -0- $ -0- $375,000
Loan loss expense -0- 20,000 -0- -0- 20,000
Charge-offs -0- -0- -0- -0- -0-
Recoveries -0- -0- -0- -0- -0-
---------- ------------ ----------- -------------- -------------
Balance - end of quarter $ -0- $395,000 $ -0- $ -0- $395,000
Components of allowance for loan losses at March 31, 2004:
Collective loan losses-
Historical experience $ -0-
Current credit risk assessment 395,000
--------
Total collective loan losses 395,000
Specific impaired loan losses -0-
--------
Total allowance for loan losses $395,000
In the fourth quarter of 2003, as part of the Company's regular loan grading and
risk assessment process, it was determined that the family housing loan
portfolio's credit risk had increased over historical levels. This increase was
caused by slower than expected new home sales. The slow down in new home sales
is due to slower than expected growth in the U.S. economy. This increase in
credit risk resulted in a $375,000 charge to loan loss expense in the fourth
quarter of 2003. In the first quarter of 2004, the Company charged an additional
$20,000 to loan loss expense due to an increase in the family housing loan
portfolio's outstanding loan principal. The Company has never incurred a loan
charge-off; therefore, there is no collective loan loss allowance related to the
Company's historical experience.
NOTE 7 - GOODWILL
The Company uses SFAS 142 "Goodwill and Other Intangible Assets". Goodwill
associated with the Company's acquisition of Presbyterian Investor's Fund, Inc.
during the fourth quarter of 2000, is carried at $450,997 and is not subject to
further amortization. Goodwill is tested for impairment at the end of each year
using the present value of expected future cash flows to determine its fair
value. At December 31, 2003 and 2002, goodwill's fair value exceeded its
carrying value; therefore, no provision for impairment loss has been recorded.
No goodwill was acquired or sold in either of the quarters presented in these
Consolidated Financial Statements.
NOTE 8 - UNAMORTIZED DEBT ISSUE COSTS
Unamortized debt issue costs consist of legal, accounting, and filing costs
incurred to register the Company's debt securities and commissions paid or
accrued on the sale of debt securities. These costs are amortized on a
straight-line basis over the period the associated debt is outstanding,
generally five years. At March 31, 2004, unamortized debt issue costs consist
of:
Costs incurred to register debt securities $ 594,371
Commissions paid on the sale of debt securities 2,364,982
Less: Accumulated Amortization (1,215,017)
-----------
$1,744,336
Amortization expense was $162,728 and $93,681 for the quarters ended March 31,
2004 and 2003, respectively, and is included in marketing expenses in the
accompanying Consolidated Statements of Income.
Estimated amortization expense for the next five years:
4/2004 - 3/2005 $621,930 4/2007 - 3/2008 $239,624
4/2005 - 3/2006 $442,100 4/2008 - 3/2009 $ 32,708
4/2006 - 3/2007 $407,974
F-12
NOTE 9 - BOND HOLDINGS
Bond holdings at March 31 consist of- 2004 2003
----------- -----------
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-
Undivided interest sold to investors (1,225,000) -0-
----------- -----------
Net investment in Largo, FL bonds 1,275,000 -0-
----------- -----------
Local Church Bonds, maturing 2002 & 2003 -0- 27,500
----------- -----------
Cost and fair value of bond holdings 3,787,500 2,540,000
Accrued interest receivable 198,197 89,250
----------- -----------
$ 3,985,667 $ 2,629,250
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
approximates their original cost. Accordingly, no unrealized holding gains or
losses have been recorded in 2004 or 2003.
Proceeds from the maturity of bonds were $0 and $31,250 for the quarters ended
March 31, 2004 and 2003, respectively. No realized gains or losses were
recognized in either quarter. The Company uses the specific identification
method to determine realized gains and losses.
Tax-free interest income was $83,056 and $55,982 for the quarters ended March
31, 2004 and 2003, respectively.
NOTE 10 - INCOME TAXES
The net deferred tax (liability) asset in the accompanying Consolidated Balance
Sheets includes the following components as of March 31:
2004 2003
--------- ---------
Deferred tax assets $ 203,196 $ 400,162
Deferred tax liabilities (369,453) (12,247)
--------- ---------
Net deferred tax (liability) asset ($166,257) $ 387,915
The deferred tax liabilities result from the use of accelerated depreciation
methods for property and equipment and from using the installment method for tax
accounting. The deferred tax assets result from tax versus financial reporting
differences in accounting for allowance for loan losses and from differences in
the amortization of debt issue and start-up costs. The Company estimates that
future taxable income will be sufficient to realize the deferred tax assets;
therefore, no valuation allowance was provided for as of March 31, 2004 and
2003.
During the third quarter of 2003, the Company's request with the Department of
the Treasury to change its tax accounting method for loan fees to approximate
its book treatment under SFAS Nos. 65 and 91 was approved. As a result of this
change, the Company was able to request refunds from its 2000 and 2001 federal
and state tax returns totaling $286,953, of which $244,336 was received in the
fourth quarter of 2003. The remaining requested refund amount of $42,617 is
classified as refundable income taxes in the accompanying Consolidated Balance
Sheets. In addition, the amended tax returns created a $481,154 federal net
operating loss carryforward and an $82,025 state net operating loss carryforward
that the Company used to reduce its 2003 income tax liability.
Components of the income tax provision (benefit) for the quarters ended March
31:
2004 2003
--------- ---------
Current: Federal $ 21,835 ($ 8,993)
State 5,472 (1,834)
Deferred: Federal (4,699) (87,651)
State (487) (15,468)
--------- ---------
$ 22,121 ($113,946)
F-13
Reconciliation of the Company's income tax provision (benefit) rate to statutory
federal rates for the quarters ended March 31:
2004 2003
------ ------
Statutory federal rate 35.0% (35.0%)
Effect of graduated federal rates (1.0%) 1.0%
State taxes, net of federal benefit 3.7% (3.7%)
Effect of tax-free bond interest income (21.6%) (7.5%)
Other, net .8% .3%
------ ------
Effective tax provision (benefit) rate 16.9% (44.9%)
NOTE 11 - CASH CONCENTRATION
A cash concentration risk arises when the Company has more cash in a financial
institution than is covered by federal deposit insurance. At March 31, 2004, the
Company had cash in excess of insured limits totaling $2,287,565.
NOTE 12 - INVESTOR CERTIFICATES
The Company has three types of 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 each quarter.
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 increases based on the length of time that the
certificate is outstanding. Currently, the rate starts at 7% and increases .5%
for each year the certificate is outstanding with a 9% maximum rate. Five year
certificates have a five year maturity and a $500 minimum investment. The
interest rate is 9%.
The certificates are not collateralized and no sinking fund is required to fund
redemptions at maturity. All of the certificates have been registered with the
Securities and Exchange Commission under the Securities Act of 1933.
Five year schedule of principal maturities for certificates outstanding at March
31:
Years to Maturity 2004 2003
- ----------------- ----------- ------------
On demand & 1 year $ 8,623,950 $ 6,757,563
2 4,862,922 812,814
3 10,803,667 4,931,264
4 35,705,732 11,274,694
5+ 18,172,001 52,166,816
----------- ------------
Total Principal $78,168,272 $ 75,943,151
At March 31, 2004 and 2003, accrued interest payable was $5,981,294 and
$3,213,200, respectively. Interest rates for certificates outstanding at March
31, 2004 are:
5.0% $ 2,244,673
7.0% 887,579
7.5% 4,409,490
8.0% 1,410,162
9.0% 69,216,368
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. In December, 2003, the Company's Board of Directors decided to
temporarily suspend the offering and not go forward with the registration. The
Company spent $113,473 on registration costs in 2003, which were charged to
earnings in the fourth quarter of 2003.
On April 29, 2003 Cornerstone Ministries Investments, Inc. 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 Series E Certificates of
Indebtedness along with $11,375,000 of its Common Stock. The Registration
F-14
Statement was approved by the Securities and Exchange Commission on March 26,
2004. The Company will begin issuing new Investor Certificates and shares of
Common Stock in the second quarter of 2004.
NOTE 13 - MORTGAGE PARTICIPATION AGREEMENTS
In the second quarter of 2003, the Company began selling Mortgage Participation
("MP") Agreements. The MP Agreements have not been registered and therefore, are
only available to accredited investors. The agreements are collateralized by
specific senior housing 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 investor after the Company receives interest payments on
related the collateralized loans. The agreements have no stated 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. The MP
Agreement investors do not have the right to sell or repledge their interest in
the underlying collateral. Interest expense related to MP Agreements was
$153,755 for the quarter ended March 31, 2004. MP Agreement principal and
interest outstanding and related collateral as of March 31, 2004:
MP Amount Total Collateral
Outstanding Carrying Amount
----------- ---------------
Lewisville, TX senior housing loan; matures 10/1/04
with a one year extension at the Company's option $ 3,766,000 $10,334,786
Garland, TX senior housing loan; matures 12/1/04
with a one year extension at the Company's option 2,396,500 $ 6,010,411
-----------
Total principal outstanding 6,162,500
Accrued interest payable 49,642
-----------
$ 6,212,142
The loans which collateralize the MP agreements are classified as real estate
joint venture investments in the accompanying Consolidated Balance Sheets. The
total carrying amount is equal to the loan's outstanding principal, plus accrued
interest, less deferred loan fees.
NOTE 14 - LOAN GUARANTEES
At March 31, 2004 the Company was guarantor of $31,689,000 of potential loans
secured by senior housing facilities owned by unrelated non-profit entities.
Certain real estate joint venture investments 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 March 31, 2004, actual
amounts drawn and therefore guaranteed to a commercial bank totaled $29,314,485.
The guaranteed loans 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. All of the loan guarantees originated prior
to December 31, 2002. As of March 31, 2004, all loans which had a guarantee were
current and no loan guarantee obligation has been recognized in the financial
statements.
NOTE 15 - 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
quarters ended March 31, 2004 and 2003, the Company has not elected to
contribute to the plan.
NOTE 16 - 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 principal and interest payments of $2,068 with an annual interest rate
of 8.5%. The loan matures on March 1, 2006, at which time a balloon payment of
$158,637 will be required. Estimated annual principle payments: 2004 - $7,473;
2005 - $10,733; 2006 - $159,638.
F-15
NOTE 17 - 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"), 500 preferred 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.
In the fourth quarter of 2003, the Company's Board of Directors approved a plan
to dissolve WFG and 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. The transaction will not have a material affect on the
Company's financial position as WFG had no assets or liabilities as of March 31,
2004 and no revenue during the quarters ended March 31, 2004 or 2003.
NOTE 18 - EARNINGS PER SHARE
Basic earnings (loss) per share for the quarters ended March 31 have been
calculated as follows:
2004 Net Income $108,722
Average Common Shares Outstanding 531,095
Earnings per Common Share $0.21
2003 Net Loss ($139,968)
Average Common Shares Outstanding 531,040
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.
NOTE 19 - MAJOR CUSTOMERS
The Company received more than 10% of its total revenue for the quarter ended
March 31, 2004 from the following customers:
Amount % Description of Revenue Received
------------ ----- -------------------------------
Senior Housing Services, Inc. $1,224,742 43.3% Interest and fees from real estate joint venture investments
Wellstone Housing Corp. 511,744 18.1% Interest and fees from family housing development loans
------------ -----
$1,736,486 61.4%
The major customers are not related parties. Neither organization directly or
indirectly controls, is controlled by, or is under common control of the
Company. There is not common ownership interest, officers, or directors and the
Company does not have the power to direct or significantly influence the
management or operating policies of these customers.
F-16
NOTE 20 - FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents - Fair value approximates their carrying amount due to
the initial maturities of the instruments being three months or less.
Bond holdings - These bonds are not traded on an exchange; therefore, fair value
is estimated based on the present value of expected future cash flows, which
approximates their carrying amount.
Investor certificates and mortgage participations - Fair value is estimated
based on the present value of expected future cash flows, which approximates
their carrying amount.
Building mortgage and capital lease obligation - Fair value approximates
carrying value since stated rates are similar to rates currently available to
the Company for debt with similar terms and remaining maturities.
The estimated fair values of the Company's financial instruments at March 31,
2004 are:
Carrying Amount Fair Value
--------------- ----------
Financial assets:
Cash and cash equivalents $ 2,654,606 $ 2,654,606
Bond holdings $ 3,787,500 $ 3,787,500
Financial liabilities:
Investor certificates $78,168,272 $78,168,272
Mortgage participations $ 6,162,500 $ 6,162,500
Building mortgage $ 177,844 $ 177,844
Capital lease obligation $ 12,296 $ 12,296
F-17