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 June 30, 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.
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(Exact name of small business issuer as specified in its charter)
Georgia 58-2232313
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(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
2450 Atlanta Highway, Suite 904, Cumming, GA 30040
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(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (678)-455-1100
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Former name, address and former fiscal year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by the
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
Yes [X] No [ ]
As of June 30, 2004, there were issued and outstanding 821,503 shares of the
common stock of the issuer.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Cornerstone Ministries Investments, Inc.
Index
Page
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Form 10-QSB Title Page 1
Index 2
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Accountant's Review Report F-1
Balance Sheets as of June 30, 2004 and 2003 F-2
Statements of Operations for the Three and
Six Months ended June 30, 2004 and 2003 F-3
Statements of Changes in Shareholders' Equity
for the Six Months ended June 30, 2004 and 2003 F-4
Statements of Cash Flows
for the Six Months ended June 30, 2004 and 2003 F-5
Notes to Financial Statements F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 3
Item 3. Controls and Procedures 9
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 9
Item 2. Changes in Securities and Use of Proceeds 9
Item 3. Defaults on Senior Securities 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Certifications 10
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 June 30, 2004 and 2003 and the related statements of
operations, changes in shareholder's equity, and cash flows for the three-month
and six-month periods then ended. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with the standards of
the Public Company Accounting Oversight Board, 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 interim financial statements for them to be in
conformity with U.S. 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
August 16, 2004
F-1
CORNERSTONE MINISTRIES INVESTMENTS, INC.
BALANCE SHEETS
As of June 30, 2004, June 30, 2003 and December 31, 2003
(Unaudited)
(Consolidated - See Note 18)
Unaudited Unaudited Audited
6/30/2004 6/30/2003 12/31/2003
------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 15,773,663 $ 6,773,656 $ 4,389,851
Loan guarantee receivable 60,000 -- --
Loans in process 162,172 824,227 118,504
Real estate loans, net 47,338,654 45,628,618 47,877,277
Real estate joint venture investments, net 45,096,128 31,563,227 34,846,223
Bond holdings and accrued interest 4,014,667 2,701,600 4,001,333
Property and equipment, net 847,758 900,998 873,101
Refundable income taxes 3,522 -- 42,617
Deferred tax asset, net -- 538,443 --
Goodwill 450,997 450,997 450,997
Unamortized debt issue costs 2,328,558 1,694,439 1,772,631
Real estate held for investment 340,000 340,000 340,000
Other assets 16,434 45,376 15,813
------------ ------------ ------------
TOTAL ASSETS $116,432,553 $ 91,461,581 $ 94,728,347
============ ============ ============
LIABILITIES
Investor certificates and accrued interest $104,263,625 $ 83,946,739 $ 84,562,645
Mortgage participations and accrued interest 6,212,142 4,183,323 6,132,809
Accounts and other payables 230,759 305,870 267,806
Loan guarantee obligation 60,000 -- --
Common dividends payable 155,066 169,085 169,087
Building mortgage 175,442 184,660 180,194
Capital lease obligation 10,904 16,146 13,632
Deferred taxes payable 161,701 -- 171,443
------------ ------------ ------------
TOTAL LIABILITIES 111,269,639 88,805,823 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;
821,503, 531,532 and 531,532 shares issued and outstanding 8,215 5,315 5,315
Paid in capital 5,145,797 3,297,435 3,297,435
Retained earnings (deficit) 8,902 (573,744) 1,229
Treasury stock -- (73,248) (73,248)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,162,914 2,655,758 3,230,731
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $116,432,553 $ 91,461,581 $ 94,728,347
============ ============ ============
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-2
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2004 and 2003
(Unaudited)
(Consolidated - (Consolidated -
See Note 18) See Note 18)
3 Mo. Ended 3 Mo. Ended 6 Mo. Ended 6 Mo. Ended
6/30/2004 6/30/2003 6/30/2004 6/30/2003
----------- ----------- ----------- -----------
REVENUES
Real estate loan and joint venture interest and fees $ 2,900,850 $ 2,049,844 $ 5,598,347 $ 3,908,037
Loan participation and other income 112,212 93,944 210,968 174,233
----------- ----------- ----------- -----------
TOTAL REVENUES 3,013,062 2,143,788 5,809,315 4,082,270
----------- ----------- ----------- -----------
EXPENSES
Investor interest expense 2,162,665 1,797,058 4,125,155 3,354,375
Loan loss expense 10,000 -- 30,000 --
Marketing expenses 256,178 144,579 460,714 251,066
Salaries, payroll taxes, and benefits 308,876 256,714 629,096 471,215
Operating expenses 231,884 178,436 390,048 492,545
----------- ----------- ----------- -----------
TOTAL EXPENSES 2,969,603 2,376,787 5,635,013 4,569,201
----------- ----------- ----------- -----------
Income (Loss) Before Provision For Income Taxes 43,459 (232,999) 174,302 (486,931)
Income Tax Provision (Benefit) (10,558) (107,805) 11,563 (221,751)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 54,017 $ (125,194) $ 162,739 $ (265,180)
=========== =========== =========== ===========
Basic and Diluted Earnings (Loss)
per Common Share $ 0.07 $ (0.24) $ 0.27 $ (0.51)
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-3
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2004 and 2003
(Unaudited)
The statement for the six months ended June 30, 2003 was part of a consolidated
financial statement - see Note 18.
RETAINED
COMMON STOCK: PAID-IN PREFERRED EARNINGS TREASURY STOCK: TOTAL
SHARES AMOUNT CAPITAL STOCK (DEFICIT) SHARES STOCK EQUITY
------- --------- ------------ ----------- ---------- ---------- ---------- -----------
BALANCE, DECEMBER 31, 2002 530,947 $ 5,309 $ 3,293,641 $ -- $ (139,479) $ -- $3,159,471
Net income (loss) (265,180) (265,180)
Common stock issued 585 6 3,794 3,800
Dividend declared (169,085) (169,085)
Treasury stock acquired (11,269) (73,248) (73,248)
------- --------- ------------ ----------- ---------- ---------- ---------- -----------
BALANCE, JUNE 30, 2003 531,532 $ 5,315 $ 3,297,435 $ -- $ (573,744) (11,269) $ (73,248) $2,655,758
======= ========= ============ =========== ========== ========== ========== ===========
BALANCE, DECEMBER 31, 2003 531,532 $ 5,315 $ 3,297,435 $ -- $ 1,229 (11,269) $ (73,248) $3,230,731
Net income (loss) 162,739 162,739
Common stock issued 289,971 2,900 1,881,911 1,884,811
Common stock issuance costs (33,549) (33,549)
Dividend declared (155,066) (155,066)
Treasury stock sold 11,269 73,248 73,248
------- --------- ------------ ----------- ---------- ---------- ---------- -----------
BALANCE, JUNE 30, 2004 821,503 $ 8,215 $ 5,145,797 $ -- $ 8,902 -- $ -- $5,162,914
======= ========= ============ =========== ========== ========== ========== ===========
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-4
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2004 and 2003
(Unaudited)
(Consolidated -
See Note 18)
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 162,739 $ (265,180)
Adjustments to reconcile net income (loss) to
cash from operations-
Depreciation and amortization 398,644 227,699
Changes in-
Loans in process (43,668) (465,207)
Accrued bond interest, net (13,334) 1,312
Accrued real estate loan/joint venture interest and deferred loan fees (1,947,868) (444,888)
Allowance for loan losses 30,000 --
Refundable income taxes 39,095 --
Deferred taxes (9,742) (264,210)
Investor and mortgage participation interest payable 1,819,141 1,006,288
Accounts and other payables (37,047) 23,747
Other assets (621) (7,185)
------------ ------------
NET CASH PROVIDED (USED) BY OPERATIONS 397,339 (187,624)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (4,496,366) (11,786,045)
Real estate loan principal payments received 5,509,656 6,066,195
Real estate joint venture investments made (8,806,704) (8,152,409)
Real estate joint venture payments received -- 1,880,000
Bonds redeemed or sold -- 31,250
Property and equipment purchased (6,940) (587,326)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (7,800,354) (12,548,335)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 19,646,214 17,975,412
Investor certificates redeemed (1,763,292) (2,844,132)
Mortgage participation agreements sold 78,250 4,015,112
Debt issue costs paid (922,288) (893,058)
Building mortgage principal payments (4,752) (4,566)
Capital lease principal payments (2,728) (1,564)
Common stock issued, net of issuance costs 1,851,262 3,800
Dividends paid (169,087) (168,640)
Treasury stock sold (acquired) 73,248 (73,248)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 18,786,827 18,009,116
------------ ------------
Net change in cash and cash equivalents 11,383,812 5,273,157
Cash and cash equivalents at beginning of period 4,389,851 1,500,499
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,773,663 $ 6,773,656
============ ============
Supplemental Information-
Interest paid during the period $ 2,314,706 $ 2,299,445
Income taxes paid during the period $ 62,500 $ --
Non-cash transactions-
Investor certificates matured and re-invested $ -- $ 3,702,912
Loan interest financed and included in loan principal $ 782,529 $ 297,360
Fixed asset lease financing $ -- $ 17,710
<FN>
SEE ACCOMPANYING NOTES AND ACCOUNTANT'S REVIEW REPORT F-5
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of Cornerstone
Ministries Investments, Inc (the "Company"). Previously, the Company's financial
statements included the accounts of two wholly-owned subsidiaries, Wellstone
Communities, Inc. and Wellstone Financial Group, LLC. In June 2004, the Company
dissolved both subsidiaries. See Note 18 for additional disclosures.
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 Statements of Operations.
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 12 to 24 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
residual profits through loan participation agreements, which enable the Company
to earn 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
F-6
recognized when the borrower's sale or refinancing is completed and the Company
receives payment from the borrower.
Loans in 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 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".
The Company is guarantor on certain loans secured by senior housing facilities
which are owned by non-profit entities. Loan guarantees that originated prior to
January 1, 2003 have no obligation recognized in the financial statements. For
loan guarantees that were originated or modified on or after January 1, 2003, a
loan guarantee obligation is recognized based on the loan guarantee's estimated
fair value. The Company charges the loan guarantee's fair value to the
respective borrower as compensation for the Company's risk and payment is
expected within 30 days of the loan guarantee's origination or modification
date. Unpaid amounts are classified as "Loan guarantee receivables" in the
accompanying balance sheets. Loan guarantee obligations are analyzed at the end
of each fiscal year and if the fair value of a loan guarantee has declined, the
carrying amount of the loan guarantee obligation is reduced and credited to
earnings.
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.
F-8
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.
NOTE 2 - PROPERTY AND EQUIPMENT At June 30, property and equipment is composed
of:
2004 2003
--------- ---------
Office Condominiums $ 792,659 $ 792,659
Office Computers, Furnishings,
Software & Equipment 121,437 116,054
Vehicles 37,730 37,730
Capital lease - phone system 17,710 17,710
Less: Accumulated Depreciation (121,778) (63,155)
--------- ---------
Property and equipment, net $ 847,758 $ 900,998
Depreciation expense-
Current Quarter $ 16,262 $ 15,073
Year-to-Date $ 32,282 $ 24,375
NOTE 3 - COMMITMENTS AND RELATED PARTY TRANSACTIONS
Leases:
During 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 $1,476 for the three months, and $2,952 and
$1,968 for the six months ended June 30, 2004 and 2003, respectively. Interest
expense was $491 and $701 for the three months, and $1,037 and $946 for the six
months ended June 30, 2004 and 2003, respectively. Future yearly minimum lease
payments as of June 30, 2004:
Year Amount
- ---- -------
2004 $3,765
2005 7,531
2006 1,256
-------
Total 12,552
Less interest portion (1,648)
-------
Capital lease obligation $10,904
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
F-9
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 three and six months ended June 30, 2004, the Company paid
$335,271 and $659,493, respectively, to CCA for personnel services.
During 2003, the Company and Wellstone Communities, Inc. (a formerly 100%-owned
subsidiary) each entered into a service agreement with Cornerstone Direct Public
Offerings, LLC ("CDPO") to provide legal and administrative services for the
filing of SB-2 Registration Statements with the Securities and Exchange
Commission. Two of the Company's directors serve on the Board of Directors of
CDPO's majority owner, Cornerstone Group Holdings, Inc. The service fee was
$75,000 per filing payable in installments during the filing process. All
amounts due under these agreements were paid in the third and fourth quarters of
2003. In 2004, the Company amended its service agreement and paid an additional
$25,000 to CDPO for cost over-runs related to the length of time needed for the
registration statement to become effective. See Note 12 for additional
disclosures on the Company's registration statement and Note 18 for additional
disclosures on Wellstone Communities, Inc.'s registration statement.
NOTE 4 - REAL ESTATE LOANS
At June 30, the Company had Real Estate Loans on church and other non-profit
properties as follows:
2004 2003
------------ ------------
Family housing development loans $ 27,822,341 $ 21,932,715
Church mortgage loans 10,460,444 15,028,121
Senior housing mortgage loans 9,219,836 8,305,455
------------ ------------
Total principal 47,502,621 45,266,291
Accrued Interest 390,570 431,860
Unearned Loan Fees (149,537) (69,533)
Allowance for loan losses (405,000) -0-
------------ ------------
Total Real Estate Loans $ 47,338,654 $ 45,628,618
These loans mature as follow: 2004 - $28,131,326; 2005 - $15,442,125; 2006 - $0;
2007 - $0; 2008 - $106,497; beyond 2008 - $3,822,673. 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 six months ended June 30, the net interest payments financed
were:
2004 2003
--------- ---------
Current year interest financed $ 543,737 $ 386,947
Previous years' financed interest received (8,054) (456,861)
--------- ---------
Net financed interest $ 535,683 ($ 69,914)
On June 30, 2004, the Company had significant credit risk concentrations in the
following states:
Georgia $25,210,649
Florida $ 9,464,518
Texas $ 6,782,963
Impaired loan disclosures for the six months ended June 30 are as follows:
2004 2003
---------- ----------
Number of impaired loans 1 1
Carrying amount at June 30 $1,646,353 $ 137,526
Weighted average investment - year-to-date $1,615,304 $ 134,694
Impaired loan interest income - current quarter $ 38,849 $ 2,832
Impaired loan interest income - year-to-date $ 77,697 $ 5,664
F-10
No allowance for specific impaired loan loss has been recorded because the
carrying amount of the impaired loans as of June 30, 2004 and 2003 was less than
the present value of the loan's expected future cash flows.
NOTE 5 - REAL ESTATE JOINT VENTURE INVESTMENTS
As of June 30, 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 $ 3,883,476 $ 2,952,482
Largo, FL -0- 3,416,623
St. Petersburg, FL 3,943,320 4,295,910
Lewisville, TX 10,533,304 9,264,233
Garland, TX 6,110,256 4,400,000
Chattanooga, TN 4,439,918 2,892,648
Winter Haven, FL 5,505,751 -0-
San Antonio, TX 10,970,238 5,772,025
------------ ------------
Total principal outstanding 45,386,263 32,993,921
Accrued interest 371,123 210,973
Unearned loan fees (661,258) (1,641,667)
Allowance for loan losses -0- -0-
------------ ------------
Real estate joint venture investments, net $ 45,096,128 $ 31,563,227
The loans mature as follows: 2004 - $20,363,880; 2005 - $25,022,383. 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 six months ended June 30, the net interest payments
financed were as follows:
2004 2003
-------- --------
Current year interest financed $246,846 $367,274
Previous years' financed interest received -0- -0-
-------- --------
Net financed interest $246,846 $367,274
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 24 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 June 30, 2004 and 2003.
F-11
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
For the six months ended June 30, 2004, a summary of changes in the allowance
for loan losses by loan type was:
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- 30,000 -0- -0- 30,000
Charge-offs -0- -0- -0- -0- -0-
Recoveries -0- -0- -0- -0- -0-
---------- ------------ ----------- -------------- -------------
Balance - end of quarter $ -0- $405,000 $ -0- $ -0- $405,000
Components of allowance for loan losses at June 30, 2004:
Collective loan losses-
Historical experience $ -0-
Current credit risk assessment 405,000
--------
Total collective loan losses 405,000
Specific impaired loan losses -0-
---------
Total allowance for loan losses $405,000
Prior to 2003, the Company had no allowance for loan loss activity. 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 and second quarters of 2004, the Company charged an
additional $20,000 and $10,000 to loan loss expense, respectively. These charges
were 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
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 June 30, 2004, unamortized debt issue costs consist of:
Costs incurred to register debt securities $ 594,591
Commissions paid on the sale of debt securities 3,152,617
Less: Accumulated Amortization (1,418,650)
-----------
$2,328,558
Amortization expense was $203,633 and $109,643 for the three months, and
$366,361 and $203,324 for the six months ended June 30, 2004 and 2003,
respectively, and is included in marketing expenses in the accompanying
Statements of Operations.
F-12
Estimated amortization expense for the next five years:
7/2004 - 6/2005 $746,404 7/2007 - 6/2008 $302,435
7/2005 - 6/2006 $583,230 7/2008 - 6/2009 $144,924
7/2006 - 6/2007 $551,565
NOTE 9 - BOND HOLDINGS
Bond holdings at June 30 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 227,167 161,600
----------- -----------
$ 4,014,667 $ 2,701,600
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 six months ended
June 30, 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 $82,500 and $59,056 for the three months, and
$165,556 and $115,038 for the six months ended June 30, 2004 and 2003,
respectively.
NOTE 10 - INCOME TAXES
The net deferred tax (liability) asset in the accompanying Balance Sheets
includes the following components as of June 30:
2004 2003
--------- ---------
Deferred tax assets $ 208,753 $ 673,566
Deferred tax liabilities (370,454) (135,123)
--------- ---------
Net deferred tax (liability) asset ($161,701) $ 538,443
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 June 30, 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 amend and request refunds from its 2000 and 2001
federal and state tax returns totaling $286,953. $244,336 of the requested
refunds was received in the fourth quarter of 2003 and the remaining $42,617 was
received in the second quarter of 2004. 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.
F-13
Components of the income tax provision (benefit) for the three and six months
ended June 30:
Three Months Six Months
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Current: Federal $ (8,159) $ 45,083 $ 13,676 $ 36,090
State 2,157 8,203 7,629 6,369
Deferred: Federal (4,131) (136,927) (8,830) (224,578)
State (425) (24,164) (912) (39,672)
--------- --------- --------- ---------
$ (10,558) $(107,805) $ 11,563 $(221,751)
Reconciliation of the Company's income tax provision (benefit) rate to statutory
federal rates for the three and six months ended June 30:
Three Months Six Months
---------------- ----------------
2004 2003 2004 2003
------ ------ ------ ------
Statutory federal rate 35.0% (35.0%) 35.0% (35.0%)
Effect of graduated federal rates (1.0%) 1.0% (1.0%) 1.0%
State taxes, net of federal benefit 3.7% (3.7%) 3.7% (3.7%)
Effect of tax-free bond interest income (64.5%) (8.7%) (32.3%) (8.0%)
Other, net 2.5% .1% 1.2% .2%
------ ------ ------ ------
Effective tax provision (benefit) rate (24.3%) (46.3%) 6.6% (45.5%)
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 June 30, 2004, the
Company had cash in excess of insured limits totaling $15,416,147.
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. For
certificates sold prior to 2004 the rate starts at 7% and increases .5% for each
year the certificate is outstanding with a 9% maximum rate. Certificates (Series
E) sold in 2004 have an initial interest rate of 6.25% and increase .5% for each
year the certificate is outstanding with an 8.25% maximum rate.
Five year certificates have a five year maturity and a $500 minimum investment.
The interest rate is 9% for certificates sold prior to 2004 and 8.25% for
certificates (Series E) sold in 2004.
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 June 30:
Years to Maturity 2004 2003
- ----------------- ------------ ------------
On demand & 1 year $ 15,606,131 $ 10,744,701
2 10,803,667 10,291,648
3 15,415,539 23,194,607
4 38,404,494 17,765,879
5 16,882,292 18,198,729
------------ ------------
Total Principal $ 97,112,123 $ 80,195,564
At June 30, 2004 and 2003, accrued interest payable was $7,151,502 and
$3,751,175, respectively. Interest rates for certificates outstanding at June
30, 2004 are:
5.0% $ 2,186,871
6.25% 2,274,702
7.0% 327,953
7.5% 3,810,482
8.0% 2,471,155
8.25% 16,882,292
9.0% 69,158,668
F-14
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
Statement was approved by the Securities and Exchange Commission on March 26,
2004. The Company issued $19,152,825 in new Investor Certificates and $1,884,811
in Common Stock (289,971 shares) during 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
$154,062 and $27,020 for the three months ended and $307,817 and $27,020 for the
six months ended June 30, 2004. MP Agreement principal and interest outstanding
and related collateral as of June 30, 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 $10,506,229
Garland, TX senior housing loan; matures 12/1/04
with a one year extension at the Company's option 2,396,500 $ 6,087,652
-----------
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 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
The Company is guarantor on four 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. 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 June
30, 2004, all loans which had a guarantee were current based on their loan
terms. Loan guarantees as of June 30, 2004:
Current Loan
Origination Maturity Maximum Principal Guarantee
Location Date Date Guarantee Outstanding Obligation
- -------- ---- ---- --------- ----------- ----------
Fort Pierce, FL 5/31/04 11/30/04 $ 6,000,000 $ 6,000,000 $ 60,000
Fort Pierce, FL 7/18/01 8/15/04 4,445,000 4,445,000 -0-
Palm Bay, FL 12/31/02 12/31/05 13,800,000 12,241,293 -0-
St. Petersburg, FL 12/18/01 12/18/04 7,347,300 7,113,692 -0-
----------- ----------- --------
$31,592,300 $29,799,985 $ 60,000
As of June 30, 2004, $60,000 was due from the borrower for the Fort Pierce, FL
loan guarantee. The Company received full payment for this guarantee prior to
the issuance of these financial statements.
F-15
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 six
months ended June 30, 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 - $5,071;
2005 - $10,733; 2006 - $159,638.
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. In
June 2004, WFG was dissolved and all of the outstanding Series A Convertible
Preferred Stock was redeemed from WFG in exchange for the Company's ownership
interest in WFG. See Note 18 for additional disclosures on this transaction.
NOTE 18 - DISSOLUTION OF SUBSIDIARIES
In June 2004, the Company's Board of Directors approved an agreement to dissolve
Wellstone Financial Group, LLC ("WFG"), a 100%-owned subsidiary. In exchange for
the Company's ownership interest in WFG, the Company redeemed all of the
Company's Series A Preferred Stock owned by WFG. The fair value of the Preferred
Stock and the Company's ownership interest in WFG were both estimated at
$500,000; therefore, no cash was exchanged. As of June 30, 2004, WFG is no
longer included in the Company's financial statements. The transaction had no
effect on the Company's assets, liabilities, net income and earning per share of
common stock. WFG was dissolved because the Company has been unable to retain
the type of specialized employees necessary to develop WFG's operations into a
long-term profitable venture.
In June 2004, the Company's Board of Directors approved an agreement to dissolve
Wellstone Communities, Inc. ("WCI"), a 100%-owned subsidiary. The Company
received all of WCI's assets in exchange for its 362,500 shares of WCI Common
Stock. The fair value of this transaction was $1,265,268. WCI's assets included
$1,046,340 in cash and a real estate mortgage loan with a carrying amount of
$218,928. The transaction had no effect on the Company's assets, liabilities,
net income, and earnings per common share. WCI filed a Form SB-2 Registration
Statement in 2003 and planned to issue preferred stock to expand its specialized
loan operations and possibly purchase a bank. The Company determined that it was
not feasible to go forward with the registration statement given the proposed
financial structure; therefore, WCI was dissolved.
NOTE 19 - EARNINGS PER SHARE
Basic earnings (loss) per share for the three and six month periods ended June
30 have been calculated as follows:
Three Months Six Months
------------ ----------
2004 Net Income $ 54,017 $ 162,739
Average Common Shares Outstanding 709,902 603,085
Earnings per Common Share $ 0.07 $ 0.27
2003 Net Loss ($125,194) ($265,180)
Average Common Shares Outstanding 519,965 523,088
Loss per Common Share ($ 0.24) ($ 0.51)
F-16
Diluted earnings per share are the same as basic earnings per share because
there are no shares of Series A Convertible Preferred Stock outstanding. Other
than the Series A Convertible Preferred Stock, there are no other potentially
dilutive securities, stock options or warrants outstanding.
NOTE 20 - MAJOR CUSTOMERS
The Company received more than 10% of its total revenue for the three and six
months ended June 30, 2004 from the following customers:
Three Months
------------------
Amount % Amount % Description of Revenue Received
---------- ---- ---------- ---- -------------------------------
Senior Housing Services, Inc. $1,440,889 47.8% $2,665,631 45.9% Interest and fees from real
estate joint venture investments
Wellstone Housing Corp. 539,803 17.9% 1,051,547 18.1% Interest and fees from
---------- ---- ---------- ---- family housing development loans
$1,980,692 65.7% $3,717,178 64.0%
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.
NOTE 21 - 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 June 30,
2004 are:
Carrying Amount Fair Value
--------------- ----------
Financial assets:
Cash and cash equivalents $15,773,663 $15,773,663
Bond holdings $ 3,787,500 $ 3,787,500
Loan guarantee receivable $ 60,000 $ 60,000
Financial liabilities:
Investor certificates $97,112,123 $97,112,123
Mortgage participations $ 6,162,500 $ 6,162,500
Building mortgage $ 175,442 $ 175,442
Capital lease obligation $ 10,904 $ 10,904
Loan guarantee obligation $ 60,000 $ 60,000
F-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Selected financial data.
Please read the following selected financial data in conjunction with the rest
of this "Management's Discussion and Analysis of Financial Condition and Results
of Operation" and with our financial statements and related notes in this
filing.
Six months ended
June 30,
-----------------------------
2004 2003
----------- -----------
Revenues $ 5,809,315 $ 4,082,270
----------- -----------
Investor interest expense 4,125,155 3,354,375
Loan loss expense 30,000 -0-
Marketing expenses 460,714 251,066
Salaries, payroll taxes, benefits 629,096 471,215
Operating expenses 390,058 492,545
----------- -----------
Total expenses 5,635,013 4,569,201
----------- -----------
Operating income (loss) 174,302 (486,931)
Income tax provision (benefit) 11,563 (221,751)
----------- -----------
Net income (loss) $ 162,739 ($ 265,180)
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 June 30, 2003 and June 30, 2004
General. Assets increased from $91,461,581 at June 30, 2003 to $116,432,553 at
June 30, 2004 for an increase of $24,970,972 or 27%. This increase was a result
of the sale of Investor Certificates and Mortgage Participations, net of
redemptions of $20,316,886, new common stock issuances of $1,851,262, and cash
generated from operations since June 30, 2003, decreased by dividends paid to
shareholders. With the additional net cash from these items and from cash
already on hand, we invested in real estate loans and joint venture investments,
net of principal payments received, of $15,242,937 and purchased an additional
$1,275,000 in bond holdings. Total revenue increased for the three months ended
June 30, 2004 by $869,274 or 41% from $2,143,788 in 2003 to $3,013,062 in 2004.
Total revenue increased for the six months ended June 30, 2004 by $1,727,045 or
42% from $4,082,270 in 2003 to $5,809,315 in 2004. Net income (loss) for the
three and six months ended June 30, 2004 was $52,017 and $162,739 compared to
($125,194) and ($265,180) for the same periods ended June 30, 2003.
Total real estate loans and joint venture investments outstanding on June 30,
2004 was $92,434,782 compared to $77,191,845 on June 30, 2003 for an increase of
$15,242,937 or 20%. This increase is due to sales of Investor Certificates and
Mortgage Participation Agreements and the subsequent origination or refinancing
of real estate loans and joint venture investments, as follows:
3
New real estate loans made $ 3,229,710
Decrease in existing loans, net of principal received (1,519,674)
New real estate joint venture investments made 5,505,752
Increase in existing real estate joint venture investments 8,027,149
------------
$ 15,242,937
All other assets composed primarily of cash, bond holdings, property and
equipment, and unamortized debt issue costs were $23,997,771 as of June 30,
2004.
Our cash balance increased $9,000,007 from $6,773,656 on June 30, 2003 to
$15,773,663 on June 30, 2004. This increase is due to the large amount of
Investor Certificates sold in May and June of 2004. There is normally a lag of
one to three months between the receipt of cash from these sales and the
investment in new real estate loans and joint venture investments. We expect our
cash on hand to decrease from its current level before the end of the current
year as we are able to find suitable real estate loans and joint venture
investments to invest our cash.
Principal and interest payable on Investor Certificates and Mortgage
Participation ("MP") Agreements increased $22,345,705 or 25% from $88,130,062 as
of June 30, 2003 to $110,475,767 as of June 30, 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 allowed
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.
On May 31, 2004, a loan that we guaranteed on a senior housing facility in Fort
Pierce, FL was modified and the maturity date was extended six months. This
modification triggered the recognition of a loan guarantee obligation on our
balance sheet. The loan guarantee obligation is carried at the guarantee's
estimated fair value of $60,000. We have billed the loan guarantee obligation to
the respective borrower as compensation for our risk. At June 30, this amount
had not been paid; therefore, we also have a loan guarantee receivable on our
balance sheet. We received full payment from the borrower prior to the issuance
of these financial statements. We have two additional loan guarantees that may
be modified and extended prior to the end of the current fiscal year. If this
occurs, we will recognize additional loan guarantee obligations and we will bill
these obligations to the respective borrowers as compensation for the risk that
we have taken on related to the guarantees. Please see Note 14 of the Notes to
Financial Statements for additional information related to loan guarantees.
Real estate loan and joint venture interest and fees earned. Interest income and
fees from real estate loans and joint venture investments for the three and six
months ended June 30 is as follows:
2004 2003 Increase %
---------- ---------- ---------- -----
Three months ended $2,900,850 $2,049,844 $ 851,066 42%
Six months ended $5,598,347 $3,908,037 $1,690,310 43%
The increases were due to the following:
Three months Six months
------------ ----------
Increase in average outstanding principal $ 401,362 $ 824,461
(Three months: $89,725,937 - 2004; $72,507,546 - 2003)
(Six months: $87,127,531 - 2004; $70,272,776 - 2003)
Increase in weighted average interest rate 83,867 133,318
(Three months: 9.85% - 2004; 9.47% - 2003)
(Six months: 9.81% - 2004; 9.45% - 2003)
Increase in loan fees recognized 365,837 732,531
---------- ----------
$ 851,066 $1,690,310
The increase in average outstanding principal is due to the addition of 6 new
real estate loans and joint venture investments with outstanding principal of
$8,735,462 and an increase in existing loan principal (net of principal payments
received) with an average net outstanding principal increase of $8,119,293.
Loan participation and other income. For the three and six months ended June 30,
2004, loan participation and other income increased as follows:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
2004 2003 Change 2004 2003 Change
-------- -------- -------- -------- -------- --------
Investment income $104,887 $ 87,344 $ 17,543 $196,318 $159,797 $ 36,521
Loan participation and other income 7,325 6,600 25 14,650 14,436 214
-------- -------- -------- -------- -------- --------
Total $112,212 $ 93,944 $ 18,268 $210,968 $174,233 $ 36,735
4
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 three months ended
June 30, 2004 was $2,162,665, an increase of $365,607 or 20% compared to 2003.
Investor interest expense for the six months ended June 30, 2004 was $4,125,155,
an increase of $770,780 or 23% compared to 2003. The increases are due to:
Three Months Six Months
------------ ----------
Increase in average outstanding certificate principal, including $ 246,919 $ 482,329
interest payable subject to compounding
(Three Months: $91,311,352 - 2004; $81,033,022 - 2003)
(Six Months: $86,547,482 - 2004; $76,542,002 - 2003)
Change in weighted average interest percentage (8,354) 7,654
(Three Months: 8.80% - 2004; 8.81% - 2003)
(Six Months: 8.82% - 2004; 8.80% - 2003)
Increase in average outstanding Mortgage Participation principal
(Three Months: $6,162,500 - 2004; $1,083,769 - 2003)
(Six Months: $6,156,340 - 2004; $544,878 - 2003) 127,042 280,797
--------- ---------
$ 365,607 $ 770,780
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 and second
quarters of 2004, we charged an additional $20,000 and $10,000, respectively 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. 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 June 30, 2004, one church loan with a carrying amount of $1,646,353 was
considered impaired. As of June 30, 2003, one church loan with a carrying amount
of $134,458 was considered impaired. No specific impaired loan loss allowance
has been recorded because the carrying amount of the loans are less than the
loan's collateral and the present value of the loan's expected future cash
flows.
As of June 30, 2004, allowance for loan losses as a percent of outstanding loan
principal by loan type:
Loan Loss Outstanding
Allowance Principal %
----------- ----------- -----------
Family Housing Development Loans $ 405,000 $27,822,341 1.5%
Church Mortgage Loans -0- 10,460,444 0%
Senior Housing Mortgage Loans -0- 9,219,836 0%
Real Estate Joint Venture Investments -0- 45,386,263 0%
----------- ----------- -----------
Total $ 405,000 $92,888,884 .4%
Marketing expenses. Total expenses for the marketing of investor certificates
for the three and six months ended June 30, 2004 were $256,178 and $460,714
compared to $144,579 and $251,066 for the same periods in 2003. The increases
are due to:
Three Months Six Months
------------------------------ ------------------------------
2004 2003 Change 2004 2003 Change
-------- -------- -------- -------- -------- --------
Debt issue cost amortization $203,633 $110,518 $ 93,115 $366,361 $204,199 $162,162
Management & 19,750 7,981 11,769 39,499 7,981 31,518
Consulting
Printing 8,378 4,586 3,792 15,645 6,748 8,897
Other marketing costs 24,417 21,494 2,923 39,209 32,138 7,071
-------- -------- -------- -------- -------- --------
Total $256,178 $144,579 $111,599 $460,714 $251,066 $209,648
5
Debt issue cost amortization expense increased due to Investor Certificates and
Mortgage Participations sold since June 30, 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 began 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 $2,328,558 and $1,694,439 as of
June 30, 2004 and 2003, respectively.
Operating and personnel expenses. Personnel expenses (salaries, payroll taxes,
and benefits) for the three months ended June 30 increased $52,162 or 20% from
$256,714 in 2003 to $308,876 in 2004. For the six months ended June 30,
personnel expenses increased $157,881 or 33% from $471,215 in 2003 to $629,096
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 $1,300,000 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 $335,271 to CCA during the three months ended June 30,
2004, of which $308,876 is included in personnel expense, $12,645 is included in
operating expenses and $13,750 is included in marketing expenses. The Company
paid $659,493 to CCA during the six months ended June 30, 2004, of which
$619,348 is included in personnel expenses, $12,645 is included in operating
expenses and $27,500 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.
For the three and six months ended June 30, 2004 and 2003, operating expenses
were as follows:
Three Months Six Months
--------------------------------- ---------------------------------
2004 2003 Change 2004 2003 Change
--------- --------- --------- --------- --------- ---------
a) Trust service/paying agent fees $ 47,890 $ 35,818 $ 12,072 $ 74,193 $ 72,263 $ 1,930
b) Consulting fees 43,096 28,410 14,686 49,296 91,610 (42,314)
c) Audit, accounting & tax services 8,915 12,705 (3,790) 28,787 44,311 (15,524)
d) Employee recruiting costs -0- 6,682 (6,682) -0- 46,335 (46,335)
e) Depreciation & amortization 16,262 15,073 1,189 32,282 24,375 7,907
f) Office expenses 28,118 28,670 (552) 43,585 52,833 (9,248)
g) Legal expenses 5,568 12,496 (6,928) 30,854 34,430 (3,576)
h) Appraisal costs 26,208 -0- 26,208 26,208 -0- 26,208
i) Other operating expenses 55,827 38,582 17,245 104,843 126,388 (21,545)
--------- --------- --------- --------- --------- ---------
Total operating expenses $ 231,884 $ 178,436 $ 53,448 $ 390,048 $ 492,545 ($102,497)
The changes are due to the following:
a) Trust service/paying agent fees - increased in the current quarter due
to an increase in transaction activity for our Investor Certificates
related to the new registration statement.
b) Consulting fees - In the second quarter of 2004, we used consultants to
identify new business markets in the African American community
(churches, affordable senior housing and family housing) which
increased costs over the second quarter of 2003. Year-to-date, we have
spent less than last year because in the first quarter of 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 did not use
consultants for any material projects in the first quarter of 2004.
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 - The six month increase is due to the
purchase of an office building, office furnishings and computers in
late February, 2003.
f) Office expenses - In late 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 for the six months ended June 30, 2004.
g) Legal expenses - We have used outside attorneys slightly less in 2004
than in 2003.
h) Appraisal costs - Increased in the second quarter of 2003 due to new
appraisals being commissioned on a number of properties which serve as
collateral on senior housing and church loans.
6
i) Other operating expenses - increased in the second quarter due to
travel costs and Board of Directors expenses. Board of Directors costs
increased because our annual meeting was held during the second quarter
of 2004 versus the first quarter in 2003. For the six months ended June
30, 2004, other operating costs have 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 three
and six months ended June 30, 2004 was ($10,558) and $11,563, compared to
($107,805) and ($221,751) for the same periods ended June 30, 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 2004 and 2003 is as follows:
2004 2003
------ ------
Three Months (24.3%) (46.3%)
Six Months 6.6% (45.5%)
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 $155,066 and $169,085 were declared on June 30, 2004 and
2003 and paid on July 15, 2004 and 2003, respectively.
Liquidity and Capital Resources
Cash flows from operations. Net cash provided by the Company's operations for
the six months ended June 30, 2004 was $397,339, which compares to $187,624 in
net cash used by operations for the six months ended June 30, 2003 for an
increase in net cash provided by operations of $584,963. 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 $1,819,141 in the
first six months of 2004 due to an increase in outstanding debt and because
approximately 25% of the Investor Certificate holders who purchased certificates
in 2003 and 2004 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 $782,529 and $297,360 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 six months ended June 30, 2004 and 2003 is as follows:
2004 2003
--------- ---------
Family Housing Development $ 496,082 ($ 78,504)
Church Construction 39,601 8,590
Real Estate Joint Venture 246,846 367,274
--------- ---------
$ 782,529 $ 297,360
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 increase in the family housing net financed interest in 2004 as compared to
2003 is due to: 1) the Company receiving $453,938 in financed interest in 2003
that was originally financed in 2002 on a major project in Mableton, GA, 2)
increased loan balances on six projects which are now in the development phase
and are financing their monthly interest, and 3) the addition of four new loans
since June 30, 2003 which are in the development phase of construction.
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 is in the pre-development phase and financed
its interest payments during the first six months 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.
The McKinney loan is collateralized by raw land that is being developed for
senior housing whereas the other Real Estate Joint Venture Investment loans are
collateralized by existing facilities that only needed to be remodeled.
Therefore, the period in which the interest is being financed on the McKinney
loan is longer than the other Real Estate Joint Venture Investment loans.
7
Cash flows from investing activities. For the six months ended June 30, 2004,
the Company used $7,800,354 in cash from investing activities which is a
decrease of $4,747,981 from $12,548,335 for the six months ended June 30, 2003.
The decrease was due to the following:
Decrease in real estate loans and joint venture investments made ($6,635,384)
Decrease in real estate loan and joint venture investment
principal payments received 2,436,539
Decrease in bonds redeemed or sold 31,250
Decrease in fixed asset and real estate purchases (580,386)
-----------
($4,747,981)
The decrease in real estate loans and joint venture investments made in 2004 is
due to the new registration statement not becoming effective until March 26,
2004. We did not have as much time in 2004 to originate new loans as we did in
2003. This should turn around in the second half of 2004 as we invest the cash
that we have received from new investor certificates and stock issuances.
The decrease in real estate loan and joint venture investment principal payments
received is due to a large principal pay-down received in 2003 on a real estate
joint venture investment in Largo, FL.
During the six months ended June 30, 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 six months ended June 30, 2004,
the Company raised $19,724,464 from the sale of Investor Certificates and
Mortgage Participation Agreements. This represents a decrease of $2,266,060 from
new Investor Certificate and Mortgage Participation sales of $21,990,524 for the
six months ended June 30, 2003. Registered Investor Certificates were available
for sale for three months in 2004 versus four months in 2003, which caused the
decrease in 2004's sales.
In early May, 2003, we sold out of all available registered Investor
Certificates; therefore, no new certificates were available to sell while we
were getting a new registration statement approved by the Securities and
Exchange Commission. The new registration statement was not approved until March
26, 2004, which caused the decrease in the amount of time that we were able to
issue new certificates in 2004.
Investor Certificates redeemed decreased from $2,844,132 for the six months
ended June 30, 2003 to $1,763,292 for the six months ended June 30, 2004. In
2003, we called certificates related to the church bond fund, which increased
2003's redemptions as compared to 2004.
We have $15,606,131 in Investor Certificates coming due or redeemable upon
demand in the next 12 months. $8,556,338 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. Also, $4,534,968 million in five year bonds will mature in March,
2005. Our historical experience indicates that over 80% of the maturities will
be reinvested into new Investor Certificates, but there is no guarantee that
this will happen. We will ensure that we have enough cash available to handle
these maturities.
Among the measures we take to mitigate any demands for cash are:
o Maintain a minimum cash balance, normally no less than $3,000,000.
o Have readily marketable loans that can be sold for par or a premium.
o Asking 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.
8
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 June 30,
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: August 12, 2004 Cornerstone Ministries Investments, Inc.
(Registrant)
By: /S/ John T. Ottinger
--------------------------------------------
John T. Ottinger
Vice President and Chief Financial Officer
9