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, 2005
Or
/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ____________
Commission File No. 333-93475
CORNERSTONE MINISTRIES INVESTMENTS, INC.
(Exact name of small business issuer as specified in its charter)
Georgia 58-2232313
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
2450 Atlanta Highway, Suite 904, Cumming, GA 30040
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Issuer's telephone number, including area code: (678)-455-1100
--------------
- --------------------------------------------------------------------------------
Former name, address and former fiscal year, if changed since last report.
Check whether the issuer (1) filed all reports required to be filed by the
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for past 90 days.
Yes X No
--- ---
As of March 31, 2005, there were issued and outstanding 813,913 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
Balance Sheets as of March 31, 2005 and 2004 F-2
Statements of Operations for the three months
ended March 31, 2005 and 2004 F-3
Statements of Changes in Shareholders' Equity
for the three months ended March 31, 2005 and 2004 F-4
Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 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 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 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
To The Board of Directors
Cornerstone Ministries Investments, Inc.
We have reviewed the accompanying balance sheet of Cornerstone Ministries
Investments, Inc. as of March 31, 2005 and the related statements of operations,
changes in shareholder's equity, and cash flows for the three-month periods
ending March 31, 2005 and 2004. 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, 2004, including the
balance sheet as of December 31, 2004 was audited by us and we expressed an
unqualified opinion on them in our report dated March 17, 2005, but we have not
performed any auditing procedures since that date.
/s/ Robert N. Clemons, CPA, PA
DeLand, Florida
May 9, 2005
F-1
CORNERSTONE MINISTRIES INVESTMENTS, INC.
BALANCE SHEETS
As of March 31, 2005 and 2004
(Consolidated -
See Note 17)
3/31/2005 3/31/2004
------------ ------------
ASSETS
Cash and cash equivalents $ 11,114,985 $ 2,654,606
Loans in process 89,283 170,402
Real estate loans, net 59,520,790 46,939,081
Real estate joint venture investments, net 58,661,890 37,150,939
Bond holdings and accrued interest 3,967,583 3,985,667
Property and equipment, net 796,562 860,200
Refundable income taxes -- 42,617
Goodwill 450,997 450,997
Unamortized debt issue costs 2,707,314 1,744,336
Real estate held for investment 340,000 340,000
Other assets 119,005 21,617
------------ ------------
TOTAL ASSETS $137,768,409 $ 94,360,462
============ ============
LIABILITIES
Investor certificates and accrued interest $126,611,033 $ 84,149,566
Mortgage participations and accrued interest 4,951,948 6,212,142
Accounts and other payables 146,272 232,473
Loan guarantee obligation 131,000 --
Building mortgages 595,788 177,844
Capital lease obligation 6,365 12,296
Deferred taxes payable 56,441 166,257
------------ ------------
TOTAL LIABILITIES 132,498,847 90,950,578
------------ ------------
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; 813,913, 531,528 and 819,351 shares
issued and outstanding 8,139 5,315
Paid in capital 5,083,276 3,297,435
Retained earnings 178,147 109,951
Treasury stock -- (2,817)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 5,269,562 3,409,884
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $137,768,409 $ 94,360,462
============ ============
<FN>
SEE ACCOMPANYING NOTES F-2
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF OPERATIONS
For the three months ended March 31, 2005 and 2004
(Consolidated -
See Note 17)
2005 2004
---------- ----------
REVENUES
Real estate loan and joint venture interest and fees $3,233,140 $2,697,497
Loan participation and other income 470,921 98,756
---------- ----------
TOTAL REVENUES 3,704,061 2,796,253
---------- ----------
EXPENSES
Investor interest expense 2,729,419 1,962,490
Loan loss expense 25,000 20,000
Marketing expenses 287,569 204,536
Salaries, payroll taxes, and benefits 378,614 320,220
Operating expenses 187,962 158,164
---------- ----------
TOTAL EXPENSES 3,608,564 2,665,410
---------- ----------
Income Before Provision For Income Taxes 95,497 130,843
Income Tax Provision 8,593 22,121
---------- ----------
NET INCOME $ 86,904 $ 108,722
========== ==========
Basic and Diluted Earnings
per Common Share $ 0.11 $ 0.21
SEE ACCOMPANYING NOTES F-3
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended March 31, 2005 and 2004
The statement for the three months ended March 31, 2004 was part of a
consolidated financial statement - see Note 17.
COMMON STOCK:
-------------------------- PAID-IN PREFERRED RETAINED TREASURY TOTAL
SHARES AMOUNT CAPITAL STOCK EARNINGS STOCK EQUITY
----------- ----------- ----------- ------- ----------- --------- -----------
BALANCE, DECEMBER 31, 2003 531,528 $ 5,315 $ 3,297,435 $ -- $ 1,229 $ (73,248) $ 3,230,731
Net income 108,722 108,722
Common stock issued -- -- -- --
Treasury stock sold (10,836 shares) 70,431 70,431
----------- ----------- ----------- ------- ----------- --------- -----------
BALANCE, MARCH 31, 2004 531,528 $ 5,315 $ 3,297,435 $ -- $ 109,951 $ (2,817) $ 3,409,884
=========== =========== =========== ======= =========== ========= ===========
BALANCE, DECEMBER 31, 2004 819,351 $ 8,194 $ 5,118,568 $ -- $ 91,243 $ -- $ 5,218,005
Net income 86,904 86,904
Common stock issued -- -- -- --
Common stock redeemed (5,438) (55) (35,292) (35,347)
----------- ----------- ----------- ------- ----------- --------- -----------
BALANCE, MARCH 31, 2005 813,913 $ 8,139 $ 5,083,276 $ -- $ 178,147 $ -- $ 5,269,562
=========== =========== =========== ======= =========== ========= ===========
<FN>
SEE ACCOMPANYING NOTES F-4
</FN>
CORNERSTONE MINISTRIES INVESTMENTS, INC.
STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004
(Consolidated -
See Note 17)
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 86,904 $ 108,722
Adjustments to reconcile net income to cash
from operations-
Depreciation and amortization 255,060 178,748
Changes in-
Loans in process (58,410) (51,898)
Accrued bond interest, net 28,300 15,666
Accrued real estate loan/joint venture interest and deferred loan fees (1,118,297) (866,232)
Allowance for loan losses 25,000 20,000
Deferred taxes (13,916) (5,186)
Investor and mortgage participation interest payable 1,111,803 648,933
Loan guarantee obligations, net of related receivables 27,000 --
Accounts and other payables (98,349) (35,333)
Other assets 49,508 (5,804)
------------ ------------
NET CASH PROVIDED BY OPERATIONS 294,603 7,616
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (7,919,595) (2,045,317)
Real estate loan principal payments received 3,016,208 3,117,636
Real estate joint venture investments made (1,499,397) (1,592,607)
Bonds redeemed or sold 17,850 --
Property and equipment purchased -- (3,119)
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (6,384,934) (523,407)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold 5,392,064 363,118
Investor certificates redeemed (514,241) (1,424,047)
Mortgage participation agreements sold 150,000 78,250
Mortgage participation agreements redeemed (2,400,000) --
Debt issue costs paid (275,375) (134,433)
Building mortgage principal payments (6,581) (2,350)
Capital lease principal payments (1,576) (1,336)
Common stock redeemed (35,347) --
Dividends paid (266,287) (169,087)
Treasury stock sold -- 70,431
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,042,657 (1,219,454)
------------ ------------
Net change in cash and cash equivalents (4,047,674) (1,735,245)
Cash and cash equivalents at beginning of period 15,162,659 4,389,851
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,114,985 $ 2,654,606
============ ============
Supplemental Information-
Interest paid during the period $ 1,628,506 $ 1,311,493
Income taxes paid during the period $ 105,000 $ 62,500
Non-cash transactions-
Investor certificates matured and re-invested $ 126,412 $ --
Loan interest financed and included in loan principal $ 441,150 $ 397,137
<FN>
SEE ACCOMPANYING NOTES 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 17 for additional disclosures.
The Company originates and purchases mortgage loans, substantially all of which
are made to faith-based organizations. The Company offers specialized loan
programs for churches, non-profit sponsors of senior housing facilities and
either non-profit or for-profit sponsors of affordable and low income housing
projects. 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 Southeastern United States.
Cash and cash equivalents include checking accounts and short-term certificates
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 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 36 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 and lease-up stages of the borrower's operations. This takes
two to six months if there is an existing building and 12 to 24 months if
the financed property is raw land and a new building is being constructed.
When the facility is operational, the financed interest 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
F-6
residual profits 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 cash 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 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".
F-7
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.
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 guarantees 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 quarter and if the fair value of the loan guarantee has declined, the
carrying amount of the 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.
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 reported revenues and
expenses. Actual amounts may vary from the estimates that are used.
Basic earnings per common share are calculated by dividing net income 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.
New Accounting Pronouncements:
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS
123R). This standard amends SFAS No. 123, Accounting for Stock-Based
Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS 123R establishes the
accounting for grants of stock options and other transactions in which an entity
exchanges its equity instruments for goods or services. SFAS 123R requires that
companies use a fair value method to value stock options and recognize the
related compensation expense in net earnings. The provisions of SFAS 123R are
effective for the first reporting period beginning after June 15, 2005, although
earlier application is encouraged. The Company does not have any share-based
payment obligations and does not expect this pronouncement to have a material
effect on our financial position or results of operations.
In March 2004, the FASB's Emerging Issues Task Force (EITF) finalized Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-1). The FASB has delayed the implementation of EITF
03-1 and has begun a new project to address the issues associated with
other-than-temporary impairment of debt and equity securities. The outcome of
this new project and its impact on the Company's financial position or results
of operations cannot be determined at this time.
F-8
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities (VIEs), an interpretation of ARB (Accounting
Research Bulletin) No. 51. In December 2003, the FASB issued a revised version
of FIN 46 (FIN 46R), which delayed the effective date of FIN 46 for all VIEs
until March 2004. This interpretation requires the consolidation of entities in
which an enterprise absorbs a majority of the entity's 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. FIN 46R and its various
interpretations have not materially impacted the Company's financial position or
results of operations.
Recently, the FASB has been very active, issuing a number of accounting
pronouncements with various effective dates. These pronouncements, which were
not discussed above, do not have a material effect on our financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT At March 31, property and equipment is composed
of:
2005 2004
--------- ---------
Office Condominiums $ 795,034 $ 792,659
Office Computers, Furnishings,
Software & Equipment 122,037 123,596
Vehicles 30,351 37,730
Capital lease - phone system 17,710 17,710
Less: Accumulated Depreciation (168,570) (111,495)
--------- ---------
Property and equipment, net $ 796,562 $ 860,200
Depreciation expense $ 14,183 $ 16,020
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. The
carrying value of the capitalized lease asset was $5,411 and $11,315 as of March
31, 2005 and 2004, respectively. Amortization expense was $1,476 and $1,476 and
interest expense was $307 and $546 for the three months ended March 31, 2005 and
2004, respectively. Future minimum lease payments as of March 31, 2005:
Year Amount
- ---- ------
2005 5,648
2006 1,256
------
Total 6,904
Less interest portion (539)
------
Capital lease obligation $6,365
======
Loan Commitments:
The Company makes loan commitments in connection with certain real estate loans
and joint venture investments that include funding for project development,
building construction, renovations, lease-up operations, financed interest and
other amounts that the borrower may draw upon in accordance with the loan
agreement. For existing loans, the Company has $5,853,596 in approved, unused
loan commitments for real estate loans and $3,967,377 for real estate joint
venture investments as of March 31, 2005. The Company also has one new approved
real estate loan commitment for $1,300,000 as of March 31, 2005 which the
company expects to fund in April, 2005.
Related Party Transactions:
Cornerstone Capital Advisors, Inc. - Management and Advisory Service Agreement
Effective July 1, 2003, the Company entered into a Management and Advisory
Services Agreement with Cornerstone Capital Advisors, Inc. ("CCA") to provide
loan management, administration, and accounting; investor relations; marketing;
F-9
computer and management information systems administration; record maintenance;
executive management; and bookkeeping and accounting after June 30, 2003. 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 Company's board of
directors. Two of the Company's directors serve on the CCA board of directors.
From July 1, 2003 until July 31, 2004, the agreement obligated the Company to
reimburse actual expenses incurred by CCA. Also, CCA was eligible to earn
incentive compensation of up to 10% of the actual expenses billed to the Company
for the prior 12 months. The base for the incentive compensation included 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 were determined by the board of director's judgment on the extent
to which CCA's services contributed to the results.
Effective August 1, 2004, the original agreement was modified so that the
Company will pay CCA as follows:
o Management Fee - equal to 10% of the Company's revenues from all sources
other than loan fees, loan participations and revenue received from CCA
plus 30% of loan participation revenue. This fee is payable monthly.
o Loan Origination Fee - equal to 30% of the total loan fee charged by the
Company to its borrowers. The fee is generally paid from loan proceeds and
reduces deferred loan fees.
For the three months ended March 31, the Company paid CCA as follows:
2005 2004
-------- --------
Management Fees $378,614 $324,222
Loan Origination Fees -0- -0-
-------- --------
$378,614 $324,222
======== ========
As of March 31, 2005 and 2004, the Company owed no amounts to CCA under the
terms of this agreement. Also, as of March 31, 2005, the Company was owed
$72,649 by CCA which represents future management fees advanced by the Company.
The advance accrues interest at 10% per annum. The advance is included in "other
assets" in the accompanying balance sheets.
Cornerstone Capital Advisors, Inc. - Office Lease
Effective August 1, 2004, the Company and CCA entered into a lease agreement
whereby CCA is leasing the Company's corporate office building and
office/computer equipment in Cumming, GA. The lease payment is $5,000 per month.
The initial lease term ends on August 31, 2005, after which time the lease
converts to a month-to-month lease unless CCA notifies the Company of its intent
not to renew within 30 days from the end of the initial lease term. The
Company's cost basis in the office building and office/computer equipment is
approximately $626,000. For the three months ended March 31, 2005, the Company
received $15,000 under the lease agreement.
Cornerstone Direct Public Offerings, LLC
The Company contracts 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 is $75,000 per filing payable in
installments during the filing process.
During 2003, the Company entered into a service agreement with CDPO for the
filing of a SB-2 Registration Statement. The initial $75,000 fee was paid in
2003. In January, 2004, the Company amended the service agreement and paid an
additional $25,000 to CDPO for cost over-runs related to the length of time
needed for the Company's registration statement to become effective.
In July, 2004, the Company entered into a service agreement with CDPO for the
filing of a new SB-2 Registration Statement. $75,000 was paid to CDPO in 2004
F-10
under this service agreement. In January 2005, the Company amended the agreement
and paid $20,000 to CDPO due to an increase in the time needed to register the
securities with various state securities regulators. No amounts were owed to
CDPO as of March 31, 2005 and 2004. See Note 12 for additional disclosures on
the Company's registration statements.
NOTE 4 - REAL ESTATE LOANS
At March 31, the Company had Real Estate Loans outstanding as follows:
2005 2004
------------ ------------
Family housing development loans $ 36,714,920 $ 26,423,822
Church mortgage loans 9,169,099 11,631,542
Senior housing mortgage loans 13,792,638 9,135,836
------------ ------------
Total principal 59,676,657 47,191,200
Accrued Interest 600,391 385,143
Unearned Loan Fees (99,258) (242,262)
Allowance for loan losses (657,000) (395,000)
------------ ------------
Total Real Estate Loans $ 59,520,790 $ 46,939,081
============ ============
These loans mature as follow: 2005 - $35,353,782; 2006 - $21,412,541; 2007 - $0;
2008 - $0; 2009 - $601,720; beyond 2009 - $2,308,614. 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 three months ended March 31, the net interest payments
financed were:
2005 2004
--------- ---------
Current year interest financed $ 312,903 $ 234,197
Previous years' financed interest received (48,855) (3,095)
--------- ---------
Net financed interest $ 264,048 $ 231,102
========= =========
On March 31, 2005, the Company had significant credit risk concentrations in the
following states:
Georgia - $ 27,786,158
Florida - $ 14,037,320
Texas - $ 10,557,078
Impaired loan disclosures for the three months ended March 31:
2005 2004
-------- ------
Number of impaired loans 1 0
Carrying amount at year end $269,324 N/A
Weighted average investment - year-to-date $266,308 N/A
Impaired loan interest income $ 6,033 N/A
No allowance for specific impaired loan loss has been recorded because the
carrying amount of the impaired loan as of March 31, 2005 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:
F-11
Location 2005 2004
- -------- ------------ ------------
McKinney, TX $ 4,138,210 $ 3,192,665
St. Petersburg, FL 4,810,334 3,832,820
Lewisville, TX 10,617,954 10,473,304
Garland, TX 6,511,957 6,075,255
Chattanooga, TN 5,666,188 3,995,123
San Antonio, TX 12,322,872 9,922,188
Winter Haven, FL 5,942,402 -0-
Bryan, TX 3,266,317 -0-
Edmond, OK 5,346,201 -0-
------------ ------------
Total principal outstanding 58,622,435 37,491,355
Accrued interest 539,269 315,491
Unearned loan fees (499,814) (655,907)
Allowance for loan losses -0- -0-
------------ ------------
Real estate joint venture investments, net $ 58,661,890 $ 37,150,939
============ ============
These loans mature as follows: 2005 - $54,484,225; 2006 - $4,138,210. Loan
maturity may be accelerated in accordance with loan terms, generally upon
certain events of default such as non-payment of scheduled payments or
bankruptcy.
All of the loans, except as noted below, are secured by first or second
mortgages. Three facilities are partially secured by the respective non-profit
borrower's 100% ownership interest in the Limited Liability Companies ("LLC")
which own the properties. The facilities which are owned by the LLC's have a
first mortgage from an outside lender securing the property. The location and
amount of the loans which are secured in this manner as of March 31, 2005 are as
follows:
Lewisville, TX - $ 9,284,620
Bryan, TX - $ 1,932,984
Edmond, OK - $ 3,337,251
-----------
Total $14,554,855
===========
The Company participates in the residual profits of the real estate joint
venture investments 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.
In March, 2005, the Company received $257,000 in loan participation income from
a borrower as a result of the borrower's sale of a senior housing facility in
which the Company held a real estate joint venture investment.
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 three months ended March 31, the net interest
payments financed were as follows:
2005 2004
-------- --------
Current year interest financed $177,102 $166,035
Previous years' financed interest received -0- -0-
-------- --------
Net financed interest $177,402 $166,035
======== ========
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 March 31, 2005 and 2004.
F-12
NOTE 6 - ALLOWANCE FOR LOAN LOSSES
For the three months ended March 31, 2005 and 2004, a summary of changes in the
allowance for loan losses by loan type is as follows:
Real Estate
Family Senior Joint Venture
Church Housing Housing Investments Total
---------- ------------ ----------- -------------- -------------
Balance - 12/31/03 $ -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 - 3/31/04 $ -0- $395,000 $ -0- $ -0- $395,000
---------- ------------ ----------- -------------- -------------
Balance - 12/31/04 $ -0- $632,000 $ -0- $ -0- $632,000
Loan loss expense -0- 25,000 -0- -0- 25,000
Charge-offs -0- -0- -0- -0- -0-
Recoveries -0- -0- -0- -0- -0-
Balance - 3/31/05 -0- -0- -0- -0- -0-
---------- ------------ ----------- -------------- -------------
$ -0- $657,000 -0- -0- $657,000
---------- ------------ ----------- -------------- -------------
Components of allowance for loan losses at March 31, 2005 and 2004:
2005 2004
-------- --------
Collective loan losses-
Historical experience $ -0- $ -0-
Current credit risk assessment 657,000 395,000
-------- --------
Total collective loan losses 657,000 395,000
Specific impaired loan losses -0- -0-
-------- --------
Total allowance for loan losses $657,000 $395,000
======== ========
For the three months ended March 31, 2005 and 2004, the Company charged $25,000
and $20,000, respectively to loan loss expense due to an increase in the family
housing loan portfolio's outstanding principal balance.
From April 1, 2004 through December 31, 2004, the Company charged $237,000 to
loan loss expense. This charge was due to an increase in the family housing loan
portfolio's outstanding loan principal, slower than expected new home sales
volumes at three projects, and an increase in the time that it has taken four
projects to finish the development phase and start selling homes. These factors
have increased the family housing loan portfolio's credit risk as compared to
prior years.
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 adopted SFAS 142 "Goodwill and Other Intangible Assets" effective
January 1, 2002. Goodwill associated with the Company's acquisition of
Presbyterian Investor's Fund, Inc. 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 March 31, 2005 and 2004, Goodwill's fair value exceeded its carrying
value; therefore, no provision for impairment loss has been recorded. No
goodwill was acquired or sold in 2004 or 2005.
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 securities are outstanding,
generally five years. At March 31, 2005, unamortized debt issue costs consist
of:
F-13
Costs incurred to register debt securities $ 733,214
Commissions paid on the sale of debt securities 4,089,644
Less: Accumulated Amortization (2,115,544)
-----------
$ 2,707,314
===========
Amortization expense was $239,817 and $162,728 for the three months ended March
31, 2005 and 2004, respectively, and is included in marketing expenses in the
accompanying Statements of Operations. Estimated amortization expense for the
next five years:
4/2005 - 3/2006 - $ 840.041 4/2008 - 3/2009 - $377,562
4/2006 - 3/2007 - $ 762,123 4/2009 - 3/2010 - $132,928
4/2007 - 3/2008 - $594,660
NOTE 9 - BOND HOLDINGS
Bond holdings at March 31 consist of- 2005 2004
----------- -----------
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 2,465,000 2,500,000
Undivided interest sold to investors (1,207,850) (1,225,000)
----------- -----------
Net investment in Largo, FL bonds 1,257,150 1,275,000
----------- -----------
Cost and fair value of bond holdings 3,769,650 3,787,500
Accrued interest receivable 197,933 198,197
----------- -----------
$ 3,967,583 $ 3,985,667
=========== ===========
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 for the three months ended March 31, 2005 and 2004.
Net proceeds from the partial maturity of bonds were $17,850 and $0 for the
three months ended March 31, 2005 and 2004, respectively. No realized gains or
losses were recognized. The Company uses the specific identification method to
determine realized gains and losses.
Tax-free interest income was $81,914 and $83,056 for the three months ended
March 31, 2005 and 2004, respectively.
NOTE 10 - INCOME TAXES
The net deferred tax (liability) asset in the accompanying balance sheets
includes the following components as of March 31:
2005 2004
--------- ---------
Deferred tax assets $ 306,456 $ 203,196
Deferred tax liabilities (362,897) (369,453)
--------- ---------
Net deferred tax (liability) asset ($ 56,441) ($166,257)
========= =========
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, 2005 and
2004.
F-14
Components of the Company's income tax provision (benefit) for the three months
ended March 31:
2005 2004
-------- --------
Current: Federal $ 17,550 $ 21,835
State 4,959 5,472
Deferred: Federal (12,564) (4,699)
State (1,352) (487)
-------- --------
$ 8,593 $ 22,121
======== ========
Reconciliation of the Company's income tax provision (benefit) rate to statutory
federal rates for the three months ended March 31:
2005 2004
------ ------
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 (29.2%) (21.6%)
Other, net .5% .8%
----- -----
Effective tax provision rate 9.0% 16.9%
Current income taxes payable were $11,991 and $1,480 as of March 31, 2005 and
2004, respectively and is included in "accounts and other payables" in the
accompanying balance sheets.
NOTE 11 - CASH CONCENTRATION RISK & RESTRICTED CASH
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, 2005, the
Company had cash in excess of insured limits totaling $10,746,272.
Included in cash and cash equivalents as of March 31, 2005 and 2004 is
restricted cash, as follows:
2005 2004
-------- --------
Investor Certificate trustee agreements $260,635 $256,980
Mortgage loan compensating balance agreement 427,649 -0-
-------- --------
$688,284 $256,980
======== ========
Regions Bank is the trustee for certain of the Company's Investor Certificates.
Under the terms of the agreements, the Company agreed to place cash into an
account which cannot be used in the Company's operations as long as the trustee
agreements are in place. The trustee agreements are for renewable one-year terms
and the Company can terminate the agreements at any time. In May, 2005 the
Company terminated the agreements and is using a new trustee for its Investor
Certificates who does not require the Company to have restricted cash on hand as
part of the trustee agreements.
In connection with the Company's mortgage loan on its corporate office building,
the lender requires that the Company keep an amount on deposit with the lender
that is at least equal to the amount of principal outstanding on the loan. The
maturity date of the loan is September 1, 2009. Please see Note 15 for
additional disclosures related to the mortgage loan.
The Company has an agreement with a financial institution to invest excess funds
overnight in a Eurodollar account. Investment positions are settled daily and
related interest earnings are included in loan participation and other income in
the Statement of Operations. As the investment meets the Company's definition of
cash and cash equivalents it is carried as such in the accompanying Balance
Sheets.
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 4%.
F-15
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 and F) sold after 2003 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 and F) sold after 2003.
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 2005 2004
- ----------------- ------------ ------------
On demand & 1 year $22,634,834 $ 8,623,950
2 14,624,585 4,862,922
3 30,664,131 10,803,667
4 7,738,300 35,705,732
5+ 41,190,616 18,172,001
------------ ------------
Total Principal $116,852,466 $ 78,168,272
============ ============
At March 31, 2005 and 2004, accrued interest payable was $9,758,567 and
Years to Maturity
Interest rates for certificates outstanding at March 31, 2005 are:
4.00% - $1,731,323 8.00% - $ 4,198,095 9.00% - $63,830,683
6.25% - $4,003,167 8.25% - $41,190,616
7.50% - $ 501,653 8.50% - $ 1,396,929
On April 29, 2003 the Company filed a Form SB-2 Registration Statement under the
Securities Act of 1933 with the Securities and Exchange Commission to sell up to
$40,000,000 of its Series E Investor Certificates along with $11,375,000 of its
Common Stock. The Registration Statement was approved by the Securities and
Exchange Commission on March 26, 2004. From April 2004 through December 2004,
the Company issued $39,931,209 in Series E Investor Certificates and $2,129,341
in Common Stock (327,591 shares at $6.50 per share).
On August 27, 2004, the Company filed a Form SB-2 Registration Statement under
the Securities Act of 1933 with the Securities and Exchange Commission to sell
up to $20,000,000 of its Series F Investor Certificates along with $9,750,000 of
its Common Stock. The Securities and Exchange Commission notified the Company
that it would not complete a full review of the registration statement. The
registration statement became effective on November 1, 2004 and the Company
started to sell securities registered in this statement in January, 2005. For
the three months ended March 31, 2005, the Company sold $5,393,127 in Series F
Investor Certificates and no Common Stock.
NOTE 13 - MORTGAGE PARTICIPATION AGREEMENTS
In 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 investors after the Company receives interest payments on the related
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
$134,630 and $153,755 for the three months ended December 31, 2005 and 2004,
respectively. MP Agreement principal and interest outstanding and related
collateral as of March 31, 2005:
F-16
MP Amount Total Collateral
Outstanding Carrying Amount
----------- ---------------
Winter Haven, FL senior housing loan; matures 5/1/05
with two year extensions at the Company's option $1,516,000 $5,967,872
Garland, TX senior housing loan; matures 12/1/05
with a one year extension at the Company's option 3,396,500 $6,508,222
----------
Total principal outstanding 4,912,500
Accrued interest payable 39,441
-----------
$4,951,948
==========
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 three 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 the Company to
guarantee the loan 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 March 31, 2005, all loans which had a guarantee
were current based on their loan terms. Loan guarantees as of March 31, 2005:
Renewal/ Current Loan
Origination Maturity Maximum Principal Guarantee
Location Date Date Guarantee Outstanding Obligation
- -------- -------- --------- ----------- ----------- -----------
Fort Pierce, FL 5/31/04 4/15/05 $ 6,000,000 $ 6,000,000 $ 60,000
Palm Bay, FL 12/31/02 12/31/05 13,800,000 12,650,181 -0-
St. Petersburg, FL 12/18/04 12/18/05 7,347,300 7,074,440 71,000
----------- ----------- -----------
$27,147,300 $25,724,621 $ 131,000
=========== =========== ===========
In February 2005, the Company originated a loan on a facility in Fort Pierce, FL
which paid off a loan with an outside bank in which the Company had a loan
guarantee. The $44,000 estimated fair value of the guarantee was credited to
earnings in the first quarter of 2005.
NOTE 15 - BUILDING MORTGAGES
Building mortgages outstanding at March 31: 2005 2004
-------- --------
Fidelity Bank - collateralized by rental office building $168,139 $177,844
Interest rate equal to "prime + 1.5%", currently 7%; monthly principal &
interest payment of $1,723; matures March 1, 2006, at which time a balloon
payment of $159,573 is due
Fidelity Bank - collateralized by corporate office building 427,649 -0-
-------- --------
Interest rate equal to "prime + 1.5%", currently 7%; monthly principal &
interest payment of $3,818; matures Sept. 1, 2009, at which time a balloon
payment of $340,543 is due
Total principal outstanding at March 31 $595,788 $177,844
Interest expense for the three months ended March 31 $ 10,167 $ 3,853
Total carrying value of the mortgage's collateral $738,483 $232,931
Estimated annual principal payments: 2005 - $20,065; 2006 - $179,609; 2007 -
$19,680; 2008 - $21,050; 2009 - $355,384.
F-17
NOTE 16 - SERIES A CONVERTIBLE PREFERRED STOCK
In 2001, the Company amended its Articles of Incorporation to provide for the
issuance of up to 235,000 shares of Series A Convertible Preferred Stock. The
shares do not accrue dividends unless such dividends are declared by the Board
of Directors. The shares entitle the preferred shareholder to have one vote per
share, presently equal to the voting rights of Common shareholders. Each share
is convertible, after 3 years, into shares of Common Stock based on an
adjustable formula.
During 2001, as part of the Company's formation and initial capitalization of
Wellstone Financial Group, LLC ("WFG"), 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 17 for additional disclosures on this transaction.
NOTE 17 - 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 136,250 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. WCI was dissolved because the
Company determined that it was not feasible to go forward with the registration
statement given the proposed financial structure.
NOTE 18 - EARNINGS PER SHARE
Basic earnings per share for the three months 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
2005 Net Income $86,904
- ---- Average Common Shares Outstanding 815,812
Earnings per Common Share $0.11
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 19 - MAJOR CUSTOMERS
The Company received more than 10% of its total revenue for the three months
ended March 31, 2005 from the following customers:
Amount % Description of Revenue Received
------ ------ -------------------------------
Senior Housing Services, Inc. $1,625,590 43.9% Interest and fees from real estate joint
venture investments
Wellstone Housing, LLC 680,401 18.4% Interest and fees from family housing
development loans
Sage Living Centers, Inc. 565,013 15.2% Interest and fees from real estate joint
---------- ----- venture investments
$2,871,004 77.5%
========== ====
F-18
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.
On January 1, 2005, Senior Housing Services, Inc formed a single member Limited
Liability Company (Wellstone Housing, LLC) and purchased the assets and assumed
all of Wellstone Housing Corporation's liabilities, which included the Company's
real estate loans. The total combined revenue received from Senior Housing
Services, Inc. and Wellstone Housing, LLC was $2,305,991 or 62.3% of the
Company's total revenue.
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 mortgages 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.
Loan guarantee obligations - Fair value approximates the risk-factored net
present value of possible future cash flows related to the specific loan
guarantee obligation.
The estimated fair values of the Company's financial instruments at March 31,
2005 are:
Carrying Amount Fair Value
------------ ------------
Financial assets:
Cash and cash equivalents $ 11,114,985 $ 11,114,985
Bond holdings $ 3,769,650 $ 3,769,650
Financial liabilities:
Investor certificates $116,852,466 $116,852,466
Mortgage participations $ 4,912,500 $ 4,912,500
Building mortgages $ 595,788 $ 595,788
Capital lease obligation $ 6,365 $ 6,365
Loan guarantee obligations $ 131,000 $ 131,000
F-19
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 or Plan of Operation" and with our
financial statements and related notes in this filing.
Three months ended
March 31,
---------------------------
2005 2004
---------- ----------
Revenues $3,704,061 $2,796,253
---------- ----------
Investor interest expense 2,729,419 1,962,490
Loan loss expense 25,000 20,000
Marketing expenses 287,569 204,536
Salaries, payroll taxes, benefits 378,614 320,220
Operating expenses 187,962 158,164
---------- ----------
Total expenses 3,608,564 2,665,410
---------- ----------
Operating income 95,497 130,843
Income tax provision 8,593 22,121
---------- ----------
Net income $ 86,904 $ 108,722
========== ==========
Overview of operations
We have always focused on serving 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 prior to 2001 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. During the
last quarter of 2004, we began to make loans to for-profit sponsors of
affordable and low-income housing projects. Less than 2% of our assets are
invested with for-profit sponsors and even though this percentage may increase
in the future, it will remain a small part of our loan portfolio. 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, 2004 and March 31, 2005
General. Assets increased from $94,360,462 at March 31, 2004 to $137,768,409 at
March 31, 2005 for an increase of $43,407,947 or 46%. This increase is a result
of the sale of Investor Certificates and Mortgage Participations, net of
redemptions of $41,201,273 and new common stock issuances, net of retirements of
$1,788,665. 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 $34,092,660. Total revenue increased for the
three months ended March 31, 2005 by $907,808 or 32% from $2,796,253 in 2004 to
$3,704,061 in 2005. Net income for the three months ended March 31, 2005 was
$86,904 compared to $108,722 for the same period ended March 31, 2004.
Total real estate loans and joint venture investments outstanding on March 31,
2005 was $118,182,680 compared to $84,090,020 on March 31, 2004 for an increase
of $34,092,660 or 41%. 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 loan originations $ 7,089,641
Increase in existing loans, net of principal received 5,492,068
New real estate joint venture investments made 14,554,920
Increase in existing real estate joint venture investments 6,956,031
-----------
$34,092,660
===========
All other assets composed primarily of cash, bond holdings, property and
equipment, and unamortized debt issue costs were $19,585,729 as of March 31,
2005.
Our cash balance increased $8,460,379 from $2,654,606 on March 31, 2004 to
$11,114,985 on March 31, 2005. This increase is due to the large amount of
Investor Certificates sold from May 2004 to March 2005. There is normally a lag
of two to four 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 $41,201,273 or 46% from $90,361,708 as
of March 31, 2004 to $131,562,981 as of March 31, 2005. 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. Also, another registration statement was filed in August 2004 and became
effective in November 2004 which allows us to sell an additional $20,000,000 in
Investor Certificates and $9,750,000 in Common Stock. These registrations have
allowed us to 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 three months
ended March 31 is as follows:
2005 2004 Increase %
---- ---- -------- ---
$3,233,140 $2,697,497 $ 535,643 20%
The increase was due to the following:
Increase in average outstanding principal $ 734,663
($115,392,648 - 2005; $84,529,125 - 2004)
Increase in weighted average interest rate 27,095
(9.90% - 2005; 9.77% - 2004)
Change in loan fees recognized (226,115)
---------
$ 535,643
=========
The increase in average outstanding principal is due to the addition of 8 new
real estate loans and joint venture investments with outstanding principal of
$21,644,561 and increases in the weighted average principal outstanding on
existing loans of $9,218,962.
Loan participation and other income. For the three months ended March 31, 2005,
loan participation and other income increased as follows:
2005 2004 Change
-------- -------- --------
Investment income $147,184 $ 91,431 $ 55,753
Loan participation & other 323,737 7,325 316,412
-------- -------- --------
Total $470,921 $ 98,756 $372,165
======== ======== ========
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 increase in the Company's excess
cash in 2005 versus 2004.
Loan participation and other income increased due to a $257,000 loan
participation gain recorded in March, 2005, $44,000 in loan guarantee revenue
recognized in February, 2005 (see Note 14 of the "Notes to Financial Statements"
for additional disclosures on loan guarantees) and $15,000 in rent revenue
received from Cornerstone Capital Advisors for their rent of the corporate
office building in Cumming, GA.
Investor interest expense. Investor interest expense for the three months ended
March 31, 2005 was $2,729,418, an increase of $766,926 or 39% compared to 2004.
The increase is due to:
4
Increase in average outstanding certificate principal, including $ 821,040
interest payable subject to compounding
($119,663,241 - 2005; $81,783,612 - 2004)
Change in weighted average interest percentage (34,989)
(8.67% - 2005; 8.90% - 2004)
Decrease in average outstanding Mortgage Participation principal
($5,385,200 - 2005; $6,150,200 - 2004) (19,125)
---------
$ 766,926
=========
Loan loss expense and allowance for loan losses. For the three months ended
March 31, 2005 and 2004, we charged $25,000 and $20,000, respectively to loan
loss expense. These charges were due to increases in the family housing
development loan portfolio's outstanding principal.
The total allowance for loan losses increased from $395,000 on March 31, 2004 to
$657,000 on March 31, 2005. This increase is due to: 1) an increase in the
family housing development loan portfolio's outstanding principal ($100,000),
and 2) slower than expected new home sales volumes at three projects and an
increase in the time that it has taken four projects to finish the development
phase and start selling homes ($162,000). These factors have increased the
family housing development loan portfolio's relative credit risk as compared to
2004, thus necessitating the increase in our allowance for loan loss balance
over the last 12 months.
The allowance for loan loss increases that we made in 2004 and 2005 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, 2005, one church loan with a carrying amount of $269,324 was
considered impaired. As of March 31, 2004, no loans were considered impaired. No
specific impaired loan loss allowance has been recorded because the carrying
amount of the impaired loan is less than the loan's collateral or the present
value of the loan's expected future cash flows.
As of March 31, 2005, allowance for loan losses as a percent of outstanding loan
principal by loan type:
Loan Loss Outstanding
Allowance Principal %
--------- ------------ ---
Family Housing Development Loans $ 657,000 $ 36,714,920 1.8%
Church Mortgage Loans -0- 9,169,099 0%
Senior Housing Mortgage Loans -0- 13,792,638 0%
Real Estate Joint Venture Investments -0- 58,622,435 0%
--------- ------------ ---
Total $ 657,000 $118,299,092 .6%
========= ============ ===
Marketing expenses. Total expenses for the marketing of Investor Certificates
for the three months ended March 31, 2005 were $287,569 compared to $204,536 for
the same period in 2004. The increase is due to:
2005 2004 Change
-------- -------- --------
Debt issue cost amortization $239,401 $162,728 $ 76,673
Other marketing costs 48,168 41,808 6,360
-------- -------- --------
$287,569 $204,536 $ 83,033
======== ======== ========
Debt issue cost amortization expense increased due to Investor Certificates and
Mortgage Participations sold since May, 2004. This expense will continue to
increase as new Investor Certificates and Mortgage Participations are sold.
Other marketing costs increased due to higher compliance and registration costs
which were caused by the increase in Investor Certificates outstanding.
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 $2,707,314 and $1,744,336 as of
March 31, 2005 and 2004, respectively.
Operating and personnel expenses. Personnel expenses (salaries, payroll taxes,
and benefits) for the three months ended March 31 increased $58,394 or 18% from
$320,220 in 2004 to $378,614 in 2005. The increase is due to the Company's
growth in operations. Prior to July 1, 2003, employees were paid directly by the
Company. On July 1, 2003, Cornerstone Capital Advisors ("CCA") hired all of our
employees and has billed us according to the management and advisory agreement
that is now in place.
5
Starting in July 2003, the Company contracted with CCA to provide all
administrative and executive personnel services. From July 1, 2003 until July
31, 2004, the agreement obligated us to reimburse actual expenses incurred by
CCA. Also, CCA was eligible to receive incentive compensation of up to 10% of
actual expenses billed to us for the prior 12 months.
Effective August 1, 2004, the original agreement was modified so that we will
pay CCA as follows:
o A monthly management fee equal to 10% of our revenues from all sources
other than loan fees, loan participation revenue, and revenue received from
CCA plus 30% of loan participation revenue.
o A loan origination fee equal to 30% of the total loan fees charged by the
Company to its borrowers. The fee is generally paid from loan proceeds and
reduces deferred loan fees that we will recognize over the life of the
loan.
Please see Note 3 of the "Notes to Financial Statements" for additional
information about our agreement with CCA and for amounts that we have paid to
CCA for three month periods ended March 31, 2005 and 2004.
For the three months ended March 31, 2005 and 2004, operating expenses were as
follows:
2005 2004 Change
-------- -------- --------
a) Trust service/paying agent fees $ 30,950 $ 26,304 $ 4,646
b) Audit, accounting & tax services 19,974 19,872 102
c) Depreciation & amortization 15,658 16,020 (452)
d) Office expenses 7,123 20,800 (13,677)
e) Legal expenses 61,839 25,287 36,552
f) Insurance 9,484 13,689 (4,205)
g) Other operating expenses 43,024 36,192 6,832
-------- -------- --------
Total operating expenses $187,962 $158,164 $ 29,798
======== ======== ========
The changes are due to the following:
a) Trust service/paying agent fees - increased due to the increase in
Investor Certificates outstanding.
b) Audit, accounting & tax services - no material change in services were
needed.
c) Depreciation & amortization - No material fixed asset purchases were
made since March 2004; therefore, depreciation and amortization expense
stayed basically the same as last year.
d) Office expenses - The decrease is due to the change in our management
contract with CCA. Prior to August, 2004, CMI was responsible for all
office costs at our corporate offices. In August 2004, the agreement
was changed and as part of the agreement, CCA is now responsible for
the ongoing operating costs of the office. Please see Note 3 of the
"Notes to Financial Statements" for additional information about our
management agreement with CCA.
e) Legal expenses - Increased due to additional legal fees incurred as a
result of the ongoing legal proceeding concerning the Chicago Stock
Exchange. Please see Part II, Item 1 for additional information.
f) Insurance - decreased due to lower premiums on director and officer
insurance and property and casualty insurance.
g) Other operating expenses - increased due to the cost of the March 2005
board meeting. In 2004, the first board meeting of the year was not
held until the second quarter so no meeting costs were incurred.
Income tax provision. The income tax provision for the three months ended March
31, 2005 was $8,593 compared to $22,121 for the same period ended March 31.
2004. The net decrease in income taxes is due to a decrease in pre-tax income.
The Company's effective tax provision rate was 9.0% and 16.9% for the three
months ended March 31, 2005 and 2004, respectively. A reconciliation of the
Company's effective tax provision rate to the federal statutory rate is included
in the attached "Notes to Financial Statements" (Note 10).
Dividends. No dividends were declared during the three months ended March 31,
2005 or 2004.
Liquidity and Capital Resources
Cash flows from operations. Net cash provided by the Company's operations for
the three months ended March 31, 2005 and 2004 was $294,603 and $7,616,
respectively. This increase was due to an increase in depreciation and
amortization expense, loan guarantee payments received, other assets, and
accrued investor certificate interest payable, partially offset by decreases in
net income, accounts and other payables, and cash received from loan fees and
loan interest.
Investor and mortgage participation interest payable increased $1,111,803 in the
first three months of 2005 due to an increase in outstanding debt and because
approximately 25% to 30% of the Investor Certificate holders who purchased
certificates in 2004 and 2005 have elected to reinvest the interest due to them
each year and not receive the interest in cash until maturity.
Included in the 2005 and 2004 changes in accrued real estate loan and joint
venture interest and deferred loan fee amounts is $441,150 and $397,137 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
6
under development or construction. A summary (by loan type) of the amount of net
financed interest for the three months ended March 31, 2005 and 2004 is as
follows:
2005 2004
--------- ---------
Family Housing Development $ 265,821 $ 193,588
Church Construction (1,773) 37,514
Real Estate Joint Venture 177,102 166,035
--------- ---------
$ 441,150 $ 397,137
========= =========
The amount for 2005 represents interest accrued and financed in 2005, net of
payments received in 2005 that were financed in previous years. 2004's amount
represents interest accrued and financed in 2004, net of payments received in
2004 that were financed in previous years.
The increase in the family housing net financed interest in 2005 as compared to
2004 is due to: 1) increased loan balances on eight projects which are now in
the development phase and are financing their monthly interest, and 2) one new
loan addition since March 31, 2004 which is in the development phase of
construction. Although the amount of financed interest from these projects will
remain fairly high (currently $90,000 to $100,000 per month), the amount of
interest financed should decline starting in the third or fourth quarter of 2005
because three or four of these projects should be going into their sales phase
and we will begin to receive interest payments in cash.
The Real Estate Joint Venture financed interest in 2005 is for a loan in
McKinney, TX ($85,169) and for a loan in Chattanooga, TN ($91,933). The
McKinney, TX loan is collateralized by raw land which is being developed for
senior housing. We have been financing the interest on this loan since June,
2003. Our 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 much longer than
the other Real Estate Joint Venture Investment loans. Normally, we finance two
to six months' of interest on senior housing loans. We anticipate, due to the
size of the McKinney project that we will finance interest for another 12 to 24
months. The Chattanooga, TN loan completed its remodeling in 2004 and its
lease-up phase has taken longer than anticipated; therefore, we have capitalized
their interest in 2005. We are analyzing and watching this loan closely to
ensure that the stabilized value of the property is greater than the loan amount
and that we do not have any collectibility issues with this loan.
Cash flows from investing activities. For the three months ended March 31, 2005,
the Company used $6,384,934 in cash from investing activities which is an
increase of $5,861,527 from $523,407 for the three months ended March 31, 2004.
The increase was due to an increase in real estate and joint venture loans made
in 2005. In the first quarter of 2004 we had no Investor Certificates available
for sale so we were unable to originate loans at the same rate that we have been
able to since April 2004.
Cash flows from financing activities. For the three months ended March 31, 2005,
the Company raised $5,542,064 from the sale of Investor Certificates and
Mortgage Participation Agreements. This represents an increase of $5,100,696
from new Investor Certificate and Mortgage Participation sales of $441,368 for
the three months ended March 31, 2004. In 2004, we had no registered Investor
Certificates for sale during the first three months of the year and were only
able to re-sell existing certificates that investors wanted to redeem early. We
have been able to sell new Investor Certificates since April 2004 which has
caused the increase over last year.
Investor Certificates redeemed for cash decreased from $1,424,047 for the three
months ended March 31, 2004 to $514,241 for the three months ended March 31,
2005. This decrease is due to a larger amount of maturities in 2004 versus 2005.
Also, in 2004, we had no new Investor Certificates in which maturing
certificates could be reinvested; therefore, all of 2004's maturities were paid
in cash.
We have $22,634,834 in Investor Certificates coming due or redeemable upon
demand in the next 12 months. $10,099,844 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 during the next 12 months. Also, $10,803,668 in five-year bonds will mature
in March, 2006. Our historical experience indicates that over 75% 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 Ask investors their intentions at least 30 days before their bonds mature.
o Have a bank willing to extend credit lines if needed.
7
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.
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,
2005, 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
The laws in many states provide an exemption from registration for offerings of
securities approved for listing on the Chicago Stock Exchange (the "Exchange").
Since April 2000, we have considered our securities to have been approved for
listing on the Exchange. Prospectuses for our public offerings of bonds and
common stock, and our publicly-filed reports, have included statements that our
common stock was approved for listing on the Chicago Stock Exchange.
On December 3, 2004, a letter from the Exchange denied our application for
listing and said that it had not previously approved our common stock for
listing. However, on February 4, 2005, a second letter from the Exchange said
that, upon review, the Exchange had apparently approved our common stock for
listing subject to the completion of an offering that would meet the Exchange's
numerical standards for shareowners' equity, number of public shareholders and
publicly held shares. A March 1, 2005 clarification from the Exchange said it
agrees that our status was not inconsistent with its being "approved for listing
upon notice of issuance," the language used in state exemption laws. Our common
stock will not be listed on the Exchange in the future.
Based upon the Exchange's position in its December 3, 2004 letter, securities
regulators for several states each raised the issue of whether we lawfully
offered and sold securities without registration in those states and/or whether
our prospectuses and publicly-filed reports were false and misleading, in their
reference to Exchange approval for listing. Michigan's Commissioner of Financial
and Insurance Services issued Orders of Denial related to our application to
register our Series F offering in that state and initiated an enforcement case
with a Notice of Opportunity to Show Compliance, to which we have responded. We
disagree with the actions taken by Michigan and have administratively appealed
its decisions.
On February 4, 2005, the Texas State Securities Board told us that, by February
11, 2005, either we sign an Agreed Cease and Desist Order and pay a $20,000 fine
or it would obtain an emergency administrative cease and desist order, without
our being represented. We chose to sign the order and we paid the fine. The
order is that we "immediately cease and desist from engaging in conduct that is
materially misleading or is otherwise likely to deceive the public in connection
with the offer for sale of any security in Texas." On April 26, 2005, we
consented to entry of a Cease and Desist Order by the Minnesota Commissioner of
Commerce that we cease and desist from offering and selling securities in
Minnesota until we are in compliance with Minnesota statutes and until the
Commissioner's further order. We also agreed to redeem all certificates
purchased by Minnesota residents and to pay an $8,000 civil penalty.
As of May 11, 2005, we are not aware that any other state has instituted any
formal proceedings on this or any other issue related to any of our securities
offerings and we are not a party to any other pending legal proceedings. We are
not aware that any of the properties covered by our mortgage loans is subject to
any pending legal proceedings or that any government authority is contemplating
any legal proceedings involving us or any of those properties, other than
described above.
Item 2. Changes in Securities
Not Applicable
8
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 11, 2005 Cornerstone Ministries Investments, Inc. (Registrant)
By: S/John T. Ottinger
-------------------------------------------------
John T. Ottinger
Vice President and Chief Financial Officer
9