================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
[x] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
----------
Commission File No. 0-8117
CHURCH LOANS & INVESTMENTS TRUST
State of Organization IRS Employer Identification
--------------------- ---------------------------
Texas No. 75-6030254
5305 I-40 West
Amarillo, Texas 79106
Registrant's telephone number: 806-358-3666
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 the past 90 days.
Yes [ X ] No [ _ ]
As of December 31, 1998, 7,000,806 shares of the Registrant's shares of
beneficial interest were outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ _ ] No [ X ]
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
INDEX
Page
----
Part I.
Item 1: Financial Information:
Condensed Balance Sheets at December 31, 1998
and March 31, 1998 ....................... 1
Condensed Statements of Income for the
nine-month periods ended
December 31, 1998 and 1997 ..x............ 2
Condensed Statements of Cash Flows
for the nine-month periods ended
December 31, 1998 and 1997 .x............ 3
Notes to Condensed Financial Statements ..... 4
Item 2: Management's Discussion and Analysis or
Plan of Operation .......................... 6
Part II. Other Information ............................... 9
Signatures ................................................ 10
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)
December 31, 1998 and March 31, 1998
ASSETS December 31, 1998 March 31, 1998
------ ----------------- --------------
CASH AND CASH EQUIVALENTS ...................... $ 144,467 $ 32,403
RECEIVABLES
Mortgage loans and church bonds -
performing ................................ 23,677,616 22,165,629
Interim construction loans - performing .... 12,893,228 10,732,915
Nonperforming mortgage loans, church
bonds and interim construction loans ...... 3,646,763 2,492,095
Less: Allowance for possible credit losses . (1,170,213) (1,035,213)
------------ ------------
39,047,394 34,355,426
Accrued interest receivable ................ 348,145 341,360
Notes receivable ........................... 475,195 405,860
------------ ------------
Total receivables ............ 39,870,736 35,102,646
PROPERTY AND EQUIPMENT, net .................... 185,865 197,619
REAL ESTATE ACQUIRED THROUGH FORECLOSURE ....... 314,197 1,479,486
UNAMORTIZED DEBT EXPENSE, net and other assets . 39,023 62,960
------------ ------------
TOTAL ASSETS ................................... $ 40,554,286 $ 36,875,114
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Notes payable and line of credit:
Related party ............................ $ 1,638,566 $ 1,969,938
Other .................................... 11,966,397 5,740,773
------------ ------------
13,604,963 7,710,711
------------ ------------
Secured savings certificates:
Related party ............................ -- 240,000
Other .................................... 3,414,377 6,823,823
3,414,377 7,063,823
Accrued interest payable ................... 90,327 29,768
Dividends payable .......................... 1,750,202 --
Other ...................................... 1,063,694 781,455
------------ ------------
Total liabilities ............ 19,923,563 15,585,757
------------ ------------
SHAREHOLDERS' EQUITY
Shares of beneficial interest, no par value;
authorized shares unlimited, 7,007,402
shares issued ............................. 20,623,866 20,623,866
Undistributed net income ................... 23,347 665,491
Treasury shares, at cost (6,596 shares) .... (16,490) --
------------ ------------
Total shareholders' equity ... 20,630,723 21,289,357
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $ 40,554,286 $ 36,875,114
============ ============
These financial statements should be read only in connection with the
accompanying notes to financial statements.
-1-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Condensed Statements of Income (Unaudited)
Three-month and nine-month periods ended
December 31, 1998 and 1997
Three-month periods Nine-month periods ended
ended December 31, ended December 31,
1998 1997 1998 1997
---- ---- ---- ----
INTEREST INCOME AND FEES
Interest and fees on mortgage
loans, church bonds, and
interim construction loans $1,155,129 $ 952,766 $2,289,823 $1,885,973
INTEREST INCOME AND FEES
Interest and fees on mortgage
loans, church bonds, and
interim construction loans $1,048,424 $ 970,903 $3,338,247 $2,856,876
Interest on temporary
investments ............. 14,311 14,469 34,562 76,058
---------- ---------- ---------- ----------
Total interest income
and fees ......... 1,062,735 985,372 3,372,809 2,932,934
---------- ---------- ---------- ----------
DEBT EXPENSE
Interest ................... 272,362 227,823 864,147 690,359
Amortization of:
Registration cost ....... -- -- -- 4,374
Commissions paid
to brokers ............. 8,840 14,171 30,734 43,766
---------- ---------- ---------- ----------
Total debt expense ... 281,202 241,994 894,881 738,499
---------- ---------- ---------- ----------
Net interest income .. 781,533 743,378 2,477,928 2,194,435
PROVISION FOR POSSIBLE
CREDIT LOSSES ............. 45,000 45,000 135,000 135,000
---------- ---------- ---------- ----------
Net interest income
less provision for
possible credit losses 736,533 698,378 2,342,928 2,059,435
OTHER INCOME ................... 12,404 42,747 14,499 81,658
OTHER OPERATING EXPENSES
General and administrative . 136,991 141,545 436,254 472,590
Board of Trust Managers' fees 14,107 10,704 41,852 35,176
---------- ---------- ---------- ----------
Total other
operating expenses 151,098 152,249 478,106 507,766
---------- ---------- ---------- ----------
Income before provisions
for taxes ........ 597,839 588,876 1,879,321 1,633,327
PROVISION FOR TAXES ............ -- -- 449 3,627
---------- ---------- ---------- ----------
NET INCOME ........... $ 597,839 $ 588,876 $1,878,872 $1,629,700
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING ...... 7,001,236 7,007,402 7,005,219 7,007,402
========== ========== ========== ==========
NET INCOME PER SHARE ........... $ .09 $. 08 $ .27 $ .23
========== ========== ========== ==========
DIVIDENDS PER SHARE $ .25 $ .21 $ .36 $ .31
========== ========== ========== ==========
These financial statements should be read only in connection with the
accompanying notes to financial statements.
-2-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Condensed Statements of Cash Flows (Unaudited)
Nine-month periods ended December 31, 1998 and 1997
Nine-month periods
ended December 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................... $ 1,878,872 $ 1,629,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ........................... 11,754 11,754
Amortization of debt expense ........... 30,734 48,140
Provision for possible credit losses ... 135,000 135,000
Amortization of loan discounts ......... (241,515) (63,090)
Changes in:
Accrued interest receivable ........ (6,785) (88,690)
Accrued interest payable ........... 60,559 (13,406)
Other liabilities .................. (62,444) 155,790
Other, net ............................. (6,797) (17,123)
------------ ------------
Net cash provided by operating
activities .................... 1,799,378 1,798,075
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in mortgage and interim
construction loans and church bonds ....... (23,803,670) (20,542,903)
Payments received on mortgage and interim
construction loans
and church bonds .......................... 20,612,398 21,001,310
Advances of notes receivable ................. (356,053) (212,471)
Payments received on notes receivable ........ 286,718 305,614
Proceeds from sale of real estate acquired
through foreclosure ....................... 115,791 --
------------ ------------
Net cash provided (used) by
investing activities .......... (3,144,816) 551,550
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of secured savings certificates ......... -- 3,314,121
Borrowings on notes payable .................. 22,881,133 1,611,412
Principal payments on:
Secured savings certificates .............. (3,649,446) (3,619,270)
Notes payable ............................. (16,986,881) (2,951,621)
Commissions paid to broker on issuance
of secured savings certificates ........... -- (33,973)
Cash dividends paid .......................... (770,814) (700,740)
Purchase of treasury shares .................. (16,490) --
------------ ------------
Net cash provided (used) by
financing activities .......... 1,457,502 (2,380,071)
------------ ------------
Increase (decrease) in cash
and cash equivalents .......... 112,064 (30,446)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .................................... 32,403 586,629
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....... $ 144,467 $ 556,183
============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest ..... $ 803,588 $ 703,765
============ ============
During December 1998, the Board of Trust managers declared cash dividends of
$1,750,202 ($.25 per share) payable in January 1999. During December 1997, the
Board of Trust managers declared cash dividends of $1,471,554 ($.21 per share)
payable in January 1998.
During the nine months ended December 31, 1997, the Trust foreclosed on
$1,396,451 in loans that were delinquent.
During the nine months ended December 31, 1998, the Trust financed the sale of
two real estate properties acquired through foreclosure that had carrying values
of $1,049,498 and deferred a gain of $344,683.
These financial statements should be read only in connection with the
accompanying notes to financial statements.
-3-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Notes to Condensed Financial Statements (Unaudited)
NOTE 1 - GENERAL
See the Summary of Significant Accounting Policies included in the Financial
Statements in the Trust's Annual Report on Form 10-KSB405.
The unaudited condensed financial statements included herein were prepared from
the books of the Trust in accordance with generally accepted accounting
principles and reflect all adjustments (consisting of normal recurring accruals)
which are, in the opinion of management, necessary to a fair statement of the
results of operations and financial position for the interim periods. Such
financial statements generally conform to the presentation reflected in the
Trust's Annual Report to Shareholders. The current interim period reported
herein is included in the fiscal year subject to independent audit at the end of
that year and is not necessarily an indication of the expected results for the
fiscal year.
NOTE 2 - WEIGHTED AVERAGE INTEREST RATES
Weighted average interest rates and net interest rate margins at December 31,
1998 and 1997 were as follows:
Mortgage loan and Total Net interest
church bond portfolio indebtedness rate margin
--------------------- ------------ -----------
December 31, 1998 10.17% 6.91 3.26
December 31, 1997 10.60% 7.42 3.18
NOTE 3 - CONTRACTUAL MATURITIES
Scheduled principal payments on mortgage loans, church bonds and interim loans
and indebtedness (including secured savings certificates and notes payable)
outstanding at December 31, 1998, for the five twelve-month periods subsequent
to December 31, 1998, follow:
Twelve-month period Mortgage loans, church bonds
ending December 31, and interim loans Indebtedness
1999 $16,418,791 15,690,340
2000 1,620,198 1,329,000
2001 1,563,320 -
2002 1,588,148 -
2003 1,666,119 -
=========== ==========
-4-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Notes to Condensed Financial Statements (Unaudited)
NOTE 4 - MORTGAGE LOANS, CHURCH BONDS AND INTERIM CONSTRUCTION LOANS
Mortgage loans, church bonds and interim construction loans on which the accrual
of interest had been discontinued amounted to $3,646,763 and $2,724,030 at
December 31, 1998 and 1997, respectively. If interest on these mortgage loans,
church bonds and interim construction loans had been accrued as earned, interest
and fees on loans in the accompanying condensed statements of income would have
been increased by approximately $211,000 and $115,000 for the nine-month periods
ended December 31, 1998 and 1997, respectively. Interest actually recognized in
1998 and 1997 was approximately $67,000 and $72,000 respectively.
NOTE 5 - SECURED SAVINGS CERTIFICATES
Secured Savings Certificates (Certificates) are issued in amounts of $1,000 or
more and have single maturity dates from 30 days to 10 years from date of issue.
With respect to an individual Certificate, interest rate and frequency of
payment of interest (either monthly, quarterly, semiannually, annually or at
maturity) are fixed at the time of issuance of the Certificate. Effective July
1997, Church Loans discontinued the sale of Certificates.
Certificates are secured under the terms of an indenture that requires, among
other things, the pledge of mortgage notes receivable with total unpaid
principal amounts not less than 100% of the aggregate principal amount of
Certificates outstanding.
NOTE 6 - ODD-LOT TENDER OFFERING
Effective September 1, 1998, the Trust began a tender offer at $2.50 per share
to all shareholders owning less than 100 shares of beneficial interest. The
offer expired November 30, 1998. A total of $16,490 (6,596 shares) were
purchased and are being held as treasury shares.
This information is an integral part of the
accompanying financial statements.
-5-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Item 2. Management's Discussion and Analysis or Plan of Operation
Results of Operations - Three-Month and Nine-Month Periods Ended December 31,
1998 as Compared to the Three-Month and Nine-Month Periods Ended December 31,
1997:
Revenues
The Trust's revenues are derived primarily from interest income earned on
mortgage loans, church bonds and interim construction loans. The Trust's
revenues of $1,062,735 for the three-month period ended December 31, 1998,
increased from $985,372 for the corresponding period in 1997. The Trust's
revenues of $3,372,809 for the nine-month period ended December 31, 1998
increased from $2,932,934 for the corresponding period. The weighted average
rate on mortgage loans, church bonds and interim loans at December 31, 1998 and
1997 was 10.17% and 10.60%, respectively. The decrease in the weighted average
interest rate was more than offset by increased earning loan and church bond
balances which increased significantly from $29,954,096 at December 31, 1997 to
$36,570,844 at December 31, 1998. Also included in the 1998 nine month period is
approximately $170,000 of loan discount amortization recognized from the early
pay-off of a large loan.
Debt Expense
The most significant expense item is debt expense which comprised the majority
of total operating expense for each of the three-month and nine-month periods
ended December 31, 1998 and 1997. Debt expense for the three-month period ended
December 31, 1998 of $281,202 as compared to the corresponding amount in 1997 of
$241,994. Debt expense of $894,881 for the nine-month period ended December 31,
1998, was increased as compared to the corresponding amount in 1997 of $738,499.
The weighted average interest rate on all indebtedness was 6.91% at December 31,
1998 as compared to 7.42% at December 31, 1997. Increased debt balances at
December 31, 1998 of $17,019,340 as compared to $11,974,490 at December 31, 1997
more than offset the decrease in weighted average interest rate.
Other Operating Income and Expenses
Other income for the nine month period in 1997 included approximately $77,000 in
rental income from certain other real estate. Such property was not rented in
1998.
Other operating expenses were $151,098 for the three months ended December 31,
1998, or $1,151 less than the comparable period in 1997. Other operating
expenses were $478,106 for the nine-months ended December 31, 1998, or $29,660
less than the comparable period in 1997. These decreases were primarily caused
by decreased legal and other fees related to the collection, foreclosure and
maintenance of several nonearning loans.
-6-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Item 2. Management's Discussion and Analysis or Plan of Operation (Continued)
Nonearning Assets
During the nine month period ended December 31, 1998, the Trust classified as
nonearning two loans with principal balances totaling $1,521,655. Accrued
interest receivable of approximately $62,000 was written off. As with other
nonearning assets, those loans are expected to have a negative impact on future
earnings.
Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure loans of $314,197 at December 31, 1998
declined from the March 31, 1998 balance of $1,479,486 primarily because of the
sale of an assisted-living center located Sedona, Arizona which had a carrying
value of $976,000. The property was sold at a gain of $344,683; however, the
gain has been deferred because the Trust has provided interim financing for the
sale.
Year 2000
The following information which appears in the section constitutes Year 2000
Readiness Disclosure, pursuant to the Year 2000 ("Y2K") Information and
Readiness Disclosure Act.
The Year 2000 issue is the result of computer systems using a two-digit format,
as opposed to four digits, to indicate the year. Any of the Trust's computer
programs or hardware that have date-sensitive software or embedded chips may not
appropriately interpret dates beyond the year 1999. This could result in a
system failure, miscalculation or other computer errors causing disruptions of
operations.
The Trust's plan to address the issue involves the follow five phases:
awareness, assessment, remediation, testing and implementation. The plan also
involves communicating with external service providers to ensure that they are
taking appropriate action to remedy any Year 2000 issues. To date, the Trust has
completed its assessment of systems that could be affected by the Year 2000. As
part of the assessment phase, systems, which have the greatest impact, were
designated as mission critical systems.
Internal mission critical systems include the Trust's internal accounting and
information system. This system includes a small server-based local area network
and a small peer-to-peer network that uses commercially available operating and
networking software. The vendors (primarily Microsoft, Compaq and Gateway) have
certified this hardware and software as Year 2000 compliant. The Trust's primary
application programs (including general ledger, mortgage loan, shareholder, bond
financing and Secured Savings Certificate accounting modules) are customized.
During November 1998, an independent consultant performed an analysis to
determine if programs were Year 2000 compliant. The cost of the testing was less
than $1,000. The Trust has engaged the consultant to modify and test the
noncompliant programs. Remediation began about December 1998 and through
February 7, 1999 was 58% complete. The remaining programs will be modified and
tested in the remaining portion of the first quarter or in the second calendar
quarter of 1999. It is estimated that the cost to modify the files will range
from $6,000-$7,500 (excludes the cost to upgrade and replace systems used in the
ordinary course of business). Such costs will be charged to expense as incurred.
-7-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
Item 2. Management's Discussion and Analysis or Plan of Operation (Continued)
Year 2000 (Continued)
The Trust's operations are relatively simple. As far as essential vendors are
concerned, the primary ones are considered to be the Trust's primary bank (the
same bank serves as depositor and lender), and the electric and telephone
utility. The Trust has received reports from these providers regarding their
efforts to attain Y2K readiness.
The negative impact of large loan customers who have not dealt with the
implications of the Y2k problem on their operations could be serious to the
Trust. However, the Trust does not believe that the risk to its typical loan
customer is as great as it is to a normal commercial operation. This is due to
the fact that the source of loan payments generally made by all churches is from
individuals making contributions via cash or check to the church. Accordingly,
it is believed that most churches should not suffer adversely from the Y2K
issue. Nevertheless, the Trust plans to survey its loan customers with balances
over $100,000 in the first quarter of calendar 1999 to determine their Y2K
compliance.
The Trust believes that it has an effective program in place to resolve the Year
2000 issue in a timely manner and that it is unlikely that Year 2000 issues will
cause any significant problems with customer service or otherwise have a
material adverse impact on the Trust's operations or financial performance.
However, if appropriate modifications are not completed in a timely manner for
some unexpected reason, the Year 2000 issue could impact the Trust's operations.
In addition, disruptions in the economy generally resulting from Year 2000
issues could also materially impact the Trust. There can be no guarantee that
the systems of other companies on which the Trust is effected will be remediated
in a timely manner and not have any adverse impact on the Trust's operations.
Therefore, the Trust will develop contingency plans in 1999 to minimize the
impact on the Trust's operations if these organizations fail to remediate their
systems properly.
-8-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
(A Real Estate Investment Trust)
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits: None.
(b) Reports on Form 8-K: None
-9-
<PAGE>
CHURCH LOANS & INVESTMENTS TRUST
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHURCH LOANS & INVESTMENTS TRUST
DATE: February 12, 1999 BY:/s/ B.R. McMorries
-----------------------------
B.R. McMorries,
Chairman of the Board of
Trust Managers
DATE: February 12, 1999 BY:/s/ Kelly Archer
-----------------------------
Kelly Archer
Chief Financial Officer
-10-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
=======================================================================
This schedule contains summary financial information extracted from the
company's financial statements as of and for the 9 months ended
December 31, 1998 and is qualified in its entirety by reference to
such financial statements.
=======================================================================
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-START> Apr-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 144,467
<SECURITIES> 0
<RECEIVABLES> 41,040,947
<ALLOWANCES> 1,170,213
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 658,342
<DEPRECIATION> 472,477
<TOTAL-ASSETS> 40,554,286
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 20,607,376
<OTHER-SE> 23,347
<TOTAL-LIABILITY-AND-EQUITY> 40,554,286
<SALES> 3,387,308
<TOTAL-REVENUES> 3,387,308
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 72,586
<LOSS-PROVISION> 135,000
<INTEREST-EXPENSE> 864,147
<INCOME-PRETAX> 1,879,321
<INCOME-TAX> 449
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,878,872
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
