UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(Mark one)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED June 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 33-27664
CML CHURCH MORTGAGE, INC.
(Exact name of registrant as specified in its charter)
Wisconsin 02-0430692
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2727 Allen Parkway, Houston Texas 77019-2115
(Address of principal executive offices) (Zip Code)
(713) 529-0045
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) had filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ____
Indicate number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
At June 30, 1997 there were 52 shares of Common Stock, $1.00 par value,
outstanding.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements.
CML CHURCH MORTGAGE, INC.
Balance Sheets
June 30, 1997 and December 31, 1996
Assets June 30, December 31,
1997 1996
Unaudited
Cash $ 1,379 $ 1,787
Cash and cash equivalents, held by trustee 142,934 147,989
Total cash and cash equivalents 144,313 149,776
Mortgage loans, held by trustee 2,262,084 2,389,007
Receivable from sale of ORE 376,334
Prepaid interest 53,670 56,137
Accrued interest receivable 14,291 14,350
Deferred issuance costs 55,573 59,672
$ 2,529,931 $ 3,045,276
Liabilities and Stockholder's Equity
Mortgage-backed senior bonds $ 2,282,009 $ 2,789,624
Mortgage-backed subordinated bonds 204,100 204,100
Accrued interest payable 29,469 31,277
Residual interests 12,974 15,101
Other liabilities 3,387
Total liabilities 2,528,552 3,043,489
Stockholder's Equity:
Common stock, par value $1.00 per share;
56,000 shares authorized; 1,000 shares issued;
52 shares outstanding 1,000 1,000
Additional paid-in capital 24,000 24,000
Retained earnings 7,379 7,787
Total 32,379 32,787
Less cost of 948 shares reacquired and
held in treasury (31,000) (31,000)
Total stockholder's equity 1,379 1,787
$2,529,931 $3,045,276
See accompanying notes to the financial statements.<PAGE>
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Three Months Ended
June 30,
1997 1996
Revenues:
Interest on mortgage loans $ 58,439 $ 79,899
Reduction of residual interest (451) 9,039
Reinvestment earnings on cash and cash equivalents
held by trustee 1,264 1,984
Other interest income 7 83
Total revenues $ 59,259 $ 91,005
Expenses:
Interest 53,931 82,678
Loan servicing fees (565) 4,691
Amortization of deferred issuance costs 4,568 8,921
Other expenses 1,745 (5,356)
Total expenses 59,679 90,934
Net income $ (420) $ 71
See accompanying notes to the financial statements.
<PAGE>
CML CHURCH MORTGAGE, INC.
Statements of Income
(Unaudited)
For the Six Months Ended
June 30
1997 1996
Revenues:
Interest on mortgage loans $ 118,537 $ 164,581
Reduction of residual interest 1,126 9,347
Reinvestment earnings on cash and cash equivalents
held by trustee 4,970 4,340
Other interest income 18 317
Total revenues $ 124,651 $ 178,585
Expenses:
Interest 111,200 129,767
Loan servicing fees 6,266 9,556
Amortization of deferred issuance costs 4,099 14,941
Other expenses 3,495 24,016
Total expenses 125,060 178,280
Net income $ (409) $ 305
See accompanying notes to the financial statements.
<PAGE>
CML CHURCH MORTGAGE, INC.
Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
1997 1996
Cash flows from operating activities:
Net income $ (409) $ 305
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs 4,099 14,941
Decrease in receivable from sale of ORE 376,334 ---
(Increase) decrease in prepaid interest 2,467 24,858
Reduction of residual interest (2,127) (9,347)
Decrease (increase) in accrued int receivable 59 3,997
Increase (decrease) in accrued int payable (1,808) (9,501)
(Decrease) increase in other liabilities (3,387) 1,261
Net cash provided by (used in)
operating activities 375,228 26,514
Cash flows from investing activities:
Principal payments on mortgage loans 126,922 466,476
Net cash provided by investing activities 126,922 466,476
Cash flows from financing activities:
Principal payments on mtge-backed senior bonds (507,613) (378,000)
Payment to redeem stock ---- (31,000)
Net cash used in financing activities (507,613) (409,000)
Net increase (dec) in cash and cash equivalents (5,463) 83,990
Cash and cash equivalents, beginning of period 149,776 149,890
Cash and cash equivalents, end of period $ 144,313 $ 233,880
See accompanying notes to financial statements.
CML CHURCH MORTGAGE, INC.
Notes to Financial Statements (Unaudited)
June 30, 1997
(1) Basis of Presentation
The financial statements included herein have been prepared without audit by
CML Church Mortgage, Inc. ("the Company"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange Commission,
although the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements and
the notes thereto included in the Company's latest annual report on Form 10K.
On January 1, 1995 the Company adopted Financial Accounting Standards Board
Statement No. 114, Accounting by Creditors for Impairment of a Loan, which
requires that creditors value all loans for which it is probable that the
creditor will be unable to collect certain amounts due according to the terms of
the loan agreement at the present value of expected future cash flows,
discounted at the loan's effective interest rate, or observable market price of
the impaired loan or the fair value of the collateral if the loan is collateral
dependent. Management believes that loan carrying values and loan loss reserves
provided in this 10-Q Filing comply with the requirements of this Statement.
(2) Potential Problem Loans
The Company has been closely monitoring one mortgage loan collateralized by
first lien on church building and related properties with an unpaid principal
balances of $752,497 at June 30, 1997. Management has been concerned with the
borrowers' ongoing ability to meet debt service requirements. Management
presently believes that the principal balances and accrued interest, if any,
should be fully recoverable in the event of default, based on the most recent
appraisal values.
With respect to the loan with a recorded balance of $752,497, the church
made a payment of $300,000 on August 1. The Church is currently conducting
a bond issuance to refinance the mortgage. The payment of $300,000 has brought
payments current through August 1 and reduced the principal to $256,380. It is
anticipated that this loan will be paid off prior to year ending 1997.
In assessing the recoverability of the loan, management evaluates infor-
mation concerning the borrowers' financial condition and obtains updates of
appraisals as considered necessary. The one mortgage loan remaining in the
Series 1 pool was assessed for recoverability, and management determined that
no specific loan loss is necessary for that loan.
(3) Mortgage Loans, Held by Trustee
The mortgage loans, which serve as collateral for the mortgage-backed senior
and subordinated bonds, consist of fixed interest rate real estate loans
evidenced by promissory notes secured by mortgages or similar security interests
which create a first lien on church buildings and related properties. The
church buildings and properties securing the loans were located in twelve
different states across the United States. All of the mortgage loans contain
provisions prohibiting prepayment during periods ranging from approximately
36 months to 48 months from the date acquired by the Company. The mortgage
loans, when originated, generally had loan-to-value ratios ranging between 23%
and 65%. The ability and willingness of these borrowers to honor their repay-
ment commitments is generally dependent upon the financial condition of the
church obligated as mortgagor, which, in turn, depends on the contributions
received from members of the congregation.
(4) Other Real Estate Owned
On December 28, 1993, the Company accepted a deed-in-lieu of foreclosure on
a church property securing a loan with an outstanding principal balance
of $1,749,203. The property is located near the south central section of Los
Angeles, California.
<PAGE>
As a result of an appraisal received by the Company in November 1993,
management recorded a write-down of $534,203 in order to value the property
at fair market value less estimated cost to sell. This write-down was treated
as a direct reduction of the Series 1 Subordinated Bonds in the amount of
$128,873, the residual interest in the amount of $294,462 and the Series 1
Senior Bonds in the amount of $110,868. In 1994, management recorded a second
write-down of $124,921. This write-down was treated as a direct reduction of
the Series 1 Senior Bonds. In February 1996, the Company received an offer to
purchase the property for $720,000 (net of estimated costs to sell). As such,
an additional write-down of $360,000 was made in the 1995 financial statements
to record the value of the property at the current value. This offer was never
finalized.
In October 1996 the company received another offer for the sale of the
property "as is" for $520,000. Additionally, two settlements totaling $207,190
were received covering three incidents of substantial vandalism and theft of the
church property since the third week of February 1996. As a result of these
transactions, an additional $45,000 write-down was recorded in the third quarter
of 1996. The new carrying value of $675,000 reflects (1) the "as is" offer
price of $520,000 less estimated cost to sell of approximately $52,000 and
(2) the $207,190 settlement amounts for repairs which will not be required if
the property is sold "as is". An environmental inspection revealed asbestos
that was exposed by the vandalism incidents. The cost of the asbestos removal
was estimated at $150,000 further reducing the offer price to approximately
$370,000. As a result, an additional $123,666 write-down was recorded at
December 31, 1996.
The property was sold "as is" on December 30, 1996, for approximately
$370,000 and funds were received in January 1997.
(5) Mortgage-backed Senior Bonds
The following is a summary of the Series 1 Senior Bonds. The interest rate,
stated maturity and original principal amounts of these bonds, all dated
August 1, 1989, and the outstanding principal amounts at June 30, 1997 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 06/30/97
9.00 2/10/1994 $ 262,000 $ 70,648
9.10 8/10/1994 277,000 74,693
9.10 2/10/1995 329,000 88,715
9.10 8/10/1995 348,000 93,838
9.25 2/10/1996 406,000 109,478
9.25 8/10/1996 430,000 115,950
9.25 2/10/1997 493,000 132,937
9.75 8/10/2001 5,506,000 1,410,539
$ 8,051,000 $2,096,798
The above maturity schedule does not reflect the write-downs of Series 1
Senior Bonds totaling $730,790 which were recorded by the Company through
June 30, 1997 (see notes 3 and 4). Management of the Company believes that if
these write-downs are realized as a result of losses on the sale of other real
estate owned or foregone interest income on nonperforming mortgage loans, the
bondholders would incur losses on a pro-rata share of their investment in
relation to the total outstanding senior bonds.
The following is a summary of the Series 2 Senior Bonds. The interest rate,
stated maturity and original principal amounts of these bonds, all dated April
1, 1990 and the outstanding principal amount at June 30, 1997 follows:
Outstanding
Original Principal
Interest Stated Principal Amounts
Rate Maturity Amounts 03/31/97
9.85 10/10/1997 362,000 58,000
9.85 4/10/1998 382,000 58,000
10.50 4/10/2003 5,359,000 800,000
$ 6,103,000 $ 916,000
<PAGE>
Interest on senior bonds is payable semiannually. The amount to be paid
bondholders on each payment date is limited, however, to the funds available
in the interest payment account.
The stated maturities are the dates on which the senior bonds will be fully
paid, assuming no prepayments are received on the mortgage loans that serve
as collateral. The actual maturities of the senior bonds will be shortened by
prepayments on the mortgage loans and by any senior bond calls.
As a result of defaults on the mortgage loans collateralizing the Series 1
Senior Bonds, the bonds are no longer subject to scheduled or mandatory redemp-
tion. Mandatory redemptions may not be reinstated until either (a) such default
is cured or (b)the aggregate amount of the principal account plus the aggregate
outstanding principal amount of mortgage loans securing the bonds as to which no
default in payment of principal or interest has occurred and which has not been
cured exceeds the outstanding principal amount of the bonds, and the amount on
deposit in the interest payment account plus interest payable on the outstanding
principal amount of such nondefaulting mortgage loans (assuming no prepayments
of principal) is at least equal to the interest payable on the outstanding
principal amount of the bonds as may be reduced from time to time by redemption.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Second Quarter 1997 vs. Second Quarter 1996
Revenues for the second quarter of 1997 include interest income of $29,895
and $24,039 from mortgages backing the unrated Series 1 bonds and unrated Series
2 bonds, respectively. The corresponding revenues for the second quarter of
1996 include interest income of $37,532 and $42,367 from mortgages backing the
unrated Series 1 bonds and unrated Series 2 bonds, respectively. The lower
income for 1997 is attributed to the lower principal balances of mortgages
outstanding due to mortgage amortization and mortgage loan principal prepay-
ments. These prepayments result in lower net income because the profit produced
by the differences in the interest rate collected on the church mortgage loans
and the rate paid to bondholders decreases as mortgage loans are prepaid.
Bond redemptions totaled $38,333 and $378,000 during the second quarter of
1997 and 1996, respectively.
First Six Months 1997 vs. First Six Months 1996
Revenues for the first six months of 1997 include interest income of $62,572
and $48,629 from mortgages backing the unrated Series 1 bonds and unrated Series
2 bonds, respectively. The corresponding revenues for the first six months of
1996 include interest income of $76,063 and $88,518 from mortgages backing the
unrated Series 1 bonds and unrated Series 2 bonds, respectively. The lower
income for 1997 is attributed to the lower principal balances of mortgages
outstanding due to mortgage amortization and mortgage loan principal prepay-
ments. These prepayments result in lower net income because the profit produced
by the differences in the interest rate collected on the church mortgage loans
and the rate paid to bondholders decreases as mortgage loans are prepaid.
Bond redemptions totaled $507,615 and $1,787,547 during the first six months
of 1997 and 1996, respectively.
As of April 1, 1994, the lockout period for mortgage loan prepayment had
expired for all mortgage loans in the Series 2 pool. Because the interest rate
on the mortgage loans in the pool is higher than the prevailing rates for
similar loans, prepayments on principal on the mortgage loans are likely to
occur. Five mortgage loans with outstanding balances totaling $4,245,404 had
been prepaid as of June 30, 1994; in the first week of July 1994 another loan
with an outstanding balance of $928,325 was prepaid. These proceeds from
prepayment were used to make a $2,726,000 principal payment on senior mortgage-
backed bonds outstanding at April 10, 1994 and a $2,362,000 principal payment on
senior mortgage-backed bonds outstanding at July 10, 1994. In November 1994
another loan with an outstanding balance of $569,041 was prepaid; these proceeds
were used to prepay senior mortgage-backed bonds. Although $5,742,770 of
prepayments had been received through December 31, 1994, no assurance can be
given as to the rate of prepayments of the mortgage lans pledged as security
for the bonds, and therefore no assurance can be given as to the amount and
timing of redemptions of bonds or the time that any particular bond will
remain outstanding prior to its stated maturity.
Other Real Estate Owned
On December 28, 1993, the Company accepted a deed-in-lieu of foreclosure on
a church property securing a loan with an outstanding principal balance
of $1,749,203. The property is located near the south central section of Los
Angeles, California.
<PAGE>
As a result of an appraisal received by the Company in November 1993,
management recorded a write-down of $534,203 in order to value the property
at fair market value less estimated cost to sell. This write-down was treated
as a direct reduction of the Series 1 Subordinated Bonds in the amount of
$128,873, the residual interest in the amount of $294,462 and the Series 1
Senior Bonds in the amount of $110,868. In 1994, management recorded a second
write-down of $124,921. This write-down was treated as a direct reduction of
the Series 1 Senior Bonds. In February 1996, the Company received an offer to
purchase the property for $720,000 (net of estimated costs to sell). As such,
an additional write-down of $360,000 was made in the 1995 financial statements
to record the value of the property at the current value.
In October 1996, the Company received an offer for the sale of the property
"as is" for $520,000. Additionally, two settlements totaling $207,190 were
made covering three incidents of substantial vandalism and theft of the church
property since the third week of February 1996. As a result of these trans-
actions, an additional $45,000 write-down was recorded in the third quarter of
1996. The new carrying value of $675,000 reflects (1) the "as is" offer
price of $520,000 less estimated cost to sell of approximately $52,000 and (2)
the $207,190 settlement amounts for repairs which will not be required if the
property is sold "as is." An environmental inspection revealed asbestos that
was exposed by the vandalism incidents. The cost of the asbestos removal was
estimated at $150,000 further reducing the offer price to approximately
$370,000. As a result an additional $123,666 write-down was recorded at
December 31, 1996.
The property was sold "as is" on December 30, 1996, for $370,000 and the
funds were received in January 1997.
The Company has been closely monitoring one mortgage loan collateralized by
a first lien on church buildings and related properties with an unpaid principal
balances of $752,497 at June 30, 1997. Management has been concerned with the
borrowers' ongoing ability to meet debt service requirements. Management
presently believes that the principal balances and accrued interest, if any,
should be fully recoverable in the event of default,
based on the most recent appraisal values.
With respect to the loan with a recorded balance of $752,497, the church
made a $300,000 payment on August 1. The church is currently conducting a bond
issuance to refinance the mortgage. The payment of $300,000 has brought
payments current through August 1 and reduced the principal to $256,380. It is
anticipated that this loan will be paid off prior to year ending 1997.
In assessing the recoverability of the loan, management evaluates infor-
mation concerning the borrowers' financial condition and obtains updates
of appraisals as considered necessary. The one mortgage loan remaining in the
Series 1 pool was assessed for recoverability, and management determined that
no specific loan loss is necessary for that loan.
Liquidity and Capital Resources
The Company has no fixed assets nor any commitments outstanding to purchase
or lease any fixed assets.
Each series of mortgage-backed bonds was structured in a manner such that
principal and interest payments received from the related mortgage loans would
be sufficient to fund all interest and principal payments on the bonds in
addition to all other expenses of the Company. As discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations 1997
vs. 1996 interest income from mortgages backing the Series 1 bonds declined due
to foregone interest income of a nonaccrual mortgage loan transferred to real
estate owned coupled with yield losses due to mortgage loan prepayments.
Because of these matters, the Company did not make $88,715 of principal payments
scheduled for February 10, 1995 to holders of 9.10% unrated Series 1 senior
bonds, $93,839 of principal payments scheduled for August 10, 1995 to holders
of 9.10% unrated Series 1 senior bonds, $109,478 of principal payments scheduled
for February 10, 1996 and $115,950 of principal payments scheduled for August
10, 1996 to holders of 9.10% unrated Series 1 senior bonds. On February 10,
1997, an additional $132,937 of principal payments was not paid as scheduled
to the holders of 9.10% unrated Series 1 senior bonds. No assurance can be
given as to the rate of prepayment of the mortgage loans or the amount of fore-
gone interest income from loans in default which may occur in the future. The
bonds are non-recourse bonds, and the holders of the bonds may not look to the
Company or the Servicer, but may only look to the pool of mortgage loans and
other assets securing the bonds for payment of principal and interest thereon.
No mortgage loans securing any other series or bonds will be available to sat-
isfy claims of holders of the bonds.
<PAGE>
On May 7, 1996, the directors of CML Church Mortgage, Inc. consented to the
adoption of the following votes effective as of April 30, 1996, and in accord-
ance with the bylaws of this Corporation, unanimously consented to the adoption
of the following resolutions:
BE IT RESOLVED,
The corporation shall purchase from Christian Mutual
Life Insurance Company ("CML") Nine Hundred Forty-eight (948) shares of the
Corporation's stock presently owned by CML for a consideration of THIRTY-ONE
THOUSAND DOLLARS ($31,000.00) and such repurchased shares shall become treasury
shares of the Corporation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
As discussed in the Liquidity and Capital Resources
Section of Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations, interest income from mortgages backing the Series 1
bonds has been reduced since December 31, 1993 due to foregone interest income
of a nonaccrual mortgage loan transferred to real estate owned coupled with
yield losses due to mortgage loan prepayments. Because of these matters,
the Company did not make $70,648 of principal payments scheduled for February
10, 1994 to holders of 9% Unrated Series 1 senior bonds, $74,693 of principal
payments scheduled for August 10, 1994 to holders of 9.10% Unrated Series 1
senior bonds and $88,715 of principal payments scheduled for February 10, 1995
to holders of 9.10% Unrated Series 1 senior bonds, $93,838 of principal payments
scheduled for August 10, 1995 to holders of 9.10% Unrated Series 1 senior bonds,
$109,478 of principal payments scheduled for February 10, 1996 to holders of
9.25% Unrated Series 1 senior bonds, $115,950 of principal payments scheduled
for August 10, 1996 to holders of 9.25% Unrated Series 1 senior bonds and
$132,937 of principal payments scheduled for February 10, 1997 to holders
of 9.25% unrated Series 1 senior bonds.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the regi-
strant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date CML Church Mortgage, Inc.
August 25, 1997 By: Jane Sy
Jane Sy, President
August 25, 1997 By: Mary Lou Rainey
Mary Lou Rainey, Secretary
