As filed with the Securities and Exchange Commission on March 19, 1997
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the Fiscal Year Ended
December 31, 1996
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period
from __________ to __________.
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Commission File Number 33-87570
AMERICAN CHURCH MORTGAGE COMPANY
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(Exact name of small business issuer in its charter)
10237 Yellow Circle Drive
Minneapolis, MN 55343
Telephone: (612) 945-9455
I.R.S. Employer Identification No. 41-1793975
tate or other jurisdiction of incorporation or organization: Minnesota
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) 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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[ x ]
State issuer's revenues for its most recent fiscal year: $217,390
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock sold, or the average bid
and asked prices of such stock, as of a specified date within the past 60 days:
Not applicable.
The number of shares outstanding of the issuer's $.01 par value common stock
as of March 19, 1997 was: 362,574.
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DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
FORM 10-KSB
Page
INDEX No.
PART I
Item 1. Description of Business............................ 3
Item 2. Description of Property............................ 10
Item 3. Legal Proceedings.................................. 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ 10
Item 6. Management's Discussion and Analysis
or Plan of Operation............................... 12
Item 7. Financial Statements:.............................. 14
Balance Sheet
December 31, 1996 and 1995................. F-2
Statement of Operations
Years Ended December 31, 1996 and
December 31, 1995..................... F-4
Statements of Stockholders' Equity
December 31, 1996 and 1995................. F-5
Statements of Cash Flows
Years Ended December 31, 1996 and
December 31, 1995..................... F-6
Notes to Financial Statements.............. F-8
Item 8. Changes In and Disagreements With
Accountants on Accounting and Financial Disclosure. 14
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16 (a) of the
Exchange Act....................................... 14
Item 10. Executive Compensation............................. 16
Item 11. Security Ownership of Certain Beneficial Owners and
Management......................................... 17
Item 12. Certain Relationships and Related Transactions..... 18
Item 13. Exhibits and Reports on Form 8-K................... 20
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Incorporated as a Minnesota corporation on May 27, 1994, the
Company operates as a Real Estate Investment Trust ("REIT") and is engaged in
the business of making mortgage loans to churches and other non-profit religious
organizations. The Company makes loans throughout the United States. The
principal amount of such loans ranges from $100,000 to $1,000,000. The Company
may also invest up to 30% of its Average Invested Assets in mortgage secured
debt securities (bonds) issued by churches and other non-profit religious
organizations. As of the date of this Report, the Company has made loans to
seven churches in the aggregate amount of $2,802,000, with the average size
being $400,000. The Company has also purchased in the secondary market for
$46,412 (which includes $407 in accrued interest) First Mortgage Church Bonds in
the face amount of $50,000, and for $72,805 Second Mortgage Church Bonds in the
face amount of $100,000. Subject to supervision of the Company's Board of
Directors, the business of the Company is managed by Church Loan Advisors, Inc.
(the "Advisor"), which provides investment advisory and administrative services
to the Company. The principals of the Advisor include principals of American
Investors Group, Inc., an NASD member broker-dealer which served as
dealer-manager of the Company's public offering of its common stock. Two of the
Advisor's principals serve as directors of the Company.
RECENT PUBLIC OFFERING
On July 11, 1995, the Securities and Exchange Commission declared
effective the Company's offering of 2,000,000 common shares at a price of $10.00
per share ($20,000,000) under SEC File 33-87570. The Company's offering was
underwritten by its affiliate American Investors Group, Inc. ("American") on a
"best efforts" basis and terminated on November 8, 1996 with 335,481 shares
having been sold in the public offering. The Company plans to initiate another
public offering of its shares ($.01 par value common stock) in the near future,
however, the number of shares and underwriter have not yet been identified.
THE COMPANY'S BUSINESS ACTIVITIES
The Company's business is managed by Church Loan Advisors, Inc.,
Minneapolis, Minnesota (the "Advisor"). The Advisor's affiliate, American has
been engaged since January 1987, in the business of underwriting first mortgage
bonds for churches throughout the United States. In underwriting such bonds,
American reviews financing proposals, analyzes a prospective borrower's
financial capability, and structures, markets and sells, mortgage-backed bond
securities which are debt obligations (notes) of such borrowers to the investing
general public. The shareholders, officers and directors of American, have been
engaged in the business of church financing since 1983, with a combined
experience of approximately 53 years in this business. Since its inception,
American has underwritten approximately 120 church bond financings, in which
approximately $145 million in first mortgage bonds have been sold to public
investors. The average size of a single church bond financing underwritten by
American since its inception is approximately $1.5 million.
In the course of its business, American has identified a demand
from potential borrowers for smaller loans of $100,000 to $1,000,000. Because of
the regulatory and administrative expenses associated with the bond financing
business, American believes that the economic feasibility of this form of
financing has diminished for financings under $750,000. As a result, the Company
believes that many churches are forced to either forego the project for which
their financing request was made, fund their project from cash flow over a
period of time and at greater expense, or seek bank financing at terms not
always favorable or available to them, due to the historic reticence of banks
toward lending to churches for other than economic reasons. The Company's
objective is to provide a lending source to this segment of the industry,
capitalizing on the human resources available at American and the Advisor and
the marketing, advertising and general goodwill of American.
FINANCING BUSINESS
The Company's primary business is to make first mortgage loans in
amounts ranging from $100,000 to $1,000,000, to churches and other non-profit
religious organizations, and selecting and investing in mortgage-secured debt
instruments ("Church Bonds") issued by churches and other non-profit religious
organizations throughout the United States. The Company will apply essentially
all of its working capital (after adequate reserves determined by the Advisor)
toward making mortgage loans and investing in Church Bonds. The Company seeks to
enhance returns on investments on such loans by (i) emphasizing shorter-term
(0-5 years) and mid-term (5-15 years) loans and construction loans (although
there is no limit on the term of loans the Company will make); (ii) seeking
origination fees (i.e. "points") from the borrower at the outset of a loan and
upon any renewal of a loan; (iii) making a limited amount of higher-interest
rate second mortgage loans to qualified borrowers; and (iv) purchasing a limited
amount of mortgage- secured debt securities having various maturities issued by
churches and other non-profit religious organizations. The Company's policies
limit the amount of second mortgage loans to 20% of the Company's Average
Invested Assets on the date any second mortgage loan is closed and limit the
amount of mortgage-secured debt securities to 30% of Average Invested Assets on
the date of their purchase. All other mortgage loans made by the Company (or
Church Bonds purchased for investment) will be secured by a first mortgage (or
deed of trust) lien in favor of the Company. Although the Company will attempt
to make mortgage loans for
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terms of short (0-5 years) or medium (5-15 years) duration, and/or with variable
interest rate provisions, it may make longer-term fixed-rate loans in its
discretion, in order to reduce the risk to the Company of downward interest rate
fluctuations.
The Company's lending and investing operations, including
determination of a prospective borrower's or church bond issuer's financial
credit worthiness, are made on behalf of the Company by the Advisor. Employees
and agents of the Advisor conduct all aspects of the Company's business,
including (i) marketing and advertising; (ii) communication with prospective
borrowers; (iii) processing loan applications; (iv) closing the loans; (v)
servicing the loans; and (vi) administering the Company's day-to-day business.
In consideration of its services to the Company, the Advisor is entitled to
receive a fee equal to 1 1/4% annually of the Company's Average Invested Assets,
plus one-half of any origination fee charged to borrowers on mortgage loans made
by the Company payable monthly.
CURRENT FIRST MORTGAGE LOAN TERMS
The Company offers prospective borrowers a selection of "Loan
Types," which include a choice of fixed or variable rates of interest indexed to
the "prime" rate of interest, the U.S. Treasury 10-Year Notes, or other
generally recognized reference index, and having various terms to maturity,
origination fees and other terms and conditions. The Loan Types, interest rates
and fees offered and charged by the Company may from time-to-time be limited,
changed or otherwise unilaterally amended by the Advisor in its discretion as a
result of such factors (among others) as (i) balance of Loan Types in the
Company's portfolio; (ii) competition from other lenders; (iii) anticipated need
to increase the overall yield to the Company on its mortgage loan portfolio;
(vi) local and national economic factors; and (v) actual experience in
borrowers' demand for the loans. In addition, the Company may make mortgage
loans on terms other than those identified in its list of Loan Types. Subject to
change, modification or elimination at the complete discretion of the Company,
the following is a list of the Loan Types which the Company currently makes
available:
<TABLE>
<CAPTION>
LOAN TYPE INTEREST RATE (1) ORIGINATION FEE (2)
<S> <C> <C>
15 Year Term (3) Fixed @ Prime + 3.0% 4.0%
20 Year Term (3) Variable Annually @ Prime + 1.25% 3.0%
Renewable Term (4) Fixed @ Prime plus:
3 Year 2.00% 3.5%
5 Year 2.50% 3.5%
7 Year 2.75% 3.5%
Construction 1 Year Term Fixed @ Prime + 3.75% 2.0%
======================================= ================================================ =============================
</TABLE>
(1) "Prime" means the prime rate of interest charged to preferred
customers, as published by a federally chartered bank
identified by the Company.
(2) Origination fees are based on the original principal amount of
the loan and are collected from the borrower at the origination
and renewal of loans, one-half of which is payable directly
to the Advisor. See "The Advisory Agreement."
(3) Fully amortized repayment term.
(4) Renewable term loans are repaid based on a 20-year amortization
schedule, and are renewable at the conclusion of their initial
term for additional like terms up to an aggregated maximum of 20
years. A fee of 1% is charged by the Company upon the date of
each renewal. If renewed by the borrower, the interest rate is
adjusted upon renewal to Prime plus two percent (2%).
THE ABOVE TABLE DESCRIBES CERTAIN MATERIAL TERMS OF LOAN TYPES, INTEREST RATES
AND FEES CURRENTLY OFFERED AND CHARGED BY THE COMPANY. THE TABLE DOES NOT,
HOWEVER, PURPORT TO IDENTIFY ALL POSSIBLE LOAN TYPES, TERMS, RATES, AND FEES THE
COMPANY MAY OFFER FROM TIME-TO-TIME. THE COMPANY MAY DETERMINE AT ANY TIME TO
MODIFY THE TERMS IDENTIFIED ABOVE AND/OR OFFER LOAN TERMS DIFFERENT THAN ANY OF
THE LOAN TYPES, INTEREST RATES AND FEES IDENTIFIED ABOVE.
MORTGAGE LOAN PROCESSING AND UNDERWRITING
Mortgage loan applications are prepared and verified by the Advisor's
personnel in the Company's Loan Origination and Underwriting Department.
Verification procedures are designed to assure a borrower's qualification under
the Company's Financing Policies which are specifically identified herein and
include, among other things, obtaining; (i) written applications (and exhibits)
signed and authenticated by the prospective borrower in form and substance
dictated by the Company; (ii) financial statements in accordance with the
Company's Financing Policies; (iii) corporate records and other organizational
documents of the borrower; (iv) preliminary title report or commitment for
mortgagee title insurance, and (v) a real estate appraisal in accordance with
the Financing
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Policies. All appraisals and financial statements will be prepared by
independent third-party professionals who are pre-approved based on their
experience, reputation and education. Completed loan applications, together with
a written summary are then presented to the Company's Underwriting Committee
which is comprised of the Advisor's President and Vice-President, the Company's
President, Chairman and the Director of Underwriting of American. The Advisor
may arrange for the provision of mortgage title insurance and for the services
of professional independent third-party accountants and appraisers on behalf of
borrowers in order to achieve pricing efficiencies on their behalf and to assure
the efficient delivery of title commitments, preliminary title reports and title
policies, and financial statements and appraisals meeting the Company's
underwriting criteria. The Advisor may arrange for the direct payment for such
professional services and for the direct reimbursement to it of such
expenditures by borrowers and prospective borrowers. Upon closing and funding of
mortgage loans, a negotiable origination fee based on the original principal
amount of each loan may be charged, of which one-half will be payable to the
Advisor.
LOAN COMMITMENTS
Subsequent to approval by the Company's Underwriting Committee, and prior
to funding a loan, the Company may issue a loan commitment to qualified
applicants. A modest loan commitment fee may be charged by the Company.
Commitments indicate the loan amount, origination fees, closing costs,
underwriting expenses (if any), funding conditions, approval expiration dates
and interest rate and other terms. Commitments generally set forth a
"prevailing" interest rate that is subject to change in accordance with market
interest rate fluctuations until the final loan closing documents are prepared,
at which time the Company commits to a stated interest rate. In certain cases
the Company may establish ("lock in") interest rate commitments up to sixty (60)
days from the commitment to closing; however, interest rate commitments beyond
sixty days will not normally be issued unless the Company receives an
appropriate fee premium based upon the assessment of the risk associated with a
longer period.
LOAN PORTFOLIO MANAGEMENT
The Company's portfolio of mortgage loans and Church Bonds is managed and
serviced by the Advisor in accordance with the Advisory Agreement. The Advisor
is responsible for all aspects of the Company's mortgage loan business,
including closing and recordation of mortgage loans; collecting payments of
principal and interest payments regularly and upon the maturity of a loan;
enforcing loan payments and other lender's requirements; periodic review of each
mortgage loan file and determination of its reserve classification; and
exercising the Company's remedies in connection with any defaulted or
non-performing loans. Fees and costs of attorneys, insurance, bonds and other
direct expenses incurred in connection with the exercise of such remedies are
the responsibility of the Company, although they may be recouped from the
borrower in the process of pursuing the Company's remedies. The Advisor will not
receive any additional compensation for services rendered in connection with
loan portfolio management or exercising the Company's remedies in the event of a
loan default.
LOAN FUNDING AND BANK BORROWING
The Company's mortgage loans (and purchases of Church Bonds) will be
funded with available cash resources and, at the discretion of the Advisor, with
borrowings under a line of credit with a commercial lender or bank. The Company
does not presently have a line of credit, and does not presently intend to
obtain one. Nonetheless, the Company may borrow up to 50% of the value of its
Average Invested Assets to make loans regardless of the Company's capacity to
(i) sell the Shares on a continuing basis, or to (ii) reposition assets from the
maturity or early repayment of mortgage loans in its portfolio. Initially, the
cash resources available to the Company will be limited to the net proceeds from
the sale of the Shares, minus reserves for operating expenses, and bad-debt
reserves, as determined by the Advisor. As the business of the Company develops
and over the course of time, cash resources available to the Company for lending
purposes will include, in addition to the net proceeds from future sales of
Shares (if any), (i) principal repayments from borrowers on loans made by the
Company, (ii) dividends reinvested in the Company by shareholders electing the
Company's Dividend Reinvestment Plan, and (iii) funds (if any) borrowed under
any line of credit arrangement, if obtained.
THE ADVISORY AGREEMENT
The Company has entered into a contract with the Advisor (the "Advisory
Agreement") under which the Advisor will furnish advice and recommendations
concerning the affairs of the Company, provide administrative services to the
Company and manage the Company's day-to-day affairs. Among other things, the
Advisor: (i) serves as the Company's mortgage loan underwriter and advisor in
connection with its primary business of making loans to churches; (ii) advises
and selects Church Bonds to be purchased and held for investment by the Company;
(iii) provides marketing and advertising and generates loan leads directly and
through its Affiliates; (iv) on behalf of the Company, deals with borrowers,
lenders, banks, consultants, accountants, brokers, attorneys, appraisers,
insurers and others; (v) supervises the preparation, filing and distribution of
tax returns and reports to governmental agencies and to Shareholders and acts on
behalf of the Company in connection with Shareholder relations; (vi) provides
office space and personnel as required for the performance of the foregoing
services as Advisor; and (vii) as requested by the Company, makes
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reports to the Company of its performance of the foregoing services and furnish
advice and recommendations with respect to other aspects of the business of the
Company. In performing its services under the Advisory Agreement, the Advisor
may use facilities, personnel and support services of its Affiliates. Expenses
such as legal and accounting fees, stock transfer agent, registrar and paying
agent fees, and dividend reinvestment agent fees are direct expenses of the
Company and are not provided for by the Advisor as part of its services.
The Advisory Agreement is renewable annually by the Company for one-year
periods, subject to a determination by the Company, including a majority of the
Independent Directors, that the Advisor's performance has been satisfactory and
that the compensation paid the Advisor by the Company has been reasonable. The
Advisory Agreement may be terminated with or without cause by the Company on 60
days written notice. Upon termination of the Advisory Agreement by either party,
the Advisor may require the Company to change its name to a name that does not
contain the word "American," "America" or the name of the Advisor or any
approximation or abbreviation thereof, and that is sufficiently dissimilar to
the word "America" or "American" or the name of the Advisor as to be unlikely to
cause confusion or identification with either the Advisor or any person or
entity using the word "American" or "America" in its name, however, the Company
may continue to use the word "church" in its name. In addition, upon non-renewal
or termination of the Advisory Agreement by the Company, the Advisor may be
entitled to a termination fee. The Company's Directors shall determine that any
successor Advisor possess sufficient qualifications to perform the advisory
function for the Company and justify the compensation provided for in its
contract with the Company.
Pursuant to the Advisory Agreement, the Advisor is required to pay all of
the expenses it incurs in providing services to the Company, including, but not
limited to, personnel expenses, rental and other office expenses, expenses of
Directors, officers and employees of the Advisor (except out-of-pocket expenses
of such persons who are directors or officers of the Company incurred in their
capacities as Directors and officers of the Company), and all of its overhead
and miscellaneous administrative expenses relating to performance of its
functions under the Advisory Agreement. The Company will be required to pay all
other expenses of the Company, including the costs and expenses of reporting to
various governmental agencies and the Shareholders and of conducting its
operations as a mortgage lender, fees and expenses of appraisers, directors,
auditors, outside legal counsel and transfer agents, and costs directly relating
to closing of loan transactions.
In the event that Total Operating Expenses of the Company exceed in any
calendar year the greater of (a) 2% of the Average Invested Assets of the
Company or (b) 25% of the Company's net income, the Advisor is obligated to
reimburse the Company, to the extent of its fees for such calendar year, for the
amount by which the aggregate annual operating expenses paid or incurred by the
Company exceed the limitation. The Independent Directors may, upon a finding of
unusual and non-recurring factors which they deem sufficient, determine that a
higher level of expenses is justified in any given year.
The Company's Bylaws provide that the Independent Directors are to
determine at least annually the reasonableness of the compensation which the
Company pays to the Advisor. Factors to be considered in reviewing the Advisory
Fee include the size of the fees of the Advisor in relation to the size,
composition and profitability of the Company's loan portfolio, the rates charged
by other investment advisors performing comparable services, the success of the
Advisor in generating opportunities that meet the Company's investment
objectives, the amount of additional revenues realized by the Advisor for other
services performed for the Company, the quality and extent of service and advice
furnished by the Advisor, the quality of the Company's investments in relation
to investments generated by the Advisor for its own account, if any, and the
performance of the Company's investments.
The Advisory Agreement provides for indemnification by the Company of the
Advisor and each of its directors, officers and employees against expense or
liability arising out of such person's activities in rendering services to the
Company, provided that the conduct against which the claim is made was
determined by such person, in good faith, to be in the best interests of the
Company and was not the result of negligence or misconduct.
FINANCING POLICIES
The Company's business of mortgage lending to churches and other
non-profit religious organizations is managed in accordance with and subject to
the policies, guidelines, restrictions and limitations identified herein
(collectively, the "Financing Policy"). The intent of the Financing Policy is to
identify for its Shareholders not only the general business in which the Company
is involved, but the parameters of the Company's lending business. These
policies may not be changed (except in certain immaterial respects by majority
approval of the Board of Directors) without the approval of a majority of the
Independent Directors, and the holders of a majority of the outstanding Shares
of the Company at a duly held meeting for that purpose:
(i) Loans made by the Company will be limited to churches and
other non-profit religious organizations, and will be secured
by mortgages. The total principal amount of all second
mortgage loans funded by the Company shall be limited to 20%
of Average Invested Assets. All other loans will be first
mortgage loans.
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(ii) The loan amount cannot exceed 75% of the value of the real
estate and improvements securing each loan, such value being
determined based on a written appraisal prepared by an
appraiser acceptable to the Advisor. On loans over $500,000,
the Company will require a written appraisal certified by a
member of the Appraisal Institute ("MAI"), or a
state-certified appraiser.
(iii) An ALTA (American Land Title Association) or equivalent
Mortgage Title Policy must be furnished to the Company by the
borrower insuring the mortgage interest of the Company.
(iv) The borrower's long-term debt (including the proposed loan)
cannot exceed four (4) times the borrower's gross income for
the previous twelve (12) months.
(v) The borrower must furnish the Company with financial
statements (balance sheet and income and expense statement)
for the last two (2) complete fiscal years and a current
financial statement as of and for the period within ninety
(90) days of the loan closing date. On loans less than
$500,000, the last complete fiscal year must be reviewed by an
independent accounting firm. On loans in excess of $500,000,
the last complete fiscal year financial statements must be
audited by an independent auditor. Borrowers in existence for
less than three fiscal years must provide financial statements
since inception. No loan will be extended to a borrower in
operation less than two years (24 months) absent express
approval by the Company's Board of Directors.
(vi) In its discretion, the Advisor, on behalf of the Company, may
require the borrower to arrange for automatic electronic or
drafting of monthly payments.
(vii) In its discretion, the Advisor, on behalf of the Company, may
require (i) key-man life insurance on the life of the senior
pastor of a church; (ii) personal guarantees of church members
and/or affiliates; and (iii) other security enhancements for
the benefit of the Company.
(viii) The borrower must agree to provide to the Company annual
reports (including financial statements) within 120 days of
each fiscal year end beginning with the fiscal year end next
following the funding of the loan.
(ix) In its discretion, the Advisor, on behalf of the Company, may
require the borrower to grant to the Company a security
interest in all personal property located and to be located
upon the mortgaged premises (excluding property leased by the
borrower).
These Financing Policies are in addition to the prohibited
investments and activities identified hereinafter and which are set forth in the
Company's By Laws.
PROHIBITED INVESTMENTS AND ACTIVITIES
The Company's Bylaws impose certain prohibitions and restrictions on
various investment practices and activities of the Company, including
prohibitions against:
(i) Investing more than 10% of its total assets in unimproved
real property or mortgage loans on unimproved real
property;
(ii) Investing in commodities or commodity futures contracts
other than "interest rate futures" contracts intended only
for hedging purposes;
(iii) Investing in mortgage loans (including construction loans)
on any one property which in the aggregate with all other
mortgage loans on the property would exceed 75% of the
appraised value of the property unless substantial
justification exists because of the presence of other
underwriting criteria;
(iv) Investing in mortgage loans that are subordinate to any
mortgage or equity interest of the Advisor or the Directors
or any of their Affiliates;
(v) Investing in equity securities;
(vi) Engaging in any short sales of securities or in trading, as
distinguished from investment activities;
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(vii) Issuing redeemable equity securities;
(viii) Engaging in underwriting or the agency distribution of
securities issued by others;
(ix) Issuing options or warrants to purchase its Shares at an
exercise price less than the fair market value of the
Shares on the date of the issuance or if the issuance
thereof would exceed 10% in the aggregate of its
outstanding Shares;
(x) Issuing debt securities unless the debt service coverage
for the most recently completed fiscal year, as adjusted
for known changes, is sufficient to properly service the
higher level of debt;
(xi) Investing in real estate contracts of sale unless such
contracts are in recordable form and are appropriately
recorded in the chain of title;
(xii) Selling or leasing to the Advisor, a Director or any
Affiliate thereof unless approved by a majority of
Directors (including a majority of Independent Directors),
not otherwise interested in such transaction, as being fair
and reasonable to the Company;
(xiii) Acquiring property from any Advisor or Director, or any
Affiliate thereof, unless a majority of Directors
(including a majority of Independent Directors) not
otherwise interested in such transaction approve the
transaction as being fair and reasonable to the Company and
at a price to the Company no greater than the cost of the
asset to such Advisor, Director or any Affiliate thereof,
or if the price to the Company is in excess of such cost,
that substantial justification for such excess exists and
such excess is reasonable. In no event shall the cost of
such asset to the Company exceed its current appraised
value;
(xiv) Investing or making mortgage loans unless a mortgagee's or
owner's title insurance policy or commitment as to the
priority of the mortgage or condition of title is obtained;
or
(xv) Issuing its shares on a deferred payment basis or other
similar arrangement.
The Company does not intend to invest in the securities of other
issuers for the purpose of exercising control, to engage in the purchase and
sale of investments other than as described in this Report, to offer securities
in exchange for property unless deemed prudent by a majority of the Directors,
to repurchase or otherwise reacquire Shares except as may be necessary to
maintain qualification as a real estate investment trust under the Code, to
issue senior securities or to make loans to other persons except in the ordinary
course of its business as described herein.
The Company in the future will not make loans to or borrow from, or
enter into any contract, joint venture or transaction with, any director or
officer of the Company, the Advisor or any Affiliate of any of the foregoing
unless a majority of the Directors, including a majority of the Independent
Directors, approves the transaction as fair and reasonable to the Company and
the transaction is on terms and conditions no less favorable to the Company than
those available from unaffiliated third parties. Any investment by the Company
in any property, mortgage or other real estate interest pursuant to a
transaction with the Advisor or any Directors or officers thereof will be based
upon an appraisal of the underlying property from an independent qualified
appraiser selected by the Independent Directors and will not be made at a price
greater than fair market value as determined by such appraisal.
COMPETITION
The real estate financing industry generally is highly competitive.
The Company will compete within its geographic areas of operation with a wide
variety of investors, including banks, savings and loan associations, insurance
companies, pension funds and fraternal organizations which may have investment
objectives similar to those of the Company. A number of these competitors have
greater financial resources, larger staffs and longer operating histories than
those of the Company. The Company competes principally by limiting its business
"niche" to lending to churches and other non-profit religious organizations,
offering loans with competitive and flexible terms, and emphasizing the
expertise of the Company in the specialized industry segment of lending to
churches and other religious organizations.
EMPLOYEES
The Company has no employees, as it will be managed by the Advisor on
a "turn-key" basis using employees of the Advisor and/or its affiliates. At
present, certain officers and directors of American and the Advisor are
providing services to the Company
8
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at no charge and which will not be reimbursed to them. These services include,
among others, legal and analytic services relating to the development of the
Company's business plan, organization and incorporation of the Company,
development and preparation of reports to be filed under the Securities Exchange
Act, and development and drafting of proprietary forms and documents to be
utilized by the Advisor in connection with the Company's business operations.
Subject to the supervision of the Company's Board of Directors, the
business of the Company is managed by Church Loan Advisors, Inc. (the
"Advisor"), which provides investment advisory and administrative services to
the Company and is owned by V. James Davis, David G. Reinhart and Philip J.
Myers. Mr. Reinhart and Mr. Davis are officers and directors of the Company and
directors of the Advisor. Philip J. Myers is President of the Advisor and of
American. The Advisor is not a registered advisor under the Investment Advisor's
Act of 1940, nor is the Company a registered investment company under the
Investment Company Act of 1940. As of the date of this Report, the Advisor
employees three persons on a part-time or other basis. The Company does not
presently expect to directly employ any persons in the foreseeable future, since
all administrative functions and operations will be contracted for through the
Advisor. However, legal and accounting services to the Company will be provided
by outside professionals and paid for directly by the Company. See Item 11
"Security Ownership of Certain Beneficial Owners and Management," and Item 12
"Certain Relationships and Related Transactions."
(Balance of page intentionally left blank)
9
<PAGE>
OPERATIONS
The Company's operations currently are located in the 8,400 square
foot offices of the Dealer Manager, American Investors Group, Inc., 10237 Yellow
Circle Drive, Minneapolis, Minnesota 55343. These facilities are owned by DRM
Holdings, Inc. The Company is not charged any rent for its use of these
facilities, or for its use of copying services, telephones, facsimile machines,
postage service, office supplies or employee services, as these costs are
covered by the advisory fee paid to the Advisor. The Company believes that the
terms of this arrangement are at least as favorable to the Company as those
obtainable from unaffiliated third parties in arm's-length discussions.
ITEM 2. DESCRIPTION OF PROPERTY
SHARED OPERATIONS FACILITIES
The Company's operations are located in the leased offices of
American Investors Group, Inc., in Minneapolis, Minnesota. It is expected that
for the foreseeable future the Company's operations will continue to be housed
in these or similar leased premises along with American's operations and those
of its Affiliates. The Company is not directly charged for rent, nor does it
incur other costs relating to such leased space, since the Advisor is including
this expense in the Advisory Fee. The office building is owned by American's
parent corporation, DRM Holdings, Inc.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
As of March 19, 1997, 342,574 shares of the Company's common shares
were issued and outstanding in the public, excluding 20,000 shares owned by the
Company's initial shareholder DRM Holdings, Inc. The Company's initial public
offering (SEC file 33-87570) which began July 11, 1995 was closed November 8,
1996 with 335,481 shares having been sold. At this time, however, there is no
organized secondary market for the Company's shares.
(b) Holders
As of March 19, 1997, there were (281) record holders of the
Company's $.01 par common stock, including DRM Holdings, Inc., a Minnesota
corporation, which owns 20,000 shares for which it paid $200,000 ($10.00 per
share).
(Balance of page intentionally left blank)
10
<PAGE>
(c) Dividends
The Company has paid dividends on its common stock as follows:
<TABLE>
<CAPTION>
Distribution Date: For Quarter Ended: Dollar Amount Distributed Annualized Yield Per
Per Share: Share Represented:
<S> <C> <C> <C>
July 30, 1996 June 30, 1996 $.1927 9.25%*
October 30, 1996 September 30, 1996 $.23125 9.25%
January 30, 1997 December 31, 1996 $.240625 9.625%
<FN>
*Represents a 75 day operating quarter (April 15th to June 30th, 1996)
</FN>
</TABLE>
As a Real Estate Investment Trust, the Company intends to make
regular quarterly distributions to Shareholders in an amount equal to at least
95% of the Company's "real estate investment trust taxable income." Such amount
will be estimated for the first three quarters of each fiscal year and adjusted
annually based upon the Company's audited year-end financial report. Cash
available for distribution to Shareholders will be derived primarily from the
interest portion of monthly mortgage payments received from churches borrowing
money from the Company, from origination and other fees paid to the Company by
borrowers in connection with such loans, interest income from mortgage-backed
securities issued by churches and other non-profit religious organizations
purchased and held by the Company for investment purposes, and earnings on any
Permitted Temporary Investments made by the Company. All dividends will be paid
by the Company at the discretion of the Board of Directors and will depend upon
the earnings and financial condition of the Company, maintenance of real estate
investment trust status, funds available for distribution, results of
operations, economic conditions, and such other factors as the Board of
Directors deems relevant. Further, during the start-up phase of its operations,
the capital of the Company, which was comprised primarily of the proceeds from
the sale of the Shares in its initial public offering, were held in relatively
low-yielding secure investments pending their application to fund loans made by
the Company. During any period where shares of the Company's common stock are
being offered and sold and the proceeds therefrom accumulated for the purpose of
funding loans made by the Company, the relative yield generated by such capital,
and, thus, dividends (if any) to Shareholders, could be less than expected once
the Company has fully invested such funds in accordance with its business plan.
The Company intends to ameliorate to some extent the possibility of low yields
during the periods where it is selling shares by (i) collecting from borrowers
an origination fee at the time a loan is made (of which one-half of any
origination fee charged in connection with a loan is paid directly to the
Advisor as additional compensation--the other one-half is payable to the
Company), and (ii) timing its lending activities to coincide as much as possible
with sales of the Shares. However, there can be no assurance that either or both
of these strategies will improve current yields to Shareholders in periods of
the Company's business operations when capital is being raised through the sale
of additional common shares. In order to qualify for the beneficial tax
treatment afforded real estate investment trusts by the Internal Revenue Code,
the Company is required to pay dividends to holders of its Shares in annual
amounts which are equal to at least 95% of the Company's "real estate investment
trust taxable income." The Company intends to distribute all or a portion of
such income to the Shareholders on a quarterly basis, subject to (i) limitations
imposed by applicable state law, and (ii) the factors identified above. The
portion of any dividend that exceeds the Company's earnings and profits will be
considered a return of capital and will not currently be subject to federal
income tax to the extent that such dividends do not exceed a Shareholder's basis
in the Shares.
Funds available to the Company from the repayment of principal
(whether at maturity or otherwise) of loans made by the Company, or from sale or
other disposition of any properties or any of its other investments may be
reinvested in additional loans to churches, invested in mortgage-backed
securities issued by churches or other non-profit organizations, or in Permitted
Temporary Investments, rather than distributed to the Shareholders. The Company
can pass through the capital gain character of any income generated by computing
its net capital gains and designating a like amount of its distribution to the
Shareholders as capital gain dividends. The distribution requirement to maintain
qualification as a real estate investment trust does not require distribution of
net capital gains, if generated. Thus, the Company has a choice of whether to
distribute any such gains. Undistributed net capital gains (if any) will be
taxable to the Company. The Board of Directors, including a majority of the
Independent Directors, will determine whether and to what extent the proceeds of
any disposition of property will be distributed to Shareholders.
11
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion regarding the financial statements of the
Company should be read in conjunction with the financial statements and notes
thereto included in this Report beginning at page F-1.
(A) PLAN OF OPERATION
The Company was founded in May 1994, began a "best efforts" offering
of its common stock on July 11, 1995, and commenced active business operations
on April 15, 1996 after completion of the "Minimum Amount" in its public
offering (described below). Consequently, for the years ended December 31, 1994
and 1995, the Company had no operating revenues, and expenses were limited to
organizational and offering-related costs.
On July 11, 1995, the Securities and Exchange Commission declared
effective the Company's offering of 2,000,000 common shares at a price of $10.00
per share. The Company achieved the Minimum Offering of at least 200,000 shares
($2,000,000) sold to not less than 100 individuals (the "Minimum Offering") on
April 15, 1996. Until the Minimum Offering was achieved, the Company could not
commence its active business of making mortgage loans to churches. Consequently,
business operations from Inception (May 27, 1994) to completion of the Minimum
Offering (April 15, 1996) were limited to daily business organizational efforts,
activities relating to the offering, reviewing potential candidates for church
mortgage loans to be made by the Company once the Minimum Offering was achieved,
and conducting informational meetings with brokers and broker-dealers identified
to the Company by the Dealer/Manager--American, an affiliate of the Company. As
of such date the Company had sold 335,481 shares to approximately 281
individuals, not including 20,000 shares ($200,000) previously purchased by the
Company's initial shareholder -- DRM Holdings, Inc.
Between the date upon which the Company began active business
operations (April 15, 1996), and as of the date of this Report, the Company has
made loans to seven churches in the aggregate amount of $2,802,000, with the
average size being $400,000. The Company has also purchased in the secondary
market for $46,412 (which includes $407 in accrued interest) First Mortgage
Church Bonds in the face amount of $50,000, for $72,805 Second Mortgage Church
Bonds in the face amount of $100,000. Funding of additional first mortgage loans
is expected to continue on an on-going basis as the Company's investable assets
become available through (i) the sale of additional shares in a subsequent
public offering; (ii) prepayment and repayment at maturity of existing loans;
(iv) borrowed funds; and (v) dividends reinvested under the Company's Dividend
Reinvestment Plan.
The public offering of the Company's shares ended November 8, 1996. The Company
plans to initial another public offering of its shares ($.01 par value common
stock) in the near future, however the number of shares and underwriter have not
yet been identified.
(B) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FINANCIAL CONDITION
During the year ended December 31, 1996 total assets of the Company
increased by $3,171,329 due primarily to sale of the Company's common stock.
Total liabilities increased by $85,343 due to deferred income and dividends
declared but not yet paid as of December 31, 1996.
RESULTS OF OPERATIONS
The Company commenced active business operations on or about April
15, 1996, therefore, results of operations through December 31, 1996 are
reflective of approximately 255 days of operations. As of December 31, 1996, the
Company had funded seven first mortgage loans to churches for an aggregate
amount of $2,685,288 and purchased $50,000 principal amount of First Mortgage
Church Bonds for a purchase price of $46,412 (which includes $407 in accrued
interest), and for $72,805 Second Mortgage Church Bonds in the face amount of
$100,000. The loans made by the Company range in interest rate charged to the
borrowers from 9.25% for annually adjustable, 20 year amortized loans, to 11.25%
for 15 year fixed interest rate loans. As of December 31, 1996, the average,
principal-adjusted interest rate on the Company's portfolio of loans was 10.86%.
The Company's portfolio of bonds has a average current yield of 11.68% .
Net operating income for the Company's fiscal year ended December 31,
1996 (reflecting 255 days of operations) was $145,386 on total revenues of
$217,390. Revenues for the fiscal year included $37,477 of "Escrow Interest"
earned on proceeds of the Company's common stock offering held in escrow pending
achievement of the sale of the Minimum Amount which occurred just prior to April
15, 1996. This escrow interest revenue was disbursed to purchasers of the
Company's common shares
12
<PAGE>
during the quarter ending June 30, 1996 based on the duration that their
investment was held in escrow, which disbursement is reflected in the Company's
Statement of Operations for the fiscal year ending December 31, 1996. Interest
income earned on the Company's portfolio of loans was $152,258, reflecting the
fact that its loans were originated at various dates during the year and,
therefore, did not all accrue interest for the entire fiscal year. Excluded from
revenue for the year ended December 31, 1996 is $43,630 of origination income,
or "points," received by the Company, recognition of which under generally
accepted accounting principles ("GAAP") must be deferred over the expected life
of each loan. However, under tax principles, origination income is recognized in
the period received. Accordingly, because the status of the Company as a real
estate investment trust requires, among other things, the distribution to
shareholders of at least 95% of "Taxable Income," the dividends declared and to
be paid to Shareholders for the quarters ended June 30, 1996, September 30, 1996
and December 31, 1996 includes origination income even though it is not
recognized in its entirety for the period under GAAP.
The Company's Board of Directors declared dividends of $.1927 for
each share held of record on June 30, 1996, $.23125 for each share held of
record September 30, 1996, and $.240625 for each share held of record on
December 31, 1996. During the Company's public offering, dividends were computed
and paid to each Shareholder based on the number of days during a quarter that
the Shareholder owned his or her shares. Based on the 75 days of operation for
the quarter ending July 30, 1996 and the subsequent quarters ended September 30,
1996 and December 31, 1996 , the dividends paid represented a 9.25%, 9.25% and
9.625% annualized yield to Shareholders respectively.
Total assets of the Company increased from $243,648 as of December
31, 1995 to $3,414,977 as of December 31, 1996, primarily as a result of the
sale and issuance of the Company's common stock pursuant to its public offering,
the proceeds of which were deployed into mortgage loans, church bonds purchased
in the secondary market, and cash & cash equivalent money market obligations.
Shareholders' Equity rose from $194,155 to $3,280,141 for the same reason.
Company liabilities at the end of the fiscal year ending December 31, 1996 are
primarily comprised of a "Deferred Income" item, reflecting the practice of the
Company of recognizing its origination income -- fees charged to borrowers at
the commencement of its loans -- over the life of each loan and dividends
declared as of December 31, 1996 but not yet paid.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1996 the Company had no assets other than the $200,000
cash paid by its promoter, DRM Holdings, for the 20,000 shares owned by it
($10.00 per share) and had incurred no material obligations, other than
accumulated and unpaid expenses pertaining to the public offering. The initial
$200,000 capital contribution by the promoter was partially used to pay legal
and accounting costs relating to the organization of the Company, Independent
Director's fees and certain professional and other fees and costs associated
with the Company's initial public offering. On or about April 15, 1996, the
Company recorded additional paid-in capital of $2,019,205 in connection with the
sale of the Company's common stock in its public offering and began active
business operations. As of December 31, 1996, the Company had recorded a total
of $3,306,437 in additional paid in capital, which includes the initial $200,000
investment by the promoter DRM Holdings.
The Company's revenue is derived principally from interest income,
and secondarily, origination fees and renewal fees generated by mortgage loans
made by it. The Company also earns income through interest on funds that are
invested pending their use in funding mortgage loans or distributions of
dividends to its Shareholders, and on income generated on church bonds it may
purchase and own. The Company generates revenue through (i) permitted temporary
investments of the net proceeds from the sale of the shares, and (ii)
implementation of its business plan of making mortgage loans to churches and
other non-profit religious organizations. The principal expenses of the Company
will be Advisory Fees, legal and accounting fees, communications costs with its
Shareholders, and the expenses of its stock transfer agent, registrar and
dividend reinvestment agent.
The Company's future capital needs are expected to be met by (i)
additional sale of its shares to the public (ii) prepayment, repayment at
maturity and renewal of mortgage loans made by the Company, and (iii) borrowed
funds. The Company believes that the "rolling" effect of mortgage loans
maturing, together with dividends reinvested under the Company's Dividend
Reinvestment Plan, will provide a supplemental source of capital to fund its
business operations in future years. Nevertheless, the Company believes that it
may be desirable, if not necessary, to sell additional shares of common stock,
in order to enhance its capacity to make mortgage loans on a continuous basis.
The Company currently plans a second public offering of its shares sometime in
the early second quarter of 1997. There can be no assurance that the Company
will be able to raise additional capital on terms acceptable for such purposes.
Although the Company may borrow funds in an amount not to exceed 50% of its
Average Invested Assets in order to increase its lending capacity, it has no
present intention of doing so, nor has it secured a source for such borrowing.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Financial Statements required by this item can be found beginning on
page F-1 of this Form-10KSB and are deemed incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Changes in Company's Certifying Accountants.
Not Applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
(a) Directors are elected for a term expiring at the next annual
meeting of the Company's Shareholders and serve for one-year terms and until
their successors are duly elected and qualified. Officers of the Company serve
at the discretion of the Company's Board of Directors. Among other requirements,
in order to maintain its REIT status, a majority of the Company's directors must
be "independent." The Company's executive officers and Directors are as follows:
<TABLE>
<CAPTION>
Name Age Office Director Since
<S> <C> <C> <C>
V. James Davis 53 President, Treasurer and Director 1994
David G. Reinhart 44 Vice President, Secretary and Director 1994
Kirbyjon H. Caldwell 44 Independent Director 1994
Robert O. Naegele, Jr. 57 Independent Director 1994
Dennis J. Doyle 44 Independent Director 1994
John M. Clarey 55 Independent Director 1994
</TABLE>
V. James Davis, has been the President and a Director of the Company
since its inception. From November 1986 to November 1996 he served as President
and a Director of American Investors Group, Inc. (the Dealer-Manager of the
Company's public stock offering). Prior to November, 1986, he was employed as
President of Keenan & Clarey, Inc., Minneapolis, Minnesota, a church bond
underwriter and broker-dealer, where he also served as Financial and Operations
Principal and as a Director. From January 1976 to March 1984, Mr. Davis was
employed as Administrative Vice-President, and Financial and Operations
Principal, by Offerman & Co., Inc., Minneapolis, Minnesota, a national
broker-dealer and originator of corporate bond financing projects. Mr. Davis has
been in the securities business since 1970 and was previously employed with
other securities firms in Appleton, Wisconsin and Rockford, Illinois. He holds a
Bachelor of Science degree in Liberal Arts from the University of Wisconsin -
Whitewater (1967) and completed course work at St. Joseph College, Rensselaer,
Indiana. Mr. Davis holds a General Operations Principal license and a Financial
Operations Principal license with the National Association of Securities
Dealers, Inc.
David G. Reinhart, has been the Vice-President, Secretary and a
Director of the Company since its inception. He is also Chairman of the Board of
American Investors Group, Inc., a Director and General Counsel of the Advisor,
and President, director and shareholder of DRM, the parent corporation of
American. Mr. Reinhart has served as legal counsel to banks, trust companies and
broker-dealers in the area of church financings and otherwise since
approximately March 1984. He was employed in the St. Paul firm of Reinhart Law
Offices, P. A. from November 1985 to February 1987, and from July 1983 to
November 1985 he was employed as an Associate Attorney with the law firm of
Robins, Kaplan, Miller & Ciresi, Minneapolis, Minnesota. Mr. Reinhart received
his Juris Doctor degree, cum laude, in May 1979, from Hamline University School
of Law, St. Paul, Minnesota and received his Bachelor of Science degree in May
1976, from Northern Michigan University, Marquette, Michigan. Mr. Reinhart has
practiced law in the areas of corporate finance and general business law since
1979 and has developed expertise in the area of church financing.
Kirbyjon H. Caldwell, has served as an Independent Director of the
Company since September 1994. He currently is Senior Pastor of Windsor Village
United Methodist Church and St. John's United Methodist Church in Houston,
Texas, in which capacities he has served since January 1982 and September 1992,
respectively. Membership in both churches is approximately 7,500 combined and
their ministries reach a broad segment of the Houston region. Kirbyjon Caldwell
received his B.A. degree
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in Economics from Carlton College (1975), an M.B.A. in Finance from the
University of Pennsylvania's Wharton School (1977), and his Masters in Theology
from Southern Methodist University School of Theology (1981). He is a member of
the Boards of Directors of Texas Commerce Bank (Houston), Hermann Hospital
(Houston), Greater Houston Partnership, The United Way of The Texas Gulf Coast,
and the American Cancer Society. He is also the founder and member of several
foundations and other community development organizations.
Robert O. Naegele, Jr., has served as an Independent Director of the
Company since September 1994. For more than the past five years Mr. Naegele has
been actively involved as a part-owner of outdoor advertising companies located
in Indiana; Illinois; Iowa; Kansas; Missouri and Georgia. He has served on the
Executive Committee of the Outdoor Advertising Association of America and as a
Planning Commission Member and Councilman for the City of Shorewood, Minnesota,
and as a member of the Advisory Board of Speak the Word Church and World
Outreach, Minneapolis, Minnesota.
Dennis J. Doyle, has served as an Independent Director of the Company
since September 1994. He is the owner and co-founder of Welsh Companies, Inc.,
Minneapolis, Minnesota -- a full-service real estate company involved in
property management, brokerage, investment sales, construction and residential
and commercial development. Welsh Companies was co-founded by Mr. Doyle in 1980,
and has five regional offices and 220 employees. Mr. Doyle is the recipient of
numerous civic awards relating to his business skills. He also is a member of
the Board of Directors of HEART (a non-profit organization), The Children's
Theater (Minneapolis) and Grow Biz International, a publicly-owned company. He
is also a member of the Board of Advisors of the Minnesota Real Estate Journal,
and a member of the International Commercial Realty Services ("ICRS") and
National Association of Office and Industrial Parks ("NAIOP").
John M. Clarey, has served as an Independent Director of the Company
since September 1994. Since January 1992, he has been employed as First Vice
President of Miller & Schroeder Financial, Inc., a Minneapolis, Minnesota based
investment banking firm and NASD-member broker-dealer. From February 1991
through December 1991, Mr. Clarey was a general partner of the Clarepoint
Partners, LP, a private venture capital firm, of which he was one of the
founders. From July 1989 to February 1991, he was a Senior Vice President of
Miller, Johnson and Kuehn, Inc., a Minneapolis-based broker-dealer. From
November 1980 to July 1989, Mr. Clarey served as President and Chief Executive
Officer of Allison-Williams Company, a Minneapolis- based investment banking
firm specializing in municipal and corporate finance. From September 1965 to
November 1970, he was employed as Executive Vice President of Keenan & Clarey,
Inc., a Minneapolis broker-dealer specializing in structuring and development of
corporate debt issues and financings for churches and other non-profit
corporations. During his career in the securities and finance industry, Mr.
Clarey has been active as a senior officer and director of local, regional, and
national trade and professional associations and has served as a volunteer
officer and director of various charitable organizations. He graduated from
Marquette University, Milwaukee, Wisconsin (1963) with a B.A. in economics.
Administration of the day-to-day operations of the Company is
provided by the Advisor under the Advisory Agreement. The Company currently has
no employees and the Company's officers receive no compensation for their
services, other than through their interests in affiliates of the Company. The
Company's officers have no employment contracts with the Company or the Advisor
and are considered employees "at will." The Company believes that, because of
the depth of management of the Advisor and its Affiliates, the loss of one or
more key employees of the Advisor, or one or more officers of the Company, would
not have a material adverse effect upon its operations. Accordingly, their
association with the Company or the Advisor could be terminated at any time. As
required by the Company's Bylaws, a majority of the Directors are Independent
Directors in that they are otherwise unaffiliated with and do not receive
compensation from the Company (other than in their capacity as Directors) or
from the Advisor or the Dealer Manager.
The Directors are responsible for considering and approving, by
majority vote, the policies of the Company and meet as often and devote such
time to the business of the Company as their oversight duties may require.
Pursuant to the Company's Bylaws, the Independent Directors have the
responsibility of evaluating the capability and performance of the Advisor and
determining that the compensation being paid to the Advisor by the Company is
reasonable.
The Company currently pays each Independent Director a fee of $500
for each board meeting ($200 for telephonic meetings), limited to $2,500 per
year. In addition, the Company reimburses directors for travel expenses incurred
in connection with their duties as Directors of the Company. The Company also
has adopted a Stock Option Plan for Directors and the Advisor, under which each
Director and the Advisor's president are granted annually options to purchase
3,000 Shares each of the Company's common stock at a price equal to the fair
market value at the date of the grant.
Directors and officers are permitted to engage in other activities of
the type conducted by the Company, and neither the Company's Articles of
Incorporation or Bylaws nor any policy of the Company restricts officers or
Directors from conducting, for their own account or on behalf of others,
business activities of the type conducted by the Company. The Directors and
officers are nevertheless not relieved of their duties of loyalty to the Company
and its Shareholders. The Directors may be removed by
15
<PAGE>
a majority vote of all Shares outstanding and entitled to vote at any annual
meeting or special meeting called for such purpose.
(b) The requirements of Section 16(a) of the Exchange Act do not
apply to the Company or any of its Directors, Executive Officers, Promoters or
Control Persons.
ITEM 10. EXECUTIVE COMPENSATION.
The Company's two executive officers do not receive compensation from
the Company, however, Mr. Davis and Mr.Reinhart each own a one-third interest in
the Advisor. See Item 12 Certain Relationships and Related Transactions.
The Company currently pays each Independent Director a fee of $500
for each board meeting ($200 for telephonic meetings), limited to $2,500 per
year. In addition, the Company reimburses directors for travel expenses incurred
in connection with their duties as Directors of the Company. The Company also
has adopted a Stock Option Plan for Directors and the Advisor, under which each
Director and the Advisor's president are granted annually options to purchase
3,000 Shares each of the Company's common stock at a price equal to the fair
market value at the date of the grant.
WARRANTS AND OPTIONS
On September 30, 1994, the Board of Directors adopted a Stock Option
Plan for Directors and the Advisor (the "Option Plan") to be administered by the
Directors, which provides for a grant of an option to purchase 3,000 shares of
$.01 par value Common Stock, subject to certain adjustments, to a Director upon
his or her appointment or election and upon each re-election (directors are
elected annually) or to the Advisor upon the Advisor's appointment or annual
re-appointment. The purchase price of the Common Stock granted under each option
shall be the fair market value, as defined in the Option Plan, at the time the
option is granted. On November 15, 1994, the Company issued options under the
Option Plan to each of the six Directors and the Advisor, to purchase 3,000
shares each (an aggregate of 21,000 shares) at a price of $10 per share. These
options vest and are thus exercisable on or after November 15, 1995 and expire
November 15, 1999.
Pursuant to the terms of the Underwriting Agreement in connection
with the Company's public stock offering, which expired November 8, 1996, the
Company had agreed to issue warrants to the Dealer Manager (and/or the
Soliciting Dealers) to purchase shares of the Company's $.01 par value Common
Stock equal to one Share for every ten Shares sold in the offering, at a price
of $10.00 per share. These warrants have not been issued, however, the Dealer
Manager has a right to the issuance of warrants for the purchase of 33,548
shares. The Dealer Manager (American) is an Affiliate of the Advisor and certain
officers and directors of the Company and Advisor.
The Company may, from time to time, grant full-time employees and
existing Directors and officers of the Company and the Advisor warrants,
options, stock purchase rights, incentive stock options or similar arrangements
to purchase shares of Common Stock of the Company. In accordance with applicable
state law, the Company has agreed to limit the number of options or warrants
issuable to the Advisor, Affiliates or any Directors to ten percent (10%) of the
outstanding Shares of the Company on the date of grant of any options or
warrants. The purchase price of Shares issuable pursuant to such warrants or
options will not be less than the fair market value at the time of the grant.
The Company may refuse to allow the exercise of a warrant into Common
Stock if the effect of such exercise or conversion would, in the opinion of
counsel for the Company, disqualify or jeopardize the Company as a real estate
investment trust under the Code.
(Balance of page intentionally left blank)
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of the date of this Report, the
number of Shares beneficially owned by each Director and by all executive
officers and Directors as a group. Except as identified below, the Company is
unaware of any beneficial owner of more than five percent (5%) of the
outstanding Shares of the Company's capital stock.
<TABLE>
<CAPTION>
Number of Percent
Shares (1) Of Class
<S> <C> <C>
V. James Davis...................................................... 1,013 .28%
David G. Reinhart................................................... 10,420 (2) 2.90%
Kirbyjon H. Caldwell................................................ ---- ----
Robert O. Naegele, Jr. ............................................. 5,000 1.39%
Dennis J. Doyle..................................................... ---- ----
John M. Clarey...................................................... ---- ----
All Executive Officers and Directors
as a Group (five individuals).................................. 16,433 4.57%
</TABLE>
(1) Excludes 3,000 Shares which each Director and the President of the
Advisor has an option to purchase pursuant to the Stock Option Plan
for Directors and the Advisor, which options expire November 15,
1999.
(2) Shares indicated are owned of record by DRM Holdings, Inc., a
Minnesota corporation ("DRM") which owns a total of 20,000 shares of
the Company's stock for which it paid $200,000. These shares are
"restricted securities" and their sale, transfer or assignment may be
subject to restrictions imposed by states in which the Shares were
sold in the initial public offering. DRM is owned by David G.
Reinhart, the Company's Vice President, Secretary and a Director, and
by Philip J. Myers, the Advisor's President. Messrs. Reinhart and
Myers are also directors of the Advisor and of American. The number
of shares and percentages set forth above are calculated by
multiplying the total number of Shares owned by DRM by the percentage
such individuals' ownership of stock in DRM relates to the total
outstanding shares of stock of DRM. Philip J. Myers, the Advisor's
President, could be considered the beneficial owner of 9,680 shares
which is 2.69% percent of the class outstanding.
(Balance of page intentionally left blank)
17
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE ADVISOR
Subject to the supervision of the Company's Board of Directors, the
business of the Company is managed by the Advisor,
which provides investment advisory and administrative services to the Company.
The Advisor is owned equally by V. James Davis, David G. Reinhart and Philip J.
Myers. Messrs.. Davis and Reinhart are officers and Directors of the Company.
Messrs.Reinhart and Myers are also shareholders, officers and directors of DRM
Holdings, Inc., which owns 100% of American Investors Group, Inc. Messrs.
Reinhart and Myers together own all outstanding common stock of DRM Holdings,
Inc. As of the date of this Report, the Advisor employed, directly or
otherwise, three persons on a part-time basis, including Philip J. Myers,
President
and Scott J. Marquis, Vice President of the Company.
Pursuant to the Advisory Agreement, the Company must pay the Advisor
certain advisory fees and expenses, as defined in the agreement and remit
one-half of any origination fee collected from a borrower in connection with
mortgage loans made or renewed by the Company.
AMERICAN INVESTORS GROUP, INC.
Pursuant to the Underwriting Agreement in connection with the
Company's initial public offering which concluded November 8, 1997, the Company
paid the Dealer Manager (American), a sales commission equal to 4.3% of the
gross amount of sales of the Shares sold, plus a non-accountable expense
reimbursement of $35,000. Also, the Company has agreed to issue Soliciting
Dealer Warrants to the Dealer Manager (American) and Soliciting Dealers. The
Dealer Manager (American) is an affiliate of the Advisor. The following table
sets forth the name and positions of certain officers and all directors of the
American:
Name Position
Philip J. Myers President, Secretary and Director
Scott J. Marquis Vice President
David G. Reinhart Chairman, Board of Directors
In the course of its business, it is expected that the Company will
purchase church bonds being underwritten and sold by American. Although the
Company would not pay any commissions, American would benefit from such purchase
as a result of commissions paid to it by the issuer of such bonds. American also
would benefit from mark-ups on bonds bought from it and mark-downs on bonds sold
through it by the Company on the secondary market. Any church bonds purchased by
the Company will be purchased for investment purposes only at the public
offering price. Church bonds purchased in the secondary market, if any, will be
purchased at the best price available, subject to customary markups (or in the
case of sales -- markdowns), on terms no less favorable than those applied to
other customers of American, and would not exceed industry standards or in any
event (in the case of mark-ups and mark-downs on secondary bond sales and
purchases) exceed five percent of the principal amount of bonds purchased or
sold. Principals of the Company and the Advisor may receive a benefit in
connection with such transactions due to their affiliation with the Dealer
Manager. It is the policy of the Company not to invest in excess of 30% of its
Average Invested Assets in Church Bonds.
CHURCH LOAN ADVISORS, INC.
Church Loan Advisors, Inc., a Minnesota corporation (the "Advisor"),
was organized on May 27, 1994 to engage in the business of rendering lending and
advisory services solely to the Company, and to administer the business affairs
and operations of the Company. The Advisor's offices are located at 10237 Yellow
Circle Drive, Minneapolis, Minnesota 55343.
The following table sets forth the names and positions of the
officers and directors of the Advisor:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
V. James Davis Director
David G. Reinhart Director
18
<PAGE>
Philip J. Myers, age 40, is President, Treasurer and a Director of
the Advisor, having served in such capacities since its inception. He is also
currently employed full-time as President, Secretary and a Director of the
Dealer Manager, American Investors Group, Inc. Mr. Myers earned his Bachelor of
Arts degree in Political Science in 1977 from the State University of New York
at Binghamton and his Juris Doctor Degree from the State University of New York
at Buffalo School of Law in 1980. From 1980 until 1982, Mr. Myers served as an
attorney with the Division of Market Regulation of the U. S. Securities and
Exchange Commission in Washington, D. C. and, from 1982 to 1984, as an attorney
with the Division of Enforcement of the Securities and Exchange Commission in
San Francisco. From August 1984 to January 1986, he was employed as an attorney
with the San Francisco law firm of Wilson, Ryan and Compilongo where he
specialized in corporate finance, securities and broker-dealer matters. From
January 1986 to January 1989 when he became affiliated with American Investors
Group, Inc., Mr. Myers was engaged as Senior Vice-President and General Counsel
of Financial Planners Equity Corporation ("FPEC"), a 400 broker securities
dealer formerly located in Marin County, California. He is a member of the New
York, California (inactive status) and Minnesota Bar Associations, and a
registered General Securities Principal.
Scott J. Marquis, age 39, is Vice-President and Secretary of the
Advisor, having served in such capacities since December 13, 1994. He is also
currently employed full-time as Vice-President and Controller of the Dealer
Manager, American Investors Group, Inc., where he has been employed since
February 1987. Prior to his employment with American Investors Group, Inc., Mr.
Marquis was employed for approximately seven years with the Minneapolis-based
broker dealer, Piper, Jaffray & Hopwood, in the capacity of supervisor of its
trade clearance department. Mr. Marquis is a licensed financial principal and
registered representative of American Investors Group, Inc., and holds his
Series 7, 63 and 27 licenses from the National Association of Securities
Dealers, Inc.
See Item 9 above for a description of the positions and business
experience of V. James Davis and David G. Reinhart, both of whom are Directors
of the Advisor.
The Advisory Agreement. The Company has entered into a contract with
the Advisor (the "Advisory Agreement") under which the Advisor will furnish
advice and recommendations concerning the affairs of the Company, provide
administrative services to the Company and manage the Company's day-to-day
affairs. In performing its services under the Advisory Agreement, the Advisor
may use facilities, personnel and support services of its Affiliates. Expenses
such as legal and accounting fees, stock transfer agent, registrar and paying
agent fees, and dividend reinvestment agent fees are direct expenses of the
Company and are not provided for by the Advisor as part of its services.
The Advisory Agreement is renewable annually by the Company for
one-year periods, subject to a determination by the Company, including a
majority of the Independent Directors, that the Advisor's performance has been
satisfactory and that the compensation paid the Advisor by the Company has been
reasonable. The Advisory Agreement may be terminated with or without cause by
the Company on 60 days written notice. Upon termination of the Advisory
Agreement by either party, the Advisor may require the Company to change its
name to a name that does not contain the word "American," "America" or the name
of the Advisor or any approximation or abbreviation thereof, and that is
sufficiently dissimilar to the word "America" or "American" or the name of the
Advisor as to be unlikely to cause confusion or identification with either the
Advisor or any person or entity using the word "American" or "America" in its
name, however, the Company may continue to use the word "church" in its name. In
addition, upon non-renewal or termination of the Advisory Agreement by the
Company, the Advisor may be entitled to a termination fee. The Company's
Directors shall determine that any successor Advisor possess sufficient
qualifications to perform the advisory function for the Company and justify the
compensation provided for in its contract with the Company.
Pursuant to the Advisory Agreement, the Advisor is required to pay
all of the expenses it incurs in providing services to the Company, including,
but not limited to, personnel expenses, rental and other office expenses,
expenses of Directors, officers and employees of the Advisor (except
out-of-pocket expenses of such persons who are directors or officers of the
Company incurred in their capacities as Directors and officers of the Company),
and all of its overhead and miscellaneous administrative expenses relating to
performance of its functions under the Advisory Agreement. The Company will be
required to pay all other expenses of the Company, including the costs and
expenses of reporting to various governmental agencies and the Shareholders and
of conducting its operations as a mortgage lender, fees and expenses of
appraisers, directors, auditors, outside legal counsel and transfer agents, and
costs directly relating to closing of loan transactions.
In the event that Total Operating Expenses of the Company exceed in
any calendar year the greater of (a) 2% of the Average Invested Assets of the
Company or (b) 25% of the Company's net income, the Advisor is obligated to
reimburse the Company, to the extent of its fees for such calendar year, for the
amount by which the aggregate annual operating expenses paid or incurred by the
Company exceed the limitation. The Independent Directors may, upon a finding of
unusual and non-recurring factors which they deem sufficient, determine that a
higher level of expenses is justified in any given year.
19
<PAGE>
The Company's Bylaws provide that the Independent Directors are to
determine at least annually the reasonableness of the compensation which the
Company pays to the Advisor. Factors to be considered in reviewing the Advisory
Fee include the size of the fees of the Advisor in relation to the size,
composition and profitability of the Company's loan portfolio, the rates charged
by other investment advisors performing comparable services, the success of the
Advisor in generating opportunities that meet the Company's investment
objectives, the amount of additional revenues realized by the Advisor for other
services performed for the Company, the quality and extent of service and advice
furnished by the Advisor, the quality of the Company's investments in relation
to investments generated by the Advisor for its own account, if any, and the
performance of the Company's investments.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation*
3.2 By-Laws*
4 Specimen Certificate*
10.1 Advisory Agreement*
10.2 Dividend Reinvestment Plan of Company*
10.3 Stock Option Plan for Directors and Advisor (with
Exhibits)*
10.4 Gemisys Corporation Agreement to act as Transfer
Agent, Registrar & Dividend Reinvestment Agent*
10.5 Advisory Agreement between Registrant and Church Loan
Advisors, Inc.*
* Incorporated herein by reference to the Registrant's
Registration Statement on Form S-11
(Commission File No. 33-87570).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
--------------------------------------------------------------
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN CHURCH MORTGAGE COMPANY
Dated: March 19, 1997
By:______________________
V. James Davis, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
By: _________________
David G. Reinhart
Vice-President, Secretary (principal accounting and financial
officer) and a Director
By: __________________
V. James Davis
President (principal executive officer), Treasurer and a Director
By: __________________________ Date: ___________________
Dennis J. Doyle, Director
By: __________________________ Date: ___________________
John M. Clarey, Director
By: __________________________ Date: ___________________
Robert O. Naegele, Director
By: __________________________ Date: ___________________
Kirbyjon H. Caldwell, Director
21
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Minneapolis, Minnesota
Financial Statements
December 31, 1996 and 1995
22
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
C O N T E N T S
Page
REPORT OF INDEPENDENT AUDITORS F-1
FINANCIAL STATEMENTS
Balance Sheet F-2 - F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6 - F-7
Notes to Financial Statements F-8 - F-13
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Church Mortgage Company
Minneapolis, Minnesota
We have audited the accompanying balance sheet of American Church Mortgage
Company as of December 31, 1996 and 1995 and the related statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Church Mortgage
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
February 12, 1997
F-1
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 612,744 $135,282
Current maturities of loans receivable 55,436
----------- -------
Total current assets 668,180 135,282
LOANS RECEIVABLE, net of current maturities 2,605,388
BONDS RECEIVABLE 120,640
DEFERRED OFFERING COSTS 107,295
DEFERRED TAX ASSET 20,000
ORGANIZATION EXPENSES, net 769 1,071
--------- -------
TOTAL ASSETS $3,414,977 $243,648
========= =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-2
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 8,482 $ 49,493
Deferred income 10,383
Dividends payable 80,424
--------- ------
Total current liabilities 99,289 49,493
DEFERRED INCOME 35,547
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 359,791 at December 31, 1996
and 20,000 shares at December 31, 1995 3,598 200
Additional paid-in capital 3,306,437 199,800
Accumulated deficit (29,894) (5,845)
---------- --------
Total stockholders' equity 3,280,141 194,155
---------- --------
TOTAL LIABILITIES AND EQUITY $3,414,977 $243,648
========= ========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-3
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME $217,390 $ 4,436
OPERATING EXPENSES 72,004 5,759
-------- -------
OPERATING INCOME (LOSS) 145,386 (1,323)
BENEFIT FROM INCOME TAXES (20,000) -
-------- ------
NET INCOME (LOSS) $165,386 ($ 1,323)
======= =======
INCOME (LOSS)PER COMMON SHARE $ .79 ($ .07)
======= =======
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 209,072 20,000
======= ======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-4
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 20,000 $ 200 $ 199,800 ($ 4,522)
Net loss (1,323)
------ ------ ------- -------
BALANCE, DECEMBER 31, 1995 20,000 200 199,800 (5,845)
Issuance of 339,791 shares of
common stock, net of
offering costs 339,791 3,398 3,106,637
Net income 165,386
Dividends declared (189,435)
------- ------ --------- --------
BALANCE, DECEMBER 31, 1996 359,791 $3,598 $3,306,437 ($ 29,894)
======= ===== ========= ========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-5
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 165,386 ($ 1,323)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Deferred income taxes (20,000)
Amortization 303 303
Change in assets and liabilities
Decrease in accounts payable (41,012)
Increase in deferred income 45,930
----------- -------
Net cash from (used for) operating activities 150,607 (1,020)
CASH FLOWS FROM INVESTING ACTIVITIES
Organization expenses paid (35)
Investment in mortgage loans (2,685,288)
Collections on mortgage loans 24,464
Investment in bonds (120,640)
----------- -------
Net cash used for investing activities (2,781,464) (35)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock offering 3,217,330
Dividends paid (109,011)
Payment of deferred offering costs (12,686)
------------ --------
Net cash from (used for) financing activities 3,108,319 (12,686)
--------- --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 477,462 (13,741)
CASH AND EQUIVALENTS - Beginning of Year 135,282 149,023
----------- -------
CASH AND EQUIVALENTS - End of Year $ 612,744 $135,282
=========== =======
- Continued -
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-6
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES Deferred
offering costs financed through accounts
payable $34,693
======
Deferred offering costs reclassified to additional
paid-in capital $107,295
=======
Dividends declared but not paid $ 80,424
=======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for
Interest $ - $ -
Income taxes $ - $ -
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-7
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company, which was a development stage company until 1996, was
organized to engage in the business of making mortgage loans to churches and
other nonprofit religious organizations throughout the United States, on terms
that it establishes for individual organizations. The Company concluded its
public stock offering in November 1996 and commenced its principal business
activities early in 1996.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
The Company maintains some cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
Marketable Securities
The Company accounts for its debt securities under Financial Accounting
Standards No. 115,"Accounting for Certain Investments in Debt and Equity
Securities."
The Company classifies its marketable debt securities as "held-to-maturity"
because it has the intent and ability to hold the securities to maturity.
Securities classified as held-to-maturity are carried at amortized cost.
Allowance for Loans Receivable
The Company follows a policy of providing an allowance for loans receivable.
However, at December 31, 1996, management believes the loans receivable to be
collectible in all material respects.
F-8
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Deferred Offering Costs
Deferred offering costs represent amounts incurred in connection with the
Company's public offering of common stock. These costs were offset against
proceeds of the offering in 1996.
Organization Expenses
Organization expenses are stated at cost and are amortized using the
straight-line method over five years.
Deferred Income
Deferred income represents loan origination fees which are recognized over the
life of the loan as an adjustment to the yield on the loan.
Income Taxes
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 differences in recognition of income from loan origination
fees for financial and income tax reporting. Deferred taxes are recognized for
operating losses that are available to offset future taxable income.
For fiscal 1996, the Company will elect to be taxed as a Real Estate Investment
Trust (REIT). Accordingly, the Company will not be subject to Federal income tax
to the extent of distributions to its shareholders if the Company meets all the
requirements under the REIT provisions of the Internal Revenue Code.
Income (Loss) Per Common Share
Income (loss) per common share is computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Fully diluted and primary income (loss) per common share are the same
for the periods presented.
F-9
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1995 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Newly Issued Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" was approved for issuance. The Company will adopt this Statement in
fiscal 1997. The effect of this Statement has not been determined, however, the
impact on the Company's financial position and results of operations is not
expected to be material.
2. MORTGAGES AND BONDS RECEIVABLE
At December 31, 1996, the Company had first mortgage loans receivable totaling
$2,660,824. The loans bear interest ranging from 9.25% to 11.25%. The maturity
schedule for those loans as of December 31, 1996 is as follows:
1997 $ 55,436
1998 61,987
1999 69,091
2000 77,009
2001 85,836
Thereafter 2,311,465
---------
Total $2,660,824
The Company also has three bonds receivable, which are carried at cost plus
amortized interest income. The bonds pay quarterly interest ranging from 8.5% to
9.55%. The combined principal of $150,000 is due at various maturity dates
between May 15, 2001 and June 1, 2010.
3. STOCK OPTION PLAN
The Company has adopted a Stock Option Plan granting each member of the Board of
Directors and the president of the Advisor (Note 4) an option to purchase 3,000
shares of common stock annually upon their re-election. The purchase price of
the stock will be the fair market value at the grant date. On November 15, 1994,
the Company granted options to purchase an aggregate of 21,000 shares of common
stock at $10 per share. These options became exercisable November 15, 1995 and
expire November 15, 1999. No options have been exercised as of December 31,
1996.
F-10
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
3. STOCK OPTION PLAN - Continued
The Company has chosen to account for stock based compensation in accordance
with APB Opinion 25. Management believes that the disclosure requirements of
Statement of Financial Accounting Standards No. 123 are not material to its
financial statements.
4. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc. (Advisor).
The Advisor is responsible for the day-to-day operations of the Company and
provides administrative services and personnel.
Upon nonrenewal or termination of the Advisory Agreement, the Company is
required to pay the Advisor a termination fee equal to two percent of the value
of the average invested assets of the Company as of the date of termination,
subject to limitations set forth in the Advisory Agreement.
The Company pays the Advisor an annual base management fee of 1.25 percent of
average invested assets (generally defined as the average of the aggregate book
value of the assets invested in securities and equity interests in and loans
secured by real estate), which is payable on a monthly basis. The Advisor will
also receive one-half of the origination fees paid by a mortgage loan borrower,
in connection with a mortgage loan made or renewed by the Company. The Company
paid advisory and origination fees totaling $64,680 during 1996. The Company
paid no advisory or origination fees during 1995.
The Advisor and the Company are related through common ownership and common
management. See Note 6.
5. INCOME TAXES
The income tax benefit consists of the following components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ - $ -
Deferred (20,000)
------ ----
Total tax benefit ($20,000) $ -
====== =====
</TABLE>
F-11
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
5. INCOME TAXES - Continued
The following reconciles the income tax benefit with the expected provision
obtained by applying statutory rates to pretax income:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected tax expense (benefit) $45,700 ($300)
(Increase) decrease in valuation allowance (1,300) 300
Benefit of REIT distributions (64,400)
------ ----
Totals ($20,000) $ -
====== ====
The components of deferred income taxes are
as follows:
1996 1995
---- ----
Deferred tax assets:
Temporary differences (loan origination fees) $20,000
Net operating loss carryforward $1,300
Valuation allowance - (1,300)
------ -----
Net deferred tax asset $20,000 $ -
====== =====
</TABLE>
During the years ended December 31, 1996 and 1995. The Company decreased its
valuation allowance against deferred tax assets by $1,300 in fiscal 1996 and
increased the valuation allowance by $300 in fiscal 1995.
6. PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK
The Company filed a Registration Statement with the Securities and Exchange
Commission for a public offering of its common stock in 1995. The Company
offered to sell 2,000,000 shares of its common stock at a price of $10 per
share. The offering was underwritten by an affiliate of the Advisor on a "best
efforts" basis, but required a minimum sale of at least 200,000 shares of common
stock. This minimum amount of shares was sold as of April 15, 1996, whereupon
the Company commenced its principal operating activities. The Company's public
offering of its shares continued through November 8, 1996.
Pursuant to the terms of the Underwriting Agreement, the Company paid the
affiliated broker-dealer referred to above commissions and nonreimbursable
expenses of approximately $144,000 during 1996.
F-12
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, none of which
are held for trading purposes, are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and equivalents $ 612,744 $ 612,744 $135,282 $135,282
Loans receivable 2,660,824 2,660,824
Bonds receivable 120,640 120,640
</TABLE>
The carrying value of cash and equivalents approximates fair value. The fair
value of the loans receivable and the bonds receivable are estimated by
discounting future cash flows using current discount rates that reflect the
risks associated with similar types of loans.
F-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 612,744
<SECURITIES> 0
<RECEIVABLES> 2,605,388
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,436
<PP&E> 0
<DEPRECIATION> 769
<TOTAL-ASSETS> 3,414,977
<CURRENT-LIABILITIES> 99,289
<BONDS> 0
0
0
<COMMON> 3,598
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,414,977
<SALES> 0
<TOTAL-REVENUES> 217,390
<CGS> 0
<TOTAL-COSTS> 72,004
<OTHER-EXPENSES> 20,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 145,386
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165,386
<EPS-PRIMARY> .79
<EPS-DILUTED> 0
</TABLE>
