As filed with the Securities and Exchange Commission on March 31, 1998
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, 1997
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
State 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: $384,118
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 February 28, 1998 was: 624,233
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
FORM 10-KSB
INDEX Page
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, 1997 and 1996....................... F-2
Statement of Operations
Years Ended December 31, 1997 and
December 31, 1996............................ F-4
Statements of Stockholders' Equity
December 31, 1997 and 1996....................... F-5
Statements of Cash Flows
Years Ended December 31, 1997 and
December 31, 1996............................ 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
fifteen churches in the aggregate amount of $5,351,000, with the average size
being $356,000. The Company has also purchased in the secondary market for
$47,282 (which includes $407 in accrued interest) First Mortgage Church Bonds in
the face amount of $52,000, 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 serves as
dealer-manager of the Company's current public offering of its common stock. Two
of the Advisor's principals serve as directors of the Company.
Current Public Offering
On September 26, 1997, the Securities and Exchange Commission
declared effective the Company's second offering of 1,500,000 common shares at a
price of $10.00 per share ($15,000,000) under SEC File 33-87570. The Offering is
currently being co-underwritten by American Investors Group, Inc.("American")
and LaSalle St. Securities, Inc., ("LaSalle"). American is the Managing
Underwriter and is an affiliate of the Company. This Offering is being conducted
on a"best-efforts" basis pursuant to applicable rules of the Securities and
Exchange Commission and will terminate no later than 365 days from September 26,
1997, subject to extension by mutual agreement of the Company and the Managing
Underwriter for an additional 120 days, or until completion of the sale of all
Shares, whichever occurs first. The Company reserves the right to terminate this
Offering at any time. As of February 28, 1998 the Company has sold 624,233
shares of its common stock and has a total of 248,945 issued and outstanding in
this offering.
The Company's Business Activities
The Company's business is managed by Church Loan Advisors, Inc.,
Minnetonka, Minnesota (the "Advisor"). The Advisor's affiliate, American have
been engaged since 1987 in the business of underwriting first mortgage bonds for
churches throughout the United States. In underwriting such bonds, American
reviews financing proposals, analyzes prospective borrowers' financial
capability, and structures, markets and sells, mortgage-backed 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
$165 million in first mortgage bonds have been sold to public investors. The
average size of single church bond financings 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 determined 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 to
lend 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 and experience 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 applies 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
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<PAGE>
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 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; (vi) shareholder relations and (vii) 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. The
Advisor's management fees are computed and 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 1.75% 3.5%
5 Year 2.00% 3.5%
7 Year 2.25% 3.5%
Construction 1 Year Term Fixed @ Prime + 3.50% 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 provided the
borrower has not committed an event of default during the service period of the
loan. 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 and does, in fact,
negotiate these terms and fees with many of its borrowers.
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
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<PAGE>
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 Policies. All appraisals and financial statements
are 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 is 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 loan commitment deposit is normally required from the borrowing
church to commence the loan preparation procedure. These deposits are directly
applied by the Advisor to engage accountants and appraisers to prepare their
respective reports on the Church. 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
5
<PAGE>
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 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:
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(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.
(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 equal to or 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;
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(v) Investing in equity securities;
(vi) Engaging in any short sales of securities or in trading,
as distinguished from investment activities;
(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 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.
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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 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
employs 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."
Year 2000 Issue
The "Year 2000 Issue" is a data management problem that may have
significant financial consequences for some companies. Many computer programs
use only two digits to identify the year in the date field. As a result, those
programs cannot distinguish between the year 2000 and the year 1900. On January
1, 2000, these programs may inaccurately process data, or in worst case
scenario, stop processing entirely.
Although the Company does rely on computer based financial software to
process its books and records, the software utilized by the Company will not
impact the Company financially, if at all, with respect to the "Year 2000
Issue." The financial software utilized by the Company requires that the date
field be completed in its entirety. For example: the year "1900" must be entered
as "1900" and the year "2000" must be entered as "2000". Therefore, a date
cannot be entered as "00" causing problems in many programs as to what year "00"
is representing, either "1900" or "2000." The Company utilizes window-based
"off-the- shelf" software to process its books and records. "Off-the-shelf"
software implies its public use and availability. It can be purchased at most
computer or retail stores, at minimal cost, it is easy to learn to use and can
be replaced inexpensively if a "Year 2000 Issue", or other factors unique to the
Company's needs, becomes problematic. Finally, "off-the-shelf" software is
continually being upgraded by the software manufacturer and the "Year 2000
Issue" has been addressed by many of these companies, including the Company's
current software product, in the form of new upgrades or new versions of the
software. Companies most affected by the "Year 2000 Issue" are primarily large
companies with assets and resources substantially greater than the Company's
which utilize customized software residing on large "main-frame" systems to meet
specific needs of their company or industry.
Finally, the Company utilizes the services of Gemisys Corporation, of
Englewood, Colorado for its shareholder services, transfer agent and dividend
and proxy disbursement agent. Gemisys has stated that its current "Universe"
platform has been programmed so that any date in the system as "00" (e.g.,
2/1/00) will be interpreted as the year 2000, not 1900. This is due to the fact
that Gemisys uses an "internal date" that correlates to the actual date. These
"internal dates" are in sequential order and not repeated. This includes any
data conversions to Gemisys's system. The Company as well as its shareholder
services agent have addressed the "Year 2000 Issue" and have determined this
issue will not affect its continuing operations.
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9
<PAGE>
Operations
The Company's operations currently are located in the 8,400 square foot
offices of the Advisor's affiliate, American Investors Group, Inc., 10237 Yellow
Circle Drive, Minnetonka, Minnesota 55343. These facilities are owned by DRM
Holdings, Inc. which is the parent company of American. 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, since 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 available from unaffiliated third parties on
an arm's-length basis.
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 February 28, 1998, 624,233 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. In addition, on September 26, 1997,
the Securities and Exchange Commission declared effective the Company's
secondary offering of 1,500,000 common shares at a price of $10.00 per share
($15,000,000) under SEC File 33-87570. As of February 28, 1998, 248,945 shares
of the Company's common stock has been sold during the current public offering.
At this time, however, there is no organized secondary market for the Company's
outstanding shares.
(b) Holders
As of February 28, 1998, there were (475) 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).
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10
<PAGE>
(c) Dividends
The Company has paid dividends for the prior fiscal year 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>
April 30, 1997 March 31, 1997 $.2250 9.00%
July 30, 1997 June 30, 1997 $.22875 9.15%
October 30, 1997 September 30, 1997 $.2375 9.50%
January 30, 1998 December 31, 1997 $.25625 10.25%
</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.
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." For the fiscal year ended December 31, 1997 the Company
distributed 99.8% of its taxable income to shareholders in the form of quarterly
dividends. The Company intends to continue distributing 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 initial 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. The
Company concluded its initial public offering on November 8, 1996. 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.
On September 26, 1997, the Securities and Exchange Commission declared
effective the Company's secondary offering of 1,500,000 common shares at a price
of $10.00 per share ($15,000,000) under SEC File 33-87570. The Offering is
currently being co-underwritten by American Investors Group, Inc.("American")
and LaSalle St. Securities, Inc., ("LaSalle"). American is the Managing
Underwriter and is an affiliate of the Company. This Offering is being conducted
on a"best-efforts" basis pursuant to applicable rules of the Securities and
Exchange Commission and will terminate no later than 365 days from September 26,
1997, subject to extension by mutual agreement of the Company and the Managing
Underwriter for an additional 120 days, or until completion of the sale of all
Shares, whichever fist occurs. The Company reserves the right to terminate this
Offering at any time. As of February 28, 1998 the Company has sold 248,945
shares of its common stock.
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 fifteen churches in the aggregate amount of $5,351,000, with the
average size being $356,000. The Company has also purchased in the secondary
market for $47,282 (which includes $407 in accrued interest) First Mortgage
Church Bonds in the face amount of $52,000, 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 its current 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.
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operation
Financial Condition
During the year ended December 31, 1997 total assets of the Company
increased by $1,948,419 due primarily to sale of the Company's common stock.
Total liabilities increased by $86,981 due to deferred income and dividends
declared but not yet paid as of December 31, 1997.
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, 1997, the Company
completed its first full fiscal year of operations. During the fiscal year
ending December 31,1997 the Company funded an
12
<PAGE>
additional five first mortgage loans and three second mortgage loans to churches
for an aggregate amount of $2,665,712 and purchased $2,000 principal amount of
First Mortgage Church Bonds for a purchase price of $871. All loans made by the
Company range in interest rate charged to the borrowers from 9.75% for annually
adjustable, 20 year amortized loans, 11.25% for fixed 15 year amortized loans to
12.00% for a 2-year interim loan. As of December 31, 1997, the average,
principal-adjusted interest rate on the Company's portfolio of loans was 11.15%.
The Company's portfolio of bonds has an average current yield of 11.20% .
Net operating income for the Company's fiscal year ended December 31,
1997 was $360,814 on total revenues of $384,118. Interest income earned on the
Company's portfolio of loans was $343,695, reflecting the fact that the eight
new 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, 1997 is $42,480 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 March 30, 1997, June 30, 1997, September 30,
1997 and December 31, 1997 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 $.2250 for each
share held of record on March 31, 1997, $.22875 for each share held of record
June 30, 1997, $.2375 for each share held of record September 30, 1997, and
$.25625 for each share held of record on December 31, 1997. During the Company's
public offering, dividends are 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 four quarters of operations for the quarter ending March
31, 1997, June 30, 1997, September 30, 1997 and December 31, 1997, the dividends
paid represented a 9.00%, 9.15%, 9.50% and 10.25% annualized yield to
Shareholders respectively. Total dividends paid in 1997 represent a 9.48% annual
rate of return on each share of common stock owned and purchased for $10 per
share.
Total assets of the Company increased from $3,414,977 as of December
31, 1996 to $5,363,396 as of December 31, 1997, primarily as a result of the
sale and issuance of the Company's common stock pursuant to its secondary public
offering, the proceeds of which were deployed into eight new mortgage loans,
church bonds purchased in the secondary market, and cash and cash equivalent
money market obligations. Shareholders' Equity rose from $3,280,141 to
$5,141,579 for the same reason. Company liabilities at the end of the fiscal
year ending December 31, 1997 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, 1997 but not yet
paid.
Liquidity and Capital Resources
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.
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 54 President, Treasurer and Director 1994
David G. Reinhart 45 Vice President, Secretary and Director 1994
Kirbyjon H. Caldwell 45 Independent Director 1994
Robert O. Naegele, Jr. 58 Independent Director 1994
Dennis J. Doyle 45 Independent Director 1994
John M. Clarey 56 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 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.
14
<PAGE>
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 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.
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<PAGE>
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 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 president of 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.
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............................................ 1,112 .18%
David G. Reinhart......................................... 10,200 (2) 1.63%
Kirbyjon H. Caldwell...................................... ---- ----
Robert O. Naegele, Jr. ................................... 5,000 .80%
Dennis J. Doyle........................................... ---- ----
John M. Clarey............................................ ---- ----
All Executive Officers and Directors
as a Group (six individuals)......................... 16,312 2.61%
</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 9,800 shares which is 1.57% 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
secondary public offering which commenced September 26, 1997, the Company has
agreed to pay the Managing Underwriter and Co-Underwriter selling commissions
equal to 5.95% of the gross proceeds form the sale of the Shares, all or any
part of which commissions may be re-allowed to the Soliciting Dealers. The
Company has also agreed to pay the non-accountable expenses of the Managing
Underwriter (American) in the amount of $35,000 on the first 100,000 Shares sold
and $7,000 on each increment of 100,000 Shares sold thereafter. In addition, the
Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933. The public
offering price of the Shares was determined by negotiations between the Company
and the Managing Underwriter based on the price paid ($10.00 per share) by the
Company's initial shareholder and shareholders and shareholders who purchased
shares in the Company's initial public offering completed November 8, 1996. The
Managing Underwriter (American) is an affiliate of the Advisor. The following
table sets forth the name and positions of certain officers and all directors of
American:
<TABLE>
<CAPTION>
Name Position
<S> <C> <C>
Philip J. Myers President, Secretary and Director
Scott J. Marquis Vice President
David G. Reinhart Chairman, Board of Directors
</TABLE>
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 Managing
Underwriter. 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.
18
<PAGE>
The following table sets forth the names and positions of the officers
and directors of the Advisor:
<TABLE>
<CAPTION>
Name Position
<S> <C> <C>
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
V. James Davis Director
David G. Reinhart Director
</TABLE>
Philip J. Myers, age 41, 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
Managing Underwriter, 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 40, 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 of the Managing Underwriter,
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
19
<PAGE>
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.
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 31, 1998
By: /s/ V. James Davis
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: /s/ David G. Reinhart
David G. Reinhart
Vice-President, Secretary (principal accounting and financial officer)
and a Director
By: /s/ V. James Davis
V. James Davis
President (principal executive officer), Treasurer and a Director
By: /s/ Dennis J. Doyle Date: 03/31/98
Dennis J. Doyle, Director
By: /s/ John M. Clarey Date: 03/31/98
John M. Clarey, Director
By: /s/ Robert O. Naegele, Jr. Date: 03/31/98
Robert O. Naegele, Jr., Director
By: /s/ Kirbyjon H. Caldwell Date: 03/31/98
Kirbyjon H. Caldwell, Director
21
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Minneapolis, Minnesota
Financial Statements
December 31, 1997 and 1996
<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, 1997 and 1996 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, 1997 and 1996, 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 20, 1998
1
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
ASSETS 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and equivalents $ 291,815 $ 612,744
Current maturities of loans receivable 103,505 55,436
--------- -------
Total current assets 395,320 668,180
Loans Receivable, net of current maturities 4,808,803 2,605,388
Bonds Receivable 125,809 120,640
Deferred Tax Asset 33,000 20,000
Organization Expenses, net 464 769
--------- ---------
Total assets $5,363,396 $3,414,977
========= =========
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
2
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable $ 15,490 $ 8,482
Deferred income 17,301 10,383
Dividends payable 127,899 80,424
---------- ---------
Total current liabilities 160,690 99,289
Deferred Income 61,127 35,547
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 571,615 at December 31, 1997
and 359,791 shares at December 31, 1996 5,716 3,598
Additional paid-in capital 5,184,882 3,306,437
Accumulated deficit (49,019) (29,894)
---------- ---------
Total stockholders' equity 5,141,579 3,280,141
--------- ---------
Total liabilities and equity $5,363,396 $3,414,977
========= =========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
3
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest Income $384,118 $217,390
Operating Expenses 36,304 72,004
-------- -------
Operating Income 347,814 145,386
Benefit from Income Taxes (13,000) (20,000)
-------- -------
Net Income $360,814 $165,386
======= =======
Income Per Common Share $ .91 $ .79
======= =======
Weighted Average Common Shares Outstanding 398,160 209,072
======= =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
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, 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)
Issuance of 211,824 shares of
common stock, net of
offering costs 211,824 2,118 1,878,445
Net Income 360,184
Dividends declared (379,939)
------- ----- --------- -------
Balance, December 31, 1997 571,615 $5,716 $5,184,882 ($ 49,019)
======= ===== ========= =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
5
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 360,814 $ 165,386
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes (13,000) (20,000)
Amortization 303 303
Change in assets and liabilities
Decrease in accounts payable 7,009 (41,012)
Deferred income 32,498 45,930
----------- --------
Net cash from operating activities 387,624 150,607
Cash Flows from Investing Activities
Investment in mortgage loans (2,315,712) (2,685,288)
Collections on mortgage loans 64,228 24,464
Investment in bonds (5,169) (120,640)
----------- -----------
Net cash used for investing activities (2,256,653) (2,781,464)
Cash Flows from Financing Activities
Proceeds from stock offering, net 1,880,563 3,217,330
Dividends paid (332,463) (109,011)
---------- ----------
Net cash from financing activities 1,548,100 3,108,319
--------- ---------
Net Increase (Decrease) in Cash and Equivalents (320,929) 477,462
Cash and Equivalents - Beginning of Year 612,744 135,282
----------- ---------
Cash and Equivalents - End of Year $ 291,815 $ 612,744
=========== =========
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
6
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Schedule of Noncash Financing
and Investing Activities
Offering costs reclassified to additional
paid-in-capital $118,106 $107,295
======= =======
Dividends declared but not paid $127,899 $ 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.
7
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company 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.
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, 1997 an 1996, management believes the loans receivable
to be collectible in all material respects, and therefore, no allowance is
presently provided.
8
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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.
The Company has elected 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 Per Common Share
No adjustments were made to income in either year for the purpose of calculating
earnings per share. Stock options were not included in computing earnings per
share because their effects were antidilutive.
The adoption of Statement of Financial Accounting Standard No. 128, "Earnings
Per Share", had no effect on the previously reported 1996 earnings per share.
9
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Newly Issued Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" was approved for issuance. The Company will adopt this
Statement in fiscal 1998. 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, 1997, the Company had first mortgage loans receivable totaling
$4,912,308. The loans bear interest ranging from 9.75% to 15.00%. The maturity
schedule for those loans as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 103,505
1999 218,763
2000 132,621
2001 148,098
2002 165,384
Thereafter 4,143,937
---------
Total $4,912,308
</TABLE>
The Company also has four bonds receivable, which are carried at cost plus
amortized interest income. The bonds pay quarterly interest ranging from 7.75%
to 9.55%. The combined principal of $152,000 is due at various maturity dates
between May 15, 2001 and January 25, 2012.
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,
1997.
10
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
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 non-renewal 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.
Under the term of 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 $61,525 and $64,680 during 1997 and 1996, respectively. During
1997 and 1996 the Advisor waived fees of $23,119 and $6,662 respectively.
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>
1997 1996
---- ----
<S> <C> <C>
Current $ - $ -
Deferred (13,000) (20,000)
------ ------
Total tax benefit ($13,000) ($20,000)
====== ======
</TABLE>
11
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
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>
1997 1996
---- ----
<S> <C> <C>
Expected tax expense (benefit) $118,257 $45,700
(Increase) decrease in valuation allowance (1,300)
Benefit of REIT distributions (131,257) (64,400)
------- ------
Totals ($ 13,000) ($20,000)
====== ======
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loan origination fees $33,000 $20,000
====== ======
</TABLE>
During the years ended December 31, 1996, the Company decreased its valuation
allowance against deferred tax assets by $1,300.
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 1997. The Company
offered to sell 1,500,000 shares of its common stock at a price of $10 per
share. The offering was underwritten by a managing underwriter (an affiliate of
the Advisor) and a co-underwriter on a "best efforts" basis, with no minimum
sale of stock was required. The stock sale commenced on September 26, 1997 and
will continue through January of 1999.
The Company filed a Registration Statement with the Securities and Exchange
Commission for an initial 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 initial public offering of its shares continued through November 8,
1996. The number of shares sold in this offering was 355,481.
12
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1997 and 1996
6. PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK- Continued
Pursuant to the terms of the Underwriting Agreements, the Company paid the
managing underwriter and participating broker-dealers commissions and
non-reimbursable expenses of approximately $162,600 and $144,000 during 1997 and
1996, respectively.
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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and equivalents $ 291,815 $ 291,815 $ 612,744 $612,744
Loans receivable 4,912,308 4,912,308 2,660,824 2,660,824
Bonds receivable 125,809 125,809 120,640 120,640
</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.
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 291,815
<SECURITIES> 125,809
<RECEIVABLES> 4,912,308
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 395,320
<PP&E> 0
<DEPRECIATION> 464
<TOTAL-ASSETS> 5,363,396
<CURRENT-LIABILITIES> 160,690
<BONDS> 0
0
0
<COMMON> 5,716
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,363,396
<SALES> 0
<TOTAL-REVENUES> 384,118
<CGS> 0
<TOTAL-COSTS> 36,304
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 347,814
<INCOME-TAX> (13,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 360,814
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
</TABLE>
