As filed with the Securities and Exchange Commission on March 31, 1999
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, 1998
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: $782,013
State the aggregate market value of the voting and non-voting common equity
stock held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
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 26, 1999 was: 1,183,878
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, 1998 and 1997......................... F-2
Statement of Operations
Years Ended December 31, 1998 and 1997............. F-4
Statements of Stockholders' Equity
December 31, 1998 and 1997......................... F-5
Statements of Cash Flows
Years Ended December 31, 1998 and 1997............. 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.............................................. 15
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
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, readers of this document and any
document incorporated by reference herein, are advised that this document and
documents incorporated by reference into this document contain both statements
of historical facts and forward looking statements. Forward looking statements
are subject to certain risks and uncertainties, which could cause actual results
to differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (i)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items; (ii)
statements of plans and objectives of the Company or its management or Board of
Directors, including the on-going public sale of its shares by the Company, or
estimates or predictions of actions by borrowers, competitors or regulatory
authorities; (iii) statements of future economic performance; and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by forward looking statements. These risks and
uncertainties include, among other things, interest rate fluctuations as they
effect the relative yield of the Company's loan portfolio and its ability to
compete in making loans to borrowers; payment default on loans made by the
Company, which could adversely affect the Company's ability to make
distributions to its Shareholders; the actions of competitors; the effects of
government regulation; and other factors which are described herein and/or in
documents incorporated by reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Matters
which are the subject of forward looking statements are beyond the ability of
the Company to control and in many cases the Company cannot predict what factors
would cause results to differ materially from those indicated by the forward
looking statements.
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. Between the date upon which the Company began active business
operations (April 15, 1996), and February 1, 1999, the Company has made 25 loans
to 22 churches in the aggregate amount of $7,734,750, with the average size
being $351,579. Of the 25 loans made by the Company, three loans totaling
$1,080,000, have been repaid early by the borrowing churches. The Company has
also purchased in the secondary market for $969,723 (which includes $407 in
accrued interest) First Mortgage Church Bonds in the face amount of $977,300 and
purchased for $72,800 Second Mortgage Church Bonds in the face amount of
$100,000. Two of the First Mortgage Church Bonds in the face amount of $33,300
have been called for redemption by the issuing organizations. 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 has served as underwriter of the Company's public offerings
of its common stock.
Public Offerings
On July 11, 1995, the Securities and Exchange Commission declared
effective the Company's first public offering of 2,000,000 common shares at a
price of $10.00 per share ($2,000,00) under SEC File 33-87570. 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 Underwriter--American Investors Group, Inc. ("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., an affiliate of the
Company.
On September 26, 1997, the Securities and Exchange Commission declared
effective the Company's second public offering of 1,500,000 common shares at a
price of $10.00 per share ($15,000,000) under SEC File 333-27601. The Offering
was co-underwritten by American Investors Group, Inc. and LaSalle St.
Securities, Inc., Chicago, Illinois ("LaSalle"). American acted in the capacity
of the Managing Underwriter and is an affiliate of the Company. The Offering was
conducted on a"best-efforts"
3
<PAGE>
basis pursuant to applicable rules of the Securities and Exchange Commission.
The Company concluded it second public offering on January 22, 1999. The Company
sold 799,759 shares during its second public offering. As of February 1, 1999
the Company has 1,175,979 shares outstanding and approximately 770 individual
shareholders.
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
Investors Group, Inc. has 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 64 years in this business. Since its
inception, American has underwritten approximately 144 church bond financings,
in which approximately $211 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 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. 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:
4
<PAGE>
<TABLE>
<CAPTION>
Loan Type Interest Rate (1) Origination Fee (2)
<S> <C> <C>
15 Year Term (3) Fixed @ Prime + 2.00% 4.0%
20 Year Term (3) Fixed @ Prime + 2.10% 4.0%
20 Year Term (3) Variable Annually @ Prime + 1.25% 3.5%
Renewable Term (4) Fixed @ Prime plus:
3 Year 1.50% 3.5%
5 Year 1.75% 3.5%
7 Year 2.00% 3.5%
Construction 1 Year Term Fixed @ Prime + 3.25% 2.0%
</TABLE>
======================== ================================ ==========
(1) "Prime" means the prime rate of interest charged to preferred
customers, as published by a federally chartered bank chosen 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 "Compensation to Advisor and Affiliates."
(3) Fully amortized repayment term.
(4) Renewable term loans are repaid based on a 20-year amortization
schedule, and are renewable at the conclusion of their initial
term for additional like terms up to an aggregated maximum of 20
years. A fee of 1% is charged by the Company upon the date of each
renewal. If renewed by the borrower, the interest rate is adjusted
upon renewal to Prime plus a specified percentage "spread," i.e.,
one and a quarter percent (1.25%).
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 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 and 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
5
<PAGE>
("lock in") interest rate commitments up to sixty (60) days from the commitment
to closing; however, interest rate commitments beyond sixty days will not
normally be issued unless the Company receives an appropriate fee premium based
upon the assessment of the risk associated with a longer period.
Loan Portfolio Management
The Company's portfolio of mortgage loans and Church Bonds is managed and
serviced by the Advisor in accordance with the Advisory Agreement. The Advisor
is responsible for all aspects of the Company's mortgage loan business,
including closing and recordation of mortgage loans; collecting payments of
principal and interest payments regularly and upon the maturity of a loan;
enforcing loan payments and other lender's requirements; periodic review of each
mortgage loan file and determination of its reserve classification; and
exercising the Company's remedies in connection with any defaulted or
non-performing loans. Fees and costs of attorneys, insurance, bonds and other
direct expenses incurred in connection with the exercise of such remedies are
the responsibility of the Company, although they may be recouped from the
borrower in the process of pursuing the Company's remedies. The Advisor will not
receive any additional compensation for services rendered in connection with
loan portfolio management or exercising the Company's remedies in the event of a
loan default.
Loan Funding and Bank Borrowing
The Company's mortgage loans (and purchases of Church Bonds) will be funded
with available cash resources and, at the discretion of the Advisor, with
borrowings under a line of credit with a commercial lender or bank. The Company
does not presently have a line of credit, and does not presently intend to
obtain one. Nonetheless, the Company may borrow up to 50% of the value of its
Average Invested Assets to make loans regardless of the Company's capacity to
(i) sell the Shares on a continuing basis, or to (ii) reposition assets from the
maturity or early repayment of mortgage loans in its portfolio. Initially, the
cash resources available to the Company will be limited to the net proceeds from
the sale of the Shares, minus reserves for operating expenses, and bad-debt
reserves, as determined by the Advisor. As the business of the Company develops
and over the course of time, cash resources available to the Company for lending
purposes will include, in addition to the net proceeds from future sales of
Shares (if any), (i) principal repayments from borrowers on loans made by the
Company, (ii) dividends reinvested in the Company by shareholders electing the
Company's Dividend Reinvestment Plan, and (iii) funds (if any) borrowed under
any line of credit arrangement, if obtained.
The Advisory Agreement
The Company has entered into a contract with the Advisor (the "Advisory
Agreement") under which the Advisor will furnish advice and recommendations
concerning the affairs of the Company, provide administrative services to the
Company and manage the Company's day-to-day affairs. Among other things, the
Advisor: (i) serves as the Company's mortgage loan underwriter and advisor in
connection with its primary business of making loans to churches; (ii) advises
and selects Church Bonds to be purchased and held for investment by the Company;
(iii) provides marketing and advertising and generates loan leads directly and
through its Affiliates; (iv) on behalf of the Company, deals with borrowers,
lenders, banks, consultants, accountants, brokers, attorneys, appraisers,
insurers and others; (v) supervises the preparation, filing and distribution of
tax returns and reports to governmental agencies and to Shareholders and acts on
behalf of the Company in connection with Shareholder relations; (vi) provides
office space and personnel as required for the performance of the foregoing
services as Advisor; and (vii) as requested by the Company, makes 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.
6
<PAGE>
Pursuant to the Advisory Agreement, the Advisor is required to pay all of
the expenses it incurs in providing services to the Company, including, but not
limited to, personnel expenses, rental and other office expenses, expenses of
Directors, officers and employees of the Advisor (except out-of-pocket expenses
of such persons who are directors or officers of the Company incurred in their
capacities as Directors and officers of the Company), and all of its overhead
and miscellaneous administrative expenses relating to performance of its
functions under the Advisory Agreement. The Company will be required to pay all
other expenses of the Company, including the costs and expenses of reporting to
various governmental agencies and the Shareholders and of conducting its
operations as a mortgage lender, fees and expenses of appraisers, directors,
auditors, outside legal counsel and transfer agents, and costs directly relating
to closing of loan transactions.
In the event that Total Operating Expenses of the Company exceed in any
calendar year the greater of (a) 2% of the Average Invested Assets of the
Company or (b) 25% of the Company's net income, the Advisor is obligated to
reimburse the Company, to the extent of its fees for such calendar year, for the
amount by which the aggregate annual operating expenses paid or incurred by the
Company exceed the limitation. The Independent Directors may, upon a finding of
unusual and non-recurring factors which they deem sufficient, determine that a
higher level of expenses is justified in any given year.
The Company's Bylaws provide that the Independent Directors are to
determine at least annually the reasonableness of the compensation which the
Company pays to the Advisor. Factors to be considered in reviewing the Advisory
Fee include the size of the fees of the Advisor in relation to the size,
composition and profitability of the Company's loan portfolio, the rates charged
by other investment advisors performing comparable services, the success of the
Advisor in generating opportunities that meet the Company's investment
objectives, the amount of additional revenues realized by the Advisor for other
services performed for the Company, the quality and extent of service and advice
furnished by the Advisor, the quality of the Company's investments in relation
to investments generated by the Advisor for its own account, if any, and the
performance of the Company's investments.
The Advisory Agreement provides for indemnification by the Company of the
Advisor and each of its directors, officers and employees against expense or
liability arising out of such person's activities in rendering services to the
Company, provided that the conduct against which the claim is made was
determined by such person, in good faith, to be in the best interests of the
Company and was not the result of negligence or misconduct.
Financing Policies
The Company's business of mortgage lending to churches and other non-profit
religious organizations is managed in accordance with and subject to the
policies, guidelines, restrictions and limitations identified herein
(collectively, the "Financing Policy"). The intent of the Financing Policy is to
identify for its Shareholders not only the general business in which the Company
is involved, but the parameters of the Company's lending business. These
policies may not be changed (except in certain immaterial respects by majority
approval of the Board of Directors) without the approval of a majority of the
Independent Directors, and the holders of a majority of the outstanding Shares
of the Company at a duly held meeting for that purpose:
(i) Loans made by the Company will be limited to churches and other
non-profit religious organizations, and will be secured by
mortgages. The total principal amount of all second mortgage loans
funded by the Company shall be limited to 20% of Average Invested
Assets. All other loans will be first mortgage loans.
(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.
7
<PAGE>
(vi) In its discretion, the Advisor, on behalf of the Company, may
require the borrower to arrange for automatic electronic or
drafting of monthly payments.
(vii) In its discretion, the Advisor, on behalf of the Company, may
require (i) key-man life insurance on the life of the senior
pastor of a church; (ii) personal guarantees of church members
and/or affiliates; and (iii) other security enhancements for the
benefit of the Company.
(viii) The borrower must agree to provide to the Company annual reports
(including financial statements) within 120 days of each fiscal
year end beginning with the fiscal year end next following the
funding of the loan.
(ix) In its discretion, the Advisor, on behalf of the Company, may
require the borrower to grant to the Company a security interest
in all personal property located and to be located upon the
mortgaged premises (excluding property leased by the borrower).
These Financing Policies are in addition to the prohibited investments
and activities identified hereinafter and which are set forth in the Company's
By Laws.
Prohibited Investments and Activities
The Company's Bylaws impose certain prohibitions and restrictions on
various investment practices and activities of the Company, including
prohibitions against:
(i) Investing more than 10% of its total assets in unimproved real
property or mortgage loans on unimproved real property;
(ii) Investing in commodities or commodity futures contracts other
than "interest rate futures" contracts intended only for
hedging purposes;
(iii) Investing in mortgage loans (including construction loans) on
any one property which in the aggregate with all other
mortgage loans on the property would exceed 75% of the
appraised value of the property unless substantial
justification exists because of the presence of other
underwriting criteria;
(iv) Investing in mortgage loans that are subordinate to any
mortgage or equity interest of the Advisor or the Directors or
any of their Affiliates;
(v) Investing in equity securities;
(vi) Engaging in any short sales of securities or in trading,
as distinguished from investment activities;
(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
8
<PAGE>
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 orother 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 and other lenders, including banks, savings and loan
associations, insurance companies, pension funds and fraternal organizations
which may have investment objectives similar to those of the Company. A number
of these competitors have greater financial resources, larger staffs and longer
operating histories than those of the Company. The Company competes principally
by limiting its business "niche" to lending to churches and other non-profit
religious organizations, offering loans with competitive and flexible terms, and
emphasizing the expertise of the Company in the specialized industry segment of
lending to churches and other religious organizations.
Employees
The Company has no employees, as it will be managed by the Advisor on a
"turn-key" basis using employees of the Advisor and/or its affiliates. At
present, certain officers and directors of American and the Advisor are
providing services to the Company 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."
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 Advisor pays rent and other fees to DRM Holdings, Inc. on a monthly
basis. 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.
9
<PAGE>
Item 2. Description of Property
The Company's operations are located in the leased offices of American
Investors Group, Inc., in Minnetonka, 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.
Market Information
As of February 26, 1999, 1,163,878 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. The Offering was co-underwritten by
American Investors Group, Inc. and LaSalle St. Securities, Inc., ("LaSalle").
American acted in the capacity of the Managing Underwriter and is an affiliate
of the Company. The Offering was conducted on a"best-efforts" basis pursuant to
applicable rules of the Securities and Exchange Commission. The Company
concluded it second public offering on January 22, 1999. The Company sold
799,759 shares in its second public offering.
Lack of Liquidity and Absence of Public Market Price.
There currently is no market for the Company's common shares and there
can be no assurance that a market will develop. It is not expected that a
material market for the shares will develop any time soon. In addition, the
market for REIT securities historically has been less liquid than non-real
estate types of publicly-traded equity securities. Further, because of such
illiquidity and the fact that the shares would be valued by market-makers (if a
market develops) based on market forces which consider various factors beyond
the Company's control, there can be no assurance that the market value of the
shares at any given time would be the same or higher than the public purchase
price of the shares. In addition, the market price, if any develops, could
decline if the yields from other competitive investments exceed the actual
dividends paid by the Company on the shares. The common stock of the Company is
not listed on any exchange and is not yet qualified for quotation on the
National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ").
Repurchase of Shares by the Company
Although the Company's common shares are not redeemable by the Company,
the Company may at its complete discretion, repurchase shares offered to it by
Shareholders. In such event, the Company may pay whatever price the Advisor
deems appropriate and reasonable, and any such shares repurchased will be
re-designated as "unissued," will no longer be entitled to distribution of
dividends and will cease to having voting rights.
Holders of the Company's Common Shares
As of February 26, 1999, there were 773 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).
10
<PAGE>
Dividends
The Company 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, 1998 March 31, 1998 $.23125 9.25%
July 30, 1998 June 30, 1998 $.23125 9.25%
October 30, 1998 September 30, 1998 $.2125 8.50%
January 30, 1999 December 31, 1998 $.2250 9.00%
</TABLE>
As a Real Estate Investment Trust, the Company makes 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 are
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 are 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, 1998 the Company
distributed 99.9% 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.
Financial Condition
During the year ended December 31, 1998 total assets of the Company
increased by $4,902,931 due primarily to sale of the Company's common stock in
its second "best efforts" public offering. Total liabilities increased by
$136,126 due to deferred income and dividends declared but not yet paid as of
December 31, 1998.
Results of Operations-1996-1997
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. Between the date upon which the Company
began active business operations and December 31, 1996, the Company made loans
to seven churches in the aggregate amount of $2,802,000, with an average loan
size being $400,000. The Company also purchased in the secondary market for
$46,412 (which includes $407 in accrued interest) First Mortgage Church Bonds in
the face amount of $50,000 and purchased for $72,800 Second Mortgage Church
Bonds in the face amount of $100,000.
As of December 31, 1997, the Company completed its first full fiscal
year of operations. During the fiscal year ended December 31,1997 the Company
funded an 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.
Results of Operations - 1998
During the fiscal year ended December 31, 1998 the Company funded an
additional six first mortgage loans and two second mortgage loans to churches
totaling $1,793,750 and $355,000 respectively. The Company also purchased
$925,300 principal amount of First Mortgage Church Bonds for a purchase price of
$922,445. In addition, during the fiscal year ended December 31, 1998, two first
mortgage loans and one second mortgage loan in the aggregate amounts of $730,000
and $350,000 respectively, have been repaid early by the borrowing churches. All
interest and principal has been repaid in full in accordance with the terms of
each loan. The Company also had two First Mortgage Church Bonds called for
redemption by the borrowing organizations. The two bonds paid all principal and
interest entitled to the Company. The face amount of the combined bonds was
$33,000, The Company's original combined purchase price was $29,225.
Between December 31, 1998 and February 1, 1999 the Company financed one
additional second mortgage loan for $235,000 and purchased 18,000 principal
amount of First Mortgage Church Bonds for a purchase price of $17,720. All loans
made by the Company range in interest rate charged to the borrowers from 9.75%
to 11.25% representing loans with repayment schedules of up to twenty years. As
of February 1, 1999, the average, principal-adjusted interest rate on the
Company's portfolio of loans was 10.96%. The Company's portfolio of bonds has an
average current yield of 9.69%.
Operating income for the Company's fiscal year ended December 31, 1998
was $705,365 on total revenues of $782,013 compared to $347,814 and $145,386 on
total revenues of $384,118 and $217,390 for the years ended December 31, 1997
and 1996 respectively . Interest income earned on the Company's portfolio of
loans was $655,219 for the year ended December 31, 1998 compared to $343,695 and
$152,259 for 1997 and 1996 respectively. This increase is due to the fact that
eight new loans were originated both in fiscal years ended December 31, 1998 and
1997 . Excluded from revenue for the year ended December 31, 1998 is $61,822 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 paid to Shareholders for the quarters ended March 31, 1998, June
30, 1998, September 30, 1998 and December 31, 1998 included origination income
even though it was not recognized in its entirety for the period under GAAP.
The Company's Board of Directors declared quarterly dividends of
$.23125 for each share held of record on March 31, 1998, $.23125 for each share
held of record June 30, 1998, $.2125 for each share held of record September 30,
1998, and $.225 for each share held of record on December 31, 1998. Based on the
four quarters of operations for the quarters ended March 31, 1998, June 30,
1998, September 30, 1998, and December 31, 1998, the dividends paid represented
a 9.25%, 9.25%, 8.50% and 9.00% annualized yield to Shareholders respectively
for an effective overall annual dividend yield of 9.00%. Total dividends paid
12
<PAGE>
in 1998 represented a 9.00% annual rate of return on each share of common stock
owned and purchased for $10 per share. Total dividends paid by the Company for
fiscal year 1997, its first full fiscal year of operations, represented a 9.48%
annual rate of return on each share of common stock owned.
Since its inception, the Company experienced its highest quarterly
dividend payment for the quarter ended December 31, 1997 and experienced its
lowest quarterly dividend payment for the quarter ended September 30, 1998. The
quarterly dividend paid for each share held of record on December 31, 1997 was
$.25625 per share representing an annualized yield of 10.25%. The quarterly
dividend payment for each share held of record on September 30, 1998 was $.2125
representing an annualized yield of 8.50%. The dividend payment for December 31,
1997 was significantly higher than the average dividend amount due to the large
number of loans funded during the quarter. Each loan funded during the quarter
generates origination income which is due and payable to shareholders as
"Taxable Income" even though origination income was not recognized in its
entirety for the period under "GAAP". The dividend payment made to September 30,
1998 shareholders of record was directly related to large cash balances the
Company received in its second stock offering and held in money market
instruments pending deployment in new loans to churches. Because interest earned
in the Company's money market account is substantially lower than interest
earned on its mortgage loans, interest income earned was lower than is
anticipated to be earned once the offering proceeds are fully deployed into new
loans.
Total assets of the Company increased from $3,414,977 as of December
31, 1996 to $5,363,396 as of December 31, 1997. As of December 31, 1998 assets
had increased to $10,266,327. The primary reason for the increase in total
assets from December 31, 1996 through December 31, 1998 was a result of the sale
and issuance of the Company's common stock pursuant to its second public
offering, the proceeds of which are deployed into new mortgage loans and cash
and cash equivalent money market obligations. Shareholders' Equity rose from
$3,280,141 at December 31, 1996 to $5,141,579 at December 31, 1997 and again to
$9,906,384 at December 31, 1998 for the same reasons. Company liabilities for
all periods after December 31, 1995 are primarily comprised of a "Deferred
Income" item, reflecting the Company's practice of recognizing its origination
income -- fees charged to borrowers at the commencement of its loans -- over the
life of each loan. Another material liability for all periods after December 31,
1995 includes dividends declared as of the end of the period reported on, but
not paid until the 30th day of the ensuing month.
During the one-month period ended January 31, 1999 total assets of the
Company increased by $661,408 due primarily to the continued public sale of the
Company's common stock. The Company's second public offering concluded January
22, 1999. A total of 779,759 shares were sold during the Company's second public
Offering. The Company has 1,175,979 shares outstanding as of February 1, 1999.
During the first-month period ending January 31, 1999 the Company funded one
additional second mortgage loan of $235,000. In addition, the Company purchased
$18,000 principal amount of First Mortgage Church Bonds for a purchase price of
$17,720. All loans made by the Company range in annual interest rate charged to
the borrowers from 9.75% to 11.25%. As of February 1, 1999, the average,
principal-adjusted interest rate on the Company's portfolio of loans was 10.96%.
The Company's portfolio of bonds has an average current yield of 9.69% .
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 that
it makes. 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
are 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. Because the Company has not itself
borrowed funds, the Company does not believe that inflation at the national
level as experienced over the past three years has made a material impact upon
its operations, nor does it believe that currently anticipated levels of
inflation in 1999 would have a material impact on its business. However, the
relatively low inflation rates of recent years has contributed to lower interest
rates, which in turn, has caused the Company to lower the interest rates it
charges church borrowers on its loans. This in turn, has and likely will
continue to impact interest income the Company will earn and, accordingly,
influence dividends declared by the Company's Board of Directors.
13
<PAGE>
Nevertheless, if the rate of inflation increased materially, the
Company could reasonably expect interest rates generally to increase, thus
possibly making the yield to investors in the Shares less attractive as compared
to alternative fixed-income investments. Conversely, if the rate of inflation
decreases materially, it could reasonably be expected that interest rates
generally would decline or remain at current levels. A decline in interest rates
generally would require the Company to offer lower rates to borrowers which, in
turn, would eventually result in lower yields to investors in the Shares. During
the Company's 1998 fiscal year, the Federal Reserve Board cut the prime interest
lending rate three times to a current prime interest rate of 7.75%. The
reduction of the prime interest required the Company to reduce its lending rates
to levels that remained competitive with other lending organizations in order to
attract qualified potential borrowers.
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 or after
January 1, 2000, these programs may inaccurately process data, or in the worst
case scenario, stop processing entirely.
Although the Company depends upon 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 Windows(TM)-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, is easy 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.
The Company currently requires each borrower to make monthly payments
by automatic funds transfer (automatic deduction or "ACH" ) from the borrower's
checking or savings account as stated in the terms of the loan agreements. The
Company intends to communicate with each borrower during the fourth quarter of
1999 regarding the potential of "Year 2000 Issues." The communication will
address the potential, among other things, that "ACH" payments on or after
December 31, 1999 may be effected and, if so, the borrowing organization will
need to be prepared to submit payments by overnight mail or other expedient
means drawn on good funds from the borrowing organization's current checking or
savings account.
Finally, the Company utilizes the services of Gemisys Corporation,
Englewood, Colorado for its shareholder services and as its transfer, dividend
and proxy disbursement agent. Gemisys has represented to the Company 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.
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.
Not Applicable
14
<PAGE>
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. Annual Shareholder Meetings are
typically held in May. 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>
David G. Reinhart 46 President, Treasurer and Director 1994
V. James Davis 54 Vice-President, Secretary and Director 1994
Kirbyjon H. Caldwell 46 Independent Director 1994
Robert O. Naegele, Jr. 58 Independent Director 1994
Dennis J. Doyle 47 Independent Director 1994
John M. Clarey 57 Independent Director 1994
</TABLE>
David G. Reinhart, has been a Director of the Company since its inception,
and has served as President and Treasurer of the Company since January 19, 1999.
He served as Vice-President and Secretary of the Company from the Company's
inception until January 19, 1999. He is also Chairman of the Board of Directors
of American Investors Group, Inc., a Director and Officer of the Advisor, and
President, director and shareholder of DRM Holdings, Inc. ("DRM"), the parent
corporation of American. Mr. Reinhart has served as legal counsel to banks,
trust companies and broker-dealers in the area of church financings and
otherwise since approximately March 1984. He currently acts as counsel for the
Managing Underwriter. 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. He is employed
from time-to-time as Adjunct Professor of Law, Hamline University School of Law.
V. James Davis, has been a Director of the Company since its inception, and has
served as the Vice-President and Secretary of the Company since January 19,
1999. He served as President and Treasurer of the Company from the Company's
inception until January 19, 1999. From November 1986 to October 1996 he served
as President and a Director of American Investors Group, Inc. 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.
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.
15
<PAGE>
Robert O. Naegele, Jr., has served as an Independent Director of the
Company since September 1994. Mr. Naegele's professional background includes
advertising, real estate development, and consumer products, with a special
interest in entrepreneurial ventures and small developing companies. Most
recently, he led a group of investors to apply for, and receive an NHL Expansion
Franchise, the Minnesota Wild, to begin play in a new arena in St. Paul,
Minnesota, in the Fall of the year 2000. Mr. Naegele and his wife, Ellis, lived
in Minneapolis through 1993 and now reside in Naples, Florida.
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. See "The Advisor and 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 the Advisor and affiliates of the Company. See "Compensation to Advisor and
Affiliates." 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. 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 Managing Underwriter.
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.
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. See "Conflicts of
Interest."
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.
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. The Advisor receives Advisory Fees under the terms of its Advisory
Agreement with the Company. 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.
16
<PAGE>
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, and each year through November 15,
1998, the Company has 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 105,000 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
through November 15, 2003.
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 Director 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of February 1, 1999, the number
of Shares beneficially owned by each Director and by all executive officers and
Directors as a group and the beneficial owner of 5% or more of the Company's
outstanding stock . Unless otherwise noted, each of the following persons has
sole voting and investment power with respect to the Shares set forth opposite
their respective names.
<TABLE>
<CAPTION>
Number of Shares Percent
Name of Beneficial Owner (1) Beneficially Owned (2) Of Class
---------------------------- ---------------------- ----------
<S> <C> <C>
Iron Workers Local #498.................... 107,295 (3) 9.12%
David G. Reinhart ......................... 10,420 (4) .89%
Robert O. Naegele, Jr...................... 5,000 .43%
V. James Davis............................. 1,215 .10%
Kirbyjon H. Caldwell....................... ---- ----
Dennis J. Doyle............................ ---- ----
John M. Clarey............................. ---- ----
All Executive Officers and Directors
as a Group (five individuals)......... 16,635 1.42%
</TABLE>
------------------------------------------
(1) The address for the Directors is 10237 Yellow Circle Drive, Minnetonka,
Minnesota 55343.
(2) Excludes 15,000 Shares which each Director and the President of the Advisor
have an option to purchase pursuant to the Stock Option Plan for Directors
and the Advisor, which options vest beginning November 15, 1995 and expire
beginning November 15, 1999. See "Management -- Warrants and Options."
(3) As of February 1, 1999, the Iron Workers Local 498 Pension Plan and Iron
Workers Local 498 Health and Welfare Fund, 4749 W. Lincoln Drive, Suite
202, Matteson Illinois 60443, owns collectively 72,129 Shares. This
beneficial owner may not own more than 9.8% of the Shares outstanding at
any time. The Company's Articles of Incorporation provide that in the event
any person acquires Excess Shares, such Excess Shares may be redeemed by
the Company, at the discretion of the Board of Directors.
(4) 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 ($10.00 per share). These shares are
"restricted securities" and may not be sold, transferred or assigned
without compliance with state and federal rules and regulations governing
the transfer of securities considered "restricted," and may be further
subject to additional restrictions imposed by states in which the Shares in
this Offering are being offered. DRM is owned by David G. Reinhart, the
Company's President, Treasurer and a Director; and by Philip J. Myers, the
Advisor's President. Mssrs. Reinhart and Myers are also directors of the
Advisor. 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 9,580 shares.
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
second public offering which commenced September 26, 1997 and concluded January
22, 1999, the Company paid the Managing Underwriter and Co-Underwriter selling
commissions equal to $332,185 and $143,672 respectively. The Company has paid
non-accountable expenses of the Managing Underwriter (American) and the
Co-Underwriter ("LaSalle") $63,983 and $13,000 respectively. 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 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:
Name Position
Philip J. Myers President, Secretary and Director
Scott J. Marquis Vice President
David G. Reinhart Chairman, Board of Directors
In the course of its business, it is expected that the Company will
purchase church bonds being underwritten and sold by American. Although the
Company would not pay any commissions, American would benefit from such purchase
as a result of commissions paid to it by the issuer of such bonds. American also
would benefit from mark-ups on bonds bought from it and mark-downs on bonds sold
through it by the Company on the secondary market. Any church bonds purchased by
the Company in an initial offering 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, Minnetonka, Minnesota 55343.
The following table sets forth the names and positions of the officers
and directors of the Advisor:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
V. James Davis Director
David G. Reinhart Director
18
<PAGE>
Philip J. Myers, age 42, 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 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 41, 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 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 Companies,
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.
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 is 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.
19
<PAGE>
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.*
EX-27 Financial Data Schedule*
* 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, 1999
By: /s/ David G. Reinhart
David G. Reinhart, President, Treasurer
(Chief Executive Officer and Chief Accounting Officer)
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
President , Treasurer and a Director
By: /s/ V. James Davis
V. James Davis
Vice-President, Secretary and a Director
By: /s/ Dennis J. Doyle Date: 03/31/99
Dennis J. Doyle, Director
By: /s/ John M. Clarey Date: 03/31/99
John M. Clarey, Director
By: /s/ Robert O. Naegele, Jr. Date: 03/31/99
Robert O. Naegele, Jr., Director
By: /s/ Kirbyjon H. Caldwell Date: 03/31/99
Kirbyjon H. Caldwell, Director
21
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Minneapolis, Minnesota
Financial Statements
December 31, 1998 and 1997
<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, 1998 and 1997 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, 1998 and 1997, 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 17, 1999
F-1
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
<TABLE>
<CAPTION>
December 31
ASSETS 1998 1997
Current Assets
<S> <C> <C>
Cash and equivalents $ 2,941,530 $ 291,815
Accounts receivable 28,777
Current maturities of mortgage loans receivable 237,242 103,505
Current maturities of bond portfolio 12,000
----------- ---------
Total current assets 3,219,549 395,320
Mortgage Loans Receivable, net of current maturities 5,994,620 4,808,803
Bond Portfolio 1,011,997 125,809
Deferred Tax Asset 40,000 33,000
Organizational Expenses, net 161 464
---------- ---------
Total assets $10,266,327 $5,363,396
========== =========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-2
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
<TABLE>
<CAPTION>
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
Current Liabilities
<S> <C> <C>
Accounts payable $ 2,645
Management fee payable $ 12,759 12,845
Deferred income 21,772 17,301
Dividends payable 233,004 127,899
--------- ---------
Total current liabilities 267,535 160,690
Deferred Income 92,408 61,127
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 1,087,646 at December 31, 1998
and 571,615 shares at December 31, 1997 10,876 5,716
Additional paid-in capital 9,973,200 5,184,882
Accumulated deficit (77,692) (49,019)
---------- --------
Total stockholders' equity 9,906,384 5,141,579
---------- ---------
Total liabilities and equity $10,266,327 $5,363,396
========== =========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-3
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997
<S> <C> <C>
Interest Income $782,013 $384,118
Operating Expenses 76,648 36,304
------- -------
Operating Income 705,365 347,814
Benefit from Income Taxes (7,000) (13,000)
------- -------
Net Income $712,365 $360,814
======= =======
Basic and Diluted Income Per Common Share $ .86 $ .91
======= =======
Weighted Average Common Shares Outstanding 825,176 398,160
======= =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-4
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
<S> <C> <C> <C> <C>
Balance, December 31, 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 360,814
Dividends declared (379,939)
-------- ------ --------- -------
Balance, December 31, 1997 571,615 5,716 5,184,882 (49,019)
Issuance of 516,031 shares of
common stock, net of
offering costs 516,031 5,160 4,788,318
Net income 712,365
Dividends declared (741,038)
--------- ------ --------- ---------
Balance, December 31, 1998 1,087,646 $10,876 $9,973,200 ($ 77,692)
========= ====== ========= ========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-5
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 712,365 $ 360,814
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes (7,000) (13,000)
Amortization 303 303
Change in assets and liabilities
Accounts receivable (28,777)
Accounts payable (2,731) 7,009
Deferred income 35,752 32,498
--------- ----------
Net cash from operating activities 709,912 387,624
Cash Flows from Investing Activities
Investment in mortgage loans (2,498,750) (2,315,712)
Collections on mortgage loans 1,179,196 64,228
Investment in bonds (931,188) (5,169)
Proceeds from bonds called 33,000
---------- ---------
Net cash used for investing activities (2,217,742) (2,256,653)
Cash Flows from Financing Activities
Proceeds from stock offering, net 4,793,478 1,880,563
Dividends paid (635,933) (332,463)
--------- ---------
Net cash from financing activities 4,157,545 1,548,100
--------- ---------
Net Increase (Decrease) in Cash and Equivalents 2,649,715 (320,929)
Cash and Equivalents - Beginning of Year 291,815 612,744
--------- ----------
Cash and Equivalents - End of Year $2,941,530 $ 291,815
========= ==========
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
F-6
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997
Supplemental Schedule of Noncash Financing and
Investing Activities
Offering costs reclassified to additional
<S> <C> <C>
paid-in capital $ 71,751 $118,106
======= =======
Dividends payable $ 233,004 $127,899
======= =======
Supplemental Cash Flow Information
Cash paid during the year for
Interest $ 59 $ -
======== =======
Income taxes $ - $ -
======== =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
F-7
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
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 primarily 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. Loans have been made to churches located in 10 states as of
December 31, 1998.
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. At December 31, 1998,
approximately $2,700,000 of cash equivalents consisted of investments in money
market funds.
The Company maintains some cash in bank deposit accounts which, at times, 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.
F-8
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Allowance for Mortgage Loans Receivable
The Company follows a policy of providing an allowance for mortgage loans
receivable. However, at December 31, 1998 and 1997, management believes the
mortgage loans receivable to be collectible in all material respects, and
therefore, no allowance is presently provided.
Organizational Expenses
Organizational expenses are stated at cost net of amortization 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 for the purpose of calculating earnings per
share. Stock options had no effect on the weighted average number of shares
outstanding.
F-9
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
2. MORTGAGE LOANS AND BOND PORTFOLIO
At December 31, 1998, the Company had first mortgage loans receivable totaling
$6,231,862. The loans bear interest ranging from 9.25% to 15.00%. At December
31, 1997, the Company had first mortgage loans receivable totaling $4,912,308
which bore interest ranging from 9.75% to 15.00%.
The Company also has a portfolio of forty-seven church bonds, which are carried
at cost plus amortized interest income. The bonds pay either semi-annual or
quarterly interest ranging from 6.35% to 10.70%. The combined principal of
$1,044,000 at December 31, 1998 is due at various maturity dates between June 1,
1999 and November 1, 2018. One bond issue comprised 86% of total bond portfolio
at December 31, 1998.
The maturity schedule for mortgage loans and bonds receivable as of December 31,
1998 is as follows:
<TABLE>
<CAPTION>
Mortgage Loans Bond Portfolio
<S> <C> <C>
1999 $ 237,242 $ 12,000
2000 350,554 17,000
2001 172,924 125,000
2002 192,953 21,000
2003 215,305 23,000
Thereafter 5,062,884 846,000
--------- ---------
1,044,000
Less discounts from par (20,003)
---------
Totals $6,231,862 $1,023,997
========= =========
</TABLE>
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 began the annual grant of 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, 1998.
F-10
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
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.,
Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day
operations of the Company and provides office space, 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 terms 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 to the Advisor management
and origination fees totaling $101,944 and $61,525 during 1998 and 1997,
respectively. During 1998 and 1997 the Advisor waived fees of $15,223 and
$23,119, 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>
1998 1997
---- ----
<S> <C> <C>
Current $ - $ -
Deferred (7,000) (13,000)
----- ------
Total tax benefit ($7,000) ($13,000)
===== ======
</TABLE>
F-11
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1998 and 1997
5. INCOME TAXES - Continued
As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to its shareholders. In order to maintain
its status as a REIT, the Company is required to distribute at least 95% of its
taxable income. In 1998, the Company had pretax income subject to tax of
$705,365 and distributions to shareholders in the form of dividends during the
tax year of $741,038. The expected tax expense to the Company, pre-dividends,
would have been $241,524. In 1997, the Company had pretax income subject to tax
of $347,814 and distributions to shareholders in the form of dividends during
the tax year of $379,939. The expected tax expense to the Company,
pre-dividends, would have been $118,257.
The following reconciles the income tax benefit with the expected provision
obtained by applying statutory rates to pretax income:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected tax expense (benefit) $241,524 $118,257
Benefit of REIT distributions (248,524) (131,257)
------- -------
Totals ($ 7,000) ($ 13,000)
======== ========
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loan origination fees $40,000 $33,000
====== ======
</TABLE>
6. PUBLIC OFFERINGS 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, and no minimum sale
of stock was required. The stock sale commenced on September 26, 1997 and
concluded on January 22, 1999. A total of 799,759 shares were sold, of which
710,339 were sold through December 31, 1998.
F-12
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes for Financial Statements
December 31, 1998 and 1997
6. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK - Continued
The Company intends to file a Registration Statement with the Securities and
Exchange Commission for a third public offering of its common stock in 1999.
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 $331,000 and $162,600 during 1998 and
1997, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Cash and equivalents $2,941,530 $2,941,530 $ 291,815 $ 291,815
Accounts receivable 28,777 28,777
Mortgage loans receivable 6,231,862 6,231,862 4,912,308 4,912,308
Bond portfolio 1,023,997 1,023,997 125,809 125,809
</TABLE>
The carrying value of cash and equivalents approximates fair value. The fair
value of the mortgage loans receivable and the bond portfolio are estimated by
discounting future cash flows using current discount rates that reflect the
risks associated with similar types of loans.
F-13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,941,530
<SECURITIES> 1,023,997
<RECEIVABLES> 6,231,862
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,219,549
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,266,327
<CURRENT-LIABILITIES> 267,535
<BONDS> 0
0
0
<COMMON> 10,876
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,266,327
<SALES> 0
<TOTAL-REVENUES> 782,013
<CGS> 0
<TOTAL-COSTS> 76,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 705,365
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 712,365
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
</TABLE>
