As filed with the Securities and Exchange Commission on March 22, 2000
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, 1999
or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period from __________ to __________.
- --------------------------------------------------------------------------------
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
Minnetonka, 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: Common Stock,
$.01 par value
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: $1,109,436
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 29, 2000 was: 1,379,540 ----------
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, 1999 and 1998.................... F-2
Statement of Operations
Years Ended December 31, 1999 and 1998........ F-4
Statements of Stockholders' Equity
December 31, 1999 and 1998.................... F-5
Statements of Cash Flows
Years Ended December 31, 1999 and 1998........ 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...... 17
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, we operate
as a Real Estate Investment Trust ("REIT") and are engaged in the business of
making mortgage loans to churches and other non-profit religious organizations
throughout the United States. The principal amount of loans we offer ranges from
$100,000 to $1,000,000. We may also invest up to 30% of our Average Invested
Assets in mortgage secured debt securities (bonds) issued by churches and other
non-profit religious organizations. Between the date upon which we began active
business operations (April 15, 1996), and February 29, 2000, we have made 38
loans to 33 churches in the aggregate amount of $13,930,750, with the average
size being $366,599. Of the 38 loans we have made, eight loans totaling
$2,432,000 have been repaid early by the borrowing churches. We also own, as of
February 29, 2000, $2,067,000 principal amount of Church Bonds which we
purchased at a price of par value ($1,000) or less. At no time have we paid a
premium for any of the bonds in our portfolio. We sold $195,000 of our bonds at
"par" during 1999. The face value of bonds in our portfolio as of February 29,
2000 was $2,067,000. Subject to supervision of our Board of Directors, our day
to day business operations are managed by Church Loan Advisors, Inc. (the
"Advisor"), which provides investment advisory and administrative services to
us. The principals of the Advisor include principals of American Investors
Group, Inc., an NASD member broker-dealer which has served as underwriter of the
three public offerings of our common stock.
Public Offerings
On July 11, 1995, the Securities and Exchange Commission declared
effective our first public offering of 2,000,000 common shares at a price of
$10.00 per share ($20,000,00) under SEC File 33-87570. We 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, we could not commence our 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
us 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 ours.
We concluded our initial public offering on November 8, 1996. As of such date we
had sold 335,481 shares to approximately 281 individuals, not including 20,000
shares ($200,000) previously purchased by our initial shareholder -- DRM
Holdings, Inc., another of our affiliates.
On September 26, 1997, the Securities and Exchange Commission
declared effective our 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. The Offering was conducted on a"best-efforts" basis
pursuant to applicable rules of the Securities and Exchange Commission. We
concluded our second public offering on January 22, 1999. We sold 799,759 shares
during our second public offering.
3
<PAGE>
On September 23, 1999 the Securities and Exchange Commission declared
effective our third public offering of 1,500,000 common shares at a price of
$10.00 per share ($15,000,000) under SEC File 333-81819. The Offering is being
conducted on a "best-efforts" basis pursuant to applicable rules of the
Securities and Exchange Commission. As of February 29, 2000, we had sold 171,269
shares, and had 1,379,540 shares outstanding and approximately 911 individual
shareholders.
The Company's Business Activities
Our business is managed by Church Loan Advisors, Inc., Minnetonka,
Minnesota (the "Advisor"). We have no employees. 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 church bonds, they review financing proposals, analyze prospective
borrowers' financial capability, and structure, market and sell, 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 68 years in this business. Since its inception,
American has underwritten approximately 163 church bond financings, in which
approximately $253,348,000 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 $1,554,282 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, administrative expenses and complexity normally associated with the
bond financing business, American determined that the economic feasibility of
bond financing has diminished for financings under $750,000. As a result, we
believe 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-by capitalizing on the
human resources and experience available at American and the Advisor, and taking
advantage of the marketing, advertising and general goodwill of American.
Financing Business
Our 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. We attempt to apply essentially all of our working
capital (after adequate reserves determined by the Advisor) toward making
mortgage loans and investing in Church Bonds. We seek to enhance returns on
investments on such loans by:
o offering terms of up to 20 years or more, generating the highest yields
possible under current market conditions;
o seeking origination fees (i.e. "points") from the borrower at the outset
of a loan and upon any renewal of a loan;
o making a limited amount of higher-interest rate second mortgage loans to
qualified borrowers; and
o purchasing a limited amount of mortgage-secured debt securities having
various maturities issued by churches and other non-profit religious
organizations.
Our 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
us (or Church Bonds purchased for investment) will be secured by a first
mortgage (or deed of trust) lien in favor of us. Although we attempt to make
mortgage loans for various terms typically ranging from three to twenty years,
we may determine to emphasis longer-term fixed-rate loans in its discretion, in
order to reduce the risk to us of downward interest rate fluctuations.
Our lending and investing operations, including determination of a
prospective borrower's or church bond issuer's financial credit worthiness, are
made on our behalf by the Advisor. Employees and agents of the Advisor conduct
all aspects of our 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 our day-to-day business. In consideration of its services,
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 we make. The Advisor's management fees are
computed and payable monthly.
4
<PAGE>
Current First Mortgage Loan Terms
We offer 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 us 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 our portfolio; (ii)
competition from other lenders; (iii) anticipated need to increase the overall
yield to our mortgage loan portfolio; (vi) local and national economic factors;
and (v) actual experience in borrowers' demand for the loans. In addition, we
may make mortgage loans on terms other than those identified in our list of Loan
Types. Subject to change, modification or elimination at our complete discretion
, the following is a list of the currently available Loan Type we may offer to
prospective borrowing institutions:
<TABLE>
<CAPTION>
Loan Type Interest Rate (1) Origination Fee (2)
<S> <C> <C>
15 Year Term (3) Fixed @ Prime + 1.45% 4.0%
20 Year Term (3) Fixed @ Prime + 1.50% 4.0%
20 Year Term (3) Variable Annually @ Prime + 1.25% 4.0%
Renewable Term (4) Fixed @ Prime plus:
3 Year 1.10% 4.0%
5 Year 1.25% 4.0%
7 Year 1.40% 4.0%
Construction 1 Year Term Fixed @ Prime + 2.25% 2.0%
================================= ========================================= =========================
</TABLE>
(1) "Prime" means the prime rate of interest charged to preferred customers, as
published by a federally chartered bank chosen by our Advisor.
(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.
(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. We charge a fee of 1% to
the borrower by us 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 us. The table does not, however,
purport to identify all possible Loan Types, terms, rates, and fees that we may
offer from time-to-time. We 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 our Advisor's
personnel in our Loan Origination and Underwriting Department. Verification
procedures are designed to assure a borrower's qualification under our Financing
Policies which are specifically identified herein and include, among other
things, obtaining:
o written applications (and exhibits) signed and authenticated by the
prospective borrower in form and substance dictated by us;
o financial statements in accordance with our Financing Policies;
o corporate records and other organizational documents of the borrower;
o preliminary title report or commitment for mortgagee title insurance; and
o a real estate appraisal in accordance with the Financing Policies.
5
<PAGE>
All appraisals and financial statements are prepared by independent
third-party professionals who are we approve based on their experience,
reputation and education. Completed loan applications, together with a written
summary are then presented to our Underwriting Committee. Our loan Underwriting
Committee is comprised of the Advisor's President and Vice-President and our
President. Our 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 our underwriting criteria. Our 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 our Advisor, and the other one-half to us.
Loan Commitments
Subsequent to approval by our Underwriting Committee, and prior to funding
a loan, we may issue a loan commitment to qualified applicants. A loan
commitment deposit may be 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 may indicate, among other things, 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 we commit to a stated interest
rate. In certain cases we may establish ("lock in") interest rate commitments up
to sixty (60) days from the commitment to closing; however, interest rate
commitments beyond sixty days will not normally be issued unless we receive an
appropriate fee premium based upon our assessment of the risk associated with a
longer period.
Loan Portfolio Management
Our portfolio of mortgage loans and Church Bonds is managed and serviced by
our Advisor in accordance with the Advisory Agreement. The Advisor is
responsible for all aspects of our 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 our 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 our responsibility. We may , however,
recoup these expenses from the borrower in the process of pursuing the our
remedies. The Advisor will not receive any additional compensation for services
rendered in connection with loan portfolio management or exercising remedies on
our behalf in the event of a loan default.
Loan Funding and Bank Borrowing
Our mortgage loans (and our 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. We currently have a
$1,000,000 line of credit with Beacon Bank, Shorewood, Minnesota. We have
borrowed against our line of credit and had an outstanding balance of $800,000
as of February 29, 2000. We may borrow up to 50% of the value of our Average
Invested Assets to make loans regardless of our 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 our portfolio. Cash resources generally available
to us consist primarily of the net proceeds from the sale of the Shares, minus
reserves for operating expenses, and bad-debt reserves, as determined by the
Advisor. As our business develops and over the course of time, cash resources
available to us 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 us, (ii) dividends reinvested by our Shareholders
electing the Dividend Reinvestment Plan, and (iii) funds borrowed under any line
of credit arrangement.
The Advisory Agreement
We have entered into a contract with the Advisor (the "Advisory Agreement")
under which the Advisor will furnish advice and recommendations concerning our
business affairs, provide administrative services to us and manage our
day-to-day operations. Among other things, the Advisor:
o serves as our mortgage loan underwriter and advisor in connection with
its primary business of making loans to churches;
o advises and selects Church Bonds to be purchased and held for investment
by us;
o provides marketing and advertising and generates loan leads directly and
through its Affiliates;
6
<PAGE>
o on our behalf, deals with borrowers, lenders, banks, consultants,
accountants, brokers, attorneys, appraisers, insurers and others;
o supervises the preparation, filing and distribution of tax returns and
reports to governmental agencies and to Shareholders and acts on our behalf in
connection with Shareholder relations;
o provides office space and personnel as required for the performance of
the foregoing services as Advisor; and o as requested by us, makes reports to us
of its performance ofthe foregoing services and furnish's advice and
recommendations with respect to other aspects of our business.
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 ours and are
not provided for by the Advisor as part of its services.
The Advisory Agreement is renewable annually by us for one-year periods,
subject to our determination, including a majority of the Independent Directors,
that the Advisor's performance has been satisfactory and that the compensation
paid the Advisor has been reasonable. We may terminate the Advisory Agreement
with or without cause upon 60 days written notice to the Advisor. Upon
termination of the Advisory Agreement by either party, the Advisor may require
us to change our 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. Our Board of Directors shall determine that
any successor Advisor possess sufficient qualifications to perform the advisory
function for us and justify the compensation provided for in its contract with
us.
Pursuant to the Advisory Agreement, the Advisor is required to pay all of
the expenses it incurs in providing services to us, 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 ours that incurred in their capacities
as our directors and officers), and all of its overhead and miscellaneous
administrative expenses relating to performance of its functions under the
Advisory Agreement. We are required to pay all other expenses we incur in the
daily operations of our business-such as the costs and expenses of reporting to
various governmental agencies and the Shareholders; the general conduct of our
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 out Total Operating Expenses exceed in any calendar year
the greater of (a) 2% of our Average Invested Assets or (b) 25% of our net
income, the Advisor is obligated to reimburse us, to the extent of its fees for
such calendar year, for the amount by which the aggregate annual operating
expenses paid or incurred by us 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.
Our bylaws provide that the Independent Directors are to determine at least
annually the reasonableness of the compensation we pay to our 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 our loan
portfolio, the rates charged by other investment advisors performing comparable
services, the success of the Advisor in generating opportunities that meet our
investment objectives, the amount of additional revenues realized by the Advisor
for other services performed for us, the quality and extent of service and
advice furnished by the Advisor, the quality of our investments in relation to
investments generated by the Advisor for its own account, if any, and the
performance of our investments.
The Advisory Agreement provides for indemnification by us 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 us, provided
that the conduct against which the claim is made was determined by such person,
in good faith, to be in our best interests and was not the result of negligence
or misconduct.
Financing Policies
Our 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 our
Shareholders not only the general business in which we are involved, but the
parameters of our 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 our outstanding Shares at a duly held meeting for that purpose:
7
<PAGE>
(i) Loans made by us 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 that we fund
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, we 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 us by the borrower insuring our
mortgage interest.
(iv) The borrower's long-term debt (including the proposed loan) cannot
exceed four (4) times their gross income for the previous twelve
(12) months.
(v) The borrower must furnish us with financial statements (balance
sheet and income and expense statement) for their last three (3)
complete fiscal years and a current financial statement 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 their inception. No loan will be extended to a borrower in
operation less than two years (24 months) absent express approval
by our Board of Directors.
(vi) In its discretion, the Advisor, on our behalf, may require the
borrower to arrange for automatic electronic or drafting of
monthly payments.
(vii) In its discretion, the Advisor, on our behalf, 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 our benefit.
(viii) The borrower must agree to provide to us 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 our behalf, may require the
borrower to grant to us 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 our bylaws.
Prohibited Investments and Activities
Our bylaws impose certain prohibitions and restrictions on our
investment practices and lending activities, including prohibitions against:
(i) Investing more than 10% of our 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;
8
<PAGE>
(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 our 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 our 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 our Directors
(including a majority of our Independent Directors), who are
not otherwise interested in such transaction, as being fair
and reasonable to us;
(xiii) Acquiring property from any Advisor or Director, or any
Affiliate thereof, unless a majority of our Directors
(including a majority of our Independent Directors) who are
not otherwise interested in such transaction approve the
transaction as being fair and reasonable and at a price to us
which is no greater than the cost of the asset to such
Advisor, Director or any Affiliate thereof, or if the price to
us is in excess of such cost, that substantial justification
for such excess exists and such excess is reasonable. In no
event shall the cost of such asset 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 shares on a deferred payment basis or other similar
arrangement.
We do not 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 our business as
described herein.
We will not make loans to or borrow from, or enter into any contract,
joint venture or transaction with, any of our Directors or officers, the Advisor
or any Affiliate of any of the foregoing unless a majority of our Directors,
including a majority of our Independent Directors, approves the transaction as
fair and reasonable to us and the transaction is on terms and conditions no less
favorable to us than those available from unaffiliated third parties. Any
investment by us 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. We
will compete within our 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 our own. A number of these competitors have
greater financial resources, larger staffs and longer operating histories than
we do. We compete principally by limiting our business "niche" to lending to
churches and other non-profit religious organizations, offering loans with
competitive and flexible terms, and emphasizing our expertise in the specialized
industry segment of lending to churches and other religious organizations.
Employees
We have no employees. Our daily opertions and other material aspects of
our business are 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 us at no charge and which
will not be reimbursed to them. These services include, among others, legal and
analytic services relating to the execution of our business plan, development
and preparation of reports to be filed under the Securities Exchange Act, and
utilization of proprietary forms and documents utilized by the Advisor in
connection with our business operations.
9
<PAGE>
Subject to the supervision of the our Board of Directors, our business is
managed by Church Loan Advisors, Inc. (the "Advisor"), which provides us
investment advisory and administrative services. The Advisor is owned by V.
James Davis, David G. Reinhart and Philip J. Myers. Mr. Reinhart and Mr.
Davis are officers and directors of ours, and they are also directors of
the Advisor. Philip J. Myers is President of the Advisor and of American
Investors Group, Inc., our underwriter in our current public offering. Mr.
Reinhart is Chairman of the Board of Directors of American. The Advisor is
not a registered advisor under the Investment Advisor's Act of 1940, nor
are we a registered investment company under the Investment Company Act of
1940. As of the date of this Report, the Advisor employs five persons on a
part-time or other basis. We do 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,
accounting and certain other services are provided to us by outside
professionals and paid by us directly. See Item 11 "Security Ownership of
Certain Beneficial Owners and Management," and Item 12 "Certain
Relationships and Related Transactions."
Operations
Our 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 Yellow Circle
Partners, L.L.P., a partnership owned by Mr. Reinhart and Mr. Myers. We are not
charged any rent for our use of these facilities, or for our 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 Yellow Circle Partners on a
monthly basis. We believe that the terms of this arrangement are at least as
favorable to us as those available from unaffiliated third parties on an arm's-
length basis.
Item 2. Description of Property
Our operations are located in the leased offices of American Investors
Group, Inc., in Minnetonka, Minnesota. It is expected that for the foreseeable
future our operations will continue to be housed in these or similar leased
premises along with American's operations and those of its Affiliates, including
the Advisor. We are not directly charged for rent, nor do we incur other costs
relating to such leased space, since the Advisor is including this expense in
the Advisory Fee.
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 29, 2000, 1,359,540 shares of our common shares were
issued and outstanding in the public, excluding 20,000 shares owned by our
initial shareholder DRM Holdings, Inc. Our initial public offering (SEC file
33-87570) which began July 11, 1995 was closed November 8, 1996 with 335,481
shares having been sold. On September 26, 1997, the Securities and Exchange
Commission declared effective our second public 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 ours. The Offering was conducted on
a"best-efforts" basis pursuant to applicable rules of the Securities and
Exchange Commission. We concluded our second public offering on January 22,
1999. We sold 799,759 shares in our second public offering. On September 23,
1999, the Securities and Exchange Commission declared effective our third public
offering of 1,500,000 common shares at a price of $10.00 per share ($15,000,000)
under SEC File 333-81819. The Offering is being conducted on a "best-efforts"
bais pursuant to applicable rules of the Securities and Exchange Commission. As
of February 29, 2000, we have sold 171,269 shares and have 1,379,540 shares
outstanding and approximately 911 shareholders.
10
<PAGE>
Lack of Liquidity and Absence of Public Market Price.
There currently is no market for our 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 our 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 our shares. In addition,
the market price, if any develops, could decline if the yields from other
competitive investments exceed the actual dividends paid by us on our shares.
Our common stock is not listed on any exchange and is not yet listed for
quotation on the National Association of Securities Dealers, Inc. Automated
Quotation System ("NASDAQ").
Repurchase of Our Shares
Although our common shares are not redeemable by us, we may at our
complete discretion, repurchase shares offered to us from time to time by our
Shareholders. In such event, we 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 have voting rights.
Holders of Our Common Shares
As of February 29, 2000, we had 911 record holders of our $.01 par
common stock, including our first Shareholder, DRM Holdings, Inc., a Minnesota
corporation and affiliate of the Advisor, which owns 20,000 shares for which it
paid $200,000 ($10.00 per share).
Dividends
We paid dividends for the prior fiscal year on our common stock as
follows:
<TABLE>
<CAPTION>
Distribution Date: For Quarter Ended: Dollar Amount Distributed Annualized Yield Per $10
Per Share: Share Represented:
<S> <C> <C> <C>
April 30, 1999 March 31, 1999 $.1875 7.50%
July 30, 1999 June 30, 1999 $.21875 8.75%
October 30, 1999 September 30, 1999 $.228125 9.125%
January 30, 2000 December 31, 1999 $.215625 8.625%
</TABLE>
As a Real Estate Investment Trust, we make regular quarterly
distributions to Shareholders. The amount of distributions to them equal at
least 95% of our "real estate investment trust taxable income." Shareholder
distributions are estimated for our first three quarters each fiscal year and
adjusted annually based upon our audited year-end financial report. Cash
available for distribution to our Shareholders is derived primarily from the
interest portion of monthly mortgage payments we receive from churches borrowing
money from us, from origination and other fees paid to us by borrowers in
connection with loans we make, interest income from mortgage-backed securities
issued by churches and other non-profit religious organizations purchased and
held by us for investment purposes, and earnings on any Permitted Temporary
Investments made us. All dividends are paid by us at the discretion of the Board
of Directors and will depend upon our earnings and financial condition,
maintenance of real estate investment trust status, funds available for
distribution, results of operations, economic conditions, and such other factors
as our Board of Directors deems relevant.
During any period where our shares of common stock are being offered
and sold and the proceeds therefrom accumulated for the purpose of funding loans
to be made by us, the relative yield generated by such capital, and, thus,
dividends (if any) to Shareholders, could be less than expected once we have
fully invested such funds into loans. We intend to combat to the extent we can
the possibility of low yields during the periods where we're 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 us), and (ii) timing our lending activities to coincide as much as
possible with sales of our Shares. However, there can be no assurance that
either or both of these strategies will improve current yields to our
Shareholders in periods of our 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, we are required to pay dividends to holders of our Shares in
annual amounts which are equal to at least 95% of our "real estate investment
11
<PAGE>
trust taxable income." For the fiscal year ended December 31, 1999 we
distributed substantially all of our taxable income to our Shareholders in the
form of quarterly dividends. We intend to continue distributing all or a portion
of such income to our 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 our 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 their Shares.
Funds available to us from the repayment of principal (whether at
maturity or otherwise) of loans made by us, or from sale or other disposition of
any properties or any of our 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. We can pass through the capital gain
character of any income generated by computing its net capital gains and
designating a like amount of our distribution to our 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, if we have a choice of whether to distribute any such gains,
undistributed net capital gains (if any) will be taxable to us. 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 our Shareholders.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion regarding our financial statements should be
read in conjunction with the financial statements and notes thereto included in
this Report beginning at page F-1.
Financial Condition
During our year ended December 31, 1999 our total assets increased by
$2,649,263 due primarily to sale of our common stock in our second and third
"best efforts" public offerings. Our total liabilities increased by $602,328 due
to deferred income, dividends declared but not yet paid as of December 31, 1999,
and an outstanding balance of $500,000 payable to Beacon Bank, Shorewood,
Minnesota for a line of credit we established in fiscal year 1999 .
Results of Operations-1996-1997
We began 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 we began
active business operations and December 31, 1996, we made loans to seven
churches in the aggregate amount of $2,802,000, with an average loan size being
$400,000. We 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.
We completed our first full fiscal year of operations December 31,
1997. During that fiscal year we funded five more first mortgage loans and three
second mortgage loans to churches for an aggregate amount of $2,665,712, and we
purchased $2,000 principal amount of First Mortgage Church Bonds for a purchase
price of $871.
Results of Operations - 1998
During our fiscal year ended December 31, 1998 we funded six more first
mortgage loans and two second mortgage loans totaling $1,793,750 and $355,000
respectively. We also purchased $925,300 principal amount of First Mortgage
Church Bonds for a purchase price of $922,445. During this year, two first
mortgage loans and one second mortgage loan in the aggregate amounts of $730,000
and $350,000 respectively, were repaid early. We also had two First Mortgage
Church Bonds called for redemption (early repayment). The face amount of the
combined bonds was $33,000, our original aggregate purchase price was $29,225.
Results of Operations -1999
During our fiscal year ended December 31, 1999 we funded fourteen more
first mortgage loans and one second mortgage loan to churches totaling
$5,696,000 and $235,000 respectively. We also purchased $1,382,000 principal
amount of First Mortgage Church Bonds for a purchase price of $1,375,478. During
this year, three first mortgage loans and one second mortgage loan in the
aggregate amounts of $952,000 and $100,000 respectively, were repaid early. We
also sold $246,000 First Mortgage Church Bonds for $244,170 and sold our only
Second Mortgage Church Bond for $100,000. We had two First Mortgage Church Bonds
called for redemption (early repayment). The face amount of the combined bonds
was $12,000.
Net income for our fiscal year ended December 31, 1999 was
$971,879 on total revenues of $1,109,436 compared to $712,365 on total revenues
of $782,013 for the year ended December 31, 1998. Interest income earned on the
Company's portfolio of loans was $848,346 for the year ended December 31, 1999,
compared to $655,219 for 1998. This increase was due
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<PAGE>
to the fact that fifteen new loans were originated in fiscal year ended December
31, 1999 . Excluded from revenue for the year ended December 31, 1999 is
$114,801 of origination income, or "points," we received. Recognition of
origination income 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
our status 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 our Shareholders for the quarters ended March 31, 1999,
June 30, 1999, September 30, 1999 and December 31, 1999 included origination
income even though it was not recognized in its entirety for the period under
GAAP.
Our Board of Directors declared quarterly dividends of $.1875 for each
share held of record on March 31, 1999, $.21875 per share held of record June
30, 1999, $.228125 per share held of record September 30, 1999, and $.215625 per
share held of record on December 31, 1999. Based on the four quarters of
operations for the quarters ended March 31, 1999, June 30, 1999, September 30,
1999, and December 31, 1999, the dividends paid represented a 7.50%, 8.75%,
9.125% and 8.625% annualized yield to Shareholders respectively for an effective
overall annual dividend yield of 8.50% in 1999.
Since our inception, we have experienced our highest quarterly dividend
payment for the quarter ended December 31, 1997 and experienced our lowest
quarterly dividend payment for the quarter ended March 31, 1999. 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 March 31, 1999 was $.1875 representing an
annualized yield of 7.50%. 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". By way of further comparison, the dividend payment made to March
30, 1999 shareholders of record was significantly lower than the average
dividend amount due directly to large cash balances we received form our second
stock offering and held in money market instruments pending deployment in new
loans to churches. Because interest earned in our money market account is
substantially lower than interest earned on our mortgage loans, interest income
earned was lower than is anticipated to be earned once the offering proceeds are
fully deployed into new loans.
Our total assets increased from $10,266,327 at December 31, 1998 to
$12,915,590 at December 31, 1999. The primary reason for the increase in total
assets from December 31, 1998 through December 31, 1999 was a result of the sale
and issuance of our common stock pursuant to our second and third public
offerings, the proceeds of which were (and continue to be) deployed into new
mortgage loans. Shareholders' Equity rose from $9,906,384 at December 31, 1998
to $11,953,319 at December 31, 1999 for the same reasons. Our liabilities for
both periods are primarily comprised of a "Deferred Income" item, reflecting our
practice of recognizing our origination income -- fees charged to borrowers at
the commencement of its loans -- over the life of each loan. Another material
liability for both periods includes dividends declared as of the end of the
period reported on, but which are not paid until the 30th day of the ensuing
month. The December 31, 1999 balance sheet also reflected a liability of
$500,000 representing the balance as of such date on our line of credit with
Beacon Bank.
Our second public offering concluded January 22, 1999. A total of
779,759 shares were sold during our second public Offering. We began the sale of
shares in our third public offering on September 22, 1999 and have sold 171,269
shares representing $1,712,690 as of February 29, 2000. During the two-month
period ended February 29, 2000 our total assets again increased by $790,964 due
primarily to the continued public sale of our common stock. Between December 31,
1999 and February 29, 2000 we financed one additional first mortgage loan for
$500,000. All loans made by us range in interest rate charged to the borrowers
from 9.50% to 12.00%. Many of our loans have repayment schedules of up to twenty
years, but may be prepaid at any time without penalty. As of February 29, 2000,
the average, principal-adjusted interest rate on our loan portfolio was 10.22%.
Our portfolio of Church Bonds has an average current yield of 9.12%.
Liquidity and Capital Resources
Our revenue is derived principally from interest income, and
secondarily, from origination fees and renewal fees generated by mortgage loans
that we make. We also earn income through interest on funds that are invested
pending their use in funding mortgage loans or distributions of dividends to our
Shareholders, and on income generated on church bonds we may purchase and own.
We generate revenue through (i) permitted temporary investments of the net
proceeds from the sale of the shares, and (ii) implementation of our business
plan of making mortgage loans to churches and other non-profit religious
organizations. Our principal expenses are advisory fees, legal and accounting
fees, communications costs with our Shareholders, and the expenses of our stock
transfer agent, registrar and dividend reinvestment agent.
Our future capital needs are expected to be met by (i) additional sale
of our shares to the public (ii) prepayment, repayment at maturity and renewal
of mortgage loans made by us, and (iii) borrowed funds. We believe that the
"rolling" effect of mortgage loans maturing, together with dividends reinvested
under our Dividend Reinvestment Plan, will provide a supplemental source of
capital to fund our business operations in future years. Nevertheless, we
believe that it may be desirable, if not necessary, to sell additional shares of
common stock in order to enhance our capacity to make mortgage loans on a
continuous basis. There can be no assurance that the we will be able to raise
additional capital on terms acceptable for such purposes.
13
<PAGE>
In addition, we are able to borrow funds in an amount not to exceed
50% of our Average Invested Assets in order to increase our lending capacity. We
currently have a $1,000,000 secured line of credit with Beacon Bank, Shorewood,
Minnesota. As of February 29, 2000 we have borrowed $800,000 against our line of
credit. This credit line is secured by the pledge of $1,000,000 in principal
amount of our Church Bonds. We are charged interest on the line of credit at a
rate of the prime-interest rate, plus 1.00%. We have borrowed funds at a rate as
low as 9.00% and as high as 9.75% (our current borrowing rate). Interest on our
line of credit is payable to Beacon Bank on a monthly basis. We do not believe
the recent interest rate increases by the Federal Reserve Board will have a
material adverse effect on our borrowing capacity or the carrying interest rate
charged by Beacon Bank. We have loaned funds at rates that are higher than the
current interest rate being charged by the bank. In addition, the higher prime
interest lending rates have caused us to increase the interest rates on loans we
make. We believe that the rate at which we lend funds will always be higher
than the cost at which we borrow the funds. However, there can be no assurance
that we can loan funds out at rates higher than the rate at which we borrow the
funds. We anticipate to "pay-down" our line of credit by (i) selling additional
shares in our public offering; (ii) applying the proceeds from principal
payments on our current loan portfolio payments and any loan re-payments; and
(iii) use the proceeds raised in our dividend reinvestment program. Increases in
the prime lending rate as well as the increase in the rate of interest charged
on our loans has and likely will continue to impact interest income we will earn
and, accordingly, influence dividends declared by the Company's Board of
Directors.
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
(Balance of Page Intentionally Left Blank)
14
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
(a) Our Directors are elected for a term expiring at the next annual
Shareholder's meeting and serve for one-year terms and until their successors
are duly elected and qualified. Annual Shareholder Meetings are typically held
in May. Our officers serve at the discretion of the our Board of Directors.
Among other requirements, in order to maintain its REIT status, a majority of
the our Directors must be "independent." Our executive officers and Directors
are as follows:
<TABLE>
<CAPTION>
Name Age Office Director Since
<S> <C> <C> <C>
David G. Reinhart 47 President, Treasurer and Director 1994
V. James Davis 55 Vice-President, Secretary and Director 1994
Kirbyjon H. Caldwell 47 Independent Director 1994
Robert O. Naegele, Jr. 59 Independent Director 1994
Dennis J. Doyle 48 Independent Director 1994
John M. Clarey 58 Independent Director 1994
</TABLE>
David G. Reinhart, has been a Director since our inception, and has served
as our President and Treasurer since January 19, 1999. He served as our
Vice-President and Secretary since our 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 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 ours since our inception, and has served
as our Vice-President and Secretary since January 19, 1999. He served as our
President and Treasurer since our 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 since September
1994. He currently is Senior Pastor of Windsor Village United Methodist Church
and St. John's United Methodist Church in Houston, Texas, in which capacities he
has served since January 1982 and September 1992, respectively. Membership in
both churches is approximately 7,500 combined and their ministries reach a broad
segment of the Houston region. Kirbyjon Caldwell received his B.A. degree in
Economics from Carlton College (1975), an M.B.A. in Finance from the University
of Pennsylvania's Wharton School (1977), and his Masters in Theology from
Southern Methodist University School of Theology (1981). He is a member of the
Boards of Directors of Texas Commerce Bank (Houston), Hermann Hospital
(Houston), Greater Houston Partnership, The United Way of The Texas Gulf Coast,
and the American Cancer Society. He is also the founder and member of several
foundations and other community development organizations.
Robert O. Naegele, Jr., has served as an Independent Director 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.
15
<PAGE>
Dennis J. Doyle, has served as an Independent Director since September
1994. He is the majority shareholder 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 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. We currently have 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. Our
officers have no employment contracts with us or the Advisor and are considered
employees "at will." We believe 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 of our officers, would not have a material adverse
effect upon our operations. As required by our bylaws, a majority of the
Directors are Independent Directors in that they are otherwise unaffiliated with
and do not receive compensation from us (other than in their capacity as
Directors) or from the Advisor or American.
Our Directors are responsible for considering and approving our policies.
They meet as often and devote such time to our business as their oversight
duties may require. Pursuant to our 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 us is reasonable.
Directors and officers are permitted to engage in other activities of the
type conducted by us, and neither our Articles of Incorporation or bylaws nor
any policy of ours restricts officers or Directors from conducting, for their
own account or on behalf of others, business activities of the type conducted by
us.
The Directors and officers are nevertheless not relieved of their duties of
loyalty to us and our 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.
Our two executive officers do not receive compensation from us, 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 us. See Item 12 Certain Relationships and Related
Transactions.
We currently pay each Independent Director a fee of $500 for each board
meeting ($200 for telephonic meetings), limited to $2,500 per year. In addition,
we reimburse Directors for travel expenses incurred in connection with their
duties as our Directors. We also have 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 our common stock at a
price equal to the fair market value at the date of the grant.
Warrants and Options
On September 30, 1994, the Board of Directors adopted a Stock Option Plan
for Directors and the Advisor (the "Option Plan") to be administered by our
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
16
<PAGE>
November 15, 1994, 1995, 1996, 1997, 1998 and 1999 we issued options under the
Option Plan to each of our six directors and the President of the Advisor, to
purchase 3,000 shares each. All of the options issued November 15, 1994 have
expired unexercised. Therefore options are currently outstanding for a total
105,000 shares at a price of $10 per share. These options vest and are thus
exercisable on or after November 15, 1996 and expire November 15, 2000 through
November 15, 2004.
We may grant full-time employees and our existing directors and officers
and the Advisor warrants, options, stock purchase rights, incentive stock
options or similar arrangements to purchase shares of our Common Stock. In
accordance with applicable state law, we have agreed to limit the number of
options or warrants issuable to the Advisor, Affiliates or any Director to ten
percent 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.
We 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 our counsel,
disqualify or jeopardize our status as a real estate investment trust under the
Internal Revenue Code.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth as of February 29, 2000, 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 our 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> <C>
David G. Reinhart ......................... 10,000 (3) .72%
Robert O. Naegele, Jr...................... 5,000 .36%
V. James Davis............................. 2,332 .17%
Kirbyjon H. Caldwell....................... ---- ----
Dennis J. Doyle............................ ---- ----
John M. Clarey............................. ---- ----
All Executive Officers and Directors
as a Group (five individuals)......... 17,332 1.26%
</TABLE>
- ------------------------------------------------
(1) The address for the Directors is 10237 Yellow Circle Drive, Minnetonka,
Minnesota 55343.
(2) Excludes 15,000 Shares (105,000 shares in the aggregate) which each of
our Directors and the President of the Advisor have an option to
purchase pursuant to the Stock Option Plan for Directors and the
Advisor. Options to purchase 84,000 Shares are currently exercisable
(3) Shares indicated are owned of record by DRM Holdings, Inc., a Minnesota
corporation ("DRM") which owns a total of 20,000 shares of 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". DRM is owned by David G.
Reinhart, our 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 10,000 shares.
Item 12. Certain Relationships and Related Transactions.
The Advisor
Subject to the supervision of the Board of Directors, our business is
managed by the Advisor, which provides investment advisory and
administrative services. 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 ours. 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, five persons on a
part-time basis, including Philip J. Myers, our President and Scott J.
Marquis, our Vice President.
Pursuant to the Advisory Agreement, we 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 us.
17
<PAGE>
American Investors Group, Inc.
Pursuant to the Underwriting Agreement in connection with our second public
offering which commenced September 26, 1997 and concluded January 22, 1999, we
paid the Managing Underwriter and Co-Underwriter selling commissions equal to
$332,185 and $143,672 respectively. We also paid non-accountable expenses of the
Managing Underwriter (American) and the Co- Underwriter (LaSalle) $63,983 and
$13,000 respectively. In addition, we 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 us and the Managing Underwriter based on the price paid
($10.00 per share) by our initial shareholder and shareholders who purchased
shares in our initial public offering, which was completed November 8, 1996. The
Managing Underwriter (American) is an affiliate of the Advisor.
Pursuant to the Underwriting Agreement in connection with our third public
offering which commenced September 23, 1999 the underwriter (American) has been
paid selling commissions equal to $101,905 as of February 29, 2000. We have also
paid approximately $30,000 non-accountable expenses of the underwriter. In
addition, we agreed to indemnify them, as 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 us and the
underwriter based on the price paid ($10.00 per share) by the initial
shareholder and shareholders who purchased shares in our prior two public
offerings. 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 our business, we have purchased and expect to continue
to purchase, church bonds being underwritten and sold by American. Although we
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 us on the secondary market. Any church bonds we purchase 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. It is our policy not to invest in excess of 30% of our Average Invested
Assets in Church Bonds.
Church Loan Advisors, Inc.
Our Advisor, Church Loan Advisors, Inc., is a Minnesota corporation
(the "Advisor"), the Advisor was organized on May 27, 1994 to engage in the
business of rendering lending and advisory services solely to us, and to
administer our business affairs and operations. 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
Philip J. Myers, age 43, 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.
18
<PAGE>
Scott J. Marquis, age 42, 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. We have entered into a contract with the
Advisor (the "Advisory Agreement") under which the Advisor will furnish advice
and recommendations concerning our affairs, provides administrative services to
us, and manages our 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 our direct expenses and are not provided for by the Advisor as part of
its services.
The Advisory Agreement is renewable annually by us for one-year
periods, subject to a determination, including a majority of the Independent
Directors, that the Advisor's performance has been satisfactory and that the
compensation paid by us to the Advisor has been reasonable. We may terminate the
Advisory Agreement with or without cause on 60 days written notice. Upon
termination of the Advisory Agreement by either party, the Advisor may require
us to change our 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, we may continue to use the word
"church" in our name. Our directors shall determine that any successor Advisor
possess sufficient qualifications to perform the advisory function for us and
justify the compensation provided for in its contract with us.
Pursuant to the Advisory Agreement, the Advisor is required to pay all
of the expenses it incurs in providing us services 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 our directors or officers), and all of its overhead and
miscellaneous administrative expenses relating to performance of its functions
under the Advisory Agreement. We are required to pay all other expenses,
including the costs and expenses of reporting to various governmental agencies
and our Shareholders and of conducting our 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 our Total Operating Expenses exceed in any calendar
year the greater of (a) 2% of our Average Invested Assets or (b) 25% of our net
income, the Advisor is obligated to reimburse us, to the extent of its fees for
such calendar year, for the amount by which the aggregate annual operating
expenses paid or incurred by us 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.
Our bylaws provide that the Independent Directors are to determine, at
least annually, the reasonableness of the compensation which we pay 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 our
profitability, the rates charged by other investment advisors performing
comparable services, the success of the Advisor in generating opportunities that
meet our investment objectives, the amount of additional revenues realized by
the Advisor for other services performed, the quality and extent of service and
advice furnished by the Advisor, the quality of our investments in relation to
investments generated by the Advisor for its own account, if any, and the
performance of our 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. 333-81819 ).
(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 22, 2000
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: 03/22/00
---------------------------------------- -------------
Dennis J. Doyle, Director
By: /s/ John M. Clarey Date: 03/22/00
----------------------------------------- -------------
John M. Clarey, Director
By: /s/ Robert O. Naegele, Jr. Date: 03/22/00
------------------------------------- ------------
Robert O. Naegele, Jr., Director
By: /s/ Kirbyjon H. Caldwell Date: 03/22/00
-------------------------------------- -----------
Kirbyjon H. Caldwell, Director
21
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Minnetonka, Minnesota
Financial Statements
December 31, 1999 and 1998
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
We have audited the accompanying balance sheet of American Church Mortgage
Company as of December 31, 1999 and 1998 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, 1999 and 1998, 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 10, 2000
<PAGE>
<TABLE>
<CAPTION>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- --------------------------------------------------------------------------------------------------------
December 31
ASSETS 1999 1998
- --------------------------------------------------------------------------------------------------------
Current Assets
<S> <C> <C>
Cash and equivalents $ 382,765 $ 2,941,530
Accounts receivable 5,782 28,777
Current maturities of mortgage loans receivable 218,398 237,242
Current maturities of bond portfolio 17,000 12,000
Prepaids 2,917
--------- ----------
Total current assets 626,862 3,219,549
Mortgage Loans Receivable, net of current maturities 10,189,529 5,994,620
Bond Portfolio, net of current maturities 2,039,199 1,011,997
Deferred Tax Asset 60,000 40,000
Organizational Expenses, net 161
----------- -----------
Total assets $12,915,590 $10,266,327
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- --------------------------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- --------------------------------------------------------------------------------------------------------
Current Liabilities
<S> <C> <C>
Line of credit $ 500,000
Management fee payable $ 12,759
Deferred income 23,078 21,772
Dividends payable 274,280 233,004
--------- --------
Total current liabilities 797,358 267,535
Deferred Income, net of current maturities 164,913 92,408
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 1,322,289 at December 31, 1999
and 1,087,646 shares at December 31, 1998 13,223 10,876
Additional paid-in capital 12,070,410 9,973,200
Accumulated deficit (130,314) (77,692)
---------- ---------
Total stockholders' equity 11,953,319 9,906,384
---------- ---------
Total liabilities and equity $12,915,590 $10,266,327
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
<TABLE>
<CAPTION>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
- -------------------------------------------------------------------------------------------------------
Years Ended December 31
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income $1,109,436 $782,013
Operating Expenses 157,557 76,648
--------- -------
Operating Income 951,879 705,365
Benefit from Income Taxes (20,000) (7,000)
--------- -------
Net Income $ 971,879 $712,365
========= =======
Basic and Diluted Income Per Common Share $ .81 $ .86
========= =======
Weighted Average Common Shares Outstanding 1,203,954 825,176
========= =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
----------------- Capital Deficit
Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Issuance of 234,643 shares of
common stock, net of
offering costs 234,643 2,347 2,097,210
Net income 971,879
Dividends declared (1,024,501)
--------- ------ ---------- ---------
Balance, December 31, 1999 1,322,289 $13,223 $12,070,410 ($ 130,314)
========= ====== ========== =========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31
1999 1998
- ------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income $ 971,879 $ 712,365
Adjustments to reconcile net income to net cash
from operating activities:
Deferred income taxes (20,000) (7,000)
Amortization 161 303
Change in assets and liabilities
Accounts receivable 22,995 (28,777)
Prepaids (2,917)
Accounts payable (12,759) (2,731)
Deferred income 73,811 35,752
--------- -------
Net cash from operating activities 1,033,170 709,912
Cash Flows from Investing Activities
Investment in mortgage loans receivable (5,931,000) (2,498,750)
Collections of mortgage loans receivable 1,754,935 1,179,196
Investment in bond portfolio (1,368,392) (931,188)
Proceeds from bond portfolio called/sold 336,190 33,000
--------- ----------
Net cash used for investing activities (5,208,267) (2,217,742)
Cash Flows from Financing Activities
Net borrowings on line of credit 500,000
Proceeds from stock offering, net 2,099,557 4,793,478
Dividends paid (983,225) (635,933)
--------- ---------
Net cash from financing activities 1,616,332 4,157,545
--------- ---------
Net Increase (Decrease) in Cash and Equivalents (2,558,765) 2,649,715
Cash and Equivalents - Beginning of Year 2,941,530 291,815
--------- ---------
Cash and Equivalents - End of Year $ 382,765 $2,941,530
========= =========
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31
1999 1998
- ----------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Financing and
Investing Activities
Offering costs reclassified to additional
<S> <C> <C>
paid-in capital $ 122,664 $ 71,751
======= =======
Dividends payable $ 274,280 $ 233,004
======= =======
Supplemental Cash Flow Information
Cash paid during the year for
Interest $ 8,180 $ 59
====== =======
Income taxes $ - $ -
====== =======
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1999 and 1998
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 13 states as of
December 31, 1999.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at two financial institutions. At
times throughout the year, the Company's cash and equivalents balances may
exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in
money market funds is not Federally insured. At December 31, 1999 and 1998, such
investments were $300,000 and $2,700,000 respectively. The Company has not
experienced any losses in such accounts.
Bond Portfolio
The Company accounts for its bond portfolio under Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company classified its bond portfolio as "held-to-maturity" in 1998 because
it had the intent and ability to hold the securities to maturity. Bonds
classified as held-to-maturity are carried at amortized cost. During 1999, the
Company sold $195,000 of its bonds at par, which was the same as amortized cost,
to an affiliate of the Advisor (See Note 4). There were no gains or losses on
the sale.
In 1999, the Company reclassified its bond portfolio to an "available-for sale"
classification, which had no financial statement effect. Available-for-sale
bonds are carried at fair value. Although no ready public market for these bonds
exists, management believes that their cost approximates their fair value.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1999 and 1998
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, 1999 and 1998, management believes the
mortgage loans receivable to be collectible in all material respects, and
therefore, no allowance is presently provided.
Organizational Expenses
Organizational expenses were stated at cost net of amortization and were
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.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1999 and 1998
2. MORTGAGE LOANS AND BOND PORTFOLIO
At December 31, 1999, the Company had first mortgage loans receivable totaling
$10,407,927. The loans bear interest ranging from 9.50% to 12.00%. At December
31, 1998, the Company had first mortgage loans receivable totaling $6,231,862
which bore interest ranging from 9.25% to 15.00%.
The Company also had a portfolio of mortgage secured church bonds at December
31, 1999 and 1998 which are carried at cost plus amortized interest income. The
bonds pay either semi-annual or quarterly interest ranging from 5.75% to 10.50%.
The combined principal of $2,056,199 at December 31, 1999 is due at various
maturity dates between February 1, 2001 and February 1, 2019. Three bond issues
comprised 85% of the total bond portfolio at December 31, 1999. One bond issue
comprised 86% of the total bond portfolio at December 31, 1998.
The maturity schedule for mortgage loans and bonds receivable as of December 31,
1999 is as follows:
Mortgage Loans Bond Portfolio
2000 $ 218,398 $ 17,000
2001 245,194 27,000
2002 272,326 68,000
2003 302,474 37,000
2004 335,972 110,000
Thereafter 9,033,563 1,797,199
---------- ---------
Totals $10,407,927 $2,056,199
========== =========
3. STOCK OPTION PLAN
The Company 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 was to 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 21,000 options granted expired November 15, 1999. No
options were exercised as of December 31, 1999.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1999 and 1998
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.
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 $230,978 and $101,944 during 1999 and 1998,
respectively. During 1999 and 1998 the Advisor waived fees of $0 and $15,223,
respectively.
The Advisor and the Company are related through common ownership and common
management. See Notes 1 and 6.
5. INCOME TAXES
The income tax benefit consists of the following components:
1999 1998
Current $ - $ -
Deferred (20,000) (7,000)
------ -----
Total tax benefit ($20,000) ($7,000)
====== =====
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 1999 and 1998
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 1999, the Company had pretax income subject to tax of
$951,879 and distributions to shareholders in the form of dividends during the
tax year of $1,024,501. The expected tax expense to the Company, pre-dividends,
would have been $323,639. 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.
The following reconciles the income tax benefit with the expected provision
obtained by applying statutory rates to pretax income:
1999 1998
---- ----
Expected tax expense (benefit) $323,639 $241,524
Benefit of REIT distributions (343,639) (248,524)
------- -------
Totals ($ 20,000) ($ 7,000)
======= =======
The components of deferred income taxes are as follows:
1999 1998
---- ----
Loan origination fees $60,000 $40,000
====== ======
6. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK
The Company filed a second 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.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes for Financial Statements
December 31, 1999 and 1998
6. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK - Continued
The Company filed a Registration Statement with the Securities and Exchange
Commission for a third public offering of its common stock in August 1999. 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 an underwriter (an affiliate of the
Advisor)on a "best efforts" basis, and no minimum sale of stock was required.
The stock sale commenced on September 23, 1999. A total of 119,663 shares have
been sold through December 31, 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 $170,000 and $331,600 during 1999 and
1998, 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash and equivalents $ 382,765 $ 382,765 $2,941,530 $2,941,530
Accounts receivable 5,782 5,782 28,777 28,777
Mortgage loans receivable 10,407,927 10,407,927 6,231,862 6,231,862
Bond portfolio 2,056,199 2,056,199 1,023,997 1,023,997
</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.
<PAGE>
AMERICAN CHURCH MORTGAGE COMPANY
Notes for Financial Statements
December 31, 1999 and 1998
8. LINE OF CREDIT
The Company has obtained a $1,000,000 line of credit with its bank on July 22,
1999, subject to certain borrowing base limitations, through August 1, 2000.
Interest is charged at 1% over the prime rate totaling 9.5% at December 31,
1999. The line of credit is collateralized by the mortgage secured bonds held by
the Company. Outstanding borrowings were $500,000 at December 31, 1999.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-30-1999
<CASH> 382,765
<SECURITIES> 2,056,199
<RECEIVABLES> 10,413,709
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 626,862
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 12,915,590
<CURRENT-LIABILITIES> 797,358
<BONDS> 0
0
0
<COMMON> 13,223
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,915,590
<SALES> 0
<TOTAL-REVENUES> 1,109,346
<CGS> 0
<TOTAL-COSTS> 157,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 951,879
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 971,879
<EPS-BASIC> .81
<EPS-DILUTED> .81
</TABLE>
