U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PREEFFECTIVE AMENDMENT NO.1 To
FORM SB-2 REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MINISTRY PARTNERS INVESTMENT CORPORATION
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
33-0489154
(IRS Employer Identification Number)
1150 N. Magnolia Avenue
Anaheim, California 92801
800-753-6742
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN C. GARMO
President
1150 N. Magnolia Avenue
Anaheim, California 92801
800-753-6742
With copy to:
BRUCE J. RUSHALL, ESQ.
RUSHALL & McGEEVER
1903 Wright Place, Suite 250
Carlsbad, California 92009
760-438-6855
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of proposed sale to the public: Upon the effective date
of this Post-effective Amendment to the Registration Statement. If this Form
is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following space and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: _____
If this Form is a post-effective amendment filed pursuant to Rule462(c)
under the Securities Act, check the following space and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: _____
If delivery of the Prospectus is expected to be made pursuant to Rule434,
please check the following space: _____
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered: Class A-1 Notes
Dollar Amount to be Registered: $12,500,000
Proposed Maximum Offering Price per Unit: $1,000
Proposed Maximum Aggregate Offering Price: $15,000,000
Amount of Registration Fee: $3,688
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
MINISTRY PARTNERS INVESTMENT CORPORATION
CROSS-REFERENCE SHEET
Item Number and Caption in Form SB-1 Location or Heading in Prospectus
1. Front of Registration Statement and Facing Page of Registration
Outside Front Cover Page of Prospectus Statement; Cover Page of
Prospectus.
2. Inside Front and Outside Back Cover Inside Front and Outside Back
Pages of Prospectus. Back Cover Pages of Prospectus.
3. Summary Information and Risk Factors. Prospectus Summary; The Business;
Risk Factors.
4. Use of Proceeds. Prospectus Summary; Use of
Proceeds.
5. Determination of Offering Price. *
6. Dilution *
7. Selling Security Holders. *
8. Plan of Distribution. *
9. Legal Proceedings. Legal Proceedings.
10. Directors, Executive Officers, Management.
Promoters and Control Persons.
11. Security Ownership of Certain Voting Security Ownership
Beneficial Owners and Management.
12. Description of Securities. Description of the Notes.
13. Interests of Named Experts and *
Counsel.
14. Disclosure of Commission Position Information Not Required in the
on Indemnification for Securities Act Prospectus.
Liabilities.
15. Organization within Last Five Years. The Business.
16. Description of Business The Business.
17. Management's Discussion and Management's Discussion and
Analysis of Plan of Operation. Analysis of Financial Condition
and Results of Operations.
18. Description of Property. The Business.
19. Certain Relationships and Certain Transactions; Risk Factors.
Related Transactions.
20. Market for Common Equity and *
Related Stockholder Matters.
21. Executive Compensation. Management Compensation.
22. Financial Statements. Financial Statements.
23. Changes In and Disagreements with *
Accountants on Accounting and Financial
Disclosure.
* Omitted as not applicable.
PROSPECTUS
$12,500,000
MINISTRY PARTNERS INVESTMENT CORPORATION
Class A-1 Promissory Notes
We are offering our Class A-1 Promissory Notes. The Notes are offered in
Series 1, 5, 10, 25, 50, 100 and C. Each series is offered with maturities of
6, 12, 24, 30 and 60 months, except the Class C Series which we offer with a
maturity of 72 months only. Each series bears interest at a rate equal to a
fixed spread above the blended index rate for the respective series and
maturity of the Note in effect on the date of sale. The blended index rate is
comprised of two banking industry rates reported by the Bank Rate Monitor(tm).
INVESTING IN OUR NOTES INVOLVES RISKS. SEE "Risk Factors" beginning on
page 3. There will be no public market for our Notes.
The Notes are subject to the Class A-1 Notes Loan and Standby Trust
Agreement (the "Loan Agreement") which sets forth the rights of the
Noteholders. Our obligation to pay the Notes is unsecured and not guaranteed
by any person. We are offering the Notes directly through our officers and
selected employees. Unless sooner terminated, we will continue this Offering
until the second anniversary date of this Prospectus, subject to applicable
federal and state securities laws.
Offering Underwriting Proceeds to the
Price Discount Company(1)
Minimum Purchase $ 1,000 None $ 1,000
Total $ 12,500,000 None $ 12,500,000
(1) Before deduction of filing, printing, legal, accounting and
miscellaneous expenses payable by us which we estimate will not
exceed $30,000.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATIONS TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL SECURITIES IN ANY STATE
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH STATE.
The current Rate Schedule and any other supplements to this Prospectus are
placed inside this front cover.
The date of this Prospectus is November 30, 1999
Table of Contents
Page
INTRODUCTION 1
PROSPECTUS SUMMARY 1
The Offering 1
RISK FACTORS 3
Risks Related to Our Business 4
Risks Related to the Offering 8
USE OF PROCEEDS 12
THE BUSINESS 13
Our Company 13
Employees 13
Facilities 13
Overview of Our Business 14
Capitalization and Operational Funding 14
ECCU Credit Line Financing 16
ECCU and its Relationship to Our Company 16
Cash Reserve Policy 18
Mortgage Loan Investments 18
Mortgage Loan Portfolio Management 22
Nature of Mortgage Loan Investments 23
MANAGEMENT 26
Board of Directors 28
Committees 28
Director Compensation 28
MANAGEMENT COMPENSATION 29
VOTING SECURITY OWNERSHIP 29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 30
Results of Operations 31
Liquidity and Capital Resources 32
CERTAIN TRANSACTIONS 33
DESCRIPTION OF THE NOTES 33
General 33
Series of Class A-1 Notes 34
Interest 34
Reinvestment Option 36
Optional Prepayment 36
Early Presentment of Notes 37
Loan And Standby Trust Agreement 37
Trustee in the Event of an Uncured Default 40
Amendment, Supplement and Waiver 41
Certain Definitions 42
LEGAL PROCEEDINGS 45
PLAN OF DISTRIBUTION 45
Sales to IRAs 46
Sales to 403(b) Plans 46
HOW TO PURCHASE A NOTE 46
EXPERTS AND COUNSEL 46
ADDITIONAL INFORMATION 47
INDEX TO FINANCIAL STATEMENTS F-1
EXHIBIT A - Form of Class A-1 Note A-1
EXHIBIT B - Form of Loan and Standby Trust Agreement B-1
____________________________________________
YOU SHOULD RELY ONLY ON INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL AND SEEKING OFFERS TO
BUY NOTES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME PROSPECTUS MAY BE DELIVERED OR OF ANY
SALE OF THE NOTES.
INTRODUCTION
Please read this Prospectus carefully. It describes our business,
finances and the Notes. We have prepared this Prospectus so that you will
have the information necessary to make your investment decision.
PROSPECTUS SUMMARY
We invest in secured loans (mortgage loans) made to eligible evangelical
Christian churches and church organizations. We purchase our mortgage loan
investments from our Parent corporation, Evangelical Christian Credit Union.
We may occasionally purchase mortgage loans from other institutions in the
future. For ease of reference, we will refer to Evangelical Christian Credit
Union as ECCU, or our Parent. However, our business is separate from that of
ECCU, and ECCU is not responsible for and does not guarantee our business or
our Notes.
We depend on proceeds from the sale of the Notes and our other debt
securities to investors to make our mortgage loan investments. We also from
time to time, depend on the sale of our debt securities to timely pay our debt
obligations. We started selling our debt securities notes in 1991 and since
that time we have sold over $30,000,000 of our debt securities of various
classes and series in previous public and private offerings. At September 30,
1999, we had more than $13,000,000 of total debt securities outstanding,
$5,800,000 of which were Class A-1 Notes outstanding as of the date of this
Prospectus.
Our executive offices are located at 1150 N. Magnolia Avenue, Anaheim,
California 92801 and our telephone number is 800-753-6742.
The Offering
Amount of our Class
A-1 Notes Offered: $12,500,000
Use of Proceeds: To purchase additional mortgage loan investments; to
repay our outstanding indebtedness as it becomes due.
Interest Rate: For series 1 through 100 Notes, the interest rate is
fixed on the date the Note is sold at the rate equal to
the blended index rate then in effect for the
respective
Note series and maturity, plus the respective fixed
spread as follows:
Note Series Fixed Spread
1 1.00%
5 1.12%
10 1.24%
25 1.36%
50 1.48%
100 1.60%
For series C10 and C25 Notes, interest rate is adjusted
monthly and is the sum of the blended index rate for
90-day certificates of deposit, plus:
C10 1.00%
C25 1.50%
The BIR: The blended index rate is the average of the National
Index Rate and the Los Angeles Index Rate for financial
institutions reported in the applicable edition of the
Bank Rate Monitor(tm) in effect on the first day of
each month. We reserve the right to change the rates
of the Notes offered more often than monthly.
Note Maturity: We offer the Series 1, 5, 10, 25, 50 and 100 Notes in
maturities of 6, 12, 24, 30 and 60 months each. The
Series C Notes have a maturity of 72 months only.
Your Right to Call
or Redeem Note: You may call for redemption of the Class C Notes at any
time after 90 days.
Interest Payment Date: Unless you select the reinvestment option or other
payment option, your Note is payable interest only in
arrears, monthly, on or before the 5th business day of
the month next following the due date, pro rated for
the first partial payment period. Interest begins to
accrue on the date you purchase your Note. The minimum
required purchase price for each Note is as follows:
Minimum Purchase: Series 1 Notes $1,000
Series 5 Notes $5,000
Series 10 Notes $10,000
Series 25 Notes $25,000
Series 50 Notes $50,000
Series 100 Notes $100,000
Series C10 Notes $10,000
Series C25 Notes $25,000
Interest Reinvestment
Option: At any time, you can direct us to retain all interest
payable on your Note and pay you interest on such
interest at the same rate payable on the principal
of the Note. This allows you to earn interest on your
interest (i.e., you earn compound interest).
Ranking: Our Notes are general obligations backed by our full
faith and credit. They will generally be equal in right
to payment with our other existing and future
indebtedness, but will be senior in right to payment to
our credit lines with our parent and any other of our
indebtedness which is expressly subordinated to your
Notes. Your Notes will not be secured or guaranteed.
Optional Repayment: We reserve the right to recall or redeem your Notes at
our election at any time upon not less than 30 days nor
more than 60 days prior written notice.
Certain Covenants: Under the Loan Agreement we promise, among other things,
to:
a. Maintain an Adjusted Net Worth of at least
$2,000,000;
b. Maintain a Fixed Charge Coverage Ratio of at least
1.2 to 1.0;
c. Limit our Other Indebtedness to $750,000 or less;
d. Not pay dividends or make certain other
distributions to our shareholder, ECCU;
e. Enter into certain transactions with ECCU or its
Affiliates; or
f. Consummate certain consolidations, mergers or sales
of our assets.
Discretionary
Prepayment: You may request at any time that we repurchase or prepay
all or any portion of your Note prior to its maturity.
We may prepay in our sole discretion, at an amount equal
to the unpaid principal amount prepaid plus accrued and
unpaid interest thereon, less an amount equal to the
lesser of 3 months interest payable on the prepaid
amount or interest payable thereon for 1/6 of the
original term of the Note.
Loan and Standby
Trust Agreement: The Notes are part of up to $25 million of Class A-1
Notes which may be issued pursuant to the Loan and
Standby Trust Agreement. As a condition to your
purchase of a Note, you must agree to be bound by the
terms and conditions of the Loan and Standby Trust
Agreement. Among other things, this Agreement requires
you to pursue your remedies with respect to any default
by us on the Notes through a trustee which may be
appointed by the majority vote of the holders of the
outstanding Notes (Noteholders).
Use of Proceeds: After payment of our Offering costs, we will use the
proceeds to purchase additional Notes and to pay
interest and principal due on our currently outstanding
Notes as payment becomes due.
RISK FACTORS
Carefully consider the risks described below before making your
investment decision. Refer to the other information in this Prospectus,
including our financial statements and the related notes.
If any of the following risks occur, our business, operations or
financial condition could be materially harmed. As a result, our ability to
repay your Note could be impaired and you could lose all of your investment.
Risks Related to Our Business
Because the amount and time of payment of our outstanding indebtedness
will be different from the timing and amounts we receive from our mortgage
loan investment portfolio, we may from time to time have insufficient
liquidity, which could impair our ability to timely pay some or all of our
outstanding debt obligations.
From time to time, the amount of revenue from our receivables could be
less than our obligations to pay the Notes and our other obligations. This
could be true even though the principal amount of our receivables exceeds that
of our liabilities because of the different required rates of payment.
Ordinarily, we expect borrowings on our credit line and our cash reserves
to fund these shortfalls. However, if these resources were not available, we
would need to look for additional financing. If additional financing were
not available, we could default on the payment of some or all of the Notes.
Also, a delay or default in the payment of a significant amount of our
mortgage loan investments would impair our ability to pay the Notes and our
other debt.
Our profitability depends on the excess, if any, of interest earned on our
investment portfolio over the amount of interest we are required to pay on the
Notes and our other debt obligations. Unexpected interest rate fluctuations
could reduce or eliminate our profit margins.
Our profitability is principally a function of the spread between the
yields at which we are able to purchase our mortgage loan and the interest
rates we must pay to our investors. A decrease in the spread would have a
negative effect on our ability to pay our debt obligations and our general
administrative expenses and other costs of operations.
We have in the past and expect to continue to rely on the ability of our
parent, ECCU, to originate profitable mortgage loan investments.
We will continue to rely primarily on ECCU to originate our mortgage loan
investments and we do not intend to retain personnel appropriately licensed
to internally originate or broker our own loan investments. Even though the
mortgage loans we acquire from ECCU must meet our underwriting criteria and
be approved by our board, there is no assurance that we could not obtain
more profitable or advantageous mortgage loan investments through sources
independent of ECCU.
Also, because a majority of our board of directors (our Board) and our
officers are also directors and/or officers of ECCU, conflicts of interest
are inherent in mortgage loan transactions between ourselves and ECCU.
These conflicts of interest include:
a. Conflicts in determining which ECCU mortgage loans will be
made available to us;
b. Conflicts of interest regarding the price and term of
mortgage loans ECCU offers to us;
c. The creditworthiness of borrowers of mortgage loans ECCU
offers to us.
Our short-term liquidity depends in substantial part on the ECCU lines of
credit and there is no assurance that our parent will continue to provide us
with credit.
We have relied on the ECCU lines of credit since our inception as a
significant source for funding our temporary cash needs. ECCU is under no
obligation to extend its credit agreements in the future and may, under
various circumstances, terminate its existing loans. ECCU provides these
lines of credit in accordance with its normal operating and regulatory
standards which require us to meet certain credit standards for the loan to
continue. Accordingly, there is no assurance that ECCU will continue to
renew the ECCU lines of credit without terms and conditions which are less
favorable to us.
Because we invest in specialized purpose mortgage loans, our loan
portfolio is not diversified beyond our target borrower group.
We are among a limited number of institutions providing loans to
evangelical churches and church organizations. Because they are not
commercial enterprises and depend on pledges and donations from their
members, these organizations do not readily qualify for loans or
construction loans on practical terms from bank and other commercial
institutions. Also, the secondary market for these loans, that is,
persons who purchase these loans after they are made, is also limited
and narrow in its scope.
Also, the majority of our mortgage loans are made to borrowers located in
California. Therefore, we will be particularly sensitive to downturns in
economic conditions affecting California.
Our mortgage loan agreements generally require the borrower to adequately
insure the property securing the loan against liability and casualty loss.
However, certain types of losses, generally those of a catastrophic nature
such as earthquakes, floods or storms, and losses due to civil
disobedience, are either uninsurable or are not economically insurable.
If a property were destroyed by an uninsured loss, we could suffer loss of
all or a substantial part of our mortgage loan investment.
Our ability to timely pay interest and principal on our indebtedness
depends on a number of factors and may depend from time to time on our ability
to sell the Notes.
We may from time to time depend on the sale of additional Notes or other
debt instruments for funds to repay outstanding debt as it becomes due and
payable. As of September 30, 1999, 88.6% of our approximately $13.1 million
of outstanding Class A-1 Notes and other debt securities mature on or
before June 30, 2000. To timely repay this debt, we must depend on revenues
from our mortgage loan investments, the sale of new Notes, either through
reinvestment by existing Noteholders or to new investors.
Our short-term liquidity depends on our cash reserves and borrowings on
the ECCU credit line. Our long-term liquidity will depend on timely receipt
of principal and interest payments on our mortgage loan investments and the
sale of additional Notes and other debt securities. Only in times of
emergency would we look to the sale or hypothecation of our mortgage loan
investments for liquidity.
This is because the market for our mortgage loans is specialized and the
prices at which our portfolio could be liquidated is uncertain. Our ability
to repay our various debt obligations depends on a number of factors, most
of which are outside our control. These factors include:
a. The timely payment by borrowers under our mortgage loan
investments;
b. Legal and regulatory requirements affecting our ability to
collect any defaulted mortgage loan investments;
c. Changes in federal income tax or other regulatory laws
which would detrimentally impact our cashflow through the
payment of taxes or surcharges;
d. Changes in local or national financial markets, real estate
markets, or economic conditions in general.
We expect to rely on funds from the following sources to timely meet our
obligations under the Notes:
a. Net cash from operations;
b. Funds borrowed temporarily under the ECCU lines of credit;
c. The reinvestment by existing Noteholders into notes or debt
securities upon maturity of their indebtedness;
d. The sale of the Notes and/or other debt securities; and
e. The sale and/or hypothecation of our mortgage loan
investments.
There is no assurance that sufficient funds will be available from these
sources when we need them.
In the event the borrower defaults on one of our mortgage loans, we will
generally need to recover our investment through the sale of the property
securing the loan.
In general we have to look to the sale of our mortgage loan security for
recovery of our investment in the event of an uncured default on our
mortgage loans. In that event, the value of the real property security may
prove insufficient, in which case we would not recover the amount of our
investment. Even though an appraisal of the property may be obtained at the
time the Loan is originated, the property's value could decline as a result
of a number of subsequent events, including:
a. Uninsured casualty loss (such as an earthquake or flood);
b. A decline in the local real estate market;
c. Undiscovered defects on the property;
d. Waste or neglect of the property
e. A downturn in demographic and residential trends;
f. A decline in growth in the area in which the property is
located. Also, churches and church-related properties are
generally not as marketable as more common commercial,
retail or residential properties.
The occurrence of any of these factors could severely impair the value of
our security for our mortgage loan investment.
We expect that we could incur foreclosures and losses in connection with
our mortgage loan investments during recessionary or depressed economic
periods.
During recessionary or depressed economic periods, we could incur
greater losses through defaults and foreclosures on our mortgage loan
investments. This is because churches and church-related borrowers depend
on donations and pledges from their members, and could be vulnerable to
adverse changes in financial and economic conditions.
Also, during times of recession or depression, the demand for mortgage
loans, even in times of declining interest rates, could decline. Also,
in connection with any sale or hypothecation of a mortgage loan, we would
likely be responsible in whole or in part for a limited period of time for
any delinquencies or default. If we should experience significant
delinquency rates, our revenues would materially decrease and, subject to
our other available cash resources at the time, our ability to timely pay
the Notes and our other indebtedness may be substantially impaired.
We depend on reinvestments by our investors.
It is anticipated that a significant amount of the Notes will be
purchased by holders of our existing notes and debt securities upon maturity
of those loans. Historically, we have enjoyed a significant rate of
reinvestment by our investors upon maturity of their debt obligations. For
example, during 1998 and 1997, 86.9% and 75.6%, respectively reinvested in
new debt securities upon maturity of their loans. If our investors do not
reinvest in substantial amounts, our ability to timely pay our debt could be
significantly impaired. There is no assurance that these past rates of
reinvestment will continue in the future.
If we were forced to sell our mortgage loans, we may not recover our
investment.
Should we be required to liquidate our mortgage loan investments, the
amount we could realize is uncertain and cannot be predicted. It would
depend on several factors, including the quality and yield of the mortgage
loans and prevailing financial market and economic conditions. It is
therefore possible that we would realize substantially less than the face
amount of our mortgage loans, should we be required to sell or hypothecate
them.
Risks Related to the Offering
Our obligation to pay the Notes is not secured, not guaranteed by any
person, and is our general obligation ranking in right of payment to our
obligation to pay our existing and future indebtedness, except those
obligations which may be expressly subordinated in payment to the Notes.
The Noteholders will have no greater right to payment than that of our
other general creditors. At September 30, 1999 we had outstanding
approximately $13.1 million of total debt obligations, including
approximately $5.8 million of previously sold Class A-1 Notes.
Approximately 86.6%, 6.0%, and 1.5% of the principal amount of this debt, is
due and payable prior to June 30, 2000, 2001 and 2002, respectively.
Repayment of the Notes is our exclusive obligation and the Notes are not the
obligation or responsibility of ECCU or any other person.
The Notes are unrated and there will be no sinking fund for repayment of
the Notes.
We have not obtained a rating for your Notes from an independent rating
agency and we do not intend to request such a rating. Also, there will not
be a sinking fund established for the repayment of the Notes and we must
rely on our available cash resources to timely repay your Note. There is
no assurance that we will have adequate cash resources available at the
time the Notes are due.
We have not independently determined the offering price for our Notes.
The Notes are being offered at their face amount, i.e., at par. We have
not determined the price of the Notes based on any single or group of
objective factors. No independent appraisal or evaluation company, or other
expert or advisor has been consulted in regards to the pricing of our Notes.
Therefore, there is no assurance that the yield the investors would receive
on the purchase of our Notes is not lower than that which could be obtained
from similar investments from other issuers. Also, the price in terms of
our Notes have not been reviewed by an independent underwriter.
You will not be able to rely on the review by an independent underwriter.
When an offering is made through an underwriter, that firm generally
takes the responsibility of reviewing and approving the offering in
accordance with its professional standards and due diligence procedures.
Because we are selling the Notes directly through our officers and
employees, you will not be able to rely on an independent underwriter's
review of the Offering.
Your rights as a Noteholder are governed, restricted and regulated by the
Loan Agreement.
When you purchase a Note you become a party to the Loan Agreement which
restricts and regulates your rights as a Noteholder. For example, in the
event of a default or breach by us, under the Loan Agreement you could seek
remedies against us only through a trustee appointed under the Loan
Agreement. The Noteholders would be required to appoint a trustee in order
to proceed against us under the Loan Agreement.
The Loan Agreement requires Noteholders owning only a majority vote of
the outstanding principal amount of the Notes, to take certain acts for and
to bind all of the Noteholders. This includes the election and removal of a
trustee, adopting certain amendments and supplements to the Loan Agreement
and the Notes, and waiving certain defaults, events of default or breaches
by us under the Loan Agreement.
The Loan Agreement contains cross-default provisions whereby our default
on one series of our Note obligations will constitute a default with respect
to each other series of Notes outstanding. Thus, Noteholders suffering an
actual default may be more inclined to act to appoint a trustee under the
Loan Agreement to take action against us than Noteholders who suffer only a
technical default on their Notes because of these cross-default provisions.
Accordingly, where there is an actual default on one or more series of Notes
constituting less than a majority of the unpaid principal balance of all of
our outstanding Notes, such Noteholders may not be able to obtain the
required majority vote to appoint a trustee and proceed under the Loan
Agreement. In such event, you may have no practical recourse against us.
BY EXECUTING THE SUBSCRIPTION DOCUMENT, YOU ADOPT AND AGREE TO BE BOUND
BY THE TERMS AND CONDITIONS OF THE LOAN AND STANDBY TRUST AGREEMENT AND TO THE
APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. CAREFULLY REVIEW THE LOAN AND
STANDBY TRUST AGREEMENT ATTACHED AS EXHIBIT "B" TO THIS PROSPECTUS.
YOU MAY NOT INSTITUTE OR CONTINUE ANY PROCEEDING, JUDICIAL OR OTHERWISE, WITH
RESPECT TO YOUR NOTE, THE LOAN OR STANDBY TRUST AGREEMENT, OR THE
APPOINTMENT OF A RECEIVER OR OTHER TRUSTEE OR FOR ANY OTHER REMEDY IN
CONNECTION THEREWITH DURING THE PERIOD OF OPERATION OF THE LOAN AND STANDBY
TRUST AGREEMENT, UNLESS CERTAIN CONDITIONS, AS SET FORTH IN THE LOAN AND
STANDBY TRUST AGREEMENT, ARE SATISFIED.
The Noteholders will need to appoint a trustee before they can pursue their
remedies under the Loan Agreement.
Under the Loan Agreement, you and the other Noteholders may pursue your
remedies in the event of our default or otherwise exercise your rights under
the Loan Agreement only through a trustee. There is no current trustee and
one may be appointed by a Majority vote of the Noteholders. Identification
of a suitable trustee and the agreement by a majority vote of the
Noteholders could be time consuming and completion of this appointment
process could significantly delay your ability to exercise your rights under
the Loan Agreement.
The Loan Agreement has not been registered under the Trust Indenture Act of
1939.
Because the Notes are being issued under an exemption from registration
under the Trust Indenture Act of 1939, the Loan Agreement does not contain
all of the trust indenture provisions otherwise required by this Act. The
Act's provisions relating to trust indentures are designed to protect
debtholders.
Under the Loan Agreement a Majority Vote of the Noteholders may amend or
supplement your Note or the Loan Agreement without your consent.
The terms of your Notes and Loan Agreement may be amended or supplemented
without your consent by a majority vote of the Noteholders. A majority vote
means the approval of the Noteholders owning a majority of the unpaid
principal amount of the Notes outstanding, not the majority of the number of
Noteholders.
Also, by a majority vote, the Noteholders may approve the waiver of any
default, event of default or breach of a covenant or other condition under
the Note.
Also, a trustee acting under the Loan Agreement has the power to
compromise or settle any claims against us by the Noteholders and, if such
compromise or settlement is approved by a majority vote of the Noteholders,
the settlement or compromise would be binding on all Noteholders. IN SUCH
EVENT, YOU MAY BE WITHOUT PRACTICAL RECOURSE AGAINST US.
We may not be able to maintain our promised Minimum Tangible Adjusted Net
Worth of $2.0 million under certain circumstances.
In the Loan Agreement we promise to maintain Minimum Tangible Adjusted
Net Worth, as defined, of at least $2.0 million. For the purposes of this
calculation, the amounts of the ECCU lines of credit then in place are
treated as a Tangible Asset. However, ECCU is under no obligation to renew
or to maintain this or any other credit other than in accordance with its
terms. Our ability to keep this promise will largely depend on our ability
to keep the ECCU credit line in the existing amount of $2.1 million. Our
ability to keep this promise will also depend on a number of other factors.
We believe the most significant of these factors will be our ability to
avoid any uncured defaults on a significant amount of our mortgage loan
investments. In the event of a default, we would seek recovery only from
the real property or other collateral securing the loan or, from any
guarantor of the loan, if any. As discussed below, there is no assurance
that we could recover the full amount of our mortgage loan under these
circumstances. Also, even if eventually recovered, the delay in payment
of a significant amount of our mortgage loan investments could severely
restrict our ability to timely pay interest and/or principal on the Notes
or our other debt obligations.
There will be no public market for your Notes and you must depend solely on
our ability to repay your Note for liquidity of your investment.
Persons investing in the Notes should be prepared to hold their Note for
maturity, subject to any redemption right you may have under your particular
Note. Noteholders have the right to tender their Note for voluntary
repurchase by us at any time at a reduced price (generally a reduction in
the face amount by the lessor of 3 months interest payable on the Note
principal amount of the note prepaid or one-sixth of the interest payable
on such amount). However, our repurchase of your Note is voluntary and
you should not rely on our willingness or ability to do so.
Because we share some common directors and officers with ECCU, our management
has conflicts of interest with those of ECCU.
The terms on which we purchase mortgage loan investments from our Parent
are not the result of arms-length negotiations. Moreover, to a significant
extent, we share common management with ECCU, which results in conflicts of
interest for such persons in passing on these transactions. Therefore,
there is no assurance that we could not purchase mortgage loan investments
on better terms from unrelated persons.
We may apply the proceeds from this offering to repay existing indebtedness
which will not increase our mortgage loan investment portfolio.
We may from time to time apply all or a substantial amount of the
proceeds from the sale of the Notes to the repayment of interest and/or
principal on our previously issued debt securities. Thus, all or a
substantial part of the proceeds from this Offering may be used to pay
existing debt rather than for mortgage loan investments.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
This Prospectus contains forward-looking statements. These statements
relate to future events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential," "continue," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially. In evaluating these statements you should
specifically consider various factors, including the risks outlined under
"Risk Factors." These factors may cause our actual results to differ
materially from any forward-looking statement. In addition, this Prospectus
contains forward-looking statements attributed to third-party sources relating
to their opinions or estimates regarding real estate loans or the Lender
business in general. You should not place undue reliance on these
forward-looking statements.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this Prospectus to conform such
statements to actual results or to changes in our expectations.
USE OF PROCEEDS
We estimate that we will receive proceeds from this offering of
approximately $12,470,000, after payment of our offering expenses which are
estimated not to exceed $30,000 in the event all of the Notes are sold.
Because this is a "best efforts" offering and is expected to continue over a
period of 24 months, these net proceeds, if received at all, will be received
over a period of time. We expect to use the net proceeds of the offering for
the following purposes:
a. To pay interest and principal due on our outstanding
indebtedness (other than subordinated indebtedness owed
to our Parent); and
b. The purchase of mortgage loan investments.
We have not identified specific expenditures to which we will apply the
offering proceeds and our management will have broad discretion over their use
and investment. Pending use of the net proceeds, we intend to invest them in
a short-term, interest bearing commercial account with our Parent.
THE BUSINESS
Our Company
We provide funds for real property secured loans for the benefit of
Evangelical churches and church organizations. Our funding is provided by the
purchase of our debt securities by members of and persons associated with
these churches and organizations. Our mission is to provide practical yields
to our investors in relation to the yields we realize on our mortgage loan
investments. Our sole shareholder, ECCU, has not, and does not intend in the
future to cause us to operate with a view towards maximizing profit. Our
primary goal is to provide funds for secured loans to Evangelical churches
and church organizations on a cost effective basis both for us and our
investors.
Ministry Partners Investment Corporation, was incorporated in California
in October, 1991, for the sole purpose of investing in or purchasing existing
loans to qualified church organizations. We were formed by and continue to be
a wholly-owned subsidiary of ECCU. We are a taxable organization under both
federal and California state law. ECCU is a mutual benefit corporation and is
presently exempt from federal but not California state income tax.
To date, our investments have been financed by ECCU's investment in our
common stock and through the sale of our collateralized and uncollateralized
debt securities. Our investments have been facilitated through warehouse
lines of credit from ECCU. This credit line financing is currently in the
amount of $2.1 million. We intend to maintain this credit line indefinitely.
ECCU has agreed to subordinate this loan to the payment of the Class A-1
Notes.
Employees
We employ three full-time persons. ECCU provides us with certain
administrative services for which ECCU charges us on a current basis. The
amounts the ECCU charges us in this regard are market rate for similar
services and facilities charged by unrelated persons.
Facilities
We rent our offices of approximately 1,000 square feet from ECCU on a
month-to-month basis.
Our business offices are located at 1150 N. Magnolia Avenue, Suite 290,
Anaheim, California 92801. Our telephone number is 1-800-753-6742.
Overview of Our Business
We are one of the few institutions or agencies within the western United
States organized to assist local evangelical Christian church congregations
and organizations to provide financing for the acquisition, development and/or
renovation of churches or church-related properties. Historically, through
the sale of our debt securities to persons affiliated with evangelical
Christian churches and organizations, we have given these persons the
opportunity to jointly and indirectly provide their organizations with such
financing, something they may not have been able to accomplish individually.
To date, we have suffered no defaults on our mortgage loan investment and we
have not defaulted on or been delinquent in the payment of any interest or
principal on our debt securities sold to investors.
There are presently few commercial lending sources available to churches
and related ministries. Commencing in the early 1990s, the sources of such
loans have become more limited, while the demand from qualified borrowers has
remained essentially constant. For reasons of efficiency and economy, we in
general rely on ECCU or others to originate its mortgage loan investments.
In organizing our business, our management relied on its substantial
experience in church and related church property financing. Based on this
experience and analysis, they concluded that:
a. In recent years, the number of new evangelical Christian
congregations has exceeded the supply of available church buildings.
This has largely contributed to a legitimate church resale market
and accompanied demand for acquisition financing.
b. As the population in certain areas, such as southern California, has
increased in recent years, the available undeveloped property
within existing communities has been absorbed. As a consequence,
the number of churches seeking to buy adjacent properties and to
remodel existing facilities to accommodate growth has increased.
c. Many existing congregations have owned their church properties for
many years and the original loans have been repaid or significantly
paid down. These church properties often have substantial appraised
values with little or no existing indebtedness. Congregations with
stable cash flows often are in a strong financial position and are
able and willing to seek financing for expansion and remodeling.
Capitalization and Operational Funding
Investor Financing. We primarily rely on financing through the sale of
our debt securities, such as the Notes, to fund our mortgage loan investments.
To fund our continuing operations, we offer our debt securities on a
continuous basis subject to compliance with applicable federal and state
securities laws. We intend to continue to direct the sales of our debt security
offerings primarily to institutions and individuals who are members or
otherwise associated with the evangelical churches and organizations. These
organizations are the primary borrowers under our mortgage loan Investments.
In the event we are unable to continue to finance our investment
activities through the sale of our debt securities, we intend to suspend
further mortgage loan investment activities and could terminate such
activities permanently. In such event, we would commence liquidation of our
mortgage loan portfolio as necessary to repay any then outstanding debt
securities as they became due. If such liquidation is necessary, we believe we
will have sufficient assets to repay any outstanding Notes based on the
availability of the ECCU lines of credit together with our other tangible
assets. The subordination of the ECCU lines of credit aggregating $2.1
together with ECCU's equity investment of $1.0 million are intended to allow
us to maintain tangible assets in excess of the outstanding unpaid principal
balance of the Notes and our other debt securities. We are subject to
continuing covenants under the Loan Agreement designed to put us in default of
the Notes in the event we fail to maintain an Adjusted Net Worth, as defined,
of at least $2 million. Our default under the Notes would, among other things,
allow the Noteholders to declare the entire unpaid balance of their Notes
immediately due and payable. These covenants are intended to assure that, at
any such time, our tangible assets will be substantially in excess of our Note
obligations and our other indebtedness pari passu with the Notes. If
liquidation is necessary, we also believe that we could realize sufficient
funds from our assets to repay any then outstanding Notes or other debt
securities on a timely basis. We base this belief on our ability to determine
our liquidity needs with reasonable certainty at least 90 days in advance, the
nature and liquidity of our cash and accounts receivable, our mortgage loan
investments, the historic prices paid for secured loans comparable to our
mortgage loan investments, and the availability of purchasers therefore. There
is, of course, no assurance that we will realize funds from the liquidation of
our mortgage loan investments in a sufficient amount to repay the Notes in full
according to their terms. See "RISK FACTORS".
Pursuant to the Loan and Standby Trust Agreement, we cannot issue Class
A-1 Notes if such issuance would result in an aggregate unpaid balance
exceeding $10,000,000 on the outstanding Class A-1 Notes, there is no
limitation as to the amount of Notes we may issue with the same or proximate
maturity dates. Therefore, it is possible that we may, from time to time, have
outstanding a significant amount of short-term notes. That is, Notes that are
due and payable six months to twelve months from the date of their issuance.
In order to repay such Notes as they become due, it will be necessary for us
to have sufficient funds available from the sale of additional notes
(including the reinvestment of the proceeds from such notes coming due), funds
available from unused portions of the ECCU lines of credit, cash on hand and,
if necessary, proceeds from the sale or hypothecation of our mortgage loan
investments. We have in the past been able to meet our current cash needs for
the repayment of our outstanding investor debt through investor reinvestment
and temporary borrowings under the ECCU lines of credit. There is, however,
no assurance that we will continue to be able to do so. See "Risk Factors".
We are able to accurately budget our cash needs at least 90 days in advance.
We feel that this will allow adequate time to provide liquidity either
through ECCU financing or, if necessary, the sale or hypothecation of mortgage
loan investments if our cash reserves are deemed inadequate to fund required
Note payments.
ECCU Credit Line Financing
We maintain credit line type loans from ECCU to provide warehouse
financing for purchase of our mortgage loan investments and for short-term
financing to meet our current operating expenses. The ECCU Credit Line is
currently approved for up to an aggregate of $2,100,000 of advances. We may
use this financing to, from time to time, pay certain operating expenses,
including interest and/or principal payments on some of the Notes. ECCU
provides us this financing in accordance with ECCU's commercial lending
standards and subject to credit union regulatory requirements. This financing
may consist of one or more loans from time to time, which loans are secured by
blanket liens on our mortgage investments and other assets.
ECCU has entered into a Subordination Agreement whereby it has
subordinated an aggregate $1.1 million of repayments of this financing to
amounts due and owing on the Class A-1 Notes so long as this financing remains
outstanding. Under the Subordination Agreement, we may repay the subordinated
amount of the balance of the ECCU lines of credit only if, at the time of
repayment, payments due and owing on the Notes within 30 days of such date,
have been made or provided for and such payment with respect to the ECCU
lines of credit will not result in our having a Minimum Tangible Adjusted Net
Worth of less than $2.0 million. As defined, Tangible Adjusted Net Worth
includes the contracted for amount of the ECCU lines of credit to the extent
it is subordinated, whether or not it is then funded. Thus, if ECCU should
fail to renew, reduce or otherwise inhibit the ECCU Lines of credit, our
Tangible Adjusted Net Worth would be reduced and further issuance of the Notes,
or other debt securities, could result in our default under the Loan Agreement.
Although ECCU intends to make this financing available to us indefinitely, its
ability to continue to do so is subject to its compliance with applicable
credit union law and regulations.
ECCU and its Relationship to Our Company
ECCU has been our sole shareholder since our formation in 1991. ECCU
organized us as a credit union service organization, or CUSO, to further
ECCU's purposes of making available to the evangelical Christian community
mortgage loans consisting of real property secured financing for the purposes
of acquisition, construction and renovation of churches and church-related
properties such as schools and related structures. ECCU has no contractual
obligations to us, our business or our creditors, other than with respect to
its capital contributions to us and its contractual obligations to us in
connection with the ECCU credit line. WE ARE SEPARATE FROM ECCU. ECCU HAS
NOT GUARANTEED OR OTHERWISE AGREED TO BE RESPONSIBLE IN ANY MANNER FOR THE
PAYMENT OF PRINCIPAL OR INTEREST ON THE NOTES. THE NOTES ARE NOT INSURED BY
ANY GOVERNMENTAL OR PRIVATE ENTITY. See "RISK FACTORS."
For the nine (9) month period ended September 30, 1999, ECCU had net
earnings, after dividends, of $2.59 million and total assets of $225.5
million. For the year ended December 31, 1998, ECCU had net earnings after
dividends of $3.55 million and total assets of $209.8 million. ECCU currently
ranks in the top 5% in assets of all of the U.S. Federal and State Chartered
Credit Unions.
ECCU has specialized in providing lending and depository services to
churches, Christian schools and related ministries for more than fifteen (15)
years. ECCU serves more than 250 separate ministry organizations and several
thousand denominationally affiliated and independent churches. ECCU's member
ministries range in size from under $250,000 in revenues to more than $250
million in revenues. Most of ECCU's member ministries have annual revenues of
$500,000 or less.
ECCU focuses on providing real property construction, acquisition
financing and refinancing to churches and church related organizations. ECCU
also specializes in providing short term cash flow financing for private
Christian schools which depend, by their nature, on seasonal cash flow. In
connection with its real property financing, ECCU often obtains a full
depository relationship with the borrower. ECCU's key market niche is
construction lending for churches and church related facilities. The typical
construction loan amounts for churches and private schools range from a few
hundred thousand dollars to over $10 million. Today, ECCU has granted and
successfully administrated more than $75 million of such construction loans.
ECCU's church and ministry based real estate loan portfolio currently totals
approximately $185 million. ECCU provides loan servicing for these loans and
an additional $140 million in such loans which it originated and sold to other
financial institutions. ECCU has experienced no reportable delinquency or
losses on church or church related real estate loans during its 35 year
history.
We believe that ECCU will continue to support us and our business so long
as, in the sole discretion of ECCU's Board of Directors, ECCU: (i) may do so
under the requirements of applicable regulatory laws and regulations; (ii)
continues to profit from its investments in and servicing of its own mortgage
loan investment portfolio, after taking into account its unreimbursed costs,
if any, of supporting our operations; and (iii) can bear the financial burden of
any support to us. THERE IS NO ASSURANCE THAT ECCU WILL CONTINUE TO PROVIDE
RESOURCES TO US BEYOND ITS CONTRACTUAL OBLIGATIONS TO DO SO AS DESCRIBED
HEREIN, OR THAT ECCU WILL RENEW SUCH CONTRACTUAL COMMITMENTS AS THEY EXPIRE ON
THE SAME BASIS IN THE FUTURE. In the event ECCU withdraws its support, it is
likely we would determine to discontinue and liquidate our mortgage loan
investment business, even if we are capable of continuing in business
independent of ECCU.
Cash Reserve Policy
Reserve Account. We currently follow a policy of retaining a portion of
the proceeds we receive from each sale of our debt securities as operating
reserves. The amounts retained range from 10% on short-term obligations to 5%
on long-term obligations. Since our organization, our operational reserves,
together with cash from operations and funds borrowed, from the ECCU lines of
credit, have been sufficient to provide funds for the timely payment of
interest and principal on our debt securities as they become due. We intend to
continue this policy but may change or modify the policy, in our discretion, at
any time or from time to time in the future.
Mortgage Loan Investments
Eligible Mortgage Loans. We invest only in mortgage loans which are the
obligations of evangelical Christian churches or related denominational
evangelical Christian church organizations. In general, these mortgage loans
must be secured by first liens on real property comprised of churches or
church-related properties and/or which are guaranteed.
Mortgage Loan Origination. We rely on ECCU for our mortgage loan
investments. We can and, management believes, that if we are required to do
so, we could operate independently of ECCU's assistance and services. We
maintain our own staff of key personnel, headed by Mr. Garmo, who can function
independently of ECCU. Nevertheless, in the event ECCU were unable to provide
continued assistance and support to us there is no assurance that our
management would elect to continue our business.
In the event we chose to cease business, management believes we would
have sufficient assets to repay any Notes then outstanding in full accordance
with these terms. However, in such an event, Noteholders might experience a
delay in the repayment of the Notes during the time it may take us to
liquidate our mortgage loan investments. See "RISK FACTORS - Dependence on
Sale of Debt Securities; Ability to Timely Repay Notes" and -- "Risk of
Insufficient Liquidity."
ECCU has been a major source of church and Christian school financing
since 1964. ECCU believes that it can continue to obtain quality mortgage loans
meeting our underwriting criteria. We have, however, identified several other
institutions which to some degree originate and/or invest in secured loans
meeting our underwriting criteria. ECCU has in the past either effected loan
purchase or sale transactions with or had serious negotiations respecting such
transactions with each of these institutions. In the event we cannot continue
to obtain our mortgage loan investments from ECCU, we believe we can obtain
mortgage loan investments of comparable size and quality from other sources.
We believe that it would be impractical for it to retain a loan underwriting
staff on either an employment or contract basis. We are not currently
licensed to originate our own mortgage loans. However, we may seek to become
so licensed in the future in order to originate our own mortgage loans.
We are aware of several credit unions which on a regular basis purchase
and/or sell participations of secured loans comparable to our mortgage loan
investments. However, we have not to date seriously discussed any mortgage
loan acquisition or sale transactions with any of these institutions. There
is no assurance that at such time, if any, as we may seek to sell a mortgage
loan, that it will be able to purchase a mortgage loan investment on terms
acceptable to us. We anticipate that if mortgage loan investments became
entirely unavailable from ECCU, we would terminate our mortgage loan investment
activities. See "RISK FACTORS."
Our policy, and that of ECCU, is not to condition or otherwise approve
Mortgage loans to borrowers based on the amount that the borrower, its members
or affiliates invest in the Notes or our other debt securities. We are
Considering a policy whereby we might consider mortgage loans to an
organization or its affiliate on a priority basis where such organization
allows us access to its members for offering of the Notes. Under such a
policy, however, neither we nor ECCU would commit or otherwise obligate
ourselves to loan funds to such an organization based on the level of
participation of that organization's members in the Offering. Neither we nor
ECCU would make a mortgage loan to any borrower unless such borrower otherwise
met our underwriting standards described below.
We believe that such a policy would be consistent with our mortgage loan
underwriting standards described below. We also believe that such a policy
would be consistent with our purposes of providing secured loans to
Evangelical churches and church organizations where such loans are funded
primarily by members of that or sister churches and/or organizations.
Mortgage Loan Underwriting Standards. Each mortgage loan investment must
meet our underwriting and appraisal standards established by our investment
committee. Our investment committee's current standards require the
following:
Yields. Yields on our mortgage loan investments must be sufficient to
meet our proposed cash flow needs, including cash required to pay principal and
interest on the outstanding Notes. Our investments in mortgage loans of
$350,000 or less may be approved by our loan investment committee. Mortgage
loans in excess of $350,000 must be approved by our Board of Directors.
Acquisitions. Unless our investment committee determines otherwise, we
will not purchase a loan for a price greater than par (that is, the
outstanding principal balance of the loan on the date of purchase). As
circumstances dictate, we intend to negotiate to purchase loans at a discount
(that is, for a purchase price less than the outstanding principal balance of
the loan on the date of purchase).
Loans we purchase from ECCU, must be approved by a majority of our
directors (including a majority of our Board of Directors (or Board) who are
independent of ECCU). Also, the price of the loan may not exceed par without
the prior approval of the investment committee including all members who are
independent of ECCU.
Interest. Our mortgage loans may bear an adjustable or fixed interest
rate, but must require monthly payments based on an amortization schedule
(typically 25 years to 30 years) and generally must be paid in full no later
than seven (7) years from the later of the date the loan is made or the date
we acquire the loan.
Size. Our investments typically range in principal amount from $200,000
to $1,000,000. We may acquire sole ownership of a mortgage loan or may own a
mortgage loan jointly with others, including ECCU. By owning mortgage loans
jointly with others, we would be able to invest in a greater number of loans
and to greater diversify our mortgage loan portfolio.
Mortgage Loan Investment Standards. Our mortgage loan investments must
meet the following criteria:
a. The borrowing organization must support its overall ability to
meet principal and interest payments when due by its
operational history. The borrower must demonstrate its ability
to repay the mortgage loans from its cash flow. For the
purposes hereof, "cash flow" means donations and other revenue
which can be demonstrated to be of a continuing nature as
distinguished from irregular fund raising campaigns.
b. Generally, the periodic principal and interest payments of the
mortgage loan must not exceed a reasonable percentage of the
borrowing organization's cash flow over the expected term of
the loan. Generally, 30% will be considered a reasonable
percentage. However, the Board may approve a larger percentage
if the borrower justifies a larger indebtedness by
demonstrating its ability to devote more cash flow to the
service of indebtedness; that an increase in cash flow is to be
anticipated in line with past experience or as a result of the
improvements to be provided with the proceeds of the proposed
financing; or other appropriate reasons.
c. The remaining term of each mortgage loan must be seven (7)
years or less from the date we acquire or originate the loan.
d. The mortgage loan must be evidenced by a written obligation and
must be secured by a first trust deed on the mortgaged
property, except we may acquire a mortgage loan secured by a
junior deed of trust if we also hold each of the senior deeds
of trust or if the loan is guaranteed by one or more persons
other than the borrower.
e. Loans shall be funded through a formal escrow in a customary
manner in order to assure that we receive good title to its
security interest in the loan at the time the loan is funded.
f. Each mortgage loan must be secured by real property for which
there is available for review a recent independent appraisal
which supports the value of the property.
g. Each mortgage loan must be covered by a current standard
lender's title insurance policy.
Generally, loans may not exceed 60% of the appraised value of the
non-residential property security or 75% of the appraised value of residential
property security. Loans having a higher loan-to-value ratio may be approved
under circumstances where the Loan is guaranteed, the borrowing organization
is able to demonstrate an exceptionally strong commitment to its building
program through member pledges, or there are other factors present which
demonstrate the borrower's ability to repay the mortgage loan. The loan-to-
value ratio for real estate means the total mortgage loans, including the
mortgage loan purchased, as a percentage of the appraised value of the
property. In general, the lower the loan-to-value ratio, the greater is the
value of the security securing payment of the loan.
a. Procedures are established to assure the mortgage loan proceeds
have been or will be spent by the borrowing congregations or
organizations for the purposes authorized. Unless we waive the
requirement for good cause, all monies received from the
mortgage loan shall be deposited in a trust account with a
federally-insured financial institution in the State of
California available only for expenditures on account of the
project for which the loan was made.
b. Where loan proceeds are to be used for construction of
improvements on real property, the proceeds are disbursed
through a fund control whereby, pursuant to written voucher
system, funds will be paid for goods, materials and services
only when the goods and materials have been delivered or the
services have been performed and applicable waivers of mechanic's
liens have been obtained. Fund control documents and procedures
must be those customarily used and followed by commercial
lenders in the geographical area in which the subject real
property is located.
c. Where the loan proceeds are to be used for construction, the
construction costs must be set forth on a schedule detailing the
construction of the project and a statement of estimated cost
with respect to each part of the construction project. The cost
estimate shall be substantiated by a statement of a qualified
independent contractor or other qualified and independent
person. The loan application shall demonstrate that with the
proceeds of the proposed financing, the applicant will have funds
sufficient to complete the project.
d. We, the original lender, or the lender's representative must
have made a personal on-site inspection of the property securing
the Loan.
e. The borrower under the loan must pass credit standards and
demonstrate sufficient income or cash flow to service the
mortgage loan.
Insurance. We require our mortgage loans to be covered by standard
insurance protection customary in the industry, including title insurance (to
insure against title defects and some forms of documentation), errors and
omissions insurance (to insure against good faith errors on the part of our
employees or agents), and liability and casualty insurance in customary
amounts. We may also require special insurance in connection with particular
mortgage loans, including earthquake, flood and environmental hazard
insurance.
Mortgage Loan Portfolio Management
Risk Rating System. We have adopted a risk rating system for rating the
risk of our mortgage loan investments. Of the 5 risk rating categories
established, only those loans with the two highest ratings (lowest assessed
risks) will be considered for purchase. We update the risk ratings of our
mortgage loan portfolio at least annually.
Our Board has adopted a liquidity management plan in an attempt to
reasonably assure the continued availability of liquid funds to repay our debt
securities as they mature. Under this plan, we have estimated continued
sources of cash, including cash reserves, reinvestment by Noteholders based on
reasonable reinvestment rate assumptions, and anticipated principal payments
on our mortgage loan investments. Our Board continually reviews these cash
availability assumptions in order to provide cash for planned liquidity needs.
However, there is no assurance that our liquidity management plan will be
sufficient to meet our actual cash demands at all times, and there may arise
circumstances where we may have to delay or postpone repayment of our debt
obligations, including the payment of interest or principal on the Notes.
Collection Procedures. Through ECCU, we have an aggressive collection
policy where, among other things, delinquent accounts are contacted within 10
days of a missed payment and monitored on a regular basis.
Restrictions on Transactions With Interested Parties. The following acts
or transactions are prohibited:
a. Our Board, investment committee members and officers shall not
participate or seek to influence any investment decision
regarding any loan or transaction wherein that individual or an
immediate family member has any direct or indirect fiduciary or
pecuniary interest. We may transact business with a Board member,
committee member or officer, or any affiliate of such person, so
long as such transaction is fair and equitable to us and is
consistent with our policies generally applicable to similar
transactions by us with unrelated parties. Any such interest must
be approved by a majority of our Board not otherwise interested in
the transaction, following full and complete disclosure of the
person's or his affiliate's interest in the transaction.
b. No fee, commission, gift or other inducement or "kickback" or
reciprocal arrangement of any kind may be solicited or accepted
by any officers, directors or employees in connection with our
investments. Reciprocal arrangements shall include any discounts
on merchandise or services, equity participation or any other form
of consideration or compensation whatsoever except as permitted by
our Board as described above.
c. We may not purchase or participate in mortgage loans where a
portion of the amount of income to be received by us from the
loan is tied to or contingent upon the revenues or income of the
borrower or endeavor or to appreciation which may be realized in
the value of the business, if any, underlying the collateral.
Nature of Mortgage Loan Investments
Our mortgage loan investments, will generally be secured by real
property. Our mortgage loan investments will not be guaranteed or insured by
ECCU or any instrumentality or agency of the federal government, any state
government or any local government. We must therefore look to foreclosure on
the property securing the mortgage loan as the primary source of recovery in
the event the loan is not repaid as required. Our ability to recover the value
of the mortgage loan under such circumstances is affected by certain legal
procedures and rights. Mortgage loans secured by real property are subject to
the laws of the state in which the property is located and as applicable,
federal law, including federal bankruptcy laws. Currently, substantially all
of our mortgage loans are secured by property located in the State of
California. In the future, we will endeavor to acquire mortgage loans secured
by properties in other states, although there is no assurance we will be able
to do so. Set forth below is a brief description of the more pertinent legal
procedures and rights pertaining to mortgage loans under California law. This
discussion is intended to provide a general overview and is not intended to
cover all legal principles or considerations relating to investments in
mortgage loans under California or federal law.
Description of Legal Aspects. The mortgage loans are in the form of
promissory notes secured by deeds of trust or mortgages on church or church
related real property. In general, the note will require the payor or maker
to pay the specified principal and interest. The deed of trust will generally
provide that in the event of a default in payment of principal and/or interest
on the note (or in the event of a default of certain other obligations such as
the failure to maintain the property in good repair) we may declare the entire
balance of principal and interest under the note then due and payable. In the
event the principal and interest is not paid within a specified period, we
must first then attempt to collect on the note by foreclosing on the security.
In general, California law will not allow us to disregard the security and to
proceed directly against the maker on the note. We must foreclose on the
property under the deed of trust.
Foreclosure. Under California law, in order to foreclose on the property
securing the mortgage loan under the deed of trust, we may either pursue a
non-judicial Trustee's sale under the deed of trust (a "private sale") or file
a lawsuit and ask the court to foreclose on the property (a "judicial
foreclosure"). We will generally choose a private sale because a private sale
can generally be accomplished more quickly and at less expense than a
"judicial foreclosure." For reasons discussed below, we would consider the
greater time and expense of a judicial foreclosure only where: (a) a
judicial foreclosure was available; (b) we determined that the value of the
security at the time was insufficient to cover the amount owed under the note;
and (c) we determined that the borrower had sufficient unencumbered personal
assets to repay the mortgage loan in the event we are able to get a court
judgment against such person.
Under California's private sale foreclosure procedure, we would first
need to record a Notice of Default. If the note remained in default after 90
days therefrom, we would record a Notice of Sale at least 20 days prior to the
scheduled sale of the property. The sale of the property would be conducted
at an auction where any party, including us, could bid for the property.
Typically at such auction, we would bid the entire amount of the mortgage loan
owed. Unless a third-party should bid an amount greater than an amount bid by
us, we would purchase the property at the sale. The amount bid by us would
include the amount owed under the mortgage loan, additional unpaid interest
and/or late charges, and the expenses of the foreclosure including legal fees
and Trustee's fees. It is not uncommon for a third-party to bid an amount
necessary to purchase the property at the private sale. Thus, the foreclosing
lender typically ends up purchasing the property. Upon purchase of property
at the private sale, we would attempt to sell the property for the best price
it could obtain. We would typically engage a real estate broker familiar with
the area in which the property is located to effect the sale. Depending on
market conditions, the ultimate proceeds of the sale of the property may not
equal our investment in the mortgage loan (including additional interest, late
charges and foreclosure costs).
Under California law, a person has the right to reinstate the property in
a private sale by repaying the amount of delinquent payments, additional late
charges, and foreclosure costs at any time prior to the time of sale of the
property. In the event this payment is made, the mortgage loan is
"reinstated." That is, the loan is no longer in default and the lender could
not proceed at that time with the foreclosure. The amount required to
reinstate the loan is not the entire balance of principal and interest
declared due by the lender, but only the delinquent payments, including
interest and late charges to the date of reinstatement. It is common,
therefore, that in the event of delinquencies, loans are typically reinstated
prior to the actual sale. It is not uncommon for this to occur several times
over the life of the loan. However, our costs in commencing foreclosure
actions and "forcing" the reinstatement are required to be paid each time the
borrower reinstates the mortgage loan.
Under a judicial foreclosure, but not a private sale, the borrower and
any junior lienholders are given a statutory period of 12 months from the date
of the court-ordered foreclosure sale to redeem the property. That is, for a
period of up to 12 months after the sale is complete, any of these persons may
redeem the property from its purchaser at the foreclosure sale for the amount
paid plus interest and costs. For the reasons discussed above, under a
private sale, it is uncommon for anyone other than the lender bringing the
judicial foreclosure action to purchase the property after judicial
foreclosure. Further, the fact that the property may be redeemed for up to an
additional 12 months substantially inhibits the purchaser's ability to resell
the property within that period. Consequently, as a practical matter, this
statutory right of redemption forces the foreclosing lender to retain the
property and pay the expenses of ownership until the redemption period has run.
For this reason and the reasons discussed above, we do not anticipate that we
will use the judicial foreclosure procedure.
Debtor Protection Statutes. California imposes statutory prohibitions
which limit the remedies of a mortgage lender. A mortgage lender is limited
in its right to receive a deficiency judgment against the borrower following
foreclosure on the secured property. A deficiency judgment in general means
the right to require the borrower to pay any amount on the mortgage loan in
excess of the property securing the loan. Another California statutory
requirement is that the mortgage lender first look to foreclosure on the
property to satisfy the mortgage loan before bringing any personal action
against the borrower. In addition, California law prevents any deficiency
judgment against a borrower by a mortgage lender where the loan either
represents a portion of the purchase price of the property payable to the
lender by that borrower (a "purchase money loan") or the loan is secured by
the borrower's residence. Finally, where a deficiency judgment is
permissible, it can only be obtained after a judicial foreclosure on the
property and then only for the excess of the outstanding debt
over the fair market value of the property at the time of the foreclosure sale
(as determined under statutory provisions). The net result of these statutes
is to offer substantial protections to borrowers and to effectively require a
mortgage lender to look only to the value of the property securing the
mortgage loan through a private sale foreclosure.
In addition to the California state laws restricting actions against
borrowers, numerous other statutory provisions including the federal
bankruptcy laws, afford additional relief to debtors which may interface with
or affect the ability of a secured lender to realize the value of its mortgage
loan in the event of a default. For example, under the Federal Bankruptcy Law,
a court with federal bankruptcy jurisdiction may permit a debtor through a
Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's property by reinstating the original
mortgage loan payment schedule and paying arrearages over a number of years.
Any such restructuring of such a mortgage loan would substantially decrease
the value of the loan and would in effect result in a loss to the lender.
Courts with bankruptcy jurisdiction also have the power to modify, suspend
and/or otherwise amend the terms of a mortgage loan secured by property of the
debtor upon just cause shown by the debtor. Such modification could include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the property, thereby leaving the lender a general unsecured
creditor for the difference between the value of the property and the
outstanding balance of the mortgage loan.
Under the Internal Revenue Code of 1986, as amended, certain liens in
favor of the Internal Revenue Service for tax payments are provided priority
over existing mortgage loans. Also, mortgage lenders are subject to other
statutory and administrative requirements under various laws and regulations
regarding the origination and servicing of mortgage loans, including laws and
regulations governing federal and state consumer protection laws, truth-in-
lending laws, the Federal Real Estate Settlement Procedures Act, the Equal
Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect an innocent assignee of a mortgage loan where the violation of the act
occurred by reason of an act of a prior holder of the loan.
We could sustain a loss as a result of any of the foregoing federal or
state laws and regulations restricting and/or regulating the origination and
servicing of mortgage loans. In order to avoid the negative application of
these laws and regulations, we have sought and will continue to seek the
advice and guidance of independent legal and accounting advisors in connection
with the acquisition and servicing of our mortgage loans. However, many of
these laws and regulations are subject to continual change and evolution and
it is always possible that inadvertent violations or liabilities may be
incurred by reason of one or more of these provisions.
MANAGEMENT
Our Directors and Executive officers are as follows:
Name Age Positions
Mark G. Holbrook 49 Chairman of the Board
John C. Garmo 52 President
Mark A. Johnson 42 Chief Financial Officer,
Treasurer, Director
Van C. Elliott* 62 Director
Arthur G. Black* 61 Director
Wallace G. Norling* 74 Director
Scott T. Vandeventer 43 Director
* Denotes Independent Director
The following is a summary of the business experience of the officers and
directors.
MARK G. HOLBROOK has served as our chairman since our inception. Mr.
Holbrook also serves as president and chief executive officer of ECCU. He
began his career with ECCU in 1975 and has served as its president since 1984.
ECCU currently has assets of over $225 million and more than 23,000 members in
50 states and 90 foreign countries. Mr. Holbrook serves as Board Chairman of
Christian Management Association. He received his Bachelor of Arts degree
from Biola University in 1973 and has completed post-graduate studies at
Chapman College. Mr. Holbrook holds a California real estate sales license.
JOHN C. (SKIP) GARMO has served as our president since December, 1994.
As president, Dr. Garmo is responsible for the management of our day-to-day
operations subject to our Board's supervision. Prior to joining us, Dr. Garmo
served as vice president of MAF Foundation, a private foundation specializing
in charitable gift-planning. Prior to joining MAF Foundation in 1988, Dr. Garmo
operated his own financial planning practice, which he started in 1985.
During this time, he was also a representative for the Presbyterian Ministers
Fund. Dr. Garmo holds a Bachelor of Music degree from Biola University, a
Master of Arts degree from California State University-Los Angeles, and a
Doctor of Philosophy from the University of Washington. Dr. Garmo is a
published author, an ordained minister, and holds a lifetime teaching
credential. He is active in various professional organizations and serves on
several ministry-related boards.
MARK A. JOHNSON has served as chief financial officer, treasurer, and a
director since our inception. Mr. Johnson also serves as executive vice
president of ECCU, a position he has held since June, 1993. Mr. Johnson is
also owner of Mailboxes Surprises since its inception in January 1994. Prior to
joining ECCU, Mr. Johnson served as vice president of a multi-company
commercial warehousing/distribution organization and for six years served as
president and chief executive officer of a subsidiary of that company. Prior
to that, Mr. Johnson served as vice president/branch manager of a Southern
California independent bank. Mr. Johnson has a Bachelor of Science degree in
Business Administration from Biola University.
VAN C. ELLIOTT has served as a director since 1994. He has served as
director for ECCU since 1990. Mr. Elliott served as associate director of the
Conservative Baptist Association of Southern California from 1980 to 1994
where he was responsible for the general administrative oversight of the
association's activities. Since that time, he has been self-employed as a
consultant, and is Vice President of Business Services for Dynamic Church
Planting International. He received his Bachelor's and Master's degrees in
mathematics and speech from Purdue University and spent seven years in the
computer industry. Mr. Elliott holds a Master of Divinity from Denver
Seminary and has spent fourteen years in local church ministries serving in
the areas of Christian education and administration. He has completed post-
graduate instruction at the College for Financial Planning. Mr. Elliott is a
member of the Institute of Certified Financial Planners, Christian Estate
Planners of California, Christian Management Association, and holds the
professional designation of Certified Financial Planner.
ARTHUR G. BLACK has served as a director since 1997. Mr. Black is
currently Director of Ministry Support for Ambassador Advertising Agency.
Prior to joining that firm in 1998, he had served as a ministry development
officer at ECCU. Mr. Black was previously executive vice president of Truth
For Life (1994-1996), a nationally-syndicated radio Bible teaching ministry.
He held similar positions with the Biola Hour (1981-1991) and Solid Rock Radio
(1991-1993), and he served as director of U.S. broadcasting for Insight For
Living from 1993 to 1994. Mr. Black has been in Christian ministry management
since 1974. Prior to that, he held several corporate sales and marketing
management positions and six years as owner/President of two consumer
product/service companies. He is a General Partner for Rancho Sierra Acres,
Christian Investors, P/L Properties and Ocean View Investors. Mr. Black was
elected to the Board of Directors to replace the seat previously held by Paul
A. Kienel.
WALLACE G. NORLING has served as a director since our inception. During
his ministerial career, Dr. Norling planted 26 churches and pastored five
churches. Dr. Norling retired as district superintendent for the southwest
district of Evangelical Free Church, a position he held for 25 years, and now
serves as Superintendent Emeritus of the southwest district of the Evangelical
Free Church. Dr. Norling has a Bachelor of Arts degree from Northwestern
University, a Master of Divinity from Bethel Seminary, an Honorary Doctor of
Divinity degree from Trinity Evangelical Divinity School.
SCOTT T. VANDEVENTER has served as a director since 1992. Mr.
Vandeventer has been employed by ECCU since 1988 and is currently executive
vice president and chief operating officer of ECCU. Prior to that time, Mr.
Vandeventer provided consulting services to ECCU and others through AM Business
Communications, Inc., a marketing communication company he founded and managed
from 1980 onward. Mr. Vandeventer is also currently associated with NYE
Partners, a business consulting firm whose clients may include firms doing
business with us and/or ECCU. Mr. Vandeventer received his Bachelors Degree
from Biola University and has completed graduate work in finance and
marketing at California State University Fullerton School of Business
Administration.
Board of Directors
We currently have five Directors. Our Directors are elected annually by
our shareholders for a term of one year or until their successors are elected
and qualified. Our officers serve at the pleasure of our Board. The
management and direction of our business activities are under the control of
our Board.
Committees
Our Board of Directors has established an investment committee. Our
investments, including loan purchases and dispositions, are reviewed and
approved by an investment committee appointed from time to time by the Board
of Directors. The committee will consist of at least 3 individuals.
Currently, Messrs. Holbrook, Elliott and Black serve as members of the
investment committee.
Director Compensation
None of our directors currently receives compensation. Each is entitled
to be reimbursed for expenses incurred in performing duties on our behalf.
MANAGEMENT COMPENSATION
The following table sets forth certain information regarding compensation
we paid to our Chief Executive Officer and President for services rendered to
us during our fiscal years ended December 31, 1998 and 1997, and during our
transitional year ended December 31, 1996. None of our executive officers
(our named Executive Officers) had a total salary, plus bonus, exceeding
$100,000 during this period.
Summary Compensation Table
Annual
Compensation Long-Term Compensation
Name and Principal Fiscal Year Restricted Securities
Position Ended Salary(s)(1) Stock Underlying
Awards Options
Mark G. Holbrook,
Chairman, Chief
Executive Officer 12/31/98 (2) -0- -0-
12/31/97 (2) -0- -0-
12/31/96 (2) -0- -0-
John C. Garmo,
President 12/31/98 $61,826 -0- -0-
12/31/97 $56,640 -0- -0-
12/31/96 $14,815 -0- -0-
(1) No bonuses were paid to any executive officers during the periods
stated.
(2) Mr. Holbrook is a full-time employee of ECCU. Mr. Holbrook currently
devotes less than 1% of his time serving us as an officer.
Option/Warrant Grants in Current Fiscal Year. We have not issued any
options, warrants or other rights to purchase our securities.
VOTING SECURITY OWNERSHIP
As of the date of this Prospectus, we had 100,000 shares of our common
stock outstanding, all of which shares are owned by Evangelical Christian
Credit Union, 1150 N. Magnolia Avenue, Anaheim, California 92801. None of our
officers or directors beneficially owned any of these shares. We do not have
outstanding any options, warrants or convertible securities.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The financial information included herein should be read in conjunction
with the Financial Statements, including the Notes thereto.
Our business consists of the offer and sale of debt obligations to
investors on a continuous basis to provide funds for our Company's mortgage
loan investments. We believe that our strategy for maintaining liquidity
will enable us to timely service and retire the Notes regardless of the
maturity mix of the Notes outstanding.
We intend to continue our current liquidity plan which relies primarily
on funds from operations, cash reserves and borrowings under the ECCU lines of
credit to pay interest and principal on our debt securities on a timely basis.
Historically, these sources have provided sufficient funds for our timely
payment of debt security obligations and we have not been required or
attempted to obtain funds from the sale or hypothecation of our mortgage loan
investments. Also, we have historically experienced significant rates of
reinvestment or renewal by our debt security investors upon maturity of their
investments. Thus, these sources may not continue to provide sufficient
liquidity in the event we do not experience comparable reinvestment rates on
the Notes. Even so, we believe funds from our ECCU Lines of credit and/or
the sale or hypothecation of our mortgage loan investments will be sufficient
to repay our obligations, should additional funds be necessary. We base this
belief on the size and quality of our mortgage loan investments, the
availability of purchasers for those assets on a timely basis and a historic
price (at or near par) paid for secured loans comparable to our mortgage
loan investments.
We do not believe that our ability to achieve sufficient margins between
interest revenues and interest expenses will be adversely impacted by
fluctuating interest rates or inflation. This is because of our ability to
adjust the interest rates offered to investors on our debt securities to
reflect increases or decreases on interest rates achievable on our mortgage
loan investments. In addition, our mortgage loan investments in general bear
variable interest rates and reflect changes in interest rate fluctuations due
to inflation or otherwise. Thus, as fluctuations affect yields on our mortgage
loan investments, we are able to adjust the cost of new funds from the sale of
our debt securities accordingly.
We are addressing the Year 2000 issue with our parent, ECCU, which is our
data processing provider. We are tracking our Year 2000 preparation in a
database that includes software, hardware devices, vendors and interfaces.
Most critical time-sensitive systems were compliant by the end of 1998. Some
remaining systems were retired in 1999 as we installed new systems to better
serve our investors. Although new systems may be characterized as Year 2000
compliant by their vendors, ECCU did not list them as compliant until they had
been installed and tested. All installed systems were compliant by mid-year
1999.
Because of the nature of their operations, we do not believe the ability
of our mortgage loan borrowers (primarily churches) to maintain their payment
schedules will be materially impacted by the Year 2000 issue. However, the
failure of several mortgage loan recipients to meet such payment schedules as
a result of the Year 2000 issue could have a material adverse effect on our
results of operation or financial position. Though we do not expect the Year
2000 issue to have a material adverse effect on our result of operation or
financial condition, there can be no assurances of that position.
Contingency plans include alternative vendors, alternative procedures and
a business recovery plan which is tested annually. The business recovery plan
is designed for catastrophic events such as earthquakes or major fires, and has
application also to the Year 2000 issue. Remediation costs associated with
Year 2000 have been minimal for us.
Results of Operations
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
During the nine months ended September 30, 1999, we incurred
a net gain of $38,712 as compared to a net gain of $49,174 for the
same nine months ended September 30, 1998, a decrease in net income of
($10,462). Net interest income after Provision for Notes Receivable Losses
increased to $305,106, an increase of $59,194 (or 24%) from $245,912 for
the nine months ended September 30, 1998. This increase is attributable
primarily to an increase in Notes Receivable. Our cost of funds
(i.e., interest expense) during this period increased $130,729 (or 28%); i.e.,
$605,898 for the nine month period ending September 30, 1999 as compared to
$475,169 for the nine months ended September 30, 1998. This increase is
attributable to an increase in Notes Payable. At September 30,1999, we
had outstanding debt securities (Notes Payable) of $14,081,158, up from
$10,849,694 at September 30, 1998, an increase of 30%.
Our operating expenses for the nine months ended September
30, 1999 increased to $238,771 from $176,257 for the same period ending
September 30, 1998, an increase of 35%. This is attributable primarily to
increases in such office operating expenses as marketing, management,
accounting services and salaries (one additional employee) for the
company over the same period in 1998.
Twelve Months Ended December 31, 1998 vs. Twelve Months Ended December
31, 1997. During the twelve months ended December 31, 1998, we incurred a net
gain of $30,258 as compared to a net gain of $2,322 for the same twelve months
ended December 31, 1997, a increase in net income of $27,936. Interest income,
net, for the period, was $339,485, an increase of 103% from $167,643for the
twelve months ended December 31, 1997. Our cost of funds (i.e., interest
expense) during this period increased $307,492 (or 86%) to $665,246 for the
twelve month period ending December 31, 1998 as compared to $357,754 for the
twelve months ended December 31, 1997. This is attributable to significant
growth in our debt securities portfolio. At December 31, 1998, we had
outstanding debt securities (Notes Payable) of $12,456,227, up from $7,803,870
at December 31, 1997, an increase of 60%.
Our operating expenses for the twelve months ended December 31,1998
increased to $275,701 from $212,217 for the same period ending December 31,
1997, an increase of 30%. This is attributable primarily to increases in office
operating expenses associated with services provided by ECCU which were
subsidized in 1997.
Liquidity and Capital Resources
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
Net increase in cash during the nine months ending September 30, 1999
was $1,237,495, compared to a net increase of $298,541 for the nine months
ended September 30, 1998, an increase of $938,954. Net cash used by
operating activities totaled ($1,121) for the nine months ended September
30, 1999, a decrease of ($65,946) over $64,825 provided by operating
activities during the nine months ended September 30, 1998. This difference is
attributable primarily to a decrease on Accounts Payable over the same period in
1998.
Net cash used by investing activities totaled ($386,314) during the
nine months ended September 30, 1999, compared to ($1,832,108) used during
the nine months ended September 30, 1998, a decrease in cash used of
($1,445,794) or (79)%. This difference is attributable to a decrease in Notes
Receivable purchased and an increase in Notes Receivable collected during the
nine month period ending September 30, 1999 as compared to the same period in
1998.
Net cash provided by financing activities totaled $1,624,931 for this
nine month period in 1999, a decrease of ($440,893), or (21%), from
$2,065,824 provided by financing activities during the nine month period
ending September 30, 1998. This difference is attributable to an increase in
principal payments made on Notes Payable and a decrease in amounts paid on the
Line of Credit during the nine month period ending September 30, 1999 as
compared to the same period in 1998.
At September 30, 1999, the Company's cash, which includes cash reserves
and cash available for investment in the Mortgage Loans, was $1,505,148,
up from $418,526 at September 30, 1998, an increase of $1,086,622.
Twelve Months Ended December 31, 1998 vs. Twelve Months Ended
December 31, 1997. Net increase in cash during the twelve months ended
December 31, 1998 was $147,668, compared to a net increase of $38,008 for the
twelve months ended December 31, 1997. This gain of $109,660 was due
primarily to an increase in interest received on Notes Receivable. Net cash
provided by operating activities totaled $48,424 for the twelve months ended
December 31, 1998; an increase of $33,937 from $14,487 provided by operating
activities during the twelve months ended December 31, 1997. This difference
is attributable primarily to an increase in interest received during the twelve
months ended December 31, 1998 as compared to the same period in 1997.
Net cash used by investing activities totaled $(3,573,111) during the
twelve months ended December 31, 1998, compared to $(6,184,793) used during
the twelve months ended December 31, 1997, a difference of $2,611,682. This
difference is primarily attributable to a decrease in Notes Receivable
purchased during the twelve months ended December 31, 1998 as compared to the
same period in 1997.
Net cash provided by financing activities totaled $3,672,355 for this
twelve-month period in 1998, a decrease of ($2,535,959) from $6,208,314
provided by financing activities during the twelve months ended December 31,
1997. This difference is primarily attributable to a decrease in net cash
provided by the Line of Credit and a decrease in net proceeds from borrowings
on Notes Payable as compared to the same period in 1997.
At December 31, 1998, our cash, which includes cash reserves and cash
available for investment in the mortgage loans, was $267,653, up from $119,985
at December 31, 1997, an increase of $147,668 (123%).
CERTAIN TRANSACTIONS
As described elsewhere in this Prospectus, ECCU is our sole shareholder.
During the past two years, ECCU has provided us with a line of credit whereby
ECCU is committed to loan us up to $2,100,000 on a revolving loan agreement.
The terms and conditions of this credit line, including the interest rates
charged thereon, are the same as those charged by ECCU to its other commercial
borrowers. Pursuant to the Subordination Agreement, ECCU has agreed to
subordinate repayment of its loans by us to our payment of the Notes and
certain other of our obligations. There is no assurance that in the future
ECCU will not modify, reduce or terminate this credit line.
ECCU provides us with office space and certain personnel. We reimburse
ECCU for the use of this office space and personnel in amounts equal to ECCU's
allocated costs therefor. There is no assurance that ECCU will not modify the
terms pursuant to which it provides office space and/or personnel to us or
that it will in the future continue to provide office space and/or personnel
to us. We acquire our mortgage loan investments from ECCU. Our mortgage loans
are serviced by ECCU. See "BUSINESS - Mortgage Loan Investments." Certain of
our officers and directors also serve as officers and/or directors of ECCU.
See "MANAGEMENT."
DESCRIPTION OF THE NOTES
General
The Class A-1 Notes are part of a Class of up to $25,000,000 of Notes
authorized under the Loan Agreement, of which an aggregate of $12.5 million is
being offered by this Prospectus in seven Series'. The capitalized terms we
use in the following discussion, unless otherwise defined, have the meanings set
forth under "Certain Definitions" below.
The Notes are general unsecured obligations of ours and rank pari passu
(equal) in right of payment with all of our other existing and future
Indebtedness, except Indebtedness which is expressly subordinated to the
Notes. Presently, our only obligation expressly subordinated to the Notes is
the ECCU Lines of credit. The Notes are not guaranteed by any person nor
insured.
The Notes are subject to and governed by the Loan Agreement, a copy of
which is described under "Loan and Standby Trust Agreement" below and is
included as Exhibit B to this Prospectus. The Loan Agreement restricts the
amount of Notes outstanding at any time to $10.0 million. The Loan Agreement
is a form of indenture between the Holders, us, and a Trustee who may be
appointed by the Noteholders thereunder. The Loan Agreement has not been
qualified under the Trust Indenture Act of 1939 (the "TIA"). The Notes are
not rated by any private or governmental agency.
Series of Class A-1 Notes
The Notes will be issued in the following series.
Minimum Initial
Series Investment
1 $1,000
5 $5,000
10 $10,000
25 $25,000
50 $50,000
100 $100,000
C10 $10,000
C25 $25,000
Each of the Series 1, 5, 10, 25, 50 and 100 Notes are offered with terms
("maturities") of six (6), twelve (12), twenty-four (24), thirty (30) and
sixty (60) months from the date of purchase. Series C Notes have a
seventy-two (72) month term and are callable at any time after the initial
three (3) months by the Holder upon ninety (90) days prior written notice to
us.
Interest
The stated interest rate payable on a Note is fixed on the date of sale
in an amount equal to a stated fixed premium above the Blended Index Rate (the
"BIR"). The BIR is the mean average of the National Index Rate and the Los
Angeles Index Rate for financial institutions reported by the applicable
edition of the Bank Rate Monitor(tm) for the respective maturity of the Note
purchased. For the purposes of the forgoing, the applicable edition of the Bank
Rate Monitor(tm) is the edition in effect on the first day of the month in
which the Note was sold. The stated fixed premiums applicable to the
respective Series of Notes are set forth in the following table.
INTEREST RATE TABLE
NOTE MATURITY
Note Series 6 Months 12 Months 24 Months 30 Months 60 Months
Series 1 1.00% 1.00% 1.00% 1.00% 1.00%
Series 5 1.12% 1.12% 1.12% 1.12% 1.12%
Series 10 1.24% 1.24% 1.24% 1.24% 1.24%
Series 25 1.36% 1.36% 1.36% 1.36% 1.36%
Series 50 1.48% 1.48% 1.48% 1.48% 1.48%
Series 100 1.60% 1.60% 1.60% 1.60% 1.60%
Series C10 1.00% (variable over 72-month term)
Series C25 1.50% (variable over 72-month term)
As an illustration of the foregoing, but not as a limitation thereon, if
at the time of the sale of a Series 25 Note having a 24-month maturity, the BIR
was 5.10%, then stated interest rate payable on such Series 25 Note would be
6.46%. Except for that of the Class C Note, which has a variable interest rate,
the stated interest rate on each Note is fixed in accordance with the foregoing
and will not change through the term of the Note. To be entitled to receive
the interest based on the BIR effective on any day, an investor must have his
or her purchase of the Note confirmed and accepted on such day by us.
The Bank Rate Monitor(tm) (the "BRM") is published by Bank Rate Monitor,
Inc., N. Beach, Florida 33408-8888. The BRM is a nationally recognized and
utilized index of interest rates charged by financial institutions. The
indexes reported are based on interest rates reported by a representative
cross section of financial institutions in selected regional and local
markets.
The interest rate in effect on the date of purchase will be applied. The
interest rates payable on the day of purchase of a Note will be confirmed by
us upon request.
Unless another payment option is selected by the Holder, interest on the
Notes will be paid monthly in arrears. A Holder may elect to receive interest
payable quarterly, semi-annually or annually. Interest will be paid on the
fifth business day of the month next following the payment due date, prorated
or the first partial payment period, if any. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 365-day year. Interest will be deemed paid when
mailed via the United States Postal Service addressed to each Holder at the
address supplied by the investor, subject to the check or instrument mailed
being drawn on good and sufficient funds.
Reinvestment Option
Holders may choose to take their Note with a reinvestment option ("Note
with Reinvestment"). In regard to a Note with Reinvestment, we will retain
all interest payable and credit the Note with interest at the stated rate
based on a 365-day year on all retained interest payments from the date such
payments would have been paid until the end of the term of the Note. No cash
payments will be made in respect of a Note with Reinvestment except in the
case of redemptions by us, discretionary acceptance by us of early presentment
by Holders or upon maturity. The Holder of a Note with Reinvestment would be
due a single payment upon maturity of the Note. If all principal amounts of
the Notes are prepaid, excluding reinvested interest under Notes with
Reinvestment, we must also prepay the reinvested interest in full upon
prepayment of the principal amount.
Pursuant to the interest investment option, we will pay additional
interest on the interest reinvested at the rates and under the terms stated in
the Note for the payment of interest on principal. Interest so invested will
not be paid and kept in a separate escrow account, but will be treated by us
in the same manner as the unpaid principal amount of the Notes to which it
relates.
Holders subject to taxation who elect the reinvestment option should be
aware that they will continue to have tax liability for all accrued and
reinvested interest in the year accrued and reinvested. See "Certain Federal
Income Tax Considerations."
Optional Prepayment
The Notes are redeemable at our election at any time, in whole or in
part, upon not less than thirty (30) nor more than sixty (60) days notice, at
their unpaid principal balance, plus accrued and unpaid interest thereon, if
any, to the redemption date.
If less than all of the Notes are to be redeemed at any time, selection
of the Notes for redemption will be made by us on a pro rata basis. Notice of
redemption shall be mailed by first class mail to each Holder of Notes to be
redeemed at such Holder's address set forth in the register of Holders. If
any Note is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof shall be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption. Our obligation to
make partial or total redemptions on a pro rata basis shall not limit our
right to redeem Notes of any Holder on a voluntary basis, including any
repurchase or prepayment of a Note upon a Holder's request as described below.
Early Presentment of Notes
A Holder may at any time, request in writing that we purchase all or any
portion of his or her Note prior to maturity by delivering such Note and
written request to us. Upon its receipt of such a request, we may, in our
sole discretion, determine to purchase the Note for a price equal to the
unpaid principal amount of such Note plus accrued but unpaid interest thereon
through the date of purchase, less a discount equal to 90 days interest
payable on the prepaid amount or, if less, interest payable thereon for
one-sixth of the term of the Note. We must determine whether to purchase a
Note so presented within ten (10) business days of its receipt of the request
to do so and will, in such event, promptly pay to the requesting Noteholder
the purchase price. We will endeavor to purchase any Note so presented for
purchase subject to availability of funds. However, there is no assurance
we will do so and any purchase of a Note will be at our sole discretion.
Loan And Standby Trust Agreement
As a condition to your purchase of a Note, you agree and adopt the Loan
and Standby Trust Agreement. The Loan Agreement authorizes the issuance of up
to $25,000,000 of Notes but restricts the issuance of a Note if the amount of
such Note would, when added to the unpaid balance of all other Notes then
outstanding, exceed $10,000,000. The following is a summary of material
provisions of the Loan Agreement. We qualify this summary by the terms and
conditions of the Loan Agreement itself, a copy of which is included as
Exhibit "B" to this Prospectus.
Our Continuing Covenants. While any Note is outstanding, we may not (and
will not permit any subsidiary to) (i) declare or pay any dividend or make any
distribution on account of our capital stock (other than dividends or
distributions payable in our or any subsidiary's stock or to us or any
wholly-owned subsidiary); (ii) purchase, redeem or otherwise acquire or retire
for value any of our capital stock or any wholly-owned subsidiary; or (iii)
voluntarily purchase, redeem or otherwise acquire or retire for value, prior
to the scheduled maturity of any mandatory sinking fund payments thereon or the
stated maturity thereof, our Indebtedness that is subordinated in right of
payment to the Notes (all such payments and other actions set forth in clauses
(i) through (iii) above being collectively referred to as "Restricted
Payments") unless, at the time of such Restricted Payment no Default or Event
of Default shall have occurred and be continuing or would occur as a
consequence thereof;
In addition, any such Restricted Payment, together with the aggregate of
all other Restricted Payments we might make, may not exceed the sum of:
(i) 50% of our Net Income for the period (taken as one accounting
period) from the fiscal year ended December 31, 1996 to the
end of our most recently ended full fiscal quarter for which
financial statements are available at the time of such
Restricted Payment (or, if such Net Income for such period is
a deficit, 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds we receive from the
issue or sale of our capital stock (other than capital stock
sold to a subsidiary), debt securities or capital stock
convertible into our capital stock upon such conversion, or
any funds advanced or loaned to us by ECCU under its
subordinated line of credit, plus
(iii) 100% of the cash, if any, contributed for our capital, as
additional paid in capital by our stockholder.
The foregoing shall not, however, prohibit the following Restricted
Payments:
(a) the payment of any dividend within sixty (60) days after the
date of declaration thereof, if at said date of declaration such payment would
have complied with the foregoing provisions; or
(b) (x) the redemption, repurchase, retirement or other
acquisition of any of our capital stock, (y) the purchase, redemption or other
acquisition or retirement for value prior to the scheduled maturity of any
mandatory sinking fund payments or stated maturity of our Indebtedness is
subordinated in right of payment to the Holders of the Notes, or (z) the making
of any investment in us or any subsidiary in each case of (x), (y) and (z) in
exchange for, or out of the proceeds of the substantially concurrent sale
(other than to us), of our capital stock.
Limitation on Outstanding Class A-1 Notes. We may not issue any Class
A-1 Note if, after giving effect to such issuance, the Class A-1 Notes then
outstanding would have an aggregate unpaid balance exceeding $10,000,000.
Limitation on Incurrence of Indebtedness. While any Note remains
outstanding, we may not, and may not permit any subsidiary to, directly or
indirectly, create, incur, issue, assume, guaranty or otherwise become,
directly or indirectly, liable with respect to (collectively, "incur") any
Indebtedness, unless our Fixed Charge Coverage Ratio, determined on a
consolidated basis, for our most recently ended four full fiscal quarters for
which financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred would have been at least 1.20
to 1.0, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom to a repayment of any Indebtedness), as if the
additional Indebtedness had been incurred at the beginning of such four-quarter
period. Provided, however, that notwithstanding the foregoing, we may incur
indebtedness that: (i) is evidenced by the Notes; (ii) was existing at December
31, 1996 as it may be extended or modified; (iii) is incurred in the ordinary
course of business for the funding of mortgage loans which includes warehouse
lines of credit and/or repurchase facilities; (iv) is in respect of
performance, completion, guarantee, surety and similar bonds, banker's
acceptances or letters of credit provided by us in the ordinary course of
business; and/or (v) when incurred does not result in other Indebtedness, as
defined below, in excess of $750,000 outstanding at any time.
Merger, Consolidation or Sale of Assets. While any Note is outstanding,
we may not consolidate or merge with or into any other person or entity (whether
or not we are the surviving corporation) or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of our properties or
assets (excepting loans held for sale in the normal course of our mortgage
banking operations) in one or more related transactions to, another corporation,
person or entity, unless (i) we are the surviving corporation of such
consolidation or merger; and (ii) immediately after such transaction no Default
or Event of Default under the Notes exists.
Maintenance of Tangible Adjusted Net Worth. In the event that, while any
Class A-1 Note is outstanding, within 55 days after the end of any fiscal
quarter (100 days after the end of any fiscal year) as of the end of which our
Tangible Adjusted Net Worth, as defined below, is less than $2,000,000 (the
"Minimum Tangible Adjusted Net Worth"), we must notify the Holders of such
event and must within sixty (60) days thereafter restore our Tangible Adjusted
Net Worth to an amount greater than the Minimum Tangible Adjusted Net Worth.
For the purposes of this covenant, Tangible Adjusted Net Worth includes the
contracted for amount of the ECCU Lines of credit to the extent it is
subordinated in right for payment on a current basis to the Notes.
Books and Records. We must keep proper books of record and account, in
which full and correct entries shall be made of all dealings or transactions
of or in relation to the Notes and our business and affairs in accordance with
generally accepted accounting principles. We must furnish to the Trustee any
and all information related to the Notes as the Trustee may reasonably request
and which is in our possession.
Other than the foregoing, there are no covenants or similar restrictions
(other than those contained under the California General Corporation Law)
restricting our ability to enter into transactions with ECCU or its other
Affiliates including, but not limited to, transactions involving the sale,
lease, transfer or otherwise disposal of any of our assets to, or purchase any
assets from, or any contract, agreement, understanding, loan, advance of
guarantee with, or for the benefit of, any such Affiliate.
Under California law, the independent Directors' fiduciary obligations
require that they act in good faith in a manner which they believe to be in
our best interests and its shareholders, which may not, in all circumstances,
be the same as those of the Holders of the Senior Notes.
Default and Remedies
Events of Default. Each of the following constitutes an Event of
Default under the Notes: (i) default for thirty (30) days in the payment when
due of interest or penalty on any Note; (ii) default for thirty (30) days in
the payment when due of principal of any Note; (iii) if not cured in a timely
manner, our failure to observe or perform any of the covenants or agreements
in the Notes or set forth under Article II of the Loan Agreement required to be
performed by it; or (iv) if not cured in a timely manner, default under the
instruments governing any Other Indebtedness or any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Other Indebtedness for money we borrow whether such Other
Indebtedness or guarantee now exists, or is hereafter created which default
(a) is caused by a failure to pay when due principal or interest on such Other
Indebtedness within the grace period provided in such Other Indebtedness and
which continues beyond any applicable grace period (a "Payment default") or
(b) results in the acceleration of such Other Indebtedness prior to its express
maturity, provided in each case the principal amount of any such Other
Indebtedness, together with the principal amount of any other such Other
Indebtedness under which there has been a Payment default or the maturity of
which has been so accelerated, aggregates $250,000 or more.
Cure of Default. In order to cure payment Default, we must mail to
the Holder, direct deposit or credit if that option is selected, the amount of
the nonpayment plus a late payment penalty equal to simple interest on the
amount unpaid at the rate of 10% per annum, measured from the date the payment
should have been mailed, deposited or credited pursuant to the terms of the
Notes until the date it actually is mailed, deposited or credited.
Remedies in Event of Default. If any Event of Default occurs and is
continuing, the Holders of not less than a Majority in Principal Amount of the
then Outstanding Notes (a "Majority in Interest") appoint a Trustee under the
Loan Agreement and may instruct the Trustee to declare all the Notes to be due
and payable immediately and take any action allowed by law to collect such
amounts. Notwithstanding the foregoing, in the case of an Event of Default
arising from events of our bankruptcy or insolvency, all outstanding Notes
will become due and payable without further action or notice. If an Event of
Default has occurred and is continuing, we must, upon written request of the
Trustee, cure such default and pay for the benefit of the Holders the whole
amount then due, any penalties which may be due and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and all other amounts due to
the Trustee hereunder. If we fail to cure such defaults and pay such amounts
forthwith upon such demand, the Trustee, in its own name and as Trustee of an
express trust, shall be entitled to sue for and recover judgment against us
and any other obligor on the Notes for the amount so due and unpaid pursuant
to the terms of the Notes.
Trustee in the Event of an Uncured Default
If an Event of Default occurs and is continuing, then the Holders of a
Majority in Interest of the Outstanding Notes may, within thirty (30) days of
such Event of Default, appoint a Trustee to represent the interests of all the
Holders pursuant to the Loan Agreement. Upon acceptance of such appointment
by the Trustee, the operation of the Trust shall commence and the power and
rights of the Trustee thereunder shall begin. If a Majority in Interest of the
Holders cannot agree on a Trustee, the Trust will not be instituted.
We have committed, upon the occurrence of an Event of Default, to engage
and pay the fee to an appropriate unaffiliated entity, such as an accounting
firm, for organizing a vote of the Holders as soon as practicable for the
purpose of appointing a Trustee in accordance with the Loan Agreement. The
entity is not required to act as a Trustee. We must supply such entity with
the names, addresses and occurrence of any Event of Default. We have agreed to
pay the reasonable expenses of any Trustee duly appointed by a Majority in
Interest of the Holders pursuant to the Loan Agreement.
Under the Loan Agreement, a Trustee may not make any settlement or
compromise concerning the rights of the Holders, in regard to payments of
principal or interest, unless it is approved in a separate vote by a Majority
in Interest of the Holders. Any settlement or compromise so approved would be
binding upon all the Holders. The Trustee may withhold from the Holders
notice of any Default or Event of Default if it believes that withholding
notice is in their interest except a Default or Event of Default relating to
the payment of principal or interest or penalties. NO HOLDER SHALL HAVE THE
RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING, JUDICIAL OR OTHERWISE, WITH
RESPECT TO THE LOAN AGREEMENT, THE NOTES, OR FOR THE APPOINTMENT OF A RECEIVER
OR TRUSTEE OR FOR ANY OTHER REMEDY HEREUNDER, DURING THE PERIOD OF THE
OPERATION OF THE TRUST AGREEMENT, UNLESS CERTAIN CONDITIONS, AS SET FORTH IN
THE TRUST AGREEMENT, ARE SATISFIED. The Loan Agreement requires Holders who
suffer an actual default on their notes to obtain the consent of a majority of
all Holders, regardless of Series or maturity or default status, to appoint a
Trustee and take action against us. THIS REQUIREMENT, IN EFFECT, MAY LEAVE
MANY NOTEHOLDERS WITHOUT PRACTICAL RECOURSE.
BY EXECUTING THE SUBSCRIPTION DOCUMENT, EACH HOLDER IS AGREEING
TO BE BOUND BY THE TERMS OF THE TRUST AGREEMENT SHOULD IT COME INTO FORCE BY
THE APPOINTMENT OF A TRUSTEE PURSUANT TO ITS TERMS. EACH PROSPECTIVE INVESTOR
SHOULD CAREFULLY REVIEW THE LOAN AGREEMENT (ATTACHED AS EXHIBIT B). THE
FOREGOING IS ONLY A SUMMARY OF THE PROVISIONS OF THE LOAN AGREEMENT.
Amendment, Supplement and Waiver
The Loan Agreement and/or the Notes may be amended or supplemented with
the consent of the Holders of at least a Majority in Principal Amount of the
then Outstanding Notes, and any Default, Event of Default, compliance or
noncompliance with any provision of the Notes may be waived with the consent
of the Holders of a Majority of Principal Amount of the then Outstanding Notes;
provided that any such amendment or supplement affecting the term, interest
rate and other terms of the Notes must be ratable and proportionate in effect
on all outstanding Note Holders based on the aggregate amount of principal and
interest and penalty payments due them.
Certain Definitions
Set forth below are certain defined terms used in this Prospectus in
discussing the terms and conditions of the Notes.
"Adjusted Net Worth" means the sum of (i) the consolidated equity of our
common stockholder(s) and any consolidated subsidiary, plus (ii) the
respective amounts reported on such entity's most recent balance sheet with
respect to any series of preferred stock, plus (iii) the amount of the ECCU
Lines of credit, whether or not then funded, and any loan ECCU or any other
lender is contractually obligated to loan to us, but only to the extent such
loan amount is expressly subordinated in right to payment on a current basis
to the Class A-1 Notes. For purposes of computing Adjusted Net Worth, except
with respect to the ECCU Lines of credit and any other loans included in
Adjusted Net Worth as provided in the foregoing, all transactions between us
and any Affiliates, including ECCU, shall be treated as if the transactions
had been entered into with an unaffiliated third-party to the extent that
GAAP would require any different treatment.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control," "controlling" and "controlled," when used with respect to any
specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Business Day" means any day other than a Saturday or Sunday or a day on
which banking institutions in the State of California are not required to be
open.
"Cash Flow" means with respect to any period, our Consolidated Net income
and any subsidiary for such period plus (a) an amount equal to any
extraordinary loss plus any net loss realized in connection with the sale or
other disposition of any assets (to the extent such net losses were deducted
in computing Net Income for such period), plus (b) provision for taxes based
on income or profits to the extent such provisions for taxes was deducted in
computing Net Income for such period, plus (c) Fixed Charges for such period,
plus (d) depreciation and amortization, plus (e) interest expense for such
period paid or accrued with respect to the ECCU Lines of credit and any other
Indebtedness which is subordinated to the Notes, plus (f) the unused amount of
financing on the ECCU Lines of credit (and other financing subordinated to the
Notes) available to us on the date the determination of Cash Flow hereunder is
made.
"Default" means any event that with the passage of time or the giving of
notice or both is or could be an Event of Default.
"ECCU Credit Line" means that certain loan agreement and note in the
amount of $2,100,000 dated March 23, 1999, as amended, as subordinated by that
certain Subordination Agreement dated June 1, 1994, as amended.
"Events of Default" means those Events of Default defined under "Events
of Default" herein, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body.
"Fixed Charges" means, with respect to any period, consolidated interest
expense for such period, whether paid or accrued, to the extent such expense
was deducted in computing Consolidated Net Income (including amortization of
original issue discount, noncash interest payments and the interest component
of capital leases, but excluding amortization of deferred financing fees) plus,
without duplication, all interest capitalized for such period on a
consolidated basis and in accordance with GAAP. Fixed Charges shall not
include any interest expense for such period paid or accrued with respect to
the ECCU Lines of credit or any other Indebtedness which is subordinated to
the Notes.
"Fixed Charge Coverage Ratio" means, with respect to any period, the
ratio of our Cash Flow for such period to our Fixed Charges for such period.
In the event we incur, assume, guarantee, repay, redeem or otherwise retire any
Indebtedness (other than our credit line with ECCU) subsequent to the
commencement of the period for which the Fixed Charge Coverage Ratio is being
calculated but prior to the event for which the calculation of the Fixed
Charge Coverage Ratio is made, then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee,
repayment, redemption or retirement of Indebtedness, including, if applicable,
the application of the proceeds therefrom, as if the same had occurred at the
beginning of the applicable period. In making such calculations on a pro
forma basis, interest attributable to Indebtedness bearing a floating interest
rate shall be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Holder" means the Person or Persons in whose name a Note is registered
on the books and records as a holder of Notes.
"Indebtedness" means any indebtedness, whether or not contingent, (i) in
respect of borrowed money or evidenced by bonds, notes, debentures or similar
instruments or credit (or reimbursement agreements in respect thereof), (ii)
representing the balance deferred and unpaid of the purchase price of any
property, (iii) representing capital lease obligations; and (iv) representing
any hedging obligations, except, in each case, any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of
the foregoing Indebtedness (other than hedging obligations) would appear as a
liability upon a balance sheet prepared in accordance with GAAP, and also
includes, to the extent not otherwise included, the guarantee of obligations
of other persons that would be included within this definition.
"Loan Agreement" means the Series A-1 Notes Loan and Standby Trust
Agreement which the Holders agree to adopt and be bound by as a condition to
their purchase of the Notes as it may from time to time be supplemented,
modified or amended by one or more supplemental agreements hereto entered into
pursuant to the applicable provisions hereof. The Agreement is not qualified
under or subject to the Trust Indenture Act of 1939, as amended.
"Majority Vote" means the vote or written consent of the Noteholders
owning a majority of the outstanding unpaid principal amount of all Outstanding
Notes as reflected on our books and records.
"Maturity Date" means the date on which the unpaid balance of principal
and accrued interest is due and payable on the respective Note.
"Net Income" means, with respect to us for any period, the aggregate of
our Net Income for such period, on a consolidated basis, determined in
accordance with GAAP; provided that the Net Income of any entity that is not
our subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or
distributions paid to the referent entity or our wholly-owned subsidiary.
"Net Tangible Assets" means, with respect to us, the total amount of our
assets and any subsidiary (less applicable reserves) on a consolidated basis,
as determined in accordance with GAAP, less intangible assets. For purposes of
computing Net Tangible Assets, all transactions between us and any Affiliates
including ECCU, shall be treated as if the transactions had been entered into
with an unaffiliated third-party to the extent GAAP would require any
different treatment.
"Other Indebtedness" means any of our Indebtedness outstanding other than
any amounts owing with respect to the Notes and any extension, refinancing,
refunding, renewal, substitution or replacement of any such Indebtedness, but
only to the extent that any such extension, refinancing, refunding, renewal,
substitution or replacement does not exceed the principal amount of the
Indebtedness being extended, refinanced, refunded, renewed, substituted or
replaced (plus the amount of the reasonable fees and expenses in connection
therewith) and that no additional security is granted in connection with any
such extension, refinancing, refunding, renewal, substitution or replacement.
"Outstanding Notes" when used with respect to Notes means, as of the date
of determination, all Notes theretofore issued and delivered by us and not
paid, prepaid or redeemed in full pursuant to their terms.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock partnership, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Rate Schedule" means the schedule of interest rates payable on the Notes
as issued from time to time by us as a supplement to the Prospectus.
"Tangible Adjusted Net Worth" means our Adjusted Net Worth less our
intangible assets, if any.
"Trustee" means the Person or Persons elected as the "Trustee" pursuant
to the terms of this Agreement or a successor thereto once the latter shall have
become such pursuant to the applicable provisions of this Agreement.
LEGAL PROCEEDINGS
No legal proceedings to which we are a party or which otherwise involve
us currently exist.
PLAN OF DISTRIBUTION
We are offering the Notes directly by certain of our officers and
directors. Currently, we anticipate that only Mr. Garmo will provide
significant services in placing the Notes and that certain of our employees
will provide only ministerial services in connection with the Offering. None of
these persons will receive any commission or compensation for their services
in connection with the sale of the Notes other than their normal employment
compensation.
We intend to offer the Notes pursuant to written solicitations
(accompanied or preceded by a copy of the Prospectus) directed to our current
and past investors, members of various evangelical denominational, non-
denominational, church and ministry organizations, and possibly to members of
specific churches and/or church organizations.
We will offer the Notes through the second anniversary of this
Prospectus, unless sooner terminated, and subject to prior sale. Our ability
to continue the Offering through that date depends upon other things, our
continuing compliance with applicable federal and state securities laws.
Sales to IRAs
We may sell Notes under agreements with individual retirement accounts
(IRAs) specifically permitting investment in the Notes. The minimum purchase
for an IRA is $1,000. Interest will be accumulated in the IRA purchaser's
account and posted on the last day of each calendar month and statements will
be mailed to the custodian quarterly. Under the terms of sale to an IRA
agreement, Notes may be redeemed upon 30 days' advance written notice,
although we may waive all or part of the 30-day notice requirement. This
right to redeem will, however, be contingent upon sufficient funds being
available at the time of the request. If sufficient funds are not available,
we will inform the custodian requesting funds, and will schedule payment as
soon as is practicable. Such inability to repay upon request will not be an
event of default providing payment can be made within a period not to exceed
30 days from date of request.
Sales to 403(b) Plans
We may sell Notes under agreements to retirement plans maintained
pursuant to Section 403(b) of the Code. The minimum purchase amount for a
403(b) plan agreement is $10.00. The stated term of a 403(b) plan agreement
may not be less than two years. The interest on accounts will be generated
from the receipt to the date of withdrawal. Interest will be accumulated in
the purchaser's account and posted on the last day of each calendar month and
statements will be mailed quarterly. A 403(b) plan agreement may be redeemed
from two years after the date of issuance upon 30 days' advance written
notice, although we may waive all or part of the 30-day notice requirement.
However, this right to redeem will be contingent upon sufficient funds being
available. If sufficient funds are not available, we will inform the 403(b)
plan agreement holder requesting funds, and will schedule payment as soon as
is practicable. Such inability to repay upon request will not be an event of
default providing payment can be made within a period not to exceed 30 days
from date of request.
HOW TO PURCHASE A NOTE
Persons desiring to purchase a Note must complete, date and sign the
PURCHASE APPLICATION accompanying this Prospectus, and return it to us
together with payment in full for the aggregate principal amount of the Notes
purchased. The PURCHASE APPLICATION is subject to acceptance by us within
twenty-four hours of our receipt thereof. We may accept or reject a PURCHASE
APPLICATION in our sole discretion. Any questions concerning the procedure for
purchasing the Notes should be directed to John C. Garmo, President, P.O. Box
61084, Anaheim, California 92803-6184. Our telephone number is 1-800-753-6742.
EXPERTS AND COUNSEL
The balance sheets as of December 31, 1998 and 1997 and the related
statements of income and retained earnings, and cash flows for the fiscal
years then ended have been included in this Prospectus and reliance is made on
the report of Turner, Warren, Hwang & Conrad, an Accountancy corporation,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
Rushall & McGeever, Carlsbad, California, our special counsel, has passed
on certain legal matters in connection with the Notes.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission, or SEC, Washington,
D.C. 10549, a registration statement on Form SB-2 under the Securities Act
with respect to the Notes offered hereby. This Prospectus does not contain
all the information set forth in the registration statement and the exhibits
and schedules filed therewith. For further information about us and the Notes
offered hereby, you may refer to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to may
only be summaries of the contracts or documents. Each such statement is
qualified in all respects by reference to the full text of such contract or
other document filed as an exhibit to the registration statement.
A copy of the registration statement, the exhibits and schedules filed
therewith, as well as our periodic reports, proxy statements and other
information filed wit the SEC, may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, NW,
Washington, D.C. 20549, and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon payment of the fees prescribed by the SEC.
The SEC maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of the site is http://www.sec.gov.
We are also subject to the information and periodic reporting
requirements of the Securities Exchange Act of 1934, and, in accordance
therewith, we file periodic reports, proxy statements and other information
with the SEC.
INDEX TO FINANCIAL STATEMENTS
Financial Statements (unaudited) for the Nine Months Ended September 30, 1999
and 1998
Balance Sheets F-2
Statements of Operations and Retained Earnings F-3
Statements of Cash Flows F-4
Notes to Financial Statements F-5
Financial Statements for the Years Ended December 31, 1998 and 1997
Report of Independent Certified Public Accountants -
Turner, Warren, Hwang & Conrad Accounting Corporation,
On behalf of Ministry Partners Investment Corporation F-8
Balance Sheets F-9
Statements of Operations and Retained Earnings F-10
Statements of Cash Flows F-11
Notes to Financial Statements F-12
F-1
<PAGE>
MINISTRY PARTNERS INVESTMENT CORPORATION
Financial Statements
For the quarters ended September 30, 1999 and 1998
BALANCE SHEETS
September 30,
1999 1998
ASSETS:
Cash - ECCU $1,505,148 $418,526
Loan receivable 51,311 65,428
Notes receivable 13,497,867 11,362,309
Allowance for loan loss (17,000) -
Interest receivable 85,104 67,596
Prepaid offering expense 6,895 28,342
Prepaid expenses 6,622 3,216
Furniture, fixtures & equipment (net) 7,812 4,398
Total assets $15,143,759 $11,949,816
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Accounts payable (55,325) 0
Salaries payable 4,210 4,122
Accrued expenses - ECCU 19,886 17,630
Line of credit - ECCU 0 0
Notes payable 14,081,158 10,849,694
Income taxes payable 7,742 15,050
Total liabilities 14,057,671 10,886,496
Equity:
Common stock, 100,000 shares, no par value 1,000,000 1,000,000
Retained earnings 86,088 63,320
Total equity 1,086,088 1,063,320
Total liabilities and equity $15,143,759 $11,949,816
The accompanying notes are an integral part of these financial
statements
F-2
<PAGE>
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Nine months ended September 30,
1999 1998
Income:
Interest income
Note receivable and loans receivable $894,772 $713,637
Interest-bearing accounts 23,233 7,444
Total Interest Income $918,004 $721,081
Interest expense:
Line of credit 5,278 21,235
Notes payable 600,620 453,934
Total interest Expense 605,898 475,169
Net interest income 312,106 245,912
Provision for notes receivable losses 7,000 0
Net interest income after provision
for notes receivable losses 305,106 245,912
Operating expenses:
Salary and benefits 116,616 97,859
Marketing and promotion 27,953 20,467
Office operations 61,062 23,702
Legal and accounting 31,539 34,229
Ministry Support 1,600 0
Total operating expenses 238,77 176,257
Income / (loss) before taxes 66,335 69,656
Provision for taxes 27,623 20,482
Net income (loss) 38,712 49,174
Retained earnings, beginning 47,376 14,146
Retained earnings, ending 86,088 63,320
Earnings per share 0.39 0.49
The accompanying notes are an integral part of these financial
Statements
F-3
<PAGE>
STATEMENTS OF CASH FLOWS
Nine months ended September 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $38,712 $49,174
Adjustments to reconcile net income
to net cash provided by operation activities
Depreciation and amortization 2,053 773
Provision for notes receivable 7,000 -
Increase in accrued interest receivable (2,323) (25,825)
Decrease in prepaid expense 10,855 20,045
Decrease in accounts receivable 1,155 4,000
Increase (Decrease)in acct payable (51,944) 5,499
Increase (Decrease) in income taxes payable (9,407) 14,854
Prior year adjustment 2,778 (3,695)
Net cash provided (used) by operating activities $(1,121) $64,825
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments received on loans receivable 11,239 7,599
Purchase of notes receivable (2,065,981) (3,141,114)
Principal payments received on notes receivable 1,674,307 1,306,578
Purchase of property and equipment (5,879) (5,171)
Net cash used by investing activities ($386,314) $(1,832,108)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances made on the LOC 1,551,000 1,265,384
Amounts paid on the LOC (1,551,000) (2,245,384)
Principal payments made on notes payable (3,724,322) (1,715,469)
Proceeds from borrowings on notes payable 5,349,252 4,761,293
Net cash provided by financing activities $1,624,931 $2,065,824
Net increase in cash and cash equivalents $1,237,495 $298,541
Cash and cash equivalents at beginning $267,653 $119,986
Cash and cash equivalents at end $1,505,148 $418,527
F-4
<PAGE>
MINISTRY PARTNERS INVESTMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. Summary of Significant accounting policies
Nature of Business
Ministry Partners Investment Corporation (MPIC) was incorporated in
California in 1991 and is a wholly-owned subsidiary of Evangelical
Christian Credit Union (ECCU). The Company provides funds for real
property secured loans for the benefit of Evangelical churches and
church organizations through funding provided by members of and
persons associated with such churches and organizations. The
Company's offices, as well as those of its loan origination source,
ECCU, are located in the state of California and substantially all of
the business and operations of the Company are currently conducted in
California and its mortgage loan investments are concentrated in
California.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as
of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Prepaid offering expense
Prepaid offering expense is related to a proposed public offering of
unsecured notes. It is being amortized over a three year period.
Organization and start up costs
Organization and start up costs have been capitalized and are being
amortized, using the straight-line method over a five-year period
Notes Receivable
Interest income on notes receivable is recognized over the term of
the note and is generally computed using the simple interest method.
F-5
<PAGE>
2. Related party transactions
MPIC maintains all of its funds at the parent, ECCU. Total funds
held with ECCU were $1,505,148 and $418,526 at September 30, 1999 and
1998, respectively. Interest earned on these funds were $23,233 and
$7,444 for the nine months ended September 30, 1999 and 1998,
respectively.
MPIC utilized physical facilities and other services of ECCU. A
charge of $8,324 - 1999 and $4,192 - 1998 was made for these services
which is included in Office Operations. The method used to arrive at
the periodic charge is based on the fair market value of services
provided. Management asserts that such method is reasonable
Notes payable are substantially to members of ECCU
3. Notes receivable
In March 1992, MPIC purchased a pool of first trust deed seasoned
loans from ECCU for the then outstanding balance. Loan maturities
extend through 2001, although the majority were due in 1995 and 1996
Interest rates range from 7.025% to 11.50%, yielding an average of
9.138%. The loans were made to churches in Southern California and
are the collateral for certain notes payable. This pool of first
trust deed notes was retired in early 1996.
During 1997, 1998 and 1999, MPIC participated in church loans made by ECCU
Interest is at variable rates of interest; ranging from 7.500% to
11.000%. ECCU services these loans, charging a service fee.
An allowance for doubtful accounts has been established for notes
receivable of $17,000 as of September 30, 1999. At September 30, 1998 no
allowance for doubtful accounts had been established. The Company has
no experience of loan loss and, as of September 30, 1999 and 1998, none of
the loans are impaired. Management believes all of the notes are
adequately secured and fully collectible.
4. Organization and start up costs
Organization and start up costs at September 30, 1999 and 1998 are
stated as follows:
1999 1998
Start up
Cost $ 63,292 $ 63,292
Accumulated amortization 63,292 63,292
------ ------
-0- -0-
Organization
Cost 15,438 15,438
Accumulated amortization 15,438 15,438
------- ------
-0- -0-
------- ------
-0- -0-
F-6
<PAGE>
5. Line of credit - ECCU
MPIC has an unsecured $2,100,000 line of credit with ECCU, of which
$-0- and $-0- was borrowed at September 30, 1999 and 1998,
respectively. Interest at September 30, 1999 and 1998 was 8.000% and
7.500%, respectively, and varies according to ECCU's cost of funds.
6. Notes payable
MPIC has unsecured notes payable at September 30, 1999, as follows:
Total Interest Rate
Private Placement $ 199,676 7.70 - 8.55
CA Public Offering 354,585 6.90 - 8.66
National Offering 1,204,285 4.82 - 7.29
Special Offering 6,228,436 4.82 - 6.71
National A-1 Offering 5,966,542 4.82 - 6.50
International Offering 127,633 5.27 - 5.81
----------
$ 14,081,158
Future maturities at September 30 are as follows:
1999 1998
1998 -0- 4,157,785
1999 6,256,420 5,198,816
2000 6,510,096 656,087
2001 586,284 85,933
2002 292,608 260,017
2003 293,961 146,051
2004 141,789 -0-
---------- ----------
$ 14,081,158 $ 10,504,689
7. Public offering
In August 1994, MPIC received approval from the Department of
Corporations of the State of California to offer $6,000,000 in
unsecured notes payable, of which only $3,000,000 may be
outstanding at any one time. At September 30, 1999 and 1998,
$354,585 and $367,775, respectively, were outstanding.
8. National Offering
In October 1996, MPIC received approval from the Securities and
Exchange Commission to offer $5,000,000 in unsecured notes payable
nation wide. This offering has been completely sold. At September 30,
1999 and 1998, $1,204,285 and $2,151,848, respectively, were
outstanding.
In December 1997, MPIC received approval from the Securities and
Exchange Commission to offer $15,000,000 in unsecured notes
payable nation wide. This offering is currently available in
California, Colorado and Oregon. At September 30, 1999 and 1998,
$5,966,542 and $ 2,544,966, respectively, were outstanding.
F-7
<PAGE>
MINISTRY PARTNERS INVESTMENT CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
TURNER, WARREN, HWANG & CONRAD
ACCOUNTANCY CORPORATION
100 NORTH FIRST STREET, SUITE 202
BURBANK, CALIFORNIA 91502
GARY W. TURNER, CPA
JUDITH M. WARREN
WALTER Y. HWANG, CPA
DAVID A. CONRAD
(818) 955-9537
(562) 435-2826
FAX (818) 955-8416
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Ministry Partners Investment Corporation
Anaheim, California
We have audited the accompanying balance sheets of Ministry Partners
Investment Corporation as of December 31, 1998 and 1997, and the related
statements of income and retained earnings 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 Ministry Partners Investment
Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
TURNER, WARREN, HWANG & CONRAD
ACCOUNTANCY CORPORATION
Burbank, California
February 3, 1999
F-8
<PAGE>
Financial Statements for the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
BALANCE SHEETS
DECEMBER 31,
1998 audited 1997 audited
ASSETS
<S> <C> <C>
Current Assets
Cash $ 267,653 $ 119,985
Notes receivable, net of allowance for losses 344,434 418,958
Loans receivable 3,590 1,811
Interest receivable 82,781 41,771
Accounts receivable 1,155 4,000
Prepaid expenses 24,372 51,602
Total Current Assets $ 723,985 $ 638,127
Other Assets
Notes receivable 12,751,758 9,108,815
Loans receivable 58,960 71,216
Property and equipment, net 3,987 -
Total Other Assets 12,814,705 9,180,031
Total Assets $ 13,538,690 $ 9,818,158
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities
Accounts payable $ 20,715 $ 16,253
Line of credit - 980,000
Notes payable - current portion 10,877,010 5,792,705
Income taxes payable 17,149 3,694
Total Current Liabilities 10,914,874 6,792,652
Long-term Liabilities
Notes payable 12,456,227 7,803,870
Less current portion (10,877,010) (5,792,705)
Total Long-term Liabilities 1,579,217 2,011,165
Stockholder's Equity
Common stock, 10,000,000 shares authorized,
100,000 shares issued and outstanding,
no par value 1,000,000 1,000,000
Retained earnings 44,599 14,341
Total Stockholder's Equity 1,044,599 1,014,341
Total Liabilities and Stockholder's Equity $ 13,538,690 $ 9,818,158
<CAPTION>
The Accompanying notes are an integral part of these financial statements
F-9
<PAGE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
DECEMBER 31,
1998 audited 1997 audited
<S> <C> <C>
INTEREST INCOME
Notes receivable and loans receivable $ 986,717 $ 512,411
Interest-bearing accounts 18,014 12,986
Total Interest Income 1,004,731 525,397
INTEREST EXPENSE
Line of credit 21,235 21,948
Notes payable 644,011 335,806
Total Interest Expense 665,246 357,754
NET INTEREST INCOME 339,485 167,643
PROVISION FOR NOTES RECEIVABLE LOSSES 10,000 -
NET INTEREST INCOME AFTER PROVISION FOR
NOTE RECEIVABLE LOSSES 329,485 167,643
OTHER INCOME
Point fee income - 52,750
Total Other Income - 52,750
OPERATING EXPENSES
Salaries and benefits reimbursed 126,497 113,268
Marketing and promotion 36,655 34,557
Office occupancy 10,921 12,585
Office operations 61,132 10,089
Legal and accounting 40,496 39,133
Amortization - 2,585
Total Operating Expenses 275,701 212,217
INCOME BEFORE PROVISION FOR INCOME TAXES 53,784 8,176
Provision for Income Taxes 23,526 5,854
NET INCOME 30,258 2,322
<CAPTION>
The Accompanying notes are an integral part of these financial statements
F-10
<PAGE>
STATEMENTS OF CASH FLOWS
DECEMBER 31,
1998 audited 1997 audited
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 30,258 $ 2,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,184 2,585
Provision for notes receivable 10,000 -
Increase in accrued interest receivable (41,010) (6,839)
Decrease in prepaid expense 27,230 11,579
Decrease (increase) in accounts receivable 2,845 (4,000)
Increase in accounts payable 4,462 6,500
Increase in income taxes payable 13,455 2,340
Net Cash Provided by Operating Activities 48,424 14,487
CASH FLOWS FROM INVESTING ACTIVITIES
New loans made - (75,000)
Principal payments received on loans receivable 10,477 1,973
Purchase of notes receivable (5,459,964) (11,725,575)
Principal payments received on notes receivable 1,881,547 5,535,383
Proceeds from maturities of certificate of deposit - 78,426
Purchase of property and equipment (5,171) -
Net Cash Used by Investing Activities (3,573,111) (6,184,793)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances made on line of credit 1,672,384 3,606,675
Amounts paid on line of credit (2,652,384) (3,044,579)
Principal payments made on notes payable (1,735,252) (4,046,880)
Proceeds from borrowings on notes payable 6,387,607 9,693,098
Net Cash Provided by Financing Activities 3,672,355 6,208,314
Net increase in cash and cash equivalents 147,668 38,008
Cash and cash equivalents at beginning of year 119,985 81,977
Cash and cash equivalents at end of year $ 267,653 $ 119,985
</TABLE>
The Accompanying notes are an integral part of these financial statements
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business:
Ministry Partners Investment Corporation was incorporated in California in
1991 and is a wholly-owned subsidiary of Evangelical Christian Credit Union
(ECCU). The Company provides funds for real property secured loans for the
benefit of Evangelical churches and church organizations through funding
provided by members of and persons associated with such churches and
organizations. The Company's offices, as well as those of its loan
origination source, ECCU, are located in the state of California and
substantially all of the business and operations of the Company are currently
conducted in California and its mortgage loan investments are concentrated in
California.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Notes Receivable:
Interest income on notes receivable is recognized over the term of the note
and is generally computed using the simple interest method. The allowance for
notes receivable losses is increased by charges to income and decreased by
charge offs (net of recoveries).
Property and Equipment:
Furniture, fixtures, and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on a straight-line basis over the
estimated useful lives of the assets, which range from three to five years.
Prepaid Offering Expense:
Prepaid public offering is related to a public offering of unsecured notes.
It is being amortized over a three-year period.
Organization and Start Up Costs:
Organization and start-up costs have been capitalized and are being
amortized, using the straight-line method over a five-year period.
Reclassification:
Certain account reclassifications have been made to the financial statements
of the prior year in order to conform to classification used in the current
year.
NOTE 2 - RELATED PARTY TRANSACTIONS
The Company maintains all its funds at the parent, ECCU. Total funds held
with ECCU at December 31, 1998 and 1997 were $267,653 and $119,985,
respectively. Interest earned on these funds for the years ended December 31,
1998 and 1997 were $18,014 and $12,986, respectively.
The Company, as part of its investment strategy, purchases an interest in
loans offered for sale by ECCU. In consideration, ECCU has entered into an
agreement with the Company to share net fee income on loans purchased. The
Company purchased loans totaling $5,459,964 and $11,725,575 from ECCU and
received $-0- and $52,750 of fee income from ECCU on selected loans purchased
during the years ended December 31, 1998 and 1997, respectively. The Company
recognized interest income on notes receivable from ECCU of $986,717 and
$512,411 during the years ended December 31, 1998 and 1997, respectively.
The Company pays support charges for management services and rent to ECCU on
a month-to-month basis. A charge of $35,575 and $30,074 was made for these
services for the years ended December 31, 1998 and 1997, respectively. The
method used to arrive at the periodic charge is based on the fair market value
of services provided. Management believes that such method is reasonable.
The Company reimburses ECCU for salaries and benefits of employees. The
amount reimbursed for the years ended December 31, 1998 and 1997 was $126,497
and $113,268, respectively. There was $18,082 and $11,739 due to ECCU at
December 31, 1998 and 1997, respectively.
F-12
<PAGE>
NOTE 3 - NOTES RECEIVABLE
The notes receivable are backed by loan participation agreements secured by
loans originated by ECCU to various churches and related organizations to
finance facilities. Loan maturities extend through 2010, although the
majority are due in 2000 to 2002. The notes earn interest at rates between 8%
and 11.750%, with a weighted average yield of 8.855%.
The allowance for notes receivable losses of $10,000 has been established
during 1998. The Company has no experience of loan loss and, as of December
31, 1998, none of the loans are impaired. Management believes all of the
notes are adequately secured and the allowance is adequately maintained.
NOTE 4 - LINE OF CREDIT
The Company has an unsecured $2,100,000 line of credit with ECCU that
expires March 31, 1999. There were none outstanding as of December 31, 1998.
Interest at December 31, 1998 was 7.50%, and varies according to ECCU's cost
of funds. Interest of $21,235 and $21,948 was paid to ECCU during the years
ended December 31, 1998 and 1997, respectively.
NOTE 5 - NOTES PAYABLE
The Company has unsecured notes payable at December 31, 1998, as follows:
Total Interest Rate
Private Placement Notes $ 331,377 6.36% - 8.55%
Public Offering Notes 386,878 6.90% - 8.66%
National Offering Notes 5,997,823 4.81% - 7.36%
Special Offering Notes 5,729,972 5.31% - 7.00%
Offshore Notes 10,177 6.12%
$ 12,456,227
Notes payable are substantially to members of ECCU.
The following are maturities of notes payable for each of the next five years:
Year Ending
December 31 1998 1997
1998 $ - $ 5,689,477
1999 10,877,010 1,306,032
2000 864,736 478,047
2001 149,111 98,531
2002 284,984 231,783
2003 280,386 -
---------- ---------
$ 12,456,227 $ 7,803,870
F-13
<PAGE>
NOTE 6 - PUBLIC OFFERING
In August 1994, the Company received approval from the Department of
Corporations of the State of California to offer $6,000,000 in unsecured notes
payable, of which only $3,000,000 may be outstanding at any one time. There
were $386,878 and $478,643 outstanding at December 31, 1998 and 1997,
respectively. This offering has been discontinued.
The Company filed a registration statement with the U.S. Securities and
Exchange Commission and received approval in October 1996 to offer $5,000,000
in unsecured promissory notes to the public. There were $1,920,261 and
$3,421,729 outstanding at December 31, 1998 and 1997, respectively.
The Company filed a registration statement with the U. S. Securities and
Exchange Commission and received approval in December 1997 to offer
$15,000,000 in unsecured promissory notes to the public. There was $4,077,563
outstanding as of December 31, 1998.
NOTE 7 - INCOME TAXES
Federal income and state franchise taxes for the years ended December 31,
1998 and 1997 are as follows:
1998 1997
Federal income taxes $ 14,537 $ 3,660
State franchise taxes 8,989 2,194
------ -----
$ 23,526 $ 5,854
NOTE 8 - CONCENTRATION OF CREDIT RISK
At December 31, 1998 and 1997, the Company had cash at ECCU which is not
federally insured. The aggregate uninsured amount was $123,387 and $105,045,
respectively.
F-14
<PAGE>
EXHIBIT A
SPECIMEN
MINISTRY PARTNERS INVESTMENT CORPORATION
CLASS A-1 NOTE
SERIES___________
PRINCIPAL AMOUNT: $____________________ ISSUANCE DATE:________, 199_
[INTEREST REINVESTMENT ELECTED, _________________, California
See Section 5 Below]
THIS NOTE IS SUBJECT TO THE PROVISIONS OF A STANDBY TRUST AGREEMENT
DATED
November 19, 1997, which authorizes the issuance of up to $25,000,000 of
Class A-1 Notes.
1. Principal and Interest. For value received, MINISTRY PARTNERS
INVESTMENT CORPORATION, a California corporation ("Maker"), hereby
promises to pay to the order of the registered holder of this Note
("Holder"), at such address of Holder as is set forth on the records
of Maker, or at such other place as Holder may designate in writing
to Maker, the principal sum of ____________________________________
Dollars ($___________) (hereafter the "Principal"). This Note shall
bear interest from the date hereof on the unpaid Principal balance until
paid at the rate of___________ Percent (____%) per annum. Interest
accruing hereunder shall be calculated on the basis of a 365-day year
for actual days elapsed.
2. Manner and Form of Payment. This Note shall be payable interest
only, in arrears, on the fifth day of ________ and on the fifth day
of each month thereafter until _________ (the "Payment Date"), on
which date the unpaid balance of principal and accrued interest shall
be due and payable. All Principal and interest shall be payable in
lawful money of the United States of America. All payments made
hereunder shall be applied first to the payment of accrued interest
and the balance remaining to the payment of Principal.
3. Loan and Standby Trust Agreement. As a condition to the
issuance of this Note, Holder agrees to adopt and to be bound by the
terms and conditions of the Loan and Standby Trust Agreement dated
November 19, 1997 (the "Loan Agreement"), the terms and conditions of
which are incorporated herein by reference.
4. Events of Default. This Note shall be subject to each of the
Events of Default and remedies set forth in the Loan Agreement. In
order to cure Payment Default, Maker must mail to the Holder, or
direct deposit if that option is selected, the amount of the
nonpayment plus a late payment penalty equal to simple interest on
the amount unpaid at the rate of ___% per annum, measured from the
date the payment should have been mailed, deposited or credited
pursuant to the terms of this Note until the date it actually is
mailed, deposited or credited.
If an Event of Default occurs and is continuing, then and in
every such case the Holders of not less than a Majority in Principal
Amount of the Outstanding Notes may appoint a Trustee to represent
the interest of all the Holders pursuant to the Loan Agreement as
provided therein. No Holder shall have the right to institute or
continue any proceeding, judicial or otherwise, with respect to the
Notes except pursuant to the Loan Agreement.
Under the Loan Agreement, the Trustee, at the direction of the
Majority Vote of the Holders may, declare all the Notes to be due and
payable immediately and take any action allowed by law to collect
such amounts. Notwithstanding the foregoing, in the case of an Event
of Default arising from events of bankruptcy or insolvency with
respect to Maker, all Outstanding Notes will become due and payable
without further action or notice.
5. Interest Reinvestment. If the Holder has elected to reinvest
interest payable on the Note (the "Interest Reinvestment Election"),
Maker shall defer all interest payable on its Note until the Payment
Date by increasing the Principal Amount by an amount equal to each
interest payment otherwise payable on this Note, as of the Payment
Date of such interest payment. Interest shall be payable on such
increased Principal Amount thereon in the manner otherwise provided
herein.
6. Prepayment of Note. The Maker may at any time, upon not less
than thirty (30) nor more than sixty (60) days prior written notice
to the Holder, elect to prepay the Principal Amount in whole or in
part, and by delivering to the Holder payment equal to such amount of
prepayment plus accrued and unpaid interest thereon through such date
of prepayment. Notice of prepayment shall be mailed by first class
mail to Holder. If less than all of the Series of the Note is
prepaid, Maker shall prepay all Notes of the Series on a pro rata
basis. In the event of such prepayment, a new Note in principal
amount equal to the unpaid principal amount of the original Note
shall be issued in the name of Holder and the original Note shall be
cancelled. On and after the prepayment date, interest shall cease to
accrue on the portion of the Principal Amount prepaid. The foregoing
obligation to prepay a Series of Notes on a pro rata basis herein
shall not in any manner limit the Maker's right to repurchase or
prepay any Note on a voluntary basis agreed to by the holder thereof,
including any prepayment of the Note prior to maturity as described
below.
7. Early Presentment. Holder may upon written notice to Maker,
request prepayment of the Note at any time prior to maturity. In
such event, Maker shall determine in Maker's sole judgment, whether
to so prepay the Note. In the event Maker determines to prepay the
Note, it shall prepay (i) an amount equal to the unpaid balance of
the Principal Amount, plus (ii) the accrued but unpaid interest
through the date of prepayment, less (iii) an amount equal to the
lessor of three (3) months interest on the balance of the unpaid
Principal Amount or one-sixth of the interest payable on the Note
during its original term.
8. Amendment, Supplement and Wavier. Pursuant to the Loan
Agreement, the Notes may be amended or supplemented by a Majority
Vote of the Holders and any Default, Event of Default,
compliance or noncompliance with any provision of the Notes may be
waived by a Majority Vote of the Holders, provided that any such
amendment or supplement affecting the term, interest rate and other
terms of the Notes must be ratable and proportionate in effect on all
Holders of the then outstanding Notes based on the aggregate amount
of principal and interest and penalty payments due them.
9. Waivers. The Maker waives demand for payment, presentment for
payment, protest, notice of protest, notice of dishonor, notice of
nonpayment, notice of acceleration or maturity, diligence in taking
any action to collect sums owning hereunder.
10. Separability. In case any provision in this Note shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
11. California Law; Jurisdiction. This Note is made in the State
of California and the provisions hereof shall be construed in
accordance with the laws of the State of California, except to the
extent preempted by federal law; and such parties further agree that
in the event of a default hereunder, this Note may be enforced in any
court of competent jurisdiction in the State of California, and they
do hereby submit to the jurisdiction of such court regardless of
their residence or where this Note or any endorsement hereof may have
been executed.
MINISTRY PARTNERS INVESTMENT CORPORATION
By:____________________________________
EXHIBIT B
CLASS A-1 NOTE
LOAN AND STANDBY TRUST AGREEMENT
THIS LOAN AND STANDBY TRUST AGREEMENT is dated as of _____________,
1997 between Ministry Partners Investment Corporation, a California
corporation (the "Company"), the Holders of the Company's Class A-1 Notes,
as defined below, and such Trustee or Trustees as may be appointed by the
Holders pursuant to the terms hereof.
WHEREAS, the Company has undertaken to offer and issue, through an
offering registered under the Securities Act of 1933, as amended (the "1933
Act"), pursuant to that certain Registration Statement on Form SB-2 and the
Prospectus which is a part thereof (the "Prospectus"), as supplemented, up
to $25,000,000 of its Class A-1 Notes.
NOW, THEREFORE, in consideration of the agreements contained herein
and for other good and valuable consideration, the adequacy of which is
hereby acknowledged, the Company, the Holders and the Trustee mutually
agree as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
Section 1. Definitions
For the purposes of this Agreement, except as otherwise expressly
provided or unless the context otherwise requires, the capitalized terms
used herein and not otherwise defined in this section have the meaning
assigned to them in the Prospectus and include the plural as well as the
singular. All accounting terms not otherwise defined herein have the
meanings assigned to them in the Prospectus and all computations herein
provided for shall be made in accordance with generally accepted accounting
principles. In determining generally accepted accounting principles, the
Company may conform to any other rule or regulation of any regulatory
authority having jurisdiction over the Company.
"Adjusted Net Worth" means the sum of (i) the consolidated equity of
the common stockholders of the Company and any consolidated subsidiary,
plus (ii) the respective amounts reported on such entity's most recent
balance sheet with respect to any series of preferred stock, plus (iii) the
amount of the ECCU credit line, whether or not then funded, and any loan
ECCU or any other lender is contractually obligated to loan to the Company,
but only to the extent such loan amount is expressly subordinated in right
to payment on a current basis to the Class A-1 Notes. For purposes of
computing Adjusted Net Worth, except with respect to the ECCU credit line
and any other loans included in Adjusted Net Worth as provided in the
foregoing, all transactions between the Company and any Affiliates,
including ECCU, shall be treated as if the transactions had been entered
into with an unaffiliated third-party to the extent that GAAP would require
any different treatment.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this
definition, "control," "controlling" and "controlled," when used with
respect to any specified Person, means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" means this instrument as originally executed or as it may
from time to time be supplemented, modified or amended by one or more
supplemental agreements hereto entered into pursuant to the applicable
provisions hereof. The Agreement is not qualified under or subject to the
Trust Indenture Act of 1939, as amended.
"Business Day" means any day other than a Saturday or Sunday or a day
on which banking institutions in the State of California are not required
to be open.
"Cash Flow" means with respect to any period, Consolidated Net income
of the Company and any subsidiary for such period plus (a) an amount equal
to any extraordinary loss plus any net loss realized in connection with the
sale or other disposition of any assets (to the extent such net losses were
deducted in computing Net Income for such period), plus (b) provision for
taxes based on income or profits to the extent such provisions for taxes
was deducted in computing Net Income for such period, plus (c) Fixed
Charges for such period, plus (d) depreciation and amortization (including
amortization of goodwill and other intangibles) for such period to the
extent such depreciation and amortization were deducted in computing Net
Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP, plus (e) interest expense paid or
accrued for such period with respect to the subordinated ECCU Credit line
and any other Indebtedness which is subordinated to the Notes, plus (f) the
unused amount of the ECCU Credit Line (and any other financing subordinated
to the Notes) available to the Company on the date the determination of
Cash Flow is made.
"Class A Notes" means the Series 1, Series 5, Series 10, Series 25,
Series 50, Series 100 and Series C Notes provided, however, that the
aggregate of all series of Class A Notes shall not exceed $5,000,000.
"Class A-1 Notes" means the Series 1, Series 5, Series 10, Series
25, Series 50, Series 100 and Series C Notes provided, however, that the
aggregate of all series of Class A-1 Notes shall not exceed $25,000,000.
"Default" means any event that with the passage of time or the giving
of notice or both is or could be an Event of Default.
"ECCU Credit Line" means that certain loan agreement and note in the
amount of $2,100,000 dated February 26, 1997, as amended, as subordinated
by that certain Subordination Agreement dated June 1, 1994, as amended.
"Events of Default" means those Events of Default defined under
"Events of Default" herein, whatever the reason for such event and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule
or regulation of any administrative or governmental body.
"Fixed Charges" means, with respect to any period, consolidated
interest expense for such period, whether paid or accrued, to the extent
such expense was deducted in computing Consolidated Net Income (including
amortization of original issue discount, noncash interest payments and the
interest component of capital leases, but excluding amortization of
deferred financing fees) plus, without duplication, all interest
capitalized for such period on a consolidated basis and in accordance with
GAAP. Fixed Charges shall not include any interest expense for such period
paid or accrued with respect to any loan to the extent it is expressly
subordinated to in right of payment amounts due and payable to the Class A-1
Notes.
"Fixed Charge Coverage Ratio" means, with respect to any period, the
ratio of the Cash Flow of the Company for such period to the Fixed Charges
of the Company for such period. In the event the Company incurs, assumes,
guarantees, repays, redeems or otherwise retires any Indebtedness (other
than the Company's credit line with ECCU) subsequent to the commencement of
the period for which the Fixed Charge Coverage Ratio is being calculated
but prior to the event for which the calculation of the Fixed Charge
Coverage Ratio is made, then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption,
guarantee, repayment, redemption or retirement of Indebtedness, including,
if applicable, the application of the proceeds therefrom, as if the same
had occurred at the beginning of the applicable period. In making such
calculations on a pro forma basis, interest attributable to Indebtedness
bearing a floating interest rate shall be computed as if the rate in effect
on the date of computation had been the applicable rate for the entire
period.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, which are in effect from time to time.
"Holder" means the Person or Persons in whose name a Class A-1 Note
is registered on the books and records of the Company as a holder of Class
A-1 Notes.
"Indebtedness" means any indebtedness, whether or not contingent, (i)
in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or credit (or reimbursement agreements in respect
thereof), (ii) representing the balance deferred and unpaid of the purchase
price of any property, (iii) representing capital lease obligations; and
(iv) representing any hedging obligations, except, in each case, any such
balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing Indebtedness (other than hedging obligations)
would appear as a liability upon a balance sheet prepared in accordance
with GAAP, and also includes, to the extent not otherwise included, the
guarantee of obligations of other persons that would be included within
this definition.
"Majority in Interest" or "Majority of Principal Amount" shall mean a
majority of the outstanding unpaid principal amount of all Outstanding
Class A-1 Notes plus all unpaid interest due thereon (as reflected on the
books and records of the Company as voted by the Holders thereof).
"Maturity Date" means the date on which the unpaid balance of
principal and accrued interest is due and payable on the respective Class
A-1 Note. The Maturity Date of a Class A-1 Note may be six (6), twelve
(12), twenty-four (24), thirty (30) or sixty (60) months, other than the
Series C Notes shall have a Maturity Date of seventy-two (72) months from
the date of issuance.
"Net Income" means, with respect to the Company for any period, the
aggregate of the net income of the Company for such period, on a
consolidated basis, determined in accordance with GAAP; provided that the
Net Income of any entity that is not a subsidiary of the Company or that is
accounted for by the equity method of accounting shall be included only to
the extent of the amount of dividends or distributions paid to the referent
entity or a wholly-owned subsidiary of the Company.
"Net Tangible Assets" means, with respect to the Company, the total
amount of assets of the Company and any subsidiary (less applicable
reserves) on a consolidated basis, as determined in accordance with GAAP,
less intangible assets. For purposes of computing Net Tangible Assets, all
transactions between the Company and any Affiliates, including ECCU, shall
be treated as if the transactions had been entered into with an
unaffiliated third-party to the extent GAAP would require any different
treatment.
"Other Indebtedness" means any Indebtedness of the Company
outstanding other than any amounts owing with respect to the Class A-1
Notes and any extension, refinancing, refunding, renewal, substitution or
replacement of any such Indebtedness, but only to the extent that any such
extension, refinancing, refunding, renewal, substitution or replacement
does not exceed the principal amount of the Indebtedness being extended,
refinanced, refunded, renewed, substituted or replaced (plus the amount of
the reasonable fees and expenses in connection therewith) and that no
additional security is granted in connection with any such extension,
refinancing, refunding, renewal, substitution or replacement.
"Outstanding Class A-1 Notes" when used with respect to Class A-1
Notes means, as of the date of determination, all Class A-1 Notes
theretofore issued and delivered by the Company and not paid, prepaid or
redeemed in full pursuant to their terms.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock partnership, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Rate Schedule" means the schedule of interest rates payable on the
Class A-1 Notes as issued from time to time by the Company as a supplement
to the Prospectus.
"Series 1 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $1,000, bearing interest at the
rate designated for Series 1 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series 5 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $5,000, bearing interest at the
rate designated for Series 5 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series 10 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $10,000, bearing interest at the
rate designated for Series 10 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series 25 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $25,000, bearing interest at the
rate designated for Series 25 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series 50 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $50,000, bearing interest at the
rate designated for Series 50 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series 100 Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes which must be issued within
the initial principal amount of at least $100,000, bearing interest at the
rate designated for Series 100 Notes by the Company on the Rate Schedule
effective on the issuance date of said Note and having the Maturity Date
elected by the Holder.
"Series C Note" means one of the series of up to $25,000,000 of
principal amount (less the aggregate principal amount of all other series
of Class A-1 Notes issued) of Class A-1 Notes issued in the initial
principal amount of $10,000 or $25,000 bearing interest at the variable
rate designated by the Company for the Series C Notes on the Rate Schedule
effective on the date of issuance of the Note and having a Maturity Date of
seventy-two (72) months from the date of issuance.
"Tangible Adjusted Net Worth" means the Adjusted Net Worth of the
Company less the Company's intangible assets, if any.
"Trustee" means the Person or Persons elected as the "Trustee"
pursuant to the terms of this Agreement or a successor thereto once the
latter shall have become such pursuant to the applicable provisions of this
Agreement.
Section B. Acts of Holders
1. Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Holders may be embodied in and evidenced by one or more substantially
concurrent instruments of substantially similar tenor signed by such
Holders in person or by an agent or attorney duly appointed in writing;
and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee, and, where it is herein expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments.
2. The ownership of the Class A-1 Notes shall be conclusively
proven by the books and records of the Company.
3. Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Class A-1 Note shall bind every
future Holder of the same Class A-1 Note and the Holder of every Class A-1
Note issued upon the transfer thereof or in exchange therefor or in lieu
thereof, in respect of anything done or suffered to be done by the Trustee
or the Company in reliance thereon, whether or not notation of such action
is made upon such Class A-1 Note.
Section C. Notices to Trustee and the Company
Any request, demand, authorization, direction, notice, consent,
waiver or Act of Holders or other document provided or permitted by this
Agreement to be made upon, given or furnished to, or filed with:
1. The Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if given in writing by personal
service or mailed by certified mail, return receipt requested, addressed to
the Trustee at the address provided to the Holder by the Trustee in
writing, or
2. The Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder if given in writing by personal
service or mailed by certified mail, return receipt requested, addressed to
the Company at 1150 N. Magnolia Avenue, Anaheim, California 92801,
Attention: John C. Garmo, President, or at any other address previously
furnished in writing to the Trustee by the Company.
Section D. Notices to Holders
Where this Agreement provides for publication of notice to Holders of
any event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid,
to each Holder of such Class A-1 Notes, at the address of such Holder as it
appears in the books and records of the Company, not later than the latest
date, and not earlier than the earliest date, prescribed for the first
publication of such notice.
Section E. Effect of Headings and Table of Contents
The Article and Section headings herein are for convenience only and
shall not affect the construction hereof.
Section F. Successors and Assigns
All covenants and agreements in this Agreement by the Company shall
bind its successors and assigns, whether so expressed or not.
Section G. Severability
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section H. Benefits of Agreement
Nothing in this Agreement or in the Class A-1 Notes, expressed or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder, any benefit or any legal or equitable right, remedy
or claim under this Agreement.
Section I. Governing Law
This Agreement and all rights and obligations of the undersigned
hereof shall be governed, construed and interpreted in accordance with the
laws of the State of California without regard to conflict of law
principles.
Section J. Persons Deemed Owners
The Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name any Note is registered as the owner of
such Class A-1 Note for the purpose of receiving payment of principal of or
interest on said Class A-1 Note and for all other purposes whatsoever,
whether or not such Class A-1 Note is overdue.
ARTICLE II
CONTINUING COVENANTS OF THE COMPANY
Section A. Continuing Covenants of the Company
1. Limitation on Restricted Payment. While any Class A-1 Note is
outstanding, the Company shall not, and will not permit any subsidiary to,
directly or indirectly: (i) declare or pay any dividend or make any
distribution on account of the stock of the Company or any subsidiary
(other than dividends or distributions payable (x) in capital stock of the
Company or such subsidiary or (y) to the Company or any wholly-owned
subsidiary); (ii) purchase, redeem or otherwise acquire or retire for value
any capital stock of the Company or any wholly-owned subsidiary; (iii)
voluntarily purchase, redeem or otherwise acquire or retire for value,
prior to the scheduled maturity of any mandatory sinking fund payments
thereon or the stated maturity thereof, any Indebtedness of the Company
that is subordinated in right of payment to the Class A-1 Notes (all such
payments and other actions set forth in clauses (i) through (iii) above
being collectively referred to as "Restricted Payments") unless, at the
time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) such Restricted Payment, together with the aggregate of
all other Restricted Payments made by the Company or any subsidiary, does
not exceed the sum of:
(i) 50% of the Net Income of the Company for the period
(taken as one accounting period) from fiscal year ended December 31, 1996 to
the end of the Company's most recently ended full fiscal quarter for which
financial statements are available at the time of such Restricted Payment (or,
if such Net Income for such period is a deficit, 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by
the Company from the issue or sale of capital stock of the Company (other
than capital stock sold to a subsidiary of the Company), debt securities or
capital stock convertible into capital stock of the Company upon such
conversion, or any funds advanced or loaned to the Company by ECCU under
its subordinated line of credit, plus
(iii) 100% of the cash, if any, contributed to the capital of
the Company, as additional paid in capital by any stockholder of the Company.
(c) The foregoing notwithstanding, the provisions of
subsection (b)(i), (ii) and (iii) above shall not prohibit the following
Restricted Payments:
(i) the payment of any dividend within sixty (60) days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the foregoing provisions; or
(ii) (x) the redemption, repurchase, retirement or other
acquisition of any capital stock of the Company, (y) the purchase,
redemption or other acquisition or retirement for value prior to the
scheduled maturity of any mandatory sinking fund payments or stated
maturity of Indebtedness of the Company subordinated in right of payment to
the Holders of the Class A-1 Notes, or (z) the making of any investment in
the Company or any subsidiary of the Company in each case of (x), (y) and
(z) in exchange for, or out of the proceeds of the substantially concurrent
sale (other than to the Company) of, capital stock of the Company.
2. Limitation or Outstanding Class A-1 Notes. The Company shall
not issue any Class A-1 Note if, after giving effect to such issuance, the
Class A-1 Notes then outstanding would have an aggregate unpaid balance
exceeding $10,000,000.
3. Limitation on Incurrence of Indebtedness. While any Class A-1
Note is outstanding, the Company shall not, and will not permit any
subsidiary to, directly or indirectly, create, incur, issue, assume,
guaranty or otherwise become, directly or indirectly, liable with respect
to (collectively, "incur") any Indebtedness; unless the Fixed Charge
Coverage Ratio of the Company, determined on a consolidated basis, for the
Company's most recently ended four full fiscal quarters for which financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred, would have been at least 1.20 to 1.0,
determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom to a repayment of any Indebtedness), as if the
additional Indebtedness had been incurred at the beginning of such
four-quarter period. Provided, however, that notwithstanding the foregoing,
the Company may incur Indebtedness that: (i) is evidenced by the Class A-1
Notes; (ii) was existing at December 31, 1996 as it may be extended or
modified; (iii) is incurred in the ordinary course of business for the
funding of mortgage loans which includes warehouse lines of credit and
gestation or repurchase facilities; (iv) is in respect of performance,
completion, guarantee, surety and similar bonds, banker's acceptances or
letters of credit provided by the Company in the ordinary course of
business; and/or (v) when incurred, does not result in other Indebtedness
in excess of $750,000 outstanding at any time.
4. Merger, Consolidation or Sale of Assets. While any Class A-1
Note is outstanding, the Company shall not consolidate or merge with or
into any other person or entity (whether or not the Company is the
surviving corporation) or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets
(excepting loans held for sale in the normal course of the Company's
mortgage banking operations) in one or more related transactions to,
another corporation, person or entity, unless (i) the Company is the
surviving corporation of such consolidation or merger; and (ii) immediately
after such transaction no Default or Event of Default exists.
5. Maintenance of Tangible Adjusted Net Worth. In the event that,
while any Class A-1 Note is outstanding, within 55 days after the end of
any fiscal quarter (100 days after the end of any fiscal year) as of the
end of which the Company's Tangible Adjusted Net Worth is less than
$2,000,000 (the "Minimum Tangible Adjusted Net Worth"), the Company shall
notify the Holders of such event and shall within sixty (60) days
thereafter restore its Tangible Adjusted Net Worth to an amount greater
than the Minimum Tangible Adjusted Net Worth.
6. Books and Records. The Company shall keep proper books of
record and account, in which full and correct entries shall be made of all
dealings or transactions of or in relation to the Class A-1 Notes and the
business and affairs of the Company in accordance with generally accepted
accounting principles. The Company shall furnish to the Trustee any and
all information related to the Class A-1 Notes as the Trustee may
reasonably request and which is in the Company's possession.
ARTICLE III
REMEDIES
Section A. Events of Default
Each of the following constitutes an Event of Default under the Class
A-1 Notes: (i) default for thirty (30) days in the payment when due of
interest or penalty on any Class A-1 Note; (ii) default for thirty (30)
days in the payment when due of principal of any Class A-1 Note; (iii) if
not cured in a timely manner, failure by the Company to observe or perform
any of the covenants or agreements in the Class A-1 Notes or set forth
under Article II hereof required to be performed by it; or (iv) if not
cured in a timely manner, default under the instruments governing any Other
Indebtedness or any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Other
Indebtedness for money borrowed by the Company, whether such Other
Indebtedness or guarantee now exists or is hereafter created, which default
(a) is caused by a failure to pay when due principal or interest on such
Other Indebtedness within the grace period provided in such Other
Indebtedness and which continues beyond any applicable grace period (a
"Payment default") or (b) results in the acceleration of such Other
Indebtedness prior to its express maturity, provided in each case the
principal amount of any such Other Indebtedness, together with the
principal amount of any other such Other Indebtedness under which there has
been a Payment default or the maturity of which has been so accelerated,
aggregates $250,000 or more.
In order to cure payment Default, the Company must mail to the
Holder, direct deposit or credit if that option is selected, the amount of
the nonpayment plus a late payment penalty equal to simple interest on the
amount unpaid at the rate of 10% per annum, measured from the date the
payment should have been mailed, deposited or credited pursuant to the
terms of the Class A-1 Notes until the date it actually is mailed,
deposited or credited.
Section B. Appointment of Trustee and Commencement of Operation of the
Trust
If an Event of Default occurs and is continuing, then and in every
such case the Holders of not less than a Majority in Principal Amount of
the Outstanding Class A-1 Notes by written and signed ballot or other
written and signed consent may, within thirty (30) days of such Event of
Default, appoint a Trustee. Upon delivery of the properly executed written
instrument evidencing the appointment of the Trustee and the latter's
acceptance of such appointment by due execution of this specific and exact
form of Agreement, the operation of this Trust shall commence and the power
and rights of the Trustee hereunder shall begin.
Section C. Covenant to Pay Trustee Amounts Due on Class A-1 Notes and
Right of Trustee and Holders of Judgment
The Company covenants that, if an Event of Default has occurred and
is continuing, the Company will, upon written request of the Trustee, cure
such default and pay forthwith for the benefit of the Holders the whole
amount then due, any penalties which may be due and, in addition thereto,
such further amount as shall be sufficient to cover the costs and expenses
of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and all
other amounts due to the Trustee hereunder. If the Company fails to cure
such defaults and pay such amounts forthwith upon such demand, the Trustee,
in its own name and as Trustee of an express trust, shall be entitled to
sue for and recover judgment against the Company and any other obligor on
the Class A-1 Notes for the amount so due and unpaid pursuant to the terms
of the Class A-1 Notes.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of not less than a Majority in Principal Amount of the then
Outstanding Class A-1 Notes may declare all the Class A-1 Notes to be due
and payable immediately and take any action allowed by law to collect such
amounts. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company, all Outstanding Class A-1 Notes will become due and payable
without further action or notice.
The Trustee may withhold from the Holders notice of any Default or
Event of Default if it believes that withholding notice is in their
interest, except a Default or Event of Default relating to the payment of
principal, interest or penalties.
Section D. Application of Money Collected
Any money collected by the Trustee pursuant to this Article, together
with any other sums then held by the Trustee hereunder, shall be applied in
the following order, at the date or dates fixed by the Trustee and, in case
of the distribution of such money on account of principal or interest upon
presentation of the Class A-1 Notes, and the notation thereof of the
payment if only partially paid and upon surrender thereof if fully paid:
(i) First: To the payment of all unpaid amounts due to the
Trustee hereunder;
(ii) Second: To the payment of the whole amount then due and
unpaid on the Outstanding Class A-1 Notes, for principal and interest
and any penalties which may be due under the terms of the Class A-1
Notes, in respect of which or for the benefit of which such money has
been collected; and in case such proceeds shall be insufficient to
pay in full the whole amount so due and unpaid on such Class A-1
Notes, then to the payment of such principal and interest and without
any preference or priority, ratably according to the aggregate amount
so due; and
(iii) Third: To the payment of the remainder, if any, to the
Company or to whosoever may be lawfully entitled to receive the same
or as a court of competent jurisdiction may direct.
Section E. Trustee May File Proofs of Claim
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Class A-1 Notes or the property of the Company or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of the
Class A-1 Notes shall then be due and payable, as therein expressed or by
declaration or otherwise, and irrespective of whether the Trustee shall
have made any demand on the Company for the payment of overdue principal or
interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise,
(i) To file and prove a claim for the whole amount of
principal, interest and penalty owing and unpaid in respect of the
Outstanding Class A-1 Notes and to file such other papers or
documents as may be necessary or advisable in order to have the
claims of the Trustee (including to the extent permitted by law any
claim for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel) and of the Holders
allowed in such judicial proceeding, and
(ii) To collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, Trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized
by each Holder to make such payments to the Trustee, and in the event that
the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel, and any other amounts due the Trustee under this
Agreement.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan
or reorganization, arrangement, adjustment or composition affecting the
Class A-1 Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder.
Section F. Trustee May Enforce Claims Without Possession of Class A-1
Notes
All rights of action and claims under this Agreement, or documents
related thereto, may be prosecuted and enforced by the Trustee without the
possession of any of the Class A-1 Notes or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the
Trustee shall be brought in its own name as Trustee of an express trust.
Any recovery of judgment shall, after provision for the payment of the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and all other amounts due to the Trustee
hereunder, be for the ratable benefit of the Holders of the Class A-1 Notes
(based on the aggregate amount of unpaid principal and interest due each
such Holder on such date) in respect of which such judgment has been
recovered.
Section G. Limitation on Suits
DURING THE PERIOD OF THE OPERATION OF THIS AGREEMENT, NO HOLDER
SHALL
HAVE ANY RIGHT TO INSTITUTE OR CONTINUE ANY PROCEEDING or judicial action
pursuant to Articles II and III above or otherwise, under or with respect
to this Agreement or the Class A-1 Notes, or for the appointment of a
receiver or trustee or for any other remedy hereunder, unless all of the
following have occurred:
(i) Such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(ii) The Holders of not less than a Majority in Principal
Amount of the Outstanding Class A-1 Notes shall have made written
request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder;
(iii) Such Holder has offered to the Trustee indemnity
reasonably acceptable to the Trustee against the costs, expenses and
liabilities to be incurred in compliance with such request and
provided security therefor reasonably acceptable to the Trustee;
(iv) The Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(v) No written direction inconsistent with such written
request has been given to the Trustee during such 60-day period by
the Holders of a Majority in Principal Amount of the Outstanding
Class A-1 Notes;
it being understood and intended that no one or more Holders of Class A-1
Notes shall have any right in any manner whatever by virtue of, or pursuant
to any provision of this Agreement to affect, disturb or prejudice the
rights created under this Agreement or the rights of any other Holders of
Class A-1 Notes, or to obtain or to seek to obtain priority or preference
over any other Holders or to enforce any right under this Agreement, except
in the manner herein provided and for the equal and ratable benefit of all
Outstanding Class A-1 Note Holders. No Holder shall have the right and
each Holder hereby waives the right to sue individually except in
accordance with the provisions of this Agreement.
Section H. Rights to Settle or Compromise
A Trustee may not make any settlement or compromise concerning the
rights of Holders, including in regard to payments of principal or
interest, unless it is approved in a separate vote by a Majority in
Interest of the Holders. Any settlement or compromise so approved would be
binding upon all the Holders.
Section I. Rights and Remedies Cumulative
Except insofar as same shall contradict the express terms of this
Agreement, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders is intended to be exclusive of any other right or
remedy, and every right and remedy shall, to the extent permitted by law
and the terms of this Agreement, be cumulative and in addition to every
other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise.
Section J. Delay or Omission not Waiver
No delay or omission of the Trustee or of any Holder of any Class A-1
Note to exercise any right or remedy accruing upon an Event of Default
shall impair any such right or remedy or constitute a waiver of any such
Event of Default or an acquiescence therein. Every right and remedy given
by this Agreement or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by
the Trustee or by the Holders, as the case may be.
Section K. Waiver of Past Defaults
Before any judgment or decree for payment of money due has been
obtained by the Trustee as provided in this Article, the Holders of not
less than a Majority in Principal Amount of the Outstanding Class A-1 Notes
may, by Act of such Holders delivered to the Trustee and the Company, on
behalf of the Holders of all the Notes waive any past default hereunder and
its consequences and settle or compromise any claim related to the payment
of principal and interest on the Outstanding Class A-1 Notes, provided the
terms of such settlement or compromise have been made known to all Holders
of Outstanding Class A-1 Notes and the approval of the Majority in Interest
has been made in a signed written document. If and only if required by
law, the Trustee may provide a procedure for any Holder so desiring to
remove itself from the group settlement and to allow the Holder opting out
of the group settlement to proceed to enforce its rights individually and
as it sees fit.
Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Agreement; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
Section L. Notice of Defaults
As soon as practicable after the occurrence of any Event of Default
hereunder, the Company shall transmit notice thereof by mail to all Holders
of Class A-1 Notes, as their names and addresses appear on the books and
records of the Company.
ARTICLE IV
THE TRUSTEE
Section A. Certain Duties and Responsibilities
1. The Trustee shall, in the exercise of the rights and powers
vested in it by this Agreement, use the same degree of care and skill in
its exercise as a reasonable person would exercise or use.
2. No provision of this Agreement shall be construed to relieve
the Trustee from liability for its own grossly negligent action, its own
grossly negligent failure to act, or its own willful misconduct, except
that:
a. The Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in good faith in accordance with
the direction of the Holders of a Majority in Principal Amount of the
Outstanding Class A-1 Notes relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Agreement;
b. No provision of this Agreement shall require the Trustee
to advance, expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers;
c. The Trustee shall be presumed to have acted without
negligence if it acted, or omitted to act, in good faith and in reliance
upon an opinion of counsel obtained by it.
Section B. Certain Rights of Trustee
Except as otherwise provided below:
1. The Trustee may consult with counsel, accountants and other
experts and the advice or opinion of such counsel, accountants and other
experts shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted by the Trustee hereunder in good
faith and in reliance thereon and the Trustee shall have the right at any
time to seek instructions from a court of competent jurisdiction;
2. The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Agreement at the request or direction
of any of the Holders pursuant to this Agreement, unless such Holders shall
have offered to the Trustee security or indemnity reasonably acceptable to
the Trustee against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
3. The Trustee may execute any of the powers hereunder or perform
any duties hereunder either directly or by or through agents or attorneys
and the Trustee shall not be responsible for any misconduct or negligence
on the part of any agent or attorney appointed by it hereunder with the
care required below; and
4. Anything to the contrary contained herein notwithstanding, the
Trustee shall have no duty to take any action whatsoever if it believes in
good faith that the taking of such action may expose the Trustee to
personal liability.
Section C. May Hold Class A-1 Notes
The Trustee in its individual or any other capacity may become the
owner or pledgee of Class A-1 Notes and may otherwise deal with the Company
with the same rights it would have if it were not Trustee.
Section D. Compensation, Reimbursement and Security Therefor
The Company agrees:
1. To pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder;
2. To reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Agreement, including reasonable fees
and expenses of counsel for the Trustee, except as such expense,
disbursement or advance may be attributable to the Trustee's gross
negligence or bad faith;
3. To indemnify the Trustee for, and to hold it harmless against
any loss, liability or expense incurred without gross negligence or bad
faith on its part, arising out of or in connection with the acceptance or
administration of this trust, including the costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder.
Section E. Trustee Eligibility
The Trustee may not be an Affiliate of the Company.
Section F. Termination of Trust and Removal of Trustee, Appointment of
Successor
1. Upon the moment all Defaults or Events of Defaults are cured or
deemed cured pursuant to this Agreement, the appointment of the Trustee and
the operation of the Trust will terminate and the powers and the rights of
the Trustee hereunder shall cease forthwith.
2. No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until
the acceptance of appointment by the successor Trustee as provided herein.
3. The Trustee may resign as Trustee hereunder at any time by
giving written notice thereof to the Company and the Holders. Upon
delivery of an instrument of acceptance by a successor Trustee duly
appointed by a Majority in Interest of the Holders the resignation will
become effective.
4. The Trustee may be removed as Trustee hereunder at any time by
Act of the Holders of a Majority in Principal Amount of the Class A-1
Notes, delivered to the Trustee and to the Company.
5. If at any time:
a. The Trustee shall cease to be eligible as Trustee and
shall fail to resign after written request therefor by the Company or by
any Holder, or
b. The Trustee shall be adjudged incompetent, bankrupt or
insolvent or a receiver of the Trustee or of its property shall be
appointed or any public officer shall take charge or control of the Trustee
or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation;
then in any such case, any Holder may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
Section G. Acceptance of Appointment by Successor
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers and duties of the retiring Trustee under this
Agreement.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible
under this Article.
ARTICLE V
HOLDER'S LISTS AND REPORTS BY TRUSTEE AND THE COMPANY
Section A. The Company to Furnish Trustee Lists of Holders
The Company will furnish or cause to be furnished to the Trustee not
more than five (5) days after its appointment and acceptance as Trustee,
and at such other times as the Trustee may reasonably request in writing,
within ten (10) business days after receipt by the Company of any such
request, a list in such form as the Trustee may reasonably request
containing all the information in the possession or control of the Company,
or any of its paying agents, as to the names and addresses of the Holders
of Class A-1 Notes, obtained since the date as of which the next previous
list, if any, was furnished, and the status of the amount of principal and
interest paid or outstanding in respect of each Class A-1 Notes.
ARTICLE VI
SUPPLEMENTAL AGREEMENTS
Section A. Supplement Agreement Without Consent of Holders
Without the consent of the Holder of any Class A-1 Note, the Company,
when authorized by a board resolution, and the Trustee may from time to
time enter into one or more agreements supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
1. To add to the conditions, limitations and restrictions on the
authorized amount or purposes of issue, authentication and delivery of
Class A-1 Notes, as herein set forth, additional conditions, limitations
and restrictions thereafter to be observed; provided that any such
modification does not adversely affect the rights and interests of the
Holders.
2. To evidence the succession of another corporation or entity to
the Company and the assumption by any such successor of the covenants of
the Company contained herein; or
3. To add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company; or
4. To cure any ambiguity, to amend any provision herein which may
be inconsistent with any other provision herein or to make any other
provisions, with respect to matters or questions arising under this
Agreement, which shall not be inconsistent with the provisions of this
Agreement, provided such action shall not adversely affect the rights and
interests of the Holders.
Section B. Supplemental Agreements with Consent of Holders
With the consent of the Holders of not less than a Majority in
Principal Amount affected by such agreement or supplemental agreement, by
Act of such Holders delivered to the Company and the Trustee, the Company
and the Trustee may enter into an agreement or agreements supplemental
hereto for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement or of
modifying in any manner the rights of the Holders of the Class A-1 Notes
under this Agreement. Such agreement or supplemental agreement may, with
the consent of a Majority in Interest of the Holders of each Outstanding
Class A-1 Notes affected thereby, effect a compromise or settlement
affecting the term, interest rate and other terms of all the Class A-1
Notes; provided that any such compromise or settlement must be ratable and
proportionate in effect on all Outstanding Class A-1 Note Holders based on
the aggregate amount of principal and interest and penalty payments due
them under the terms of their respective Class A-1 Notes as of the date of
settlement.
The Trustee may in its discretion determine whether or not any Class
A-1 Notes would be affected by any supplemental agreement and any such
determination shall be conclusive upon the Holders of all Class A-1 Notes,
whether theretofore or thereafter authenticated and delivered hereunder.
The Trustee shall not be liable for any such determination made in good
faith.
It shall not be necessary for any Act of Holders under this section
to approve the particular form of any proposed supplemental agreement, but
it shall be sufficient if such Act shall approve the substance thereof.
Section C. Effect of Supplemental Agreements
Upon the execution of any supplemental agreements under this Article,
this Agreement shall be modified in accordance therewith and such
supplemental agreement shall form a part of this Agreement for all
purposes; and every Holder of Class A-1 Notes theretofore or thereafter
authenticated and delivered hereunder shall be bound thereby.
ARTICLE VII
DEFEASANCE
Section A. Payment of Indebtedness, Satisfaction and Discharge of
Agreement.
Whenever the Company has paid or caused to be paid all amounts then
currently due and payable pursuant to the terms of the Class A-1 Notes then
this Agreement and the rights and interests created hereby shall cease and
become null and void (except as to any surviving rights of transfer or
exchange of Class A-1 Notes herein or therein provided for and except as
otherwise stated in the next paragraph) and the Trustee then acting as such
hereunder shall, at the expense of the Company, execute and deliver such
instruments of satisfaction and discharge as may be necessary.
Notwithstanding anything to the contrary herein contained, the
obligations of the Company to pay or reimburse the Trustee as provided
herein shall survive the termination, satisfaction and discharge of this
Agreement.
ARTICLE VIII
MISCELLANEOUS
Section A. Counterparts
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
The Holders have consented hereto and are bound hereto by executing an
agreement to be bound hereby contained in the subscription document related
to the offering of the Class A-1 Notes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
MINISTRY PARTNERS INVESTMENT
CORPORATION, a California corporation
By: __________________________
TRUSTEE
By: ___________________________
___________________________
Print Name
Date: _____________________________
No dealer, salesperson or other individual has been authorized to give any
information or make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer by the Company to sell, or a
solicitation of an offer to buy, the securities offered hereby in any
jurisdiction where, or to any person to whom, it is unlawful to make an
offer or solicitation. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create an implication
that there has been any change in the affairs of the Company since the
date hereof or that the information contained herein is correct or complete
as of any time subsequent to the date hereof.
MINISTRY PARTNERS INVESTMENT CORPORATION
$15,000,000
Unsecured Promissory Notes
P R O S P E C T U S
November 30, 1999
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Registrant's Articles of Incorporation authorize Registrant to indemnify
its agents (including its officers and directors to the fullest extent
permitted under the California General Corporation Law). Registrant's Bylaws
generally allow for indemnification of directors and officers against certain
loss from proceedings including threatened, pending or completed investigative,
administrative civil and criminal proceedings, provided such persons acted in
good faith and in a manner the person reasonably believed to be in the best
interests of Registrant or that the person had reasonable cause to believe to
be lawful.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemized statement of expenses incurred in connection
with this Registration Statement. All such expenses will be paid by the
Company.
Securities and Exchange Commission Registration Fee $3,789
Accounting and Legal Fees and Expenses $20,000
Printing $2,500
Miscellaneous Expenses $3,500
TOTAL $29,789
All of the above items except the registration fee are estimates.
Item 26. Recent Sales of Unregistered Securities.
Since January 1997, the Company has from time to time issued note
obligations for loans negotiated with ministries or sophisticated individuals
who have purchased notes from the Company before and/or are accredited persons
within the meaning of Rule 501 under Regulation D. For each of these notes,
interest rates, terms and other conditions of the loan were negotiated with
the investor. The Company has relied upon the exemptions under Section 4(2) of
the 1933 Act in selling these debt securities. During the period from February
3, 1997 to September 30, 1999, the Company received a total of approximately
$6.2 million from 27 investors. Of these, eight investors purchased $400,000 or
more.
Item 27. Exhibits.
3.1 Articles of Incorporation of Registrant.(1)
3.2 Bylaws of Registrant.(1)
4.1 Form of Class A-1 Note.(1)
4.2 Form of Class A-1 Loan and Standby Trust Agreement.(1)
4.3 ECCU Class A-1 Note Subordination Agreement.(1)
5.1 Opinion of Rushall & McGeever.(1)
10.1 ECCU Loan Agreement and Note.
23.1 Consent of Rushall & McGeever (included in Exhibit 5.1 hereto).
23.2 Consent of Turner, Warren, Hwang & Conrad
25.1 Powers of Attorney (included on page II-4 of Registration Statement).
____________________
(1) Incorporated by reference from Registration Statement on Form SB-2 filed
on November 19, 1997 (Accession No. 0000944130-97-000025).
Item 28. Undertakings
(a) Rule 415 Offering. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made of the Securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the Registration Statement; and
notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) To include any additional or changed material information
on the plan of distribution.
Provided, however, that the undertakings set forth in paragraphs (1)(i)
and (1)(ii) above do not apply if the Registration Statement is on Form S-3 or
S-8 and the information required in a post-effective amendment is incorporated
by reference in periodic reports filed by the Registrant pursuant to the
Securities Exchange Act of 1934.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the Securities being registered which remain
unsold at the termination of the offering.
(b) Equity offerings of non-reporting small business issuers. As
Registrant has no duty before the offering to file reports with the Commission
under Section 13(a) or 15(d) of the Exchange Act registering equity securities
for sale in an underwritten offering, Registrant hereby undertakes to provide to
any underwriter at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(c) Indemnification. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Item 29. Financial Statements.
Included in the Prospectus in Part I of this Registration Statement.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form SB-2 to be signed on
its behalf by the undersigned, in the City of Anaheim, California, on the 30th
day of November, 1999.
MINISTRY PARTNERS INVESTMENT CORPORATION
By:/s/ Mark G. Holbrook
Mark G. Holbrook,
Chairman of the Board
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates stated:
Signature Title Date
/s/ Mark G. Holbrook Chairman of November 30, 1999
Mark G. Holbrook the Board
/s/ Mark A. Johnson Chief Financial November 30, 1999
Mark A. Johnson Officer, Director
/s/ Van C. Elliott, by Mark G. Secretary, Director November 30, 1999
Holbrook, his attorney-in-fact
Van C. Elliott, by Mark G.
Holbrook, his attorney-in-fact
/s/ Arthur G. Black, by Mark G. Director November 30, 1999
Holbrook, his attorney-in-fact
Arthur G. Black, by Mark G.
Holbrook, his attorney-in-fact
/s/ Wallace G. Norling, by Mark G. Director November 30, 1999
Holbrook, his attorney-in-fact
Wallace G. Norling, by Mark G.
Holbrook, his attorney-in-fact
/s/ Scott T. Vandeventer, by Director November 30, 1999
Mark G. Holbrook, his
Attorney-in-fact
Scott T. Vandeventer, by
Mark G. Holbrook, his Attorney-in-fact
TURNER, WARREN, HWANG & C0NRAD
ACCOUNTANCY CORPORATION
100 NORTH FIRST STREET SUITE 202
BURBANK, CALIFORNIA 991502
GARY W TURNER, CPA (818) 955-9537
JUDITH M WARREN, CPA (562) 435-2826
WALTER Y HWANG, CPA
DAVID A CONRAD, CPA FAX (818) 955-8416
To whom it may concern:
We hereby consent to the inclusion of our Independent Auditor's Report
for the years ended December 31, 1998 and December 31, 1997 of Ministry
Partners Investment Corporation in this Registration Statement on Form SB-2,
and to the reference to our Firm under the caption "Experts" in the
Prospectus which is a part of such Registration Statement.
/s/ Turner, Warren, Hwang & Conrad
TURNER, WARREN, HWANG & CONRAD
ACCOUNTANCY CORPORATION
Burbank, California
October 29, 1999
