SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
American Church Mortgage Company
(Exact Name of Registrant as Specified in Governing Instruments)
10237 Yellow Circle Drive
Minnetonka, MN 55343
(952) 945-9455
(Address, Including Zip Code, and Telephone Number, Including Area
Code, of Registrant's Principal Executive Offices)
Philip J. Myers, President
10237 Yellow Circle Drive
Minnetonka, MN 55343
(952) 945-9455
(Name, Address, Including Zip Code, and
Telephone Number, Including Area Code, of Agent For Service)
copies to:
Albert A. Woodward, Esq.
Mark A. Petersen, Esq.
Leonard, Street and Deinard Professional Association
150 South Fifth Street, Suite 2300
Minneapolis, MN 55402
(612) 335-1500
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Post-Effective Amendment to this Registration Statement
becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering.
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box 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 Rule 462(d)
under the Securities Act, check the following box 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 Rule 434,
please check the following box.
CALCULATION OF REGISTRATION FEE
======================================================================================================================
======================================= ==================== =================== ==================== ================
Amount Proposed Maximum Proposed Maximum Amount Of
Title Of Each Class Of Securities to be Offering Price Aggregate Offering Registration
To Be Registered Registered Per Unit Price Fee(3)
--------------------------------------- -------------------- ------------------- -------------------- ----------------
--------------------------------------- -------------------- ------------------- -------------------- ----------------
Series A Secured Investor Certificates $15,000,000 $1,000(1) $15,000,000 $1,380.00
--------------------------------------- -------------------- ------------------- -------------------- ----------------
--------------------------------------- -------------------- ------------------- -------------------- ----------------
Common Stock, $.01 par value per share 1,650,000 Shares(2) $10.00 $16,500,000 $1,518.50
======================================= ==================== =================== ==================== ================
(1) Certificates may be purchased in any multiple of $1,000.
(2) Includes 1,500,000 authorized and unissued shares to be offered to the
public, and (ii) 150,000 authorized and unissued shares reserved for
issuance under the Registrant's dividend reinvestment plan.
(3) Previously paid.
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 this 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.
AMERICAN CHURCH MORTGAGE COMPANY
1,500,000 Shares of Common Stock
$10 per Share
and
$15,000,000 of Series A Secured Investor Certificates
American Church Mortgage Company is a real estate investment trust, or
"REIT." We make mortgage loans to churches and other non-profit religious
organizations. We also purchase mortgage-secured bonds issued by such
organizations.
We are offering shares of our common stock and our Series A Secured
Investors Certificates. We are offering our shares and the certificates
separately, and not as units. You may purchase certificates or shares or both.
We may offer certificates with maturities ranging from two to seven years.
Depending on our capital needs, certificates with certain terms may not always
be available. We will periodically establish and may change interest rates on
the unsold certificates offered in this prospectus. Current interest rates will
be published in supplements to this prospectus. Once a certificate is sold, its
interest rate will not change during its term.
The certificates are non-negotiable and may be transferred only in limited
circumstances with the consent of our advisor. There is no public market for the
certificates or the shares. Neither the shares nor the certificates will be
listed on any securities exchange or NASDAQ. Our investors may have difficulty
selling their shares or certificates.
The certificates are not certificates of deposit or similar obligations and
are not guaranteed by the FDIC or any other governmental fund or private entity.
Investing in certificates or the shares involves risks and conflicts of
interest. See "Risk Factors" beginning on p. 6 and "Conflicts of Interest"
beginning on p. 16. Those risks include the following:
>> If we lose our REIT status, we will be taxed as a corporation, which
would adversely affect dividends on our shares.
>> We have conflicts of interest with the underwriter and our advisor,
which are controlled by the same person.
>> You may have difficulty selling your shares or certificates because
there is no public market and our advisor must approve all transfers
of certificates.
>> Our mortgages and bonds are secured by churches, which are typically
limited purpose properties.
The use of forecasts in this offering is prohibited. Any representations to
the contrary and any predictions, written or oral, as to the amount or certainty
of any present or future cash benefit or tax consequence which may flow from an
investment in this program is not permitted.
====================================================== ======================== ========================== =================
Common Stock Price to Public Selling Commission Proceeds to Us
- ------------------------------------------------------ ------------------------ -------------------------- -----------------
- ------------------------------------------------------ ------------------------ -------------------------- -----------------
Per Share $10.00 $.595 $9.405
- ------------------------------------------------------ ------------------------ -------------------------- -----------------
- ------------------------------------------------------ ------------------------ -------------------------- -----------------
Total $15,000,000 $892,500 $14,107,500
====================================================== ======================== ========================== =================
====================================================== ======================== ========================= ==================
Series A Secured Investor Certificates Price to Public Selling Commission (2) Proceeds to Us
- ------------------------------------------------------ ------------------------ ------------------------- ------------------
- ------------------------------------------------------ ------------------------ ------------------------- ------------------
Minimum Purchase $1,000 (1) $39.32 $960.68
- ------------------------------------------------------ ------------------------ ------------------------- ------------------
- ------------------------------------------------------ ------------------------ ------------------------- ------------------
Total $15,000,000 $598,750 $14,401,250
====================================================== ======================== ========================= ==================
(1) Certificates may be purchased in any multiple of $1,000.
(2) Estimated for purposes of this table based on the average commission we
will pay the underwriter. Actual commissions we pay the underwriter will
vary based on the term to maturity of the certificates sold on our behalf.
Includes 0.50% underwriter's management fee that we will pay to the
underwriter upon original issuance of each certificate.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
AMERICAN INVESTORS GROUP, INC.
Minnetonka, Minnesota
May 5, 2003
Table of Contents
PROSPECTUS SUMMARY...........................................................1
RISK FACTORS.................................................................6
WHO MAY INVEST..............................................................12
USE OF PROCEEDS.............................................................13
COMPENSATION TO ADVISOR AND AFFILIATES......................................14
CONFLICTS OF INTEREST.......................................................16
DISTRIBUTIONS...............................................................18
CAPITALIZATION..............................................................20
SELECTED FINANCIAL DATA.....................................................21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................22
OUR BUSINESS................................................................26
MANAGEMENT..................................................................38
SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS.................................41
CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT......................42
THE ADVISOR AND THE ADVISORY AGREEMENT......................................43
FEDERAL INCOME TAX CONSEQUENCE ASSOCIATED WITH THE CERTIFICATES.............45
FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS.......................46
ERISA CONSEQUENCES..........................................................48
DESCRIPTION OF CAPITAL STOCK................................................49
DESCRIPTION OF THE CERTIFICATES.............................................51
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS.....................................59
PLAN OF DISTRIBUTION........................................................62
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.......64
LEGAL MATTERS...............................................................64
EXPERTS.....................................................................64
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION...........................64
ADDITIONAL INFORMATION......................................................65
INDEX TO FINANCIAL STATEMENTS..............................................F-1
i
PROSPECTUS SUMMARY
This summary highlights some information from the prospectus. It may not be
all the information that is important to you. To understand this offering fully,
you should read the entire prospectus carefully, including the risk factors and
the financial statements. In this prospectus, American Church Mortgage Company
refers to itself as "we," "us, " and "our." Our prospective investors are
sometimes referred to as "you" or "your."
AMERICAN CHURCH MORTGAGE COMPANY
American Church Mortgage Company is a real estate investment trust, or
REIT. We make mortgage-backed loans from $100,000 to $1,000,000 to churches and
other non-profit religious organizations for the purchase, construction or
refinancing of real estate and improvements. As of March 31, 2003 we had
originated 50 mortgage loans in the aggregate principal amount of $19,737,478,
and had purchased $4,312,790 of church bonds having a face value of $4,312,790.
The unpaid principal balance of our loan and bond portfolios at March 31, 2003,
were $18,386,153 and $4,255,614, respectively. We intend to continue to lend
funds pursuant to our business plan as funds from the sale of shares and
certificates become available.
American Church Mortgage Company was incorporated in the State of Minnesota
on May 27, 1994. Our executive offices and those of our advisor are located at
10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343. Our
telephone number is (952) 945-9455.
OUR ADVISOR
We are managed by Church Loan Advisors, Inc. Church Loan Advisors, Inc. is
referred to in this prospectus as our advisor. Our advisor manages our business
activities, provides our office space, personnel, equipment and support
services. Our advisor assumes most of the normal operating expenses we would
otherwise incur if we had our own employees and directly managed our business
activities. Pursuant to the advisory agreement between us and our advisor, we
pay our advisor advisory fees based on our average invested assets and certain
expenses. We also pay our advisor one-half of any origination fees we collect.
Our advisor is affiliated by common ownership with American Investors Group,
Inc., which is the underwriter of this offering.
THE COMMON STOCK OFFERED
Issuer.........................................American Church Mortgage Company
Securities Offered.............1,500,000 shares of common stock, $.01 par value
Offering Price.................................$10.00 per share
Minimum Purchase...........................250 of shares; 200 for IRA accounts.
Absence of Public Market..................There is no market for our shares.
We do not believe that a public
market will develop. You may not
be able to sell your shares.
Sales Commission..........................We will pay the underwriter a
commission of 5.95% of the gross
proceeds we receive from the sale of
the shares.
1
THE CERTIFICATES OFFERED
Issuer............................. American Church Mortgage Company
Trustee............................ The Herring National Bank, Amarillo, Texas
Securities Offered.................. Series A Secured Investor Certificates
Offering Price..................... 100% of the principal amount per
certificate; multiples of $1,000 per
certificate.
Maturity........................... 2, 3, 4, 5 and 7 year maturities.
Certificates will mature on the last day
of the calendar quarter in which they
were purchased. We may cease offering
specified maturities, and begin
reoffering any unavailable maturity,
at any time.
Interest Rates..................... The interest rate we will pay for each
maturity of certificates will be set
forth in a supplement to this prospectus.
Interest Payments.................. Interest will be paid quarterly.
Principal Payment.................. Unless you renew your certificate, we
will pay the entire principal amount of
the certificate at maturity.
Redemption......................... We generally will not be required to
redeem outstanding certificates. We will
redeem outstanding certificates only in
the following cases:
o If you die, your representative may require us to redeem your certificate,
subject to an aggregate limit of $25,000 in any calendar quarter for all
redemptions.
o If there is a change of control of our business, we may redeem each
outstanding certificate at our option.
o If our outstanding indebtedness exceeds the amount of indebtedness allowed
by our bylaws, we may redeem certificates in an amount sufficient to bring
our outstanding indebtedness into compliance with our bylaws.
o If we terminate our advisory agreement with Church Loan Advisors, Inc., our
current advisor, for any reason, we will be required to offer to redeem all
outstanding certificates.
If we redeem any certificate, we will pay the holder an amount equal to the
outstanding principal amount of the redeemed certificate plus accrued but unpaid
interest.
Collateral......................... To secure payment of the
certificates, we will assign to
the trustee as collateral
non-defaulted mortgage-secured
promissory notes and church bonds
with an aggregate outstanding
principal balance equal to at
least 120% of the aggregate
outstanding principal amount of
the certificates. We will not
assign the underlying mortgages
securing the assigned promissory
notes.
Renewal............................ Certificates are renewable at
your option at the interest
rates we are offering at the time
the certificate matures. We may
cease offering to renew
certificates at any time.
Transferability.................... The certificates are
non-negotiable and may be
transferred only in limited
circumstances with the consent
of our advisor.
Absence of Public Market........... There is no market for the
certificates. We do not believe
that a public market will develop.
You may not be able to sell your
certificates.
Sales Commission.................. We will pay the underwriter a
commission for assisting us in
selling the certificates.
Commissions will range from 2.5%
to 4.125% of principal, depending
on the maturity of each
certificate sold. We will also pay
the underwriter commissions that
will range from 1.25% to 3.75%
when a certificate is renewed,
depending on the maturity of each
certificate renewed.
Outstanding Indebtedness.......... Our bylaws prohibit us from
borrowing in excess of 50% of our
average invested assets. We will
not sell certificates in an
amount in excess of, when added
to our other indebtedness, 50% of
our average invested assets.
2
USE OF PROCEEDS
We will use the proceeds received from the sale of our shares and the
certificates principally to fund mortgage loans we make to churches and other
non-profit religious organizations and to purchase bonds issued by those
organizations. Some of the proceeds may be used to pay down our line of credit,
redeem our equity securities and repay maturing certificates.
OUR REIT STATUS
As a REIT, we generally are not subject to federal income tax on income
that we distribute to our shareholders. Under the Internal Revenue Code, we are
subject to numerous organizational and operational requirements, including a
requirement that we distribute to our shareholders at least 90% of our taxable
income as calculated on an annual basis. If we fail to qualify for taxation as a
REIT in any year, our income will be taxed at regular corporate rates, and we
may not be able to qualify for treatment as a REIT for that year and the next
four years. Even if we qualify as a REIT for federal income tax purposes, we may
be subject to federal, state and local taxes on our income and property and to
federal income and excise taxes on our undistributed income.
RISK FACTORS
An investment in our shares or the certificates involves a degree of risk.
See "Risk Factors" for a more complete discussion of factors you should consider
before purchasing shares or certificates. Some of the significant risks include:
>> As a "best efforts" offering, all or a material amount of the
shares or certificates may not be sold, and consequently, some or
all of the additional capital we are seeking may not be available
to us.
>> As a "no minimum" offering, there is no minimum number of shares
or principal amount of shares or certificates that must be sold.
We will receive the proceeds from the sale of shares and
certificates as they are sold.
>> If we fail to maintain our REIT status, we will be taxed as a
corporation which would reduce funds available for distribution to
our shareholders.
>> Conflicts of interest with the underwriter and our advisor in
connection with this offering and our on-going business operations
could affect decisions made by our advisor on our behalf.
>> There is no public trading market for the shares or certificates.
A market likely will not develop after this offering.
>> Fluctuations in interest rates or default in repayment of loans by
borrowers could adversely affect our ability to make distributions
to our shareholders or to make interest payments on and repay
certificates as they mature.
CONFLICTS OF INTEREST
A number of potential conflicts exist between us and our advisor and its
principals. These conflicts include:
>> Our President owns both our advisor and the underwriter.
>> Agreements between us and our advisor and the underwriter were not
negotiated at arm's-length.
>> We and the underwriter have common business interests.
>> Negotiations between us and our advisor during the organization and
structuring of our operations were not at arm's-length.
>> The advisory agreement was not negotiated at arm's-length.
>> We share operations facilities with our advisor and the underwriter.
Our advisor and its affiliates may engage in businesses similar to ours. We
compensate our advisor and its affiliates for services rendered and pay an
annual advisory fee equal to 1.25% of average invested assets.
3
OUR INVESTMENT OBJECTIVES
Our investment objectives are to provide our equity investors and
certificate holders with:
>> a higher level of distributable income or interest rate than is available
in guaranteed or government-backed fixed-income investments;
>> preservation of their investment capital through portfolio diversification
(lending funds to many different borrowers and purchasing bonds issued by
numerous issuers);
>> greater security for our portfolio through investment only in
mortgage-backed loans and securities (providing us with collateral in the
event of a borrower's default); and
>> greater security for our certificate holders by our pledging
mortgage-secured promissory notes or debt securities that we hold to secure
our obligations under the certificates (providing certificate holders with
a stream of revenue and potential sale proceeds in the event of our
default).
BUSINESS OBJECTIVES AND POLICIES
We seek to provide cash distributions of current income to our shareholders
through the implementation of our investment and operating strategy. We make
mortgage loans from $100,000 to $1,000,000 to churches and other non-profit
religious organizations throughout the United States. We seek to enhance returns
by:
>> lending at rates of interest in excess of standard commercial and
residential mortgage interest rates.
>> seeking origination fees (i.e. "points") from the borrower at the outset of
a loan and upon any renewal of a loan
>> making a limited amount of higher-interest rate and increased risk second
mortgage loans and short-term construction loans to qualified borrowers
>> purchasing a limited amount of mortgage-secured debt securities issued by
churches and other non-profit religious organizations, typically at a
discount from par value
Our policies limit the amount of second mortgage loans to 20% of our
average invested assets on the date any second mortgage loan is closed and limit
the amount of mortgage-secured debt securities to 30% of our average invested
assets on the date of their purchase. All other mortgage loans we make are
secured by a first mortgage (or deed of trust). We may make fixed-interest rate
loans having maturities of three to twenty-five years. We may borrow up to 50%
of our average invested assets.
LENDING GUIDELINES
We follow specified lending guidelines and criteria in evaluating the
creditworthiness of potential borrowers. These guidelines and criteria include:
>> Loans we make cannot exceed 75% of the appraised value of the real property
and improvements securing the loan.
>> We may not loan more than $1,000,000 to a single borrower.
>> We require appraisals of the property securing our loans.
>> The borrower must furnish us with a mortgagee title policy insuring our
interest in the collateral.
>> The borrower's long-term debt (including the proposed loan) as of the date
of the mortgage loan may not exceed four times the borrower's gross income
for its most recent twelve months.
>> The borrower must furnish us with its reviewed or audited financial
statements for the last two (2) complete fiscal years and financial
statements for the period within ninety (90) days of the loan closing date.
4
RATIO OF EARNINGS TO FIXED CHARGES
For the Period Ended December 31
-------------------------------------------------------------------------------------
2002
1998 1999 2000 2001 2002 (pro forma)
----------- ----------- ----------- ------------ --------- ------------
Earnings (Interest 705,365 952,712 1,208,452 1,304,845 1,451,182 1,451,182
(income):
Fixed Expenses: - 0 - 833 68,199 26,835 161,241 1,091,209 (1)
Ratio of Earnings to
Fixed Charges NM (2) 1143.71:1 17.72:1 48.62:1 9.00:1 1.33:1
(1) Adjusted to reflect the sale of all certificates offered and assumes a
weighted average interest rate of 6.42% per year ($962,500 total).
Actual interest rates we will pay on certificates will be set forth in
a supplement to this prospectus. Further assumes that we derive no
income from the application of certificate sale proceeds to new
mortgage loans.
(2) Not meaningful. For the period ended December 31, 1998, we had no
fixed expenses.
WHO MAY INVEST
You may purchase shares of our common stock if you have either: (i) a
minimum annual gross income (without regard to your investment in shares or
certificates) of $45,000 and a net worth (exclusive of home, home furnishings
and automobiles) of $45,000; or (ii) a net worth (determined with the foregoing
exclusions) of $150,000. Suitability standards may be higher in certain states.
You may purchase up to $5,000 of certificates only if you have either (i) a
minimum annual gross income (without regard to your investment in shares or
certificates) of at least $30,000 and a net worth (exclusive of home, home
furnishings and automobiles) of $30,000; or (ii) a net worth (determined with
the foregoing exclusions) of at least $100,000. You may purchase more than
$5,000 of certificates only if you have either: (i) a minimum annual gross
income (without regard to your investment in shares or certificates) of at least
$45,000 and a net worth (exclusive of home, home furnishings and automobiles) of
at least $45,000; or (ii) a net worth (determined with the foregoing exclusions)
of at least $150,000. Suitability standards may be higher in certain states.
In the case of fiduciary accounts, these minimum standards must be met by
the beneficiary of the fiduciary account or by the donor or grantor who directly
or indirectly supplies the funds to purchase the shares or certificates if the
donor or grantor is the fiduciary.
5
RISK FACTORS
An investment in our shares or the certificates involves various risks. In
addition to the other information set forth in the prospectus, you should
consider the following factors before making a decision to purchase shares or
certificates.
This prospectus contains statements of a forward-looking nature relating to
future events or our future performance. These forward-looking statements are
based on our current expectations, assumptions, estimates and projections about
us and our industry. When used in this prospectus, the words "expects,"
"believes," "anticipates," "estimates," "intends," "will" and similar
expressions are intended to identify forward-looking statements. These
statements include, but are not limited to, statements of our plans, strategies
and prospects contained in this prospectus.
These forward-looking statements are only predictions and are subject to
risks and uncertainties that could cause actual events or results to differ
materially from those projected. The cautionary statements made in this
prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this prospectus. We assume no obligation to
update these forward-looking statements publicly for any reason. Actual results
could differ materially from those anticipated in these forward-looking
statements.
Risks Related to Method and Terms of This Offering
This is a Best Efforts Offering. The underwriter's obligation to sell the
shares and certificates requires only its best efforts to locate purchasers on
our behalf. The underwriter is not obligated to purchase any shares or
certificates. Less than all of the shares or certificates offered may be sold.
If less than all the shares or certificates offered are sold, we will have less
cash to loan to churches and other non-profit religious organizations.
This is a No Minimum Offering. The distribution agreement does not require
that a minimum number of shares or certificates be sold before we receive
proceeds from their sale. We will receive proceeds from the sale of shares and
certificates when and if they are sold.
We Will Incur Expenses in this Offering. Expenses incurred in connection
with this offering will reduce our assets that will be available for investment.
The Price of the Shares May Not Be Their Actual Value. We, with the
underwriter, determined the offering price of the shares. The public offering
price should not be considered an indication of the actual value of the shares.
Risks Related to Us
Our Failure to Qualify as a Real Estate Investment Trust Could Reduce the
Funds We Have Available For Investment. We operate as a real estate investment
trust. As a REIT, we are allowed a deduction for dividends paid to our
shareholders in computing our taxable income. Thus, only our shareholders are
taxed on our taxable income that we distribute. This treatment substantially
eliminates the "double taxation" of earnings to which most corporations and
their shareholders are subject. Qualification as a REIT involves the application
of highly technical and complex Internal Revenue Code provisions.
To qualify and maintain our status as a REIT, we must meet certain share
ownership, income, asset and distribution tests on a continuing basis. No
assurance can be given that we will satisfy these tests at all times. Further,
the requirements for a REIT may substantially affect day-to-day decision-making
by our advisor. Our advisor may be forced to take action it would not otherwise
take or refrain from action which might otherwise be desirable in order to
maintain our REIT status.
If we fail to qualify as a REIT in any taxable year, then we would be
subject to federal income tax on our taxable income at regular corporate rates
and not be allowed a deduction for distributions to shareholders. We would be
disqualified from treatment as a REIT for the four taxable years following the
year of losing our REIT status. We intend to operate as a REIT. However, future
economic, market, legal, tax or other consequences may cause our board of
directors to revoke the REIT election. The payment of taxes resulting from our
disqualification as a REIT or revocation of REIT status would reduce the funds
available for distribution to shareholders or for investment. Because interest
paid to certificate holders will be a deductible business expense to us, loss of
our REIT status would not necessarily impede our ability to make interest
payments to holders of certificates.
Conflicts of Interest Arise From Our Relationship with Our Advisor and the
Underwriter. The terms of transactions involving our formation and the formation
of our advisor, and our contractual relationship with our advisor, were not
negotiated at arm's-length. Our non-independent directors and officers may have
conflicts of interest in enforcing agreements between us and our advisor or the
underwriter. Future business arrangements and agreements between us and our
advisor or
6
the underwriter and their affiliates must be approved by our board of directors,
including a majority of our independent directors.
Risks Related to the Shares
There Is No Public Market for Our Shares. There is no market for the
shares. It is unlikely that a market will develop. Our common stock will not be
listed on any exchange and will not be qualified for quotation on NASDAQ. In
addition, the market for REIT securities historically has been less liquid than
other types of publicly-traded equity securities. Unless and until a market
develops for our securities, it may be difficult for you to recoup your
investment.
There Are Restrictions on Certain Transfers of Our Shares. Our articles of
incorporation and bylaws prohibit a transfer of shares to any person who, as a
result, would beneficially own shares in excess of 9.8% of the outstanding
capital stock and allow us to redeem shares held by any person in excess of 9.8%
of the outstanding capital stock. These provisions may reduce market activity
for the shares and the opportunity for shareholders to receive a premium for
their shares.
Fluctuations in Interest Rates May Cause the Value of Our Shares to
Fluctuate. Prevailing market interest rates impact borrower decisions to obtain
new loans or to refinance existing loans, possibly having a negative effect upon
our ability to originate mortgage loans. Fluctuations in interest rates may
cause the value of the shares to fluctuate unpredictably. If interest rates
decrease and the economic advantages of refinancing mortgage loans increase,
then prepayments of higher interest mortgage loans in our portfolio would likely
reduce the portfolio's overall rate of return (yield).
Interest Payments to Certificate Holders May Reduce Dividend Payments on
Our Shares. In addition to the offering of our shares, we are offering
$15,000,000 in certificates at various interest rates and maturity terms of 2 to
7 years. We expect to deploy the funds received from the sale of Certificates
into new loans at rates that provide a positive interest rate spread. This
spread, however, may be materially and adversely affected by changes in
prevailing interest rates which would reduce our net income. If this occurs, we
may not have sufficient net income after paying interest on the certificates to
maintain dividends to shareholders at the levels paid in the past or even to pay
dividends at all.
Risks Related to the Certificates
We May Incur More Indebtedness. We may incur additional indebtedness in the
future. We may assign or pledge some of our mortgage-secured promissory notes or
other collateral in connection with incurring this additional indebtedness. Our
ability to incur additional indebtedness is limited to 50% of our invested
assets by our bylaws. If all of the certificates offered are sold, and assuming
sale of none of the shares, we will have indebtedness equal to approximately 50%
of our invested assets. Once this threshold is reached, we will not be able to
incur additional indebtedness unless we raise additional equity capital. This
limitation could restrict our growth or affect our ability to repay the
certificates as they mature.
There Are Potential Adverse Effects Associated With Lending Borrowed Funds.
We intend to deploy the proceeds from this offering to make loans to churches
and other non-profit religious organizations. We have also used our line of
credit with Beacon Bank, Shorewood, Minnesota, to fund loans, and intend to use
our line of credit in this way in the future. Lending borrowed funds is subject
to greater risks than in unleveraged lending. The profit we realize from lending
borrowed funds is largely determined by the difference, or "spread," between the
interest rates we pay on the borrowed funds and the interest rates that our
borrowers pay us. Our spread may be materially and adversely affected by changes
in prevailing interest rates. Furthermore, the financing costs associated with
lending borrowed funds could decrease the effective spread in lending borrowed
funds, which could adversely affect our ability to pay interest on and repay the
certificates as they mature.
Fluctuations In Interest Rates May Affect Our Ability to Sell Certificates.
If the interest rates we offer on certificates become less attractive due to
changes in interest rates for similar investments, our ability to sell
certificates could be adversely affected or certificate holders could choose not
to renew their certificates upon maturity. Since we will rely on the proceeds
from the sales of certificates and renewals of certificates, in part, to pay
maturing certificates, a decline in sales of certificates could adversely affect
our ability to pay your certificate upon maturity. We may change the interest
rates at which we are currently offering certificates in response to
fluctuations in interest rates.
There Is No Public Market for the Certificates. There is no market for the
certificates. It is unlikely that a market will develop. Neither our common
stock nor the certificates will be listed on any exchange and will not be
qualified for quotation on NASDAQ. In addition, the market for REIT securities
historically has been less liquid than other types of publicly-traded
securities. It may be impossible for you to recoup your investment prior to
maturity of the certificates.
There Will Not Be a Sinking Fund, Insurance or Guarantee Associated With
the Certificates. We will not contribute funds to a separate account, commonly
known as a sinking fund, to repay principal or interest on the certificates upon
maturity
7
or default. The certificates are not certificates of deposit or similar
obligations of, or guaranteed by, any depository institution. Further, no
governmental or other entity insures or guarantees payment on the certificates
if we do not have enough funds to make principal or interest payments.
Therefore, if you purchase certificates, you will have to rely on our revenue
from operations, along with the security provided by the collateral for the
certificates, for repayment of principal and interest on the certificates.
The Collateral for the Certificates May Not Be Adequate If We Default. The
certificates will at all times be secured by mortgage-secured promissory notes
and church bonds having an outstanding principal balance equal to at least 120%
of the outstanding principal balance of the certificates. If we default in the
repayment of the certificates, or another event of default occurs, the trustee
will not be able to foreclose on the mortgages securing the promissory notes and
bonds in order to obtain funds to repay certificate holders. Rather, the trustee
will need to look to the revenue stream associated with our borrowers' payments
on or repayment of the promissory notes and bonds or revenue derived from sale
of the promissory notes or bonds to repay certificate holders. If the trustee
chooses to rely on revenues received from our borrowers, certificate holders may
face a delay in payment on certificates in the event of default, as borrowers
will repay their obligations to us in accordance with amortization schedules
associated with their promissory notes or bonds. If the trustee chooses to sell
promissory notes or bonds in the event of our default, the proceeds from the
sales may not be sufficient to repay our obligations on all outstanding or
defaulted certificates.
The Certificates Are Not Negotiable Instruments and Are Subject to
Restrictions on Transfer. The certificates are not negotiable debt instruments.
Rights of record ownership of the certificates may be transferred only with our
advisor's prior written consent. You will not be able to freely transfer the
certificates.
We Are Obligated To Redeem Certificates Only In Limited Circumstances. You
will have no right to require us to prepay or redeem any certificate prior to
its maturity date, except in the case of your death or if we replace our current
advisor. Further, even in the event of your death, we will not be required to
redeem your certificates if we have redeemed at least $25,000 of principal
amount of certificates during the calendar quarter in which your representative
notifies us of your death and requests redemption. We do not intend to redeem
certificates prior to maturity except in the case of death.
We May Not Have Sufficient Available Cash to Redeem Certificates If We
Terminate Our Advisory Agreement With Our Current Advisor. We will be required
to offer to redeem all outstanding certificates if we terminate our advisory
agreement with Church Loan Advisors, Inc., our current advisor, for any reason.
If the holders of a significant principal amount of certificates request that we
redeem their certificates, we may be required to sell a portion of our mortgage
loan and church bond portfolio to satisfy the redemption requests. Any such sale
would likely be at a discount to the recorded value of the mortgage loans and
bonds being sold. Further, if we are unable to sell loans or church bonds in our
portfolio, we may be unable to satisfy the redemption obligations.
The Indenture Contains Limited Protection For Holders of Certificates. The
indenture governing the certificates contains only limited events of default
other than our failure to pay principal and interest on the certificates on
time. Further, the indenture provides for only limited protection for holders of
certificates upon a consolidation or merger between us and another entity or the
sale or transfer of all or substantially all of our assets. If we default in the
repayment of the certificates or under the indenture, you will have to rely on
the trustee to exercise your remedies on your behalf. You will not be able to
seek remedies against us directly.
Risks Related to Management
We Are Dependent Upon Our Advisor. Our advisor, Church Loan Advisors, Inc.,
manages us and selects our investments subject to general supervision by our
board of directors and compliance with our lending policies. We depend upon our
advisor and its personnel for most aspects of our business operations. Our
success depends on the success of our advisor in locating borrowers and
negotiating loans upon terms favorable to us. Among others, our advisor performs
the following services for us:
o mortgage loan marketing and procurement o managing relationships with our accountants and
o bond portfolio selection and investment attorneys
o mortgage loan underwriting o corporate management
o mortgage loan servicing o bookkeeping
o money management o reporting to state, federal, tax and other
o developing and maintaining business relationships regulatory authorities
o maintaining "goodwill" o reports to shareholders and shareholder relations
8
Our shareholders' right to participate in management is generally limited to the
election of directors. Certificate holders will have no right to participate in
our management. You should not purchase shares or certificates unless you are
willing to entrust our management to our advisor and our board of directors.
We Have Conflicts of Interest with Our Advisor and the Underwriter.
Affiliations and conflicts of interests exist among our officers and directors
and the owner and officers and directors of our advisor and the underwriter. Our
advisor and the underwriter are both owned by our President, Philip Myers. Our
President and the officers and directors of our advisor are involved in the
church financing business through their affiliations with the underwriter. The
underwriter originates, offers and sells first mortgage bonds for churches. We
may purchase first mortgage bonds issued by churches through the underwriter in
its capacity as underwriter for the issuing church, or as broker or dealer on
the secondary market. In such event, the underwriter would receive commissions
(paid by the issuing church) on original issue bonds, or "mark-ups" in
connection with any secondary transactions. If we sell church bonds in our
portfolio, the bonds will be sold through the underwriter. We would pay the
underwriter commissions in connection with such transactions.
Our bylaws limit the amount of all commissions, mark-downs or mark-ups paid
to the underwriter. Our business dealings with our advisor and its affiliates
also must be approved by a majority of our board of directors, including a
majority of our independent directors.
Generally, mortgage loans we originate are smaller than the bond financings
originated by the underwriter. However, there may be circumstances where our
advisor and the underwriter could recommend either type of financing to a
prospective borrower. The decisions of our advisor and the underwriter could
affect the credit quality of our portfolio.
Redemption Obligations Relating to the Certificates May Affect Our Ability
to Replace our Advisor. We will be required to offer to redeem all outstanding
certificates if we terminate our advisory agreement with Church Loan Advisors,
Inc. Our independent directors are required to review and approve the agreement
with our advisor on an annual basis. The redemption provision relating to the
certificates may have the effect of reducing our ability to replace our current
advisor.
Risks Related to Mortgage Lending
We Are Subject to the Risks Generally Associated with Mortgage Lending.
Mortgage lending involves various risks, many of which are unpredictable and
beyond our control and foresight. It is not possible to identify all potential
risks associated with mortgage lending. Some of the more common risks
encountered may be summarized as follows:
o low demand for mortgage loans o availability of alternative financing and
competitive conditions
o interest rate fluctuations
o factors affecting specific borrowers
o changes in the level of consumer confidence
o interest rate fluctuations
o availability of credit-worthy borrowers
o losses associated with default, foreclosure of a
o national and local economic conditions mortgage, and sale of the mortgaged property
o demographic and population patterns o state and federal laws and regulations
o zoning regulations o bankruptcy or insolvency of a borrower
o taxes and tax law changes
Second Mortgage Loans Pose Additional Risks. Our financing policies allow
us to make second mortgage loans. The principal amount of such loans may not
exceed 20% of our average invested assets. Second mortgage loans entail more
risk than first mortgage loans, as foreclosure of senior indebtedness or liens
could require us to pay the senior debt or risk losing our mortgage.
Fixed-Rate Debt Can Result in Yield Fluctuations. Fixed-rate debt
obligations carry certain risks. A general rise in interest rates could make the
yield on a particular mortgage loan lower than prevailing rates. This could
negatively affect our value and consequently the value of our shares and the
certificates. Neither we nor our advisor can predict changes in interest rates.
We will attempt to reduce this risk by maintaining medium and longer-term
mortgage loans and through offering adjustable rate loans to borrowers. We do
not intend to borrow funds or sell certificates if the cost of such borrowing
exceeds the income we believe we can earn from lending the funds.
The Mortgage Banking Industry Is Highly Competitive. We compete with a wide
variety of lenders, including banks, savings and loan associations, insurance
companies, pension funds and fraternal organizations for mortgage loans. Many
9
competitors have greater financial resources, larger staffs and longer operating
histories than we have, and thus may be a more attractive lender to potential
borrowers. We intend to compete by limiting our business "niche" to lending to
churches and other non-profit religious organizations, offering loans with
competitive and flexible terms, and emphasizing our expertise in the specialized
industry segment of lending to churches and other non-profit religious
organizations.
Fluctuations in Interest Rates May Affect Our Ability to Repay the
Certificates. Prevailing market interest rates impact borrower decisions to
obtain new loans or to refinance existing loans, possibly having a negative
effect upon our ability to originate mortgage loans. If interest rates decrease
and the economic advantages of refinancing mortgage loans increase, then
prepayments of higher interest mortgage loans in our portfolio would likely
reduce our portfolio's overall rate of return (yield).
We Are Subject to the Risks Associated with Fluctuations in National and
Local Economic Conditions. The mortgage lending industry is subject to increased
credit risks and rates of foreclosures during economic downturns. In addition,
because we provide mortgages to churches and other religious organizations who
generally receive financing through charitable contributions, our financial
results are subject to fluctuations based on a lack of consumer confidence or a
severe or prolonged national or regional recession. As a result of these and
other circumstances, our potential borrowers may decide to defer or terminate
plans for financing their properties decreasing demand for mortgage loans. In
addition, during such economic times we may be unable to locate as many
credit-worthy borrowers.
Our Business May Be Adversely Affected If Our Borrowers Become Insolvent or
Bankrupt. If any of our borrowers become insolvent or bankrupt, the borrower's
mortgage payments will be delayed and may cease entirely. We may be forced to
foreclose on the mortgage and take legal title to the real estate and incur
expenses related to the foreclosure and disposition of the property. As of March
31, 2003, we had two first mortgage loans in the amounts of $235,000 and
$182,000 that have three or more payments in arrears. We are continuing to work
with the borrower of the $235,000 loan to bring the payments current. We have
initiated foreclosure proceedings on the $182,000 loan and expect to take
possession of the church and list the property for sale. We may incur a loss in
these transactions if the borrower of the first loan is unable to bring the
payments current and if we are unable to dispose of the second property or are
unable to recoup our expenses and outstanding balance from the sale of the
second property.
Risks Related to Mortgage Lending to Churches
Churches Rely on Member Contributions to Repay Our Loans. Churches rely on
member contributions for their primary source of income. Member contributions
are used to repay our loans. The membership of a church or the per capita
contributions of its members may not increase or remain constant after a loan is
funded. A decrease in a church's income could result in its inability to pay its
obligation to us, which may affect our ability to pay dividends on our common
stock or repay the certificates. We have no control over the financial
performance of a borrowing church after a loan is funded.
Churches Depend Upon Their Senior Pastors. A church's senior pastor usually
plays an important role in the management, spiritual leadership and continued
viability of that church. A senior pastor's absence, resignation or death could
have a negative impact on a church's operations, and thus its continued ability
to generate revenues sufficient to service its obligations to us.
The Limited Use Nature of Church Facilities Limits the Value of Our
Mortgage Collateral. Our loans are secured principally by first mortgages upon
the real estate and improvements owned or to be owned by churches and other
religious and non-profit organizations. Although we will require an appraisal of
the premises as a pre-condition to making a loan, the appraised value of the
premises cannot be relied upon as being the actual amount which might be
obtained in the event of a default by the borrower. The actual liquidation value
of church, school or other institutional premises could be adversely affected
by, among other factors: (i) its limited use nature; (ii) the availability on
the market of similar properties; (iii) the availability and cost of financing,
rehabilitation or renovation to prospective buyers; (iv) the length of time the
seller is willing to hold the property on the market; or (v) the availability in
the area of the mortgaged property of congregations or other buyers willing to
pay the fair value for a church facility.
Expenses of Foreclosure May Prevent Us From Recovering the Full Value of a
Loan. If we foreclose on a mortgage and take legal title to a church's real
estate, real estate taxes could be levied and assessed against the property
since the property would no longer be owned by a non-profit entity. The property
may also incur operating expenses pending its sale, such as property insurance,
security, repairs and maintenance. These expenses would be our financial
responsibility, and could be substantial in relation to our prior loan if we
cannot readily dispose of the property. Such expenses could prevent us from
recovering the full value of a loan in the event of foreclosure.
10
Risks Related to Environmental Laws
We May Face Liability Under Environmental Laws. Under federal, state and
local laws and regulations, a secured lender (like us) may be liable, under
certain limited circumstances, for the costs of removal or remediation of
certain hazardous or toxic substances and other costs (including government
fines and injuries to persons and adjacent property). Liability may be imposed
whether or not the owner or lender knew of, or was responsible for, the presence
of hazardous or toxic substances. The costs of remediation or removal of
hazardous or toxic substances, or of fines for personal or property damages, may
be substantial and material to our business operations. The presence of
hazardous or toxic substances, or the failure to promptly remediate such
substances, may adversely affect our ability to resell real estate collateral
after foreclosure or could cause us to forego foreclosure. This is a changing
area of the law. The courts have found both in favor and against lender
liability in this area under various factual scenarios.
The Collateral For Our Loans and Our Lenders May Be Subject to
Environmental Claims. If there are environmental problems associated with the
real estate securing any of our loans, the associated remediation or removal
requirements imposed by federal, state and local laws could affect our ability
to realize value on our collateral or our borrower's ability to repay its loan.
Future Changes in Tax Laws May Affect Our REIT Status
In this prospectus, we discuss our tax treatment as a REIT and the tax
effect on our shareholders based on existing provisions of the Internal Revenue
Code, existing and proposed regulations, existing administrative interpretations
and existing court decisions. New legislation, regulations, administrative
interpretations or court decisions may significantly change the tax laws.
Therefore, treatment of a REIT or the consequences of purchasing shares or
certificates may vary substantially from the treatment we describe in this
prospectus. A change in tax laws may apply retroactively.
11
WHO MAY INVEST
Who May Purchase Shares. You should make an investment in the shares only
as a long-term investment, only if you have significant financial means, and
only if you have no immediate need for liquidity of your investment. You must
purchase a minimum of 250 shares ($2,500). IRAs and qualified plans may purchase
a minimum of 200 shares ($2,000). We have established financial suitability
standards for investors desiring to purchase shares. These standards require you
to have either: (i) a minimum annual gross income (without regard to your
investment in shares or certificates) of $45,000 and a net worth (exclusive of
home, home furnishings and automobiles) of $45,000; or (ii) a net worth
(determined with the foregoing exclusions) of $150,000. Suitability standards
may be higher in some states. You must represent in your subscription agreement
that you satisfy any applicable suitability standards.
Who May Purchase Certificates. You should purchase certificates only if you
are prepared to hold the certificates until maturity, only if you have
significant financial means, and only if you have no immediate need for
liquidity of your investment. We have established financial suitability
standards for investors desiring to purchase certificates. You may purchase up
to $5,000 of certificates only if you have either (i) a minimum annual gross
income (without regard to your investment in shares or certificates) of at least
$30,000 and a net worth (exclusive of home, home furnishings and automobiles) of
$30,000; or (ii) a net worth (determined with the foregoing exclusions) of at
least $100,000. You may purchase more than $5,000 of certificates only if you
have either: (i) a minimum annual gross income of (without regard to your
investment in shares or certificates) at least $45,000 and a net worth
(exclusive of home, home furnishings and automobiles) of $45,000; or (ii) a net
worth (determined with the foregoing exclusions) of at least $150,000.
Suitability standards may be higher in some states. You must represent in your
subscription agreement that you satisfy any applicable suitability standards.
We may not complete a sale of shares or certificates until five days after
you have received a prospectus. We will refund your investment upon your
request, which we must receive within five days after you subscribe, if you
received a prospectus only at the time of subscription.
Fiduciary Accounts. In the case of fiduciary accounts, these minimum
standards must be met by the beneficiary of the fiduciary account or by the
donor or grantor who directly or indirectly supplies the funds to purchase the
shares or certificates if the donor or grantor is the fiduciary.
12
USE OF PROCEEDS
The following represents our estimate of the use of the offering proceeds
from the sale of the shares and certificates, assuming that all the offered
shares and certificates are sold.
Shares Certificates Total Percent
Gross Offering Proceeds (1) $15,000,000 $15,000,000 $30,000,000 100.00%
Less Expenses
Selling Commissions (2) 892,500 598,750 1,491,250 4.97%
Underwriter's Expense Allowance (3) 133,000 100,000 233,000 .77%
Offering Expenses (4) 100,000 100,000 200,000 .66%
Total Public Offering-Related Expenses 1,125,500 798,750 1,924,250 6.40%
Amount Available for Investment (5) $28,075,750 93.60%
- --------------------------------
(1) We are offering the shares and certificates on a "best efforts" basis
through the underwriter. There is no assurance that any shares or
certificates will be sold. As of March 31, 2003, we have sold 516,379.5
shares for $4,856,549.20 of gross proceeds and certificates for gross
proceeds of $8,919,175.
(2) We will pay the underwriter a commission of 5.95% of the gross proceeds we
receive from the sale of shares. We will pay the underwriter a commission
of 2.50% to 4.125% based on the gross principal amount and maturity of the
certificates sold. The exact amount of commissions we will pay upon the
sale of certificates cannot be determined but is estimated based on our
expectations of the maturities of certificates we will sell. We will also
pay a 0.50% underwriter's management fee to the underwriter upon the
original issuance of each certificate.
(3) We will pay the underwriter a non-accountable expense allowance of up to
$233,000, if all of the shares and certificates are sold, payable as
follows: (i) $30,000 is payable upon the sale of 100,000 shares; (ii)
$103,000 is payable, ratably, as the remaining 1,400,000 shares are sold;
(iii) $20,000 is payable upon the sale of $1,000,000 of certificates; and
(iv) $80,000 is payable ratably as the remaining $14,000,000 of
certificates is sold.
(4) These figures are our best estimates of the legal, accounting, printing,
filing fees and other expenses attendant to this offering, all of which
have been or will be paid to independent professionals and service
providers.
(5) Substantially all of the net proceeds from the sale of shares and
certificates will be used to make mortgage loans to churches and other
non-profit religious organizations and purchase mortgage bonds issued by
churches. Some of the proceeds may be used to pay down our line of credit,
redeem our equity securities and repay maturing certificates. We will use
no more that 15% of the gross proceed of this offering to pay interest on
certificates and repay principal to certificate holders. Pending
application of the proceeds as outlined above, the net proceeds of this
offering will be invested in permitted temporary investments.
13
COMPENSATION TO ADVISOR AND AFFILIATES
This table discloses all the compensation our advisor and its affiliates
can receive either directly or indirectly. In accordance with applicable state
law, the total of all acquisition fees and expenses we pay in connection with
our business cannot exceed 6% of the amount loaned, unless a majority of the
directors (including a majority of our independent directors) not otherwise
interested in the transaction approve the transaction as being commercially
competitive, fair and reasonable to us. Our total operating expenses cannot (in
the absence of a satisfactory showing to the contrary) in any fiscal year exceed
the greater of: (a) 2% of our average invested assets; or (b) 25% of our net
income for the year. Our independent directors may, upon a finding of unusual
and nonrecurring factors which they deem sufficient, determine that a higher
level of expenses is justified in any given year.
ADVISOR COMPENSATION
ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION
- -------- --------- --------------------------------
COMPENSATION
Advisory Fee Advisor 1.25%annually, paid monthly, of our average invested assets. Our
advisor received advisory fees in the amount of $52,944 for
the year ended December 31, 1998, $116,293 for the year
ended December 31, 1999, $154,389 for the year ended
December 31, 2000, $162,131 for the year ended December 31,
2001, and $172,151 for the year ended December 31, 2002.
Assuming all of the shares and certificates are sold and our
average invested assets were $45,000,000, the advisory fee
would be $562,500 per year.
Acquisition Advisor In connection with mortgage loans we make, borrowers
may be required to pay our Fees/Expenses advisor's expenses
for closing and other loan-related expenses, such as
accounting fees and appraisal fees paid by our advisor to
independent service providers. Our advisor may retain
payments made by the borrower in excess of costs, but our
bylaws limit the total of all acquisition fees and
acquisition expenses to a reasonable amount and in no event
in excess of six percent (6%) of the funds advanced to the
borrower.
Advisor Loan Advisor One-half of the origination fees collected from the borrower
Origination Fee at closing in connection with each mortgage loan we make. Our
advisor received origination fees in the amount of $76,090 for
the year ended December 31, 1998, $114,685 for the year ended
December 31, 1999, $21,250 for the year ended December 31, 2000,
$37,297 for the year ended December 31, 2001, and $98,270 for the
year ended December 31, 2002. We cannot estimate the total amount
of loan origination fees that may be realized by our advisor, but
assuming all of the remaining shares and certificates are sold
over the remaining one-year offering period and we invest in that
one-year period net proceeds of $14,723,111 in mortgage loans
with an average origination fee of 3%, the loan origination fees
payable to our advisor in such year would be $441,693. As our
loans mature or are otherwise repaid, we may make new loans to
borrowers. Loan origination fees would be payable to our advisor
in connection with these loans.
14
AFFILIATE COMPENSATION
ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION
COMPENSATION
Commissions on the Sale of Shares Underwriter 5.95% of the gross proceeds from the sales of the shares and 2.5% to
and Certificates in this Offering 4.125% of the principal amount of the certificates, depending on the term
of the certificate. The underwriter may re-allow all or a portion of this
amount to other participating broker-dealers who are members of the
National Association of Securities Dealers, Inc.
Non-Accountable Expense Allowance Underwriter Up to $233,000 to cover the underwriters costs and expenses relating to
Relating to the Sale of Shares and the offer and sale of the shares and certificates in this offering,
Certificates in this Offering payable as follows: (i) $30,000 paid upon the sale of the first 100,000
shares, (ii) $103,000 payable ratably based on the number of shares sold
thereafter, (iii) $20,000 paid upon the sale of the first $1,000,000 of
certificates, and (iv) $80,000 payable ratably based on the principal
amount of the certificates sold thereafter.
Underwriters Management Fee Underwriter 0.50% of the principal amount of the certificates, payable only upon
original issuance. We will not pay the underwriter a management fee upon
renewal of certificates.
Warrants/Options Directors Options to purchase 15,000 (90,000 aggregate) shares at an exercise price
of $10.00 per share. Annual options to our directors to purchase 3,000
shares at a purchase price equal to the fair market value on the date of
grant. Options expire ratably over five years.
Commissions and Expenses on First Underwriter Customary mark-ups and mark-downs on first mortgage church bonds we
Mortgage Bonds Purchased purchase and sell through the underwriter on the secondary market, and
commissions earned through the underwriter on church bonds we purchase in
the primary market.
Renewal Commissions Underwriter We will pay the underwriter a commission on the renewal of each
certificate that will range from 1.25% to 3.75%, depending on the maturity
of the certificate renewed.
15
CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising from our
relationship with our advisor and the underwriter. Our President owns both our
advisor and the underwriter. Our advisor, its affiliates, our directors and the
directors of our advisor are not restricted from engaging for their own accounts
in business activities similar to ours. Occasions may arise when our interests
would be in conflict with those of one or more of the directors, our advisor or
their affiliates. Our directors, a majority of whom are independent, will
endeavor to exercise their fiduciary duties in a manner that will preserve and
protect our rights and the interests of the shareholders in the event any
conflicts of interest arise. Any transactions between us and any director, our
advisor or any of their affiliates, other than the purchase or sale, in the
ordinary course of our business, of church bonds from or through the
underwriter, will require the approval of a majority of the directors who are
not interested in the transaction.
Transactions with Affiliates and Related Parties
We compensate our advisor and its affiliates for services they provide to
us. Our board of directors has the responsibility to ensure that such services
are provided on terms no less favorable than we could obtain from unrelated
persons or entities. The underwriter may receive commissions from our
transactions in church bonds.
Compensation to Our Advisor and Conflicts of Interest
We pay our advisor an annual advisory fee equal to a 1.25% of our average
invested assets. The fee is not dependent on our advisor's performance. Our
advisor receives fees when we make or renew a mortgage loan based upon a
percentage of the amount paid by a mortgage borrower as "points," or origination
fees. Accordingly, a conflict of interest could arise since the retention,
acquisition or disposition of a particular loan could be advantageous to our
advisor, but detrimental to us, or vice-versa. Because origination fees are
payable upon the closing of the loan or its renewal, and the amount is dependent
upon the size of the mortgage loan, our advisor may have a conflict of interest
in negotiating the terms of the loan and in determining the appropriate amount
of indebtedness to be incurred by the borrower.
We and our advisor believe that it would not be possible, as a practical
matter, to eliminate these potential conflicts of interest. However, the
advisory agreement must be renewed annually by the affirmative vote of a
majority of the independent directors. The independent directors may determine
not to renew the advisory agreement if they determine that our advisor is not
satisfactorily performing its duties. In connection with the performance of
their fiduciary responsibilities, the existence of possible conflicts of
interest will be one of the factors for the directors to consider in determining
the action we will take.
Compensation to the Underwriter and Conflicts of Interest
We will pay the underwriter commissions based on the number of shares and
gross amount and maturities of the certificates it sells on our behalf in this
offering. A conflict of interest could arise from this compensation arrangement,
as the underwriter may be incentivized to sell shares or certificates prior to
our being able to deploy the resulting proceeds to fund mortgage loans or
purchase church bonds.
Our Affiliates May Compete with Us
Any of our directors or officers may have personal business interests that
conflict with our interests and may engage in the church lending business or any
other business. A director or officer may have an interest in an entity we
engage to render advice or services, and may receive compensation from such
entity in addition to compensation received from us.
The underwriter provides financing to churches and other not-for-profit
religious organizations. Therefore, a conflict could arise if the underwriter
were to pursue and secure a lending opportunity otherwise available to us.
However, the average size of first mortgage bond financings undertaken by the
underwriter is approximately $1.75 million, with $1,000,000 being its stated
(but not required) minimum financing. We focus on financings ranging from
$100,000 to $1,000,000 in size. Conflicts of interest between the underwriter
and us likely will be reduced by virtue of the targeted size of loans pursued by
each. We have agreed with the underwriter that financing prospects of less than
$1,000,000 will be first directed to us for consideration. If we determine that
the loan is not suitable or decline to make the loan for any reason, or if the
prospective borrower independently declines to accept our lending, then the
underwriter or its affiliates will have the opportunity to provide financing to
that prospective borrower.
The underwriter conducted the first mortgage bond offerings for the
churches owning the five properties on which we hold second mortgages. If a
default were to occur on any of our second mortgage loans or the first mortgage
bonds secured by the properties securing or second mortgages, our interests may
be in conflict with those of the underwriter or its affiliates.
16
Neither our advisor nor its affiliates are prohibited from providing the
same services to others, including competitors. These relationships may produce
conflicts in our advisor's and its affiliates' allocation of time and resources
among various projects.
Non Arm's-Length Agreements
Many agreements and arrangements we have with our advisor and its
affiliates, including those relating to compensation, were not negotiated at
arm's-length. The conflicts or potential conflicts arising from these agreements
and arrangements will be mitigated by the following factors: (i) our Bylaws
limit our operating expenses to an amount that does not exceed the greater of 2%
of our average invested assets or 25% of our net income unless the independent
directors approve a higher amount and disclose the justification for the higher
expenses to our investors; (ii) our advisor intends to structure its business
relationships so as to be competitive with other programs in the marketplace;
and (iii) the agreements and arrangements are subject to approval by a majority
of our independent directors.
Lack of Separate Legal Representation
We are represented by the law firm of Leonard, Street and Deinard
Professional Association, Minneapolis, Minnesota, which has also acted and will
continue to act as counsel to the underwriter, our advisor, our affiliates, and
various affiliates of our advisor with respect to other matters.
Shared Operations Facilities
We are located in the leased offices of the underwriter, American Investors
Group, Inc., in Minnetonka (Minneapolis), Minnesota. We expect to continue to be
housed in these or similar leased premises along with the underwriter and its
affiliates. We are not separately charged for rent or related expenses. Our
advisor incurs our occupancy expense and many of our operating expenses in
exchange for the advisory fee.
17
DISTRIBUTIONS
In order to qualify for the beneficial tax treatment afforded real estate
investment trusts by the Internal Revenue Code, we are required to pay dividends
in annual amounts which are equal to at least 90% of our "real estate investment
trust taxable income." We intend to make distributions that meet this
requirement. Annual distributions will be estimated for the first three quarters
of each fiscal year and adjusted annually based upon our audited year-end
financial report.
Investors who purchase certificates in this offering will not be entitled
to receive dividends from us as they will not own any of our common stock.
Dividends paid to an investor purchasing shares in this offering will be
pro-rated based on the number of days in such quarter (or year) the shares were
issued and outstanding.
We began making regular quarterly distributions to our shareholders for the
period of operations ended June 30, 1996. Distributions to date, and the
annualized effective yield represented by such distributions (assuming shares
you own were purchased for $10.00 per share) are as follows:
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
Dollar Amount Annualized Yield
Distribution Distributed Per Share
For Quarter Ended: Date: Per Share(2): Represented(3):
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1996 July 31, 1996 0.1927 (1) 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1996 October 30, 1996 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1996 January 31, 1997 0.240625 9.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1997 April 30, 1997 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1997 July 31, 1997 0.22875 9.15%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1997 October 30, 1997 0.2375 9.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1997 January 31, 1998 0.25625 10.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1998 April 30, 1998 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1998 July 31, 1998 0.23125 9.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1998 October 30, 1998 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1998 January 31, 1999 0.215625 8.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 1999 April 30, 1999 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 1999 July 31, 1999 0.21875 8.75%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 1999 October 30, 1999 0.228125 9.125%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 1999 January 31, 2000 0.215625 8.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2000 April 30, 2000 0.20 8.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2000 July 31, 2000 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2000 October 31, 2000 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2000 January 31, 2001 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2001 April 30, 2001 0.2125 8.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2001 July 31, 2001 0.225 9.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2001 October 30, 2001 0.20 8.00%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2001 January 31, 2002 0.19375 7.75%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2002 April 30, 2002 0.20625 8.25%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
June 30, 2002 July 31, 2002 0.209375 8.375%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
September 30, 2002 October 31, 2002 0.1875 7.50%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
December 31, 2002 January 31, 2003 0.165625 6.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
March 31, 2003 April 30, 2003 0.165625 6.625%
- --------------------------------- ------------------------------- ------------------------------- -------------------------------
(1) Represents a 75 day operating period (April 15 to June 30, 1996).
(2) Distributions for the first three quarters of a year may exceed
accumulated earnings and profits at such date. However, the annual
cumulative dividends for each year are not intended to exceed annual
earnings and profits.
(3) Annualized yield for shares purchased for $10.00 per share.
18
The following table represents the annual rate of return on shares
purchases at $10.00 per share for the following calendar years:
- ------------------------- ------------------------- -------------------------
For Calendar Year: Distributions per Share: Annual Rate of Return:
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
1996 0.6646 9.375% (1)
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
1997 0.9475 9.475%
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
1998 0.90 9.00%
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
1999 0.85 8.50%
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
2000 0.825 8.25%
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
2001 0.83125 8.3125%
- ------------------------- ------------------------- -------------------------
- ------------------------- ------------------------- -------------------------
2002 0.76875 7.6875%
- ------------------------- ------------------------- -------------------------
- --------------------------------------------------- -------------------------
Average Annual Rate of Return since Inception: 8.6571% (2)
- --------------------------------------------------- -------------------------
(1) Annualized rate of return. Represents a 255 day operating period (April 15
to December 31, 1996).
(2) Past performance is not necessarily indicative of future performance.
We have a dividend reinvestment plan that allows our shareholders to
reinvest their dividends in shares of our common stock. Under the plan, the
dividends due to our shareholders are deposited directly with Computershare
Trust Company, Inc., which combines the purchases of all participating
shareholders. Shareholders do not incur any brokerage fees or service charges,
although any brokerage fees we pay are treated as dividend income to
shareholders.
19
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2002 and as
adjusted to give effect to sale of all of the shares and certificates.
December 31, 2002 December 31, 2002
Actual As Adjusted
Long Term Debt $ 7,428,000 $ 15,000,000
Current Liabilities 1,663,705 1,663,705
Deferred Income 346,722 346,722
Shareholder's Equity
Common Stock, $.01 par value per share; 30,000,000
shares authorized; issued and outstanding 2,205,568 shares 22,056 32,532
Additional Paid-In Capital 20,182,798 29,873,232
Accumulated Deficit (407,543) (407,543)
Total Shareholder's Equity $ 19,797,311 29,498,221
Total Capitalization $ 29,235,738 46,508,648
20
SELECTED FINANCIAL DATA
The selected financial data presented below is derived from our audited
financial statements at and for the years ended December 31, 1998, 1999, 2000,
2001 and 2002. The financial statements are included in the appendix. You should
refer to the financial statements, and notes thereto, for a more detailed
presentation of financial information.
Year Ended December 31
-------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ----------- ------------ ----------- -------------
Statement of Operations Data
Revenues
Interest Income Loans $655,219 $848,346 $1,160,113 $1,247,261 1,338,459
Interest Income Other 76,444 200,165 219,857 243,504 389,416
Capital Gains Realized 9.138 14,828 1,293 5,839 7,208
Origination Income 40,338 45,690 25,223 27,071 49,543
Income Other Sources 874 407 928 1,887 817
---------- ---------- ---------- --------- ---------
Total Revenues 782,013 1,109,436 1,407,414 1,525,562 1,785,443
Operating Expenses
Professional Fees 8,988 11,351 21,241 20,606 29,187
Director Fees 3,200 3,200 3,200 3,200 3,800
Amortization 303 833 2,917 - 0 - 29,874
Advisory Fees 52,944 116,293 154,389 162,131 172,151
Other 11,213 25,880 20,132 34,780 247,773
-------- -------- -------- -------- --------
Total Operating Expenses 76,648 157,557 201,879 220,717 482,785
Interest Expense - 0 - - 0 - 65,282 26,835 12,717
Provision for (Benefit From)
Income Taxes (7,000) (20,000) - 0 - - 0- - 0 -
------- ------- -------- ------- ---------
Net Income (loss) $712,365 $971,879 $1,140,253 $1,278,010 $1,289,941
======= ======= ========= ========= =========
Income (loss) per Common $ .86 $ .81 $ .81 $ $
Share .80 .66
Weighted Average Common
Shares Outstanding 825,176 1,203,954 1,414,275 1,593,568 1,964,428
Dividends Declared $741,676 $1,024,501 $1,164,973 $1,324,091 $1,496,369
Dividends Declared per Share $ .90 $ .85 $ .825 $ .83125 $ .76875
December 31
---------- ----------- ------------ ----------- -------------
1998 1999 2000 2001 2002
---------- ----------- ------------ ----------- -------------
Balance Sheet Data:
Assets:
Cash and Cash Equivalents $2,941,531 $ 382,765 $213,084 $1,256,556 $ 7,852,220
Current Maturities of
Loans Receivable 237,241 218,398 276,565 298,921 290,759
Loans Receivable, net of
current maturities 5,994,620 10,189,529 11,463,484 11,724,272 16,140,961
Bonds Receivable 1,023,997 2,056,199 2,289,962 3,162,511 4,309,637
Accounts Receivable 28,777 5,782 9,892 58,008 63,602
Interest Receivable - 0 - - 0 - 15,651 66,236 94,385
Prepaid Expense - 0 - 2,917 9,110 - 0 - - 0 -
Deferred Offering Costs - 0 - - 0 - - 0 - 56,587 377,174
Deferred Tax Asset 40,000 60,000 60,000 60,000 60,000
Organizational Expenses (net) 161 - 0 - - 0 - - 0 - - 0 -
---------- ---------- ----------- ---------- ----------
Total Assets $10,266,327 $12,915,590 $14,337,748 $16,683,091 $29,235,738
========== =========== ========== ========== ==========
Liabilities and
Shareholder's Equity
Account Payable $ 12,759 $ - 0 - $ 116,997 $4,350 $39,690
Note payable,line of credit - 0 - 500,000 399,653 - 0 - - 0 -
Mortgage Loan Commitment - 0 - - 0 - - 0 - - 0 - 1,243,827
Deferred Income 114,180 187,991 213,059 260,942 364,969
Dividends Payable 233,004 274,280 293,629 344,504 361,941
Shareholder's Equity
(net of deficit
accumulated during
development stage) 9,906,384 11,953,319 13,314,410 16,073,295 19,797,311
---------- ---------- ---------- ---------- ----------
$10,266,327 $12,915,590 $14,337,748 $16,683,091 $29,235,738
========== ========== ========== ========== ==========
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis
The following discussion regarding our financial statements should be read
in conjunction with the financial statements and notes thereto included in this
prospectus beginning at page F-1. We commenced operations as a real estate
investment trust in 1996, specializing in providing mortgage loans to churches
and other religious non-profit organizations.
Financial Condition
During our year ended December 31, 2002 our total assets increased by
$12,552,647 due primarily to sale of our common stock and secured investor
certificates in our fourth "best efforts" public offering. Our total liabilities
increased by $8,828,631 due primarily to the issuance of our secured investor
certificates.
Results of Operations - 2002
Since our inception, we have experienced our highest quarterly dividend
payment for the quarter ended December 31, 1997 and experienced our lowest
quarterly dividend payment for the quarter ended December 31, 2002. The
quarterly dividend paid for each share held of record on December 31, 1997 was
$.25625 per share representing an annualized yield of 10.25%. The quarterly
dividend payment for each share held of record on December 31, 2002 was $.165625
representing an annualized yield of 6.625%. The dividend payment for December
31, 1997 was significantly higher than the average dividend amount due to the
large number of loans funded during the quarter. Each loan funded during the
quarter generates origination income which is due and payable to shareholders as
"Taxable Income" even though origination income was not recognized in its
entirety for the period under "GAAP". By way of further comparison, the dividend
payment made to December 31, 2002 shareholders of record was significantly lower
than the average dividend amount due directly to large cash balances we received
from our fourth public offering of stock and secured investor certificates and
held in money market instruments pending deployment in new loans to churches.
Because interest earned in our money market account is substantially lower than
interest earned on our mortgage loans, interest income earned was lower than is
anticipated to be earned once the offering proceeds are fully deployed into new
loans.
Our total assets increased from $16,683,091 at December 31, 2001 to
$29,235,738 at December 31, 2002. The primary reason for the increase in total
assets from December 31, 2001 through December 31, 2002 was a result of the sale
and issuance of our common stock and secured investor certificates pursuant to
our fourth public offering, the proceeds of which were (and continue to be)
deployed into new mortgage loans. Shareholders' Equity rose from $16,073,295 at
December 31, 2001 to $19,797,311 at December 31, 2002 for the same reasons. Our
liabilities for both periods are largely comprised of a "Deferred Income" item,
reflecting our practice of recognizing our origination income -- fees charged to
borrowers at the commencement of its loans -- over the life of each loan.
Another material liability for both periods includes dividends declared as of
the end of the period reported on, but which are not paid until the 30th day of
the ensuing month. Our primary liability at December 31, 2002 is our long term
note payable, which is the sum of the secured investor certificates sold under
our fourth public offering.
Our Board of Directors declared dividends of $.20625 for each share of
record on March 31, 2002, $.209375 for each shares held of record on June 30,
2002, $.1875 for each shares held of record September 30, 2001 and $.165625 for
each share held of record on December 31, 2002. Based on the four quarters ended
March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, the
dividends paid represented an 8.25%, 8.375%, 7.50% and 6.625 % annualized yield
to shareholders, respectively, for an effective overall annual yield of 7.70% in
2002. In 2002, an especially in the last quarter of 2002, our dividend yield was
significantly lower than in prior periods. This decrease results primarily from
the large cash balances we received from our current public offering or common
stock and Secured Investor Certificates, which were held in money market
instruments pending deployment in new loans. Because interest earned in our
money market account is substantially lower than interest earned on our mortgage
loans, interest income earned on a per share basis was lower than in prior
periods.
Results of Operations - 2001
Net income for our fiscal year ended December 31, 2001 was $1,278,010 on
total revenues of $1,525,562 compared to $1,140,253 on total revenues of
$1,407,414 for the year ended December 31, 2000. Interest income earned on the
Company's portfolio of loans was $1,195,464 for the year ended December 31,
2001, compared to $1,160,113 for 2000. This increase was due to the fact that
five new loans were originated in fiscal year ended December 31, 2001. Excluded
from revenue for the year ended December 31, 2001 is $74,112 of origination
income, or "points," we received. Recognition of origination income under
generally accepted accounting principles ("GAAP") must be deferred over the
expected life of each loan. However, under tax
22
principles, origination income is recognized in the period received.
Accordingly, because our status as a real estate investment trust requires,
among other things, the distribution to Shareholders of at least 90% of "Taxable
Income," the dividends declared and paid to our Shareholders for the quarters
ended March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001
included origination income even though it was not recognized in its entirety as
income for the period under GAAP. Our operating expenses for our fiscal year
ended December 31, 2001 were $220,717 compared to $201,879 for our fiscal year
ended December 31, 2000.
Our Board of Directors declared quarterly dividends of $.2125 for each
share held of record on March 31, 2001, $.225 per share held of record June 30,
2001, $.20 per share held of record September 30, 2001, and $.19375 per share
held of record on December 31, 2001. Based on the four quarters of operations
for the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, and
December 31, 2001, the dividends paid represented a 8.50%, 9.00%, 8.00% and
7.75% annualized yield to Shareholders respectively for an effective overall
annual dividend yield of 8.3125% in 2001.
Liquidity and Capital Resources
Our revenue is derived principally from interest income, and secondarily,
from origination fees and renewal fees generated by mortgage loans that we make.
We also earn income through interest on funds that are invested pending their
use in funding mortgage loans or distributions of dividends to our Shareholders,
and on income generated on church bonds we may purchase and own. We generate
revenue through (i) permitted temporary investments of the net proceeds from the
sale of the shares, and (ii) implementation of our business plan of making
mortgage loans to churches and other non-profit religious organizations. Our
principal expenses are advisory fees, legal and accounting fees, communications
costs with our Shareholders, and the expenses of our stock transfer agent,
registrar and dividend reinvestment agent.
In addition, we are able to borrow funds in an amount not to exceed 50% of
our Average Invested Assets in order to increase our lending capacity. We
currently have a $2,000,000 secured line of credit with Beacon Bank, Shorewood,
Minnesota. As of March 31, 2003 we have no outstanding balance against our line
of credit. This credit line is secured by the pledge of $2,401,000 in principal
amount of our Church Bonds. Interest on our line of credit is payable to Beacon
Bank on a monthly basis. We believe that the rate at which we lend funds will
always be higher than the cost at which we borrow the funds (currently our rate
at which we can borrow funds is prime interest rate plus 1/2%). However, there
can be no assurance that we can loan funds out at rates higher than the rate at
which we borrow the funds. We anticipate to "pay-down" any future borrowings on
our line of credit by (i) selling additional securities in our public offering;
(ii) applying the proceeds from principal payments on our current loan portfolio
payments and any loan re-payments; and (iii) use the proceeds raised in our
dividend reinvestment program. Increases or decreases in the prime lending rate
as well as the increase or decrease in the rate of interest charged on our loans
has and likely will continue to impact interest income we will earn and,
accordingly, influence dividends declared by our Board of Directors.
On April 30, 2002 the Securities and Exchange Commission declared effective
our registration statement to sell to the public $1,500,000 shares of our common
stock at $10 per share ($15,000,000) and to sell to the public $15,000,000 of
debt securities, which we call "Secured Investor Certificates." Our future
capital needs are expected to be met by (i) our pending public offering; (ii)
the repayment of existing loans; (iii) dividend reinvestment by our shareholders
under our dividend reinvestment plan; and (iv) borrowing under our line of
credit.
We may borrow funds up to an amount that equals 50% of our net invested
assets. The objective of our current offering of shares and certificates is to
raise intermediate term funds that we can deploy into new loans at rates that
provide a positive spread. This additional loan development will further
diversify our loan portfolio while generating origination income to the
advantage to our shareholders. The cost of this capital is expected to be lower
than if borrowed directly from banks at variable rates of interest.
Loan Loss Reserve Policy
We follow a loan loss reserve policy on our portfolio of loans outstanding.
This critical policy requires complex judgments and the need to make estimates
of future events, which may or may not materialize as planned. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. Our policy will
reserve for the outstanding principal amount of a loan in our portfolio if the
amount is in doubt of being collected.
23
Listed below is our current loan loss reserve policy:
--------------- ------------------------ ------------------------------------------------------------------------------
Incident Percentage of Loan Status of Loan
Reserved
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
1. None Loan is current, no
interruption in payments during
history of the loan,
("interruption" means receipt
by us more than 30 days after
scheduled payment date).
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
2. None Loan current, previous interruptions experienced, but none in the last six
month period.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
3. None Loan current, previous interruptions experienced, but none in the last 90
day period.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
4. 1.00% Loan serviced regularly, but 2 or 3 payments cumulative in arrears.
Delinquency notice been sent.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
5. 2.00% Loan serviced regularly, but 4 or 5 payments cumulative in arrears.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
6. 5.00% Loan more than 5 payments cumulative in arrears, loan servicing intermittent
during the last 90 days. Ability of obligor to continue to service the loan
at scheduled levels in doubt. Restructuring contemplated or imminent.
--------------- ------------------------ ------------------------------------------------------------------------------
--------------- ------------------------ ------------------------------------------------------------------------------
7. The Greater Of: (i) Loan is declared to be in default. Foreclosure proceeding underway or
Accumulate reserve imminent. Reserve amount dependent on value of collateral. All expenses
during default period related to enforcing loan agreements are expensed.
equal to principal
loan balance in excess
of 65% of original
collateral value; or
(ii) 1% of the
remaining principal
balance each quarter
during which the
default remains in
effect
--------------- ------------------------ ------------------------------------------------------------------------------
Loan loss reserves are recorded on a quarterly basis.
Critical Accounting Policies and Estimates
Preparation of our financial statements requires estimates and judgments to
be made that affect the amounts of assets, liabilities, revenues and expenses
reported. Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting
estimates. We evaluate these estimates based on assumptions we believe to be
reasonable under the circumstances.
The difficulty in applying these policies arises from the assumptions,
estimates and judgments that have to be made currently about matters that are
inherently uncertain, such as future economic conditions, operating results and
valuations as well as management intentions. As the difficulty increases, the
level of precision decreases, meaning that actual results can and probably will
be different from those currently estimated.
Of our significant accounting policies, described in the notes to our
financial statements included herewith, we believe that the estimation of fair
value of our mortgage loans receivable and bond portfolio involve a high degree
of judgment. We estimate the fair value of our mortgage loans receivable to be
the same as the carrying value because of the substantial activity/turnover in
this portfolio. We estimate the fair value of the bond portfolio to be the same
as the carrying value because, even though there is no ready public market for
these bonds, the cost is current. We do not consider future cash flows, the
interest rate or the yield rate of a loan or bond in estimating fair value. We
do not consider the availability of a market for a loan or bond in estimating
fair value. In addition, the loan loss policy, previously discussed, is a
critical accounting policy.
24
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to changes in interest rate as a result of borrowing
activities used to fund operations and to make mortgage loans and as a result of
the interest income received on the mortgage loans that we make. We borrow using
both floating interest rate lines of credit and fixed rate notes payable. We
primarily use medium-term (five to seven years) debt as a source of capital. We
do not currently use derivative securities, interest-rate swaps or any other
type of hedging activity to manage our costs of capital.
At December 31, 2002, we had no floating interest rate debt outstanding
under our credit facilities and $7.4 million of fixed rate notes payable. The
floating interest rate on the line of credit is based upon the prevailing prime.
A hypothetical one-percent change in the prevailing prime rate would not have
affected our net income as there was currently no outstanding balance on our
variable rate line of credit. The weighted average interest rate as of December
31, 2002 on our fixed rate notes payable was 6.49%.
25
OUR BUSINESS
General
American Church Mortgage Company was established by American Investors
Group, Inc. (the "underwriter" or "American") to service demand that American
identified through the course of its business for mortgage lending to borrowers
in the amount of $100,000 to $1,000,000. Because of the regulatory and
administrative expenses associated with bond financing, the economic feasibility
of bond financing diminishes for financings under $750,000. As a result,
American believed that many churches were forced to either forego the project
for which their financing request was made, fund their project from cash flow
over a period of time and at greater expense, or seek bank financing on terms
which were not always favorable or available to them. We were incorporated in
Minnesota on May 27, 1994 to provide a lending source to this segment of the
industry, capitalizing on a lack of significant competition in the specialized
business of making smaller church loans, the experienced human resources
available at American and our advisor, and the marketing, advertising and
general goodwill of American. We began making loans in April 1996.
We make loans throughout the United States in principal amounts limited in
range from $100,000 to $1,000,000. We may invest up to 30% of our average
invested assets in mortgage-secured debt securities (bonds) issued by churches
and other non-profit religious organizations. We intend to lend funds and
acquire mortgage secured investments pursuant to our business plan as additional
funds become available from this offering, and thereafter as funds from loan
repayments, bond maturities and other resources become available.
We utilize American's unique specialization in procuring, qualifying and
servicing church loans to enhance our operations. American has underwritten
first mortgage bonds for churches throughout the United States since 1987. In
underwriting church bonds, American reviews financing applications, analyzes
prospective borrowers' financial capability, and structures, markets and sells,
mortgage-backed bond securities to the investing public. Since its inception,
American had underwritten approximately 192 church bond financings, in which
approximately $335,575,000 in first mortgage bonds have been sold to public
investors. The average size of church bond financings underwritten by American
since its inception is approximately $1.75 million.
Financing Business
We make first mortgage loans in amounts ranging from $100,000 to
$1,000,000, to churches and other non-profit religious organizations, and invest
in mortgage-secured debt instruments issued by churches and other non-profit
religious organizations, called church bonds. We apply essentially all of our
working capital (after adequate reserves determined by our advisor) toward
making mortgage loans and investing in church bonds. We seek to enhance returns
on investments by:
o offering competitively attractive mid-term (5-15 years) loans and long-term
(20-25 year) loans (although there is no limit on the term of our loans);
o seeking origination fees, or "points," from the borrower at the outset of a
loan and upon any renewal of a loan;
o making a limited amount of higher-interest rate second mortgage loans and
construction loans to qualified borrowers; and
o purchasing a limited amount of church bonds, typically at a discount from
par value.
Our policies limit the amount of second mortgage loans to 20% of our
average invested assets on the date any second mortgage loan is closed, and
limit the amount of mortgage-secured debt securities to 30% of average invested
assets on the date of their purchase. All other mortgage loans we make (or
church bonds purchased for investment) will be secured by a first mortgage or
deed of trust on the borrower's real property. As of December 31, 2002, the
percentage of average invested assets in second mortgage loans, and the
percentage of average invested assets in mortgage-secured debt securities, was
2.9% and 21% respectively. As we attempt to make mortgage loans that maximize
interest income, we may make longer-term fixed-rate loans in our discretion in
order to reduce the risk of downward interest rate fluctuations.
Our lending and investing decisions, including determination of a
prospective borrower's or church bond issuer's financial credit worthiness, are
made for us by our advisor. We have no employees. Employees and agents of our
advisor conduct all aspects of our business, including (i) marketing and
advertising; (ii) communication with prospective borrowers; (iii) processing
loan applications; (iv) closing loans; (v) servicing loans; and (vi)
administering our day-to-day business activities. In consideration of its
services, the Advisor is entitled to receive a fee equal to 1 1/4% annually of
the Company's average invested assets, plus one-half of any origination fee
charged to borrowers on mortgage loans we make. The Advisor's management fees
are computed and payable monthly.
26
Current First Mortgage Loan Terms
We offer prospective borrowers a selection of loan types, which include a
choice of fixed or variable rates of interest indexed to the prime rate, the
U.S. Treasury 10-Year Notes, or another generally recognized reference index,
and having various terms to maturity, origination fees and other terms and
conditions. The terms of loans we offer may be changed by our advisor as a
result of such factors as (i) the credit quality and experience of the
borrowers; (ii) the terms of loans in our portfolio; (iii) competition from
other lenders; (iv) anticipated need to increase the overall yield on our
mortgage loan portfolio; (v) local and national economic factors; and (vi)
actual experience in borrowers' demand for the loans. We currently make the loan
types described in the table below. This table describes material terms of loans
available from us. The table does not purport to identify all possible terms,
rates, and fees we may offer. We may modify the terms identified below or offer
loan terms different than those identified below. Many loans are individually
negotiated and differ from the terms described below.
----------------------------------- -------------------------------------- -----------------------------
Loan Type Interest Rate (1) Origination Fee (2)
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
20/25 Year Term (3) Fixed @ 8.65%/8.75% respectively 4.0%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
20 Year Term (3) Variable Annually @ Prime + 2.50% 3.5%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
Renewable Term (4) Fixed @:
3 Year 7.75% 3.5%
5 Year 7.95% 3.5%
7 Year 8.25% 3.5%
10 Year 8.35% 3.5%
----------------------------------- -------------------------------------- -----------------------------
----------------------------------- -------------------------------------- -----------------------------
Construction 1 Year Term Fixed @ 9.00% 2.0%
----------------------------------- -------------------------------------- -----------------------------
(1) "Prime" means the prime rate of interest charged to preferred customers, as
published by a federally chartered bank chosen by us. We may also tie our
offered interest rates to other indexes.
(2) Origination fees are generally based on the original principal amount of
the loan and are collected from the borrower at the origination and renewal
of loans, one-half of which is payable directly to our advisor.
(3) Fully amortized repayment term. Amortization terms may vary, as may other
loan terms, depending on individual loan negotiations and competitive
forces.
(4) Renewable term loans are repaid based on a 20-year amortization schedule,
and are renewable at the conclusion of their initial term for additional
like terms up to an aggregated maximum of 20 years. We charge a fee of 1%
upon the date of each renewal. If renewed by the borrower, the interest
rate is adjusted upon renewal to Prime plus a specified percentage
"spread."
27
Property (Portfolio) of the Company
As of March 31, 2003, we had 47 first mortgage loans aggregating
$19,127,478 in original principal amount, three second mortgage loans
aggregating $610,000 in original principal amount, and purchased $4,312,790
original principal amount first mortgage bonds issued by churches. The table
below identifies the borrowing institutions and certain key terms of the loans
currently comprising our loan portfolio.
===================================== ============== ============== ============= ======================== ====================
Borrowing Church Loan Loan Interest Collateral Appraised Funding Date
Amount Term Rate Value
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Landmark Apostolic Church $290,000 5 years 10.00% $650,000 04/25/96
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Fountain of Life Church $375,000 15 years 11.25% $500,000 05/15/96
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
River of Life Church $425,000 7 years 11.25% $600,000 05/06/96
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
St. Luke's Pentecostal $207,000 5 years 10.75% $277,000 12/04/97
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethlehem Temple, Rialto $290,000 5 years (3) 12.00% $2,375,000 12/24/97
(Second Mortgage Loan)
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Tabernacle Baptist $245,000 5 years 10.75% $375,000 03/30/98
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Hope Baptist Church $220,000 5 years (3) 11.00% $3,000,000 06/23/98
(Second Mortgage Loan)
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Mt. Ararat Baptist Church $170,000 5 years 10.75% $1,000,000 09/24/98
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Restoring America's Families $198,750 20 years 9.85% $265,000 12/09/98
Ministries
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Chapel International $115,000 5 years 10.00% $175,000 03/02/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bread of Life Church $435,000 20 years 9.85% $950,000 05/17/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Greater Hill Zion Baptist Church $500,000 20 years 9.75% $1,040,000 05/20/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Freewill Christian Center $596,000 20 years 10.00% $797,000 06/22/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethel Temple of Longview $500,000 20 years 10.25% $1,550,000 07/04/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Tabernacle Jamaica $335,000 20 years 9.95% $600,000 07/30/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Greater Fort Lauderdale $605,000 20 years 9.75% $900,000 09/08/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Growth in Christ $460,000 20 years 9.85% $697,400 11/22/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Curry Chapel A.M.E. Church $265,000 5 years (3) 9.50% $569,000 11/18/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holy Deliverance Church $250,000 20 years 9.85% $360,000 12/14/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Old Morning Star Church (2) $280,000 20 years 9.85% $356,000 12/21/99
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Praise Christian Center $500,000 20 years 9.85% $926,000 01/21/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Sierra Vista C.O.G.I.C. $450,000 20 years 10.25% $600,000 03/02/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bend Christian Center $425,000 20 years (4) 10.50% $1,010,000 06/05/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
St. Paul A.M.E Church $200,000 20 years 10.25% $325,000 11/02/00
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
First Metro Church of Houston $100,000 5 years (3) 12.00% $3,500,000 12/13/00
(Second Mtg Loan)
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Second Missionary Baptist Church $225,000 20 years 10.25% $370,000 06/19/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bethel Christian Mission $268,000 20 years 10.25% $384,000 06/25/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Chesapeake Christian Ctr (1) $661,728 20 years 9.50% $1,100,000 10/30/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
True Vine Gospel Church $350,000 25 years 9.95% $500,000 11/15/01
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Progressive Saints Christian $220,000 20 years 9.25% $375,000 01/24/02
Fellowship
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
28
===================================== ============== ============== ============= ======================== ====================
Borrowing Church Loan Loan Interest Collateral Appraised Funding Date
Amount Term Rate Value
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Fun Family Christian Center (4) $875,000 20 years 9.25% $1,290,850 03/28/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Nehemiah Christian Center $115,000 3 years 8.5% $140,000 05/30/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Unity of Faith Worship Center $426,000 20 years 8.5% $835,150 05/31/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Peniel Baptist Church $555,000 20 years 9.75% $1,358,496 06/26/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Light Fellowship $350,000 20 years 9.25% $1,650,000 07/15/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Eagle Vision Community Church $165,000 20 years 9.25% $215,000 07/19/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Aaron's Rod Kathedral $300,000 20 years 9.25% $444,000 08/06/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Abundant Faith Apostolic Church of $400,000 20 years 9.25% $634,000 08/06/02
Deliverance
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holly Grove Baptist Church $263,000 20 years 9.25% $425,000 08/12/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Holly Grove Missionary Baptist $205,000 20 years 9.25% $461,900 09/19/02
Church
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Full Life Gospel Center $327,000 20 years 9.25% $560,000 11/27/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Hope Christian Center $450,000 25 years 9.25% $725,000 12/13/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Word of Faith Christian Center $860,000 20 years 9.25% $1,500,000 12/30/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
House of Praise Ministries $610,000 20 years 8.75% $1,785,000 12/30/02
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
House of Joy & Praise Outreach $435,000 20 year 9.25% $780,000 12/30/02
Center
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
New Creation Family Church $500,000 20 years 9.25% $680,000 02/07/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
United Apostolic Church $950,000 25 yeas 9.50% $1,990,000 02/14/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Bread of Life Baptist Church $763,000 20 years 9.25% $1,160,000 02/21/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Life Changing Faith Christian Church $460,000 20 years 9.00% $690,000 03/12/03
- ------------------------------------- -------------- -------------- ------------- ------------------------ --------------------
Good News Family Worship Center $567,000 25 year 9.25% $750,000 03/13/03
===================================== ============== ============== ============= ======================== ====================
(1) Renewed loan into a 20 year fixed rate loan.
(2) Includes an initial loan in the amount of $250,000 and an additional
supplemental loan of $30,000 funded April 2001. (3) Renewed for an additional
five year period in May 2001. (4) Includes an initial loan in the amount of
$815,000 and an additional supplemental loan of $60,000 funded October 2002.
The following mortgage-secured bonds have been purchased by the Company:
================================================================================================================================
Issuer Principal Company Face Yield of Yield to Current Maturity Original
Amount Purchase Bonds Maturity Yield Date Issue
Price Date
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Palm Beach Cathedral $2,000 $ 871 7.75% 19.63% 17.80% 01/25/12 01/25/97
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $3,000 $3,000 9.50% 9.50% 9.50% 02/01/10 02/01/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle $1,000 $1,000 9.25% 9.25% 9.25% 08/01/08 02/01/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater Open Door Church $658,000 $658,000 From 7.35% to N/A 9.55% Serially to 12/17/98
9.80% 05/01/18
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $4,000 $4,000 10.50% 10.50% 10.50% 09/15/13 04/01/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
29
================================================================================================================================
Issuer Principal Company Face Yield of Yield to Current Maturity Original
Amount Purchase Bonds Maturity Yield Date Issue
Price Date
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern California $808,000 $808,000 From 9.20% to N/A 9.25% From 08/01/14 02/01/99
Word of Faith 9.25% to 2/01/19
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Generation Ministries $20,000 $20,000 9.70% 9.70% 9.70% 09/15/18 09/15/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Palo Alto Community Church $38,000 $38,000 From 7.20% to N/A 7.61% From 02/01/04 08/01/99
8.95% to 08/01/11
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater St. Matthew $340,000 $340,000 10.25% 10.25% 10.25% From 06/15/20 06/15/01
to 06/15/21
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
From the Heart Ministries, Inc. $13,000 $13,000 From 8.00% to N/A 8.71% From 02/15/03 02/15/01
10.40% to 08/15/19
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
House of Praise Ministries $6,000 $5,520 10.05% 11.43% 10.92% 04/01/11 10/01/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Community Protestant Church $5,000 $4,600 10.05% 11.46% 10.92% 02/15/11 08/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Worship $3,000 $2,760 10.15% 11.65% 11.03% 02/15/10 10/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $5,000 $4,600 10.25% 12.26% 11.14% 03/15/07 03/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Christian Love Baptist $4,000 $3,600 10.30% 12.83% 11.44% 05/15/07 11/15/92
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Christian $3,000 $2,940 10.10% 10.56% 10.31% 08/15/07 08/15/96
Center
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern California Word of $5,000 $4,510 9.25% 12.26% 10.25% 08/01/09 02/01/99
Faith
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Pembroke Park C.O.G.I.C. $6,000 $5,850 10.00% 10.46% 10.26% 11/15/09 11/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Oasis Christian Center $5,000 $4,875 10.00% 10.45% 10.26% 02/15/10 02/15/96
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
From the Heart $3,000 $3,000 10.40% 10.40% 10.40% 02/15/19 02/15/01
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
From the Heart $1,000 $1,000 10.00% 10.00% 10.00% 02/15/11 02/15/01
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
From the Heart $1,000 $1,000 10.15% 10.15% 10.15% 02/15/11 02/15/01
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Christian Pentecostal Church $8,000 $7,600 10.00% 12.63% 10.53% 02/01/04 02/01/93
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Antelope Valley Christian $2,000 $1,840 10.45% 11.62% 11.36% 09/15/15 06/15/00
School
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $1,000 $920 9.30% 10.37% 10.11% 06/15/16 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hills Harvester $4,000 $438 10.15% N/A N/A 07/15/xx N/A
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hills Harvester $6,000 $657 10.15% N/A N/A 01/15/xx N/A
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater Holy Trinity $910,000 $910,000 From 6.70% to N/A 8.50% Serially to 12/15/01
9.75% 12/15/21
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern CA Word of Faith $5,000 $4,500 9.25% 10.55% 10.28% 02/01/18 02/01/99
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Community Protestant $5,000 $4,500 10.10% 11.53% 11.22% 05/15/16 11/15/97
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
30
================================================================================================================================
Issuer Principal Company Face Yield of Yield to Current Maturity Original
Amount Purchase Bonds Maturity Yield Date Issue
Price Date
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $5,000 $4,500 10.00% 11.46% 11.11% 09/15/05 03/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $5,000 $4,500 10.25% 12.60% 11.38% 03/15/08 03/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary $5,000 $4,000 9.25% 12.37% 11.56% 12/15/14 12/15/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Full Gospel Pentecostal $5,000 $4,500 8.95% 11.07% 9.94% 10/15/08 10/15/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $528,000 $528,000 From 7.50% to N/A 8.50% Serially to 01/15/02
8.70% 01/15/18
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Community Protestant $3,000 $2,550 10.50% 12.62% 12.35% 04/01/20 04/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $3,000 $2,550 10.50% 13.33% 2.35% 09/15/10 03/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Community Protestant $3,000 $2,550 10.05% 12.89% 11.82% 02/15/11 08/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle $3,000 $2,670 10.20% 13.33% 11.46% 03/01/19 03/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $60,000 $60,000 From 7.00% to N/A 7.25% Serially to 01/15/02
7.50% 01/15/10
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern California Word of $10,000 $8,400 9.25% 11.44% 11.01% 08/01/18 02/01/99
Faith
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $4,000 $4,000 5.50% 5.50% 5.50% 07/15/03 01/15/02
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $14,000 $14,000 8.70% 8.70% 8.70% 01/15/18 01/15/02
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $3,000 $3,000 8.55% 8.55% 8.55% 01/15/17 01/15/02
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $10,000 $5,400 6.00% 18.39% 11.11% 12/15/08 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $10,000 $5,400 7.00% 15.75% 12.96% 12/15/13 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $7,000 $4,690 7.00% 11.25% 10.45% 03/15/21 03/15/99
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Antelope Valley Christian $8,000 $7,120 10.25% 12.62% 11.52% 09/15/09 05/15/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Oasis Christian Center $5,000 $4,200 9.95% 13.52% 11.85% 08/15/09 02/15/96
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Tabernacle $5,000 $5,000 8.00% 8.00% 8.00% 01/15/12 01/15/02
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern California Word of $5,000 $5,000 9.10% 9.10% 9.10% 02/01/12 02/01/99
Faith
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Fishers of Men Christian $529,000 $529,000 From 5.50% to N/A 6.43% Serially to 08/15/02
Fellowship 7.50% 08/15/14
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Full Gospel Pentecostal Church $17,000 $15,640 8.95% 10.82% 9.73% 10/15/08 10/15/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Swope Parkway Church of Christ $8,000 $7,440 9.95% 11.20% 10.70% 11/01/11 11/01/97
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Miracle Revival Center $30,000 $28,500 10.00% N/A 10.53% From 06/01/18 12/01/99
to 12/01/18
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle Church $15,000 $14,400 10.05% 10.64% 10.47% 02/01/15 02/01/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
31
================================================================================================================================
Issuer Principal Company Face Yield of Yield to Current Maturity Original
Amount Purchase Bonds Maturity Yield Date Issue
Price Date
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Christian Love Fellowship, Inc. $790.10 $505.66 8.00% 13.51% 12.50% 02/15/19 02/15/99
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $5,000 $2,950 7.00% 13.20% 11.86% 12/15/18 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Southern California Word of $5,000 $4,700 9.15% 10.08% 9.73% 08/01/13 02/01/99
Faith
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $7,000 $5,180 8.50% 234.70% 11.49% 04/01/03 04/01/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Gospel Tabernacle $23,000 $20,470 9.95% 11.96% 11.18% 02/01/12 02/01/98
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $2,000 $1,280 7.00% 12.85% 10.94% 06/15/15 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Worship $1,000 $930 9.30% 16.87% 10.00% 02/15/04 08/15/96
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
New Life Christian Ministry $3,000 $2,760 9.20% 15.17% 10.00% 08/15/04 02/15/94
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $10,000 $6,000 7.00% 12.83% 11.67% 12/15/19 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Oasis Christian Center $5,000 $4,800 9.90% 11.16% 10.31% 02/15/07 02/15/96
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Original Holy Ark Missionary $10,000 $9,600 9.50% 10.44% 9.90% 10/15/08 04/15/97
Baptist
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Church of the Great Commission $15,000 $14,400 10.50% 11.15% 10.94% 09/15/13 03/15/95
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
First AME Church of Oakland $12,000 $11,520 8.55% 9.47% 8.91% 10/15/08 10/15/99
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia $5,000 $4,800 10.15% 10.88% 10.57% 07/15/11 07/15/00
Missionary Baptist
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia $8,000 $7,680 10.15% 10.91% 10.57% 01/15/11 07/15/00
Missionary Baptist
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia $1,000 $960 10.15% 10.94% 10.57% 07/15/10 07/15/00
Missionary Baptist
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester $1,000 $886.90 7.00% 15.32% 7.89% 07/01/08 01/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester $1,000 $445.90 7.00% 15.32% 15.70% 07/01/08 01/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester $1,000 $886.90 7.00% 15.32% 7.89% 07/01/08 01/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester $2,000 $1,329.30 7.00% 15.32% 10.53% 07/01/08 01/01/00
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist $10,000 $5,900 7.00% 14.22% 11.86% 12/15/14 12/15/98
Church
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Palo Alto Community Church $10,000 $9,600 8.55% 9.67% 8.91% 08/01/07 08/01/99
================================================================================================================================
32
We have two first mortgage loans that are three or more payments in
arrears. The first loan has an outstanding balance of approximately $235,000.
The church has missed three consecutive mortgage payments in 2002 and has missed
one mortgage payment in 2003. We have reserved for this loan and are continuing
to work with the church to bring its payments current. We have notified the
church if any future mortgage payments are not met we will engage legal counsel
to foreclose on the church's property. The second loan is a first mortgage loan
with an outstanding balance of $182,000. The church, located in Battle Creek,
Michigan, has not made a monthly mortgage payment since June of 2002. We have
engaged legal counsel and are currently foreclosing on the church's property.
The church congregation has disbanded and the church's property is currently
unoccupied. We plan to take possession of the church and list the property for
sale through a local realtor.
Mortgage Loan Processing and Underwriting
Our advisor's personnel process and verify mortgage loan applications.
Verification procedures are designed to assure a borrower's qualification under
our financing policies. Verification procedures include obtaining:
o applications containing key information concerning the prospective borrower
o project description
o financial statements of the prospective borrower
o organizational documents and history of the borrower
o preliminary title report or commitment for mortgagee title insurance
o a real estate appraisal in accordance with our financing policies
We require that appraisals and financial statements be prepared by
independent third-party professionals who are pre-approved based on their
experience, reputation and education. Completed loan applications, together with
a written summary are then considered by our underwriting committee, comprised
of our advisor's president, our advisor's vice-president and the staff of the
underwriting department of the underwriter. Our advisor may arrange for the
provision of mortgage title insurance and for the services of professional
independent third-party accountants and appraisers on behalf of borrowers in
order to achieve pricing efficiencies on their behalf and to assure the
efficient delivery of title commitments, preliminary title reports and title
policies, and financial statements and appraisals meeting our underwriting
criteria. Our advisor may arrange for the direct payment for professional
services and for the direct reimbursement to it of related expenditures by
borrowers and prospective borrowers. Upon closing and funding of mortgage loans,
an origination fee based on the original principal amount of each loan is
generally charged, of which one-half is payable to us and one-half is payable to
our advisor.
Loan Commitments
Subsequent to approval by our underwriting committee, and prior to funding
a loan, we issue a loan commitment to qualified applicants. We may charge a loan
commitment fee, but typically do not. Commitments indicate the loan amount,
origination fees, closing costs, underwriting expenses (if any), funding
conditions, approval expiration dates, interest rate and other terms.
Commitments generally set forth a "prevailing" interest rate that is subject to
change in accordance with market interest rate fluctuations until the final loan
closing documents are prepared. In certain cases we may establish ("lock-in")
interest rate commitments up to sixty days from the commitment to closing.
Interest rate commitments beyond sixty days will not normally be issued unless
we receive a fee premium based upon the assessment of the risk associated with a
longer "lock-in" period.
33
Loan Portfolio Management
Our advisor manages and services our portfolio of mortgage loans in
accordance with an advisory agreement. Our advisor is responsible for all
aspects of our mortgage loan business, including:
o closing and recording of mortgage documents
o collecting principal and interest payments
o enforcing loan terms and other borrower's requirements
o periodic review of each mortgage loan file
o determination of reserve classifications
o exercising our remedies in connection with defaulted or non-performing
loans
Fees and costs of attorneys, insurance, bonds and other direct expenses
incurred in connection with the exercise of remedies in connection with a loan
default are our responsibility, although they may be recouped from the borrower
in the process of pursuing our remedies. Our advisor will not receive any
additional compensation for services rendered in connection with on-going loan
portfolio management or exercising our remedies in the event of a loan default.
Loan Funding and Borrowing
Our mortgage loans and purchases of church bonds are funded with available
cash resources. Historically, we have obtained cash resources from the sale of
our common stock, the repayment of our investments in loans and bonds, and from
our line of credit. We will use the proceeds of the sale of shares and
certificates to fund mortgage loans and purchase church bonds. We may borrow up
to 50% of the value of our average invested assets to make loans. We have a
$2,000,000 secured line of credit facility with Beacon Bank, Shorewood,
Minnesota. We intend to use this loan facility to enable us to close loans on
schedule while we may not otherwise have adequate funds on hand. The Beacon Bank
line of credit is secured by church bonds owned by us. This line of credit is
used periodically to fund loans when we do not otherwise have sufficient capital
to do so. Historically, the line has been paid as soon as additional capital
becomes available to us. We pay Beacon Bank a rate of interest equal to prime
plus 0.5% on the outstanding balance on the line, in addition to a nominal
annual renewal fee.
Financing Policies
Our business of mortgage lending to churches and other non-profit religious
organizations is managed in accordance with and subject to our financing
policies. Our financing policies identify our general business guidelines and
the parameters of our lending business.
>> Loans we make are limited to churches and other non-profit religious
organizations and are secured by mortgages. The total principal amount of
our second mortgage loans and bonds funded is limited to 20% of our average
invested assets. All other loans and bonds will be secured by first
mortgages.
>> The total principal amount of mortgage-secured debt securities we purchase
from churches and other non-profit religious organizations is limited to
30% of our average invested assets.
>> The loan amount cannot exceed 75% of the appraised value of the real estate
and improvements securing each loan. On all loans, we require a written
appraisal certified by a member of the Appraisal Institute or a
state-certified appraiser.
>> The borrower must furnish us with an ALTA (American Land Title Association)
or equivalent mortgagee title policy insuring our mortgage interest.
>> The borrower's long-term debt (including the proposed loan) cannot exceed
four times the borrower's gross income for the previous 12 months.
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>> The borrower must furnish us with financial statements (balance sheet and
income and expense statement) for the last two complete fiscal years and a
current financial statement as of and for the period within 90 days of the
loan closing date. On loans of $500,000 or less, the last complete fiscal
year must be reviewed by an independent accounting firm. On loans in excess
of $500,000, our advisor may require that the last complete fiscal year
financial statements be audited by an independent auditor. Borrowers in
existence for less than three fiscal years must provide financial
statements since inception. We do not extend loans to borrowers in
operation less than two years absent express approval by our board of
directors.
>> Our advisor typically requires the borrower to arrange for automatic
electronic or drafting of monthly payments.
>> Our advisor may require (i) key-person life insurance on the life of the
senior pastor of a church; (ii) personal guarantees of church members
and/or affiliates; and (iii) other security enhancements for our benefit.
>> The borrower must agree to provide us with annual financial statements
within 120 days of each fiscal year end during the term of the loan.
>> Our advisor may require the borrower to grant to us a security interest in
all personal property located and to be located upon the mortgaged premises
(excluding property leased by the borrower).
>> We may make fixed-interest rate loans having maturities of three to
twenty-five years.
>> We may borrow up to 50% of our average invested assets.
We require borrowers to maintain a general perils and liability coverage
insurance policy naming us as the loss-payee in connection with damage or
destruction to the property of the borrower which typically includes
weather-related damage, fire, vandalism and theft. In its discretion, our
advisor may require the borrower to provide flood, earthquake and/or other
special coverage.
These financing policies are in addition to the prohibited investments and
activities set forth in our bylaws, which are discussed in the next section.
Prohibited Investments and Activities
Our bylaws impose certain prohibitions and restrictions on our investment
practices and activities, including prohibitions against:
>> Investing more than 10% of our total assets in unimproved real property or
mortgage loans on unimproved real property;
>> Investing in commodities or commodity futures contracts other than
"interest rate futures" contracts intended only for hedging purposes;
>> Investing in mortgage loans (including construction loans) on any one
property which in the aggregate with all other mortgage loans on the
property would exceed 75% of the appraised value of the property unless
substantial justification exists because of the presence of other
underwriting criteria;
>> Investing in mortgage loans that are subordinate to any mortgage or equity
interest of our advisor or our directors or any of their affiliates;
>> Investing in equity securities;
>> Engaging in any short sales of securities or in trading, as distinguished
from investment activities;
>> Issuing redeemable equity securities;
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>> Engaging in underwriting or the agency distribution of securities issued by
others;
>> Issuing options or warrants to purchase our shares at an exercise price
less than the fair market value of the shares on the date of the issuance
or if the issuance thereof would exceed 10% in the aggregate of our
outstanding shares;
>> Issuing debt securities unless the debt service coverage for the most
recently completed fiscal year, as adjusted for known changes, is
sufficient to properly service the higher level of debt;
>> Investing in real estate contracts of sale unless such contracts are in
recordable form and are appropriately recorded in the chain of title;
>> Selling or leasing to our advisor, a director or any affiliate thereof
unless approved as being fair and reasonable by a majority of directors
(including a majority of independent directors), not otherwise interested
in such transaction;
>> Acquiring property from our advisor or any director, or any affiliate
thereof (other than church bonds from American Investors Group, Inc. in the
ordinary course of our investing activities), unless a majority of our
directors (including a majority of our independent directors) not otherwise
interested in such transaction approve the transaction as being fair and
reasonable and at a price no greater than the cost of the asset to our
advisor, director or any affiliate thereof, or if the price is in excess of
such cost, that substantial justification for such excess exists and such
excess is reasonable. In no event shall the cost of such asset exceed its
current appraised value;
>> Investing or making mortgage loans unless a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or
condition of title is obtained; or
>> Issuing our shares on a deferred payment basis or other similar
arrangement.
We do not intend to invest in the securities of other issuers for the
purpose of exercising control, to engage in the purchase and sale of investments
other than as described in this prospectus, to offer securities in exchange for
property unless deemed prudent by a majority of our directors, to repurchase or
otherwise reacquire our shares or to make loans to other persons except in the
ordinary course of our business as described herein.
We will not make loans to or borrow from, or enter into any contract, joint
venture or transaction with, any director or officer of ours, our advisor or any
affiliate of any of the foregoing unless a majority of our directors, including
a majority of the independent directors, approves the transaction as fair and
reasonable to us and the transaction is on terms and conditions no less
favorable to us than those available from unaffiliated third parties. If we
invest in any property, mortgage or other real estate interest pursuant to a
transaction with our advisor or any directors or officers thereof, then the
investment will be based upon a current appraisal of the underlying property
from an independent qualified appraiser selected by the independent directors
and will not be made at a price greater than fair market value as determined by
such appraisal.
Policy Changes
Our bylaw relating to policies, prohibitions and restrictions referred to
under "Our Business - Prohibited Investments and Activities" may not be changed
(except in certain immaterial respects by a majority approval of the board of
directors) without the approval of a majority of the independent directors and
the approval of the holders of a majority of our shares, at a duly held meeting
for that purpose.
Competition
The business of making loans to churches and non-profit religious
organizations is competitive. We compete with a wide variety of investors,
including banks, savings and loan associations, insurance companies, pension
funds and fraternal organizations which may have investment objectives similar
to ours. Some competitors have greater financial resources, larger staffs and
longer operating histories than we have. We compete by offering loans with
competitive and flexible terms, and emphasizing our expertise in this
specialized industry segment.
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Employees
We have no employees. Subject to the supervision of our board of directors,
our business is managed by our advisor, which provides investment advisory and
administrative services to us. Our advisor is owned by Philip J. Myers, our
president and one of our directors. Mr. Myers also controls the underwriter. At
present, certain officers and directors of the underwriter and our advisor are
providing services to us at no charge. These services include, among others,
legal and analytic services relating to the implementation of our business plan,
preparation of this prospectus (and registration statement of which this
prospectus is a part) and development and drafting of documents utilized by our
advisor in connection with our business operations.
Our advisor employs three persons on a part-time or other basis and expects
to hire additional persons depending on the success of this offering and the
volume of new loans to be funded. We do not expect to directly employ any
persons in the foreseeable future, since all administrative functions and
operations are contracted for through our advisor. Legal and accounting services
will be provided by outside professionals. We will pay for these services
directly.
Facilities
We are located in the 8,200 square foot offices of American Investors
Group, Inc., 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343. These
facilities are owned by Yellow Circle Partners, LLP, a partnership controlled by
David Reinhart, one of our former directors and a former affiliate of the
advisor and the underwriter. We are not charged any rent for our use of these
facilities, or for our use of copying services, telephones, facsimile machines,
postage service, office supplies or employee services, which are paid by our
advisor. Payments to our advisor under the advisory agreement are intended, at
least in part, to cover the general costs of personnel, operating facilities,
equipment and services used. We will not reimburse our advisor for these
expenses. We believe that the terms of this arrangement are at least as
favorable as those obtainable from unaffiliated third parties. We believe that
our current facilities will be adequate for the foreseeable future.
37
MANAGEMENT
General
Directors are elected for a term expiring at the next annual meeting of our
shareholders and serve for one-year terms and until their successors are duly
elected and qualified. Annual shareholder meetings are typically held in
September. Officers serve at the discretion of the Board of Directors. Among
other requirements, in order to maintain our REIT status, a majority of our
directors must be "independent." Our executive officers and directors are as
follows:
Name Age Office Director Since
Philip J. Myers 47 President, Treasurer, Secretary and Director 2001
Kirbyjon H. Caldwell 60 Independent Director 1994
Robert O. Naegele, Jr. 62 Independent Director 1994
Dennis J. Doyle 51 Independent Director 1994
Philip J. Myers has been our President since April 2001 and a director of
ACMC since October 2001. He has also served as President, Treasurer, shareholder
and a director of our advisor, Church Loan Advisors, Inc. since 1994, President,
Secretary, and a director of the underwriter, American Investors Group, Inc.
since 1996, and of its parent company, Apostle Holdings Corp. since 2000. Mr.
Myers has been an officer of the underwriter and directly engaged in church
mortgage lending since 1989. He earned his bachelor of arts degree in political
science in 1977 from the State University of New York at Binghamton and his
juris doctor degree from the State University of New York at Buffalo School of
Law in 1980. From 1980 to 1982, Mr. Myers served as an attorney in the Division
of Market Regulation of the U.S. Securities and Exchange Commission in
Washington, D.C. and, from 1982 to 1984, as an attorney with the Division of
Enforcement of the Securities and Exchange Commission in San Francisco. From
August, 1984 to January 1986, he was employed as an attorney with the San
Francisco law firm of Wilson, Ryan and Compilongo where he specialized in
corporate finance, securities and broker-dealer matters. From January 1986 to
January 1989, Mr. Myers was engaged as Senior Vice-President and General Counsel
of Financial Planners Equity Corporation, a 400 broker securities dealer
formerly located in Marin County, California. He became affiliated with American
Investors Group, Inc. in 1989. He is a member of the New York, California
(inactive status) and Minnesota State Bar Associations. Mr. Myers holds General
Securities Representative and General Securities Principal licenses with the
National Association of Securities Dealers, Inc.
Kirbyjon H. Caldwell, has served as an independent director of ACMC since
September 1994. He has been Senior Pastor of Windsor Village United Methodist
Church in Houston, Texas since January 1982. The membership of Windsor Village
is approximately 14,400. Mr. Caldwell received his B.A. degree in Economics from
Carlton College (1975), an M.B.A. in Finance from the University of
Pennsylvania's Wharton School (1977), and his Masters in Theology from Southern
Methodist University School of Theology (1981). He is a member of the Boards of
Directors of JP Morgan Chase--Texas, Continental Airlines, National Children's
Defense Fund, Baylor College of Medicine, Greater Houston Partnership and the
American Cancer Society. He is also the founder and member of several
foundations and other community development organizations.
Robert O. Naegele, Jr. has served as an independent director since
September 1994. Mr. Naegele's professional background includes advertising, real
estate development and consumer products, with a special interest in
entrepreneurial ventures and small developing companies. Most recently, he led a
group of investors to apply for, and receive an NHL expansion franchise, the
Minnesota Wild, which began play in the Xcel Energy Center in St. Paul,
Minnesota, in October 2000.
Dennis J. Doyle has served as an independent director since September 1994.
He is the majority shareholder and co-founder of Welsh Companies, Inc.,
Minneapolis, Minnesota, a full-service real estate company involved in property
management, brokerage, investment sales, construction and commercial
development. Welsh Companies was co-founded by Mr. Doyle in 1980, and has over
350 employees. Mr. Doyle is the recipient of numerous civic awards relating to
his business skills. He also is a member of the post board of directors of
Rottlund Homes and Hope For the City.
Day-to-Day Management of Operations
Our advisor manages our day-to-day operations under the advisory agreement.
We have no employees. Our officers receive no compensation for their services,
other than through their interests in our advisor and our affiliates. Our
officers have no employment contracts with us or our advisor and are considered
employees of the advisor "at will." We believe that because of the depth of
management of our advisor and its affiliates the loss of one or more key
employees of our advisor, or one or more of our
38
officers, would not have a material adverse effect upon our operations. As
required by our bylaws, a majority of our directors are independent directors in
that they are otherwise unaffiliated with and do not receive compensation from
us (other than in their capacity as directors) or from our advisor or the
underwriter.
Duties of Directors
Our directors are responsible for considering and approving our policies.
Directors meet as often and devote such time to our business as their oversight
duties may require. Pursuant to our bylaws, the independent directors have the
responsibility of evaluating the capability and performance of our advisor and
determining that the compensation we pay to our advisor is reasonable. During
2002, our directors held four meetings. All of our directors attended more than
75% of our board meetings.
Neither our articles of incorporation or bylaws nor any of our policies
restrict officers or directors from conducting, for their own account, or on
behalf of others, business activities of the type we conduct.
Directors and officers have a duty to us and our shareholders. Our
directors may be removed by a majority vote of all shares outstanding and
entitled to vote at any annual meeting or special meeting called for such
purpose.
Executive Compensation
Officers are not compensated other than through their interest in our
advisor.
We currently pay each of our independent directors a fee of $500 for each
board meeting ($400 for telephonic meetings), limited to $2,500 per year. We
reimburse directors for travel expenses incurred in connection with their duties
as directors. In 2002, our independent directors (four in number) were paid a
total of $3,800 in director's fees.
Fiduciary Responsibility of Board of Directors and Indemnification
The board of directors and our advisor are accountable to us and our
shareholders as fiduciaries. Consequently, they must exercise good faith and
integrity in handling our affairs. Similarly, our advisor has contractual
obligations to us which it must discharge with the utmost good faith and
integrity.
Our articles require us to indemnify and pay or reimburse reasonable
expenses to any individual who is our present or former director, advisor or
affiliate, provided that: (i) the director, advisor or affiliate seeking
indemnification has determined, in good faith, that the course of conduct which
caused the loss or liability was in our best interest; (ii) the director,
advisor or affiliate seeking indemnification was acting on our behalf or
performing services on our behalf; (iii) such liability or loss was not the
result of negligence or misconduct on the part of the indemnified party, except
that in the event the indemnified party is or was an independent director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of our assets and not from our shareholders directly.
We may advance amounts to persons entitled to indemnification for legal and
other expenses and costs incurred as a result of legal action instituted against
or involving such person if: (i) the legal action relates to the performance of
duties or services by the indemnified party for or on our behalf; (ii) the legal
action is initiated by a third party who is not a shareholder, or the legal
action is initiated by shareholder acting in his or her capacity as such and a
court specifically approves such advancement; and (iii) the indemnified party
receiving such advances undertakes, in writing, to repay the advanced funds,
with interest at the rate we determined, in cases in which such party would not
be entitled to indemnification.
Notwithstanding the foregoing, we may not indemnify our directors, advisor,
or affiliates and any persons acting as a broker-dealer for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities by such party unless one or more of the following conditions
are met: (i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as the particular indemnitee;
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and the related
costs should be made, and the court considering the request for indemnification
has been advised of the position of the Securities and Exchange Commission and
of the published position of any state securities regulatory authority in which
our securities were offered or sold as to indemnification for violations of
securities laws.
39
Subject to the limitations described above, we have the power to purchase
and maintain insurance on behalf of an indemnified party. We may procure
insurance covering our liability for indemnification. The indemnification
permitted by our Articles is more restrictive than permitted under the Minnesota
Business Corporation Act.
Warrants and Options
In January 2003, we terminated our stock option plan for directors and the
adviser and outstanding stock options were surrendered and cancelled. No options
were exercised during the option plan's existence.
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SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS
The following table sets forth as of March 31, 2003, certain information
regarding beneficial ownership of our shares, as adjusted to give effect to the:
issuance of the shares offered hereby, by (i) each person known by us to be the
beneficial owner of 5% or more of the outstanding shares; (ii) each of our
directors and executive officers; and (iii) all of our directors and officers as
a group. The percentage of shares outstanding before and after the Offering is
calculated separately for each person and excludes shares issuable upon exercise
of options. Unless otherwise noted, each of the following persons has sole
voting and investment power with respect to the shares set forth opposite their
respective names.
Number of Shares Percentage of Outstanding
Name of Beneficial Owner (1) Beneficially Owned Shares
Philip J. Myers 20,000 <0.1%
Robert O. Naegele, Jr. 7,877 0.9%
Kirbyjon H. Caldwell 0 0%
Dennis J. Doyle 0 0%
All Executive Officers and Directors as a Group 28,177(2) 1.3%
(5 individuals)
(1) The address for our directors is 10237 Yellow Circle Drive, Minnetonka,
Minnesota 55343.
(2) Includes 300 shares owned by Scott J. Marquis. Mr. Marquis is an officer of
our advisor.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT
Our advisor, Church Loan Advisors, Inc., manages our business subject to
the supervision of our board of directors. Our advisor provides us with
investment advisory and administrative services. Our advisor is owned by Philip
J. Myers. Mr. Myers is also the sole shareholder, officer and director of
Apostle Holdings Corp., which owns American Investors Group, Inc. (the
underwriter of this offering). Our advisor employs, among others, two key
persons on a part-time basis, including Philip J. Myers, President and Scott J.
Marquis, Vice President. Our advisor, on our behalf, regularly uses the services
of personnel employed by American Investors Group, Inc. We incur no direct cost
for such services, except for the advisory fee we pay to our advisor.
Transactions With Our Advisor.
We pay our advisor advisory fees and expenses and one-half of any
origination fee collected from a borrower. For the year ended December 31, 2002,
we paid our advisor advisory fees in the amount of $172,151 and our advisor
received loan origination fee income of $98,270. In 2001, we paid to her advisor
total advisory fees in the amount of $161,131 and our advisor received loan
origination fees income of $37,297. In 2000, we paid to our advisor total
advisory fees in the amount of $154,389 and our advisor received loan
origination fee income of $21,250. In 1999, we paid to our advisor total
advisory fees in the amount of $116,293, and our advisor received loan
origination fee income of $114,685. Our advisor voluntarily waived $12,250 in
advisory fees in 2000. The waiver of fees by our advisor was voluntary and
cannot be expected to occur in the future. We believe that the terms of the
advisory agreement are no less favorable to us had we entered into the agreement
with an independent third party as advisor.
Transactions with the Underwriter.
Pursuant to a distribution agreement we have entered into with the
underwriter, we will pay the underwriter sales commissions based on the number
of shares sold in this offering and sales commissions and an underwriter's
management fee based on the principal amount and term of certificates sold in
this offering. We will also pay the underwriter a commission when certificates
are renewed. We will also pay the underwriter a non-accountable expense
reimbursement of up to $233,000, assuming all of the shares and certificates are
sold. The underwriter is an affiliate of our advisor. We believe that the terms
of the distribution agreement are no less favorable to us than if we had entered
into the agreement with an independent third party. The following table sets
forth the name and positions of certain officers and all directors of the
underwriter:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Chief Financial and Operating Officer
In the course of our business, we may purchase church bonds being
underwritten and sold by American Investors Group, Inc., ("American"). Although
we would not pay any commissions, American will benefit from such purchases as a
result of commissions paid to it by the issuer of the bonds. American also may
benefit from mark-ups on bonds we buy from it and mark-downs on bonds we sell
through it on the secondary market. We will purchase church bonds for investment
purposes only, and only at the public offering price. Church bonds we purchase
in the secondary market, if any, will be purchased at the best price available,
subject to customary markups (or in the case of sales - markdowns), on terms no
less favorable than those applied to other customers of American. Principals of
ours and our advisor may receive a benefit in connection with such transactions
due to their affiliation with the underwriter. Other than with respect to the
purchase and sale of church bonds for our portfolio in the ordinary course of
business, all future transactions between us and our officers, directors and
affiliates will be approved, in advance, by a majority of our independent and
disinterested directors.
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THE ADVISOR AND THE ADVISORY AGREEMENT
Church Loan Advisors, Inc.
Church Loan Advisors, Inc. renders lending and advisory services to us and
administers our business affairs and operations. Our advisor's offices are
located at 10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343.
The following table sets forth the names and positions of the officers and
directors of our advisor:
Name Position
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
Scott J. Marquis, age 45, is Vice-President and Secretary of our advisor,
having served in such capacities since December 13, 1994. He is also currently
employed full-time as Chief Financial and Operating Officer of the underwriter,
American Investors Group, Inc., where he has been employed since February 1987.
Prior to his employment with American Investors Group, Inc., Mr. Marquis was
employed for approximately seven years with the Minneapolis-based broker dealer,
Piper Jaffray Companies in various capacities within its operations department.
Mr. Marquis attended the University of Minnesota, Minneapolis, Minnesota and
served in the United States Coast Guard Reserve. Mr. Marquis is a licensed
financial principal and registered representative of American Investors Group,
Inc., holds his Series 7, 63 and 27 licenses from the National Association of
Securities Dealers, Inc., and holds a Minnesota life/accident/health insurance
license.
See "Management" for a description of the positions and business experience
of Philip J. Myers.
The Advisory Agreement
We have entered into an advisory agreement with our advisor under which
our advisor provides advice and recommendations concerning our business affairs,
provides us with administrative services and manages our day-to-day affairs. Our
advisor provides us with the following services:
o serves as our mortgage loan underwriter and advisor in connection with our
primary business of making loans to churches
o advises and selects church bonds for us to purchase and hold for investment
o services all mortgage loans that we make
o provides marketing and advertising and generates loan leads directly and
through its affiliates o deals with borrowers, lenders, banks, consultants,
accountants, brokers, attorneys, appraisers, insurers and others
o supervises the preparation, filing and distribution of tax returns and
reports to governmental agencies, prepares reports to shareholders and acts
on our behalf in connection with shareholder relations
o provides office space, personnel, supplies, equipment and communications o
reports to us on its performance of the foregoing services o furnishes
advice and recommendations with respect to other aspects of our business.
The advisory agreement expires annually. We expect to renew the agreement
annually, subject to our determination, including a majority of the independent
directors, that our advisor's performance has been satisfactory and that the
compensation we have paid to our advisor has been reasonable. We may terminate
the advisory agreement on 60 days written notice with or without cause or
penalty upon a vote of the majority of our independent directors. Upon
termination of the advisory agreement by either party, our advisor may require
us to change our name to a name that does not contain the word "American,"
"America" or the name of our advisor or any approximation or abbreviation
thereof, and that is sufficiently dissimilar to the word "America" or "American"
or the name of our advisor as to be unlikely to cause confusion or
identification with either our advisor or any person or entity using the word
"American" or "America" in its name. We may continue to use the word "church" in
our name. Our
43
directors will determine that any successor advisor possesses sufficient
qualifications to perform the advisory function for us and justify the
compensation provided for in its contract with us.
Our advisor's compensation under the advisory agreement is set forth under
"Compensation to Advisor and Affiliates." Our advisor is required to pay all of
the expenses it incurs in providing services to us, including, personnel
expenses, rental and other office expenses, expenses of officers and employees
of our advisor, and all of its overhead and miscellaneous administrative
expenses relating to performance of its functions under the advisory agreement.
We pay other expenses, including expenses of reporting to governmental agencies
and shareholders, fees and expenses of appraisers, directors, auditors, outside
legal counsel and transfer agents, and costs directly incurred relating to
closing of loan transactions and to enforcing loan agreements.
In the event that our total operating expenses (before interest expense)
exceed in any calendar year the greater of (a) 2% of our average invested assets
or (b) 25% of our net income, our advisor must reimburse us, to the extent of
its fees for such calendar year, for the amount by which the aggregate annual
operating expenses paid or incurred exceeds the limitation. The independent
directors may, upon a finding of unusual and non-recurring factors which they
deem sufficient, determine that a higher level of expenses is justified.
Our bylaws require the independent directors to determine at least annually
the reasonableness of the compensation we pay to our advisor. Our independent
directors originally approved the Amended and Restated Advisory Agreement and
the Amended and Restated Bylaws on May 19, 1995 and most recently approved on
January 18, 2001 the renewal of the Restated Advisory Agreement for another
year. Factors considered in reviewing the advisory fee include the size of the
fees of our advisor in relation to the size, composition and profitability of
our loan portfolio, the rates charged by other investment advisors performing
comparable services, the success of our advisor in generating opportunities that
meet our investment objectives, the amount of additional revenues realized by
our advisor for other services performed for us, the quality and extent of
service and advice furnished by our advisor, the quality of our investments in
relation to investments generated by our advisor for its own account, if any,
and the performance of our investments.
The advisory agreement requires us to indemnify our advisor and each of its
directors, officers and employees against expense or liability arising out of
such person's activities in rendering services to us, provided that the conduct
against which the claim is made was determined by such person, in good faith, to
be in our best interest and was not the result of negligence or misconduct.
The foregoing is a summary of the material provisions of the advisory
agreement. Reference is made to the advisory agreement, filed as an exhibit to
the registration statement of which this prospectus is a part, for a complete
statement of its provisions.
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FEDERAL INCOME TAX CONSEQUENCE ASSOCIATED WITH THE CERTIFICATES
The following is a discussion of the material federal income tax
consequences relating to the ownership and disposition of the certificates. The
discussion is based on current tax laws and regulations, and related judicial
and administrative decisions, all of which are subject to change. Changes may be
applied retroactively.
Many entities and persons, such as banks, tax-exempt entities and insurance
companies, are subject to special tax rules. Further, the following applies only
to original purchasers of certificates. This discussion is included for general
information purposes only and may not be applicable to you depending upon your
particular situation. You should consult your own tax advisor regard the
federal, state and local tax consequences of your purchasing and owning
certificates.
Interest Income on the Certificates
We will pay interest on the certificates quarterly. Interest paid on the
certificates will generally be taxable to you as ordinary income as the interest
is paid to you if you are a cash method taxpayer or as the interest accrues if
you are an accrual method taxpayer.
Treatment of Dispositions of Certificates
Upon the sale, exchange, retirement or other taxable disposition of a
certificate, you will recognize gain or loss in an amount equal to the
difference between the amount realized on the disposition and your adjusted tax
basis in the certificate. Your adjusted tax basis of a renewable certificate
generally will equal your original cost for the certificate, increased by any
accrued but unpaid interest you previously included in income with respect to
the certificate and reduced by any principal payments you previously received
with respect to the certificate. Any gain or loss will be capital gain or loss,
except for gain representing accrued interest not previously included in your
income. This capital gain or loss will be short-term capital gain or loss,
depending on whether the certificate had been held for more or less than one
year.
Non-U.S. Holders
Generally, if you are a nonresident alien individual or non-U.S.
corporation and do not hold the certificate in connection with a United States
trade or business, interest paid on the certificates will be treated as
"portfolio interest," and therefore will be exempt from a 30% United States
withholding tax. In that case, you will be entitled to receive interest payments
on the certificates free of United States federal income tax provided that you
periodically provide us with a statement certifying under penalty of perjury
that you are not a United States person and provide your name and address. In
additional, in that case you will certificate be subject to United states
federal income tax on gain from the disposition or a renewable certificate
unless you are an individual who is present in the United States for 183 days or
more during the taxable year in which the disposition takes place and certain
other requirements are met. Interest paid to a non-U.S. person is not subject to
withholding if they are effectively connected with a United States trade or
business conducted by that person. Interest will, however, generally be subject
to the regular United States income tax.
Reporting and Backup Withholding
We will report to the Internal Revenue Service annual interest income paid
and to holders of record that are not excepted from the reporting requirements,
and any other information that is required to be reported with respect to the
certificates.
Under certain circumstances, as a holder of a certificate, you may be
subject to "backup withholding." Backup withholding may apply to you if you are
a United States person and, among other circumstances, you fail to furnish your
Social Security Number or other taxpayer identification number to us. Backup
withholding may apply, under certain circumstances, if you are a foreign person
and fail to provide us with the statement necessary to establish an exemption
from federal income and withholding tax on interest on the certificates. Backup
withholding is not an additional tax and may be refunded against your United
States federal income tax liability provided that you furnish the Internal
Revenue Service with certain required information.
45
FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS
The discussion of federal income tax treatment of real estate investment
trusts and their shareholders set forth below is a summary. It does not address
all potential consequences of whether we qualify as a REIT.
Qualification as a Real Estate Investment Trust
General. We operate as a real estate investment trust under the Internal
Revenue Code (the "Code"). Our ability to qualify as a REIT depends, in part, on
the timing and nature of our investments. There can be no assurance that we will
qualify to be taxed as a REIT. Qualification as a real estate investment trust
is dependent on future events. No assurance can be given that our business or
that the actual results of our operation for any particular taxable year will
satisfy the REIT requirements. The anticipated income tax treatment described in
this prospectus may be changed, perhaps retroactively, by legislative,
administrative or judicial action at any time.
The following is a general summary of the provisions that govern the
federal income tax treatment of a REIT and its shareholders. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Benefits of Qualification as a REIT. The Code provides special tax
treatment for organizations that qualify as REITs. An entity that qualifies as a
REIT generally is not subject to federal corporate income taxes on its net
income that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and shareholder
levels) that generally results from investment in a corporation.
Even if we qualify as a REIT, we will be subject to federal income tax as
follows:
o We will be taxed at regular corporate rates on any undistributed REIT
taxable income, including undistributed net capital gains.
o Under certain circumstances, we may be subject to the "alternative minimum
tax" on our items of tax preference.
o If we have (i) net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or (ii) other non-qualifying income from
foreclosure property, it will be subject to tax at the highest regular
corporate rate on such income.
o If we have net income from "prohibited transactions" (which are, in
general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of our business (i.e., when we are acting as a dealer)), such income
will be subject to a 100% tax.
o If we fail to distribute by the end of each year at least the sum of (i)
90% of our REIT ordinary income for such year, (ii) 90% of our REIT capital
gain net income for such year, and (iii) any undistributed taxable income
from prior periods, we will be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable, but for Sections 856 through 859 of the Code, as a domestic
corporation; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) during the last half of each
taxable year not more than 50% of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (which term includes
certain entities); and (vii) which meets certain other tests, described below.
Conditions (i) to (iv) must be met during the entire taxable year. Condition (v)
must be met during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
To qualify as a REIT for a taxable year, we must elect or previously have
elected to be so treated and must meet other requirements, including percentage
tests relating to the sources of its gross income, the nature and
diversification of our assets and the distribution of our income to our
shareholders.
46
The Effect of Failure to Qualify as a Real Estate Investment Trust
If we fail to qualify as a REIT in any taxable year and the relief
provisions described above do not apply, then we will be subject to a tax
(including any applicable minimum tax) on our taxable income computed in the
usual manner for corporate taxpayers without any deduction for dividends paid.
In such event, to the extent of current and accumulated earnings and profits,
all distributions to shareholders will be taxable as ordinary income, and,
subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, we will also be prohibited from electing to be
taxed as a real estate investment trust for the four taxable years following the
year during which qualification is lost. In order to renew our REIT
qualifications at the end of such a four-year period, we would be required to
distribute all of our current and accumulated earnings and profits before the
end of the period. Any distributions would be taxable as ordinary income to
shareholders. If we fail to qualify as a REIT in any year, we could incur
significant income tax liabilities which could reduce the amount of cash
available for distribution to our shareholders and cause us to incur substantial
indebtedness or liquidate investments in order to pay the resulting taxes.
Taxation of Our Shareholders
For any year for which we are treated as a REIT, distributions made to our
shareholders will be treated by them as ordinary income (which will not be
eligible for the dividends received deduction for corporations). Distributions
designated as capital gain dividends will be taxed as long-term capital gains to
the extent they do not exceed our actual net capital gain dividend for the
taxable year. Corporate shareholders may be required to treat up to 20% of any
such capital gain dividend as ordinary income. Distributions in excess of
current or accumulated earnings and profits will not be taxable to a shareholder
to the extent that they do not exceed the adjusted basis of the shareholder's
shares of stock, but rather a return of capital that will reduce the adjusted
basis of such shares of stock. To the extent that such distributions exceed the
adjusted basis of shareholder's shares of stock they will be included in income
as long-term or short-term capital gain assuming the shares are held as a
capital asset in the hands of the shareholder. We will notify shareholders at
the end of each year as to the portions of the distributions which constitute
ordinary income, net capital gain or return of capital.
Any dividend we declare in October, November or December of any year
payable to a shareholder of record on a specified date in any such month are
treated as both paid and received on December 31 of such year, provided that the
dividend is paid during January of the following calendar year. Shareholders may
not include in their individual income tax returns any of our net operating
losses or capital losses.
In general, any gain or loss upon a sale or exchange of shares by a
shareholder who has held such shares as a capital asset will be long-term or
short-term depending on whether the stock was held for more than one year.
However, any loss on the sale or exchange of shares that have been held by such
shareholder for six months or less will be treated as a long-term capital loss
to the extent of our distributions required to be treated by such shareholders
as long-term capital gain.
Taxation of Tax-Exempt Shareholders
For taxable years beginning in 1994 the Code treats a portion of the
dividends paid by a "pension held REIT" as Unrelated Taxable Business Income
("UBTI") as to any trust which (i) is described in Section 401 (a) of the Code,
(ii) is tax-exempt under Section 501(a) of the Code, and (iii) holds more than
10% (by value) of the interests in the REIT. Tax-exempt pension funds that are
described in Section 401(a) of the Code are referred to below as "qualified
trusts."
A real estate investment trust is a "pension held REIT" if (i) it would not
have qualified as a real estate investment trust but for the fact that Section
856(h)(3) of the Code provides that stock owned by qualified trusts shall be
treated, for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust (rather than by the trust itself), and (ii) either
(a) at least one such qualified trust holds more than 25% (by value) of the
interests in the REIT, or (b) one or more such qualified trusts, each of whom
owns more than 10% (by value) of the interests in the REIT, hold in the
aggregate more than 50% (by value) of the interests in the REIT.
47
Tax Consequences for Foreign Investors
The preceding discussion does not address the federal income tax
consequences to foreign investors of ownership of our shares. Foreign investors
in our shares should consult their own tax advisors concerning those provisions
of the Code which deal with the taxation of foreign taxpayers. In particular,
foreign investors should consider, the impact of the Foreign Investors Real
Property Tax Act of 1980. In addition, various income tax treaties between the
United States and other countries could affect the tax treatment of an
investment in the shares. The backup withholding and information reporting rules
are under review by the United States Treasury, and their application to the
Common Stock could be changed prospectively or retroactively by future Treasury
Regulations.
ERISA CONSEQUENCES
The following is a summary of material consequences arising under ERISA and
the prohibited transaction provisions of Internal Revenue Code Section 4975 that
may be relevant to you. This discussion does not deal with all aspects of ERISA
or Code Section 4975 or, to the extent not preempted, state law that may be
relevant to particular employee benefit plans (including plans subject to Title
I of ERISA, other employee benefit plans and IRAs subject to the prohibited
transaction provisions of Code Section 4975, and governmental plans and church
plans that are exempt from ERISA and Code Section 4975 but that may be subject
to state law requirements) in light of their particular circumstances. Employee
benefit plans subject to ERISA and the Code considering purchasing the shares
should consult with their own tax or other appropriate counsel regarding the
application of ERISA and the Code to their purchase of the shares.
Fiduciary Consequences
Certain employee benefit plans and individual retirement accounts and
individual retirement annuities (collectively, "Plans"), are subject to various
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and the Internal Revenue Code. Before investing in the shares, a Plan
fiduciary should ensure that such investment is in accordance with ERISA's
fiduciary standards. A Plan fiduciary should ensure that the investment is in
governing instruments and the overall policy of the Plan and that the investment
will comply with the diversification and composition requirements of ERISA. In
addition, provisions of ERISA and the Code prohibit certain transactions in Plan
assets that involve persons who have specified relationships with a Plan. The
consequences of such prohibited transactions include excise taxes,
disqualifications of IRAs and other liabilities. A Plan fiduciary should ensure
that any investment in the shares will not constitute a prohibited transaction.
Plan Assets Issue
A prohibited transaction may occur if our assets are deemed to be Plan
assets. In certain circumstances where a Plan holds an interest in an entity,
the assets of the entity are deemed to be Plan assets (the "look-through rule").
Under such circumstances, any person that exercises authority or control with
respect to the management or disposition of such assets is a Plan fiduciary.
Plan assets are not defined in ERISA or the Code, but the United States
Department of Labor has issued Regulations, effective March 13, 1987 (the
"Regulations"), that outline the circumstances under which a Plan's interest in
an entity will be subject to the look-through rule.
The Regulations apply only to the purchase of a Plan of an "equity
interest" in an entity, such as common stock of a REIT. The term "equity
interest" means any interest in an entity other than an investment that is
treated as indebtedness under applicable local law and which has no substantial
equity features. However, the Regulations provide an exception to the
look-through rule for equity interests that are "publicly-offered securities"
and for equity interests in an "operating company."
Under the Regulations a "publicly-offered security" is a security that is
(1) freely transferable, (2) part of a class of securities that is widely-held,
and (3) part of a class of securities that is registered under Section 12(b) or
12(g) of the Exchange Act or sold to a Plan as part of an offering of securities
to the public pursuant to an effective registration statement under the
Securities Act and the class of securities of which such security is a part is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Securities and Exchange Commission) after the end of the fiscal
year of the issuer during which the offering of such securities to the public
occurred. Whether a security is considered "freely-transferable" depends on the
facts and circumstances of each case. Generally, if the security is part of an
offering in which the minimum investment is $10,000 or less and any restriction
on or prohibition against any transfer or assignment of such security is for the
purposes of preventing a termination or reclassification of the entity for
federal or state tax purposes, the security will not be prevented from being
48
considered freely transferable. A class of securities is considered
"widely-held" if it is a class of securities that is owned by 100 or more
investors independent of the issuer and of one another.
We believe that our shares meet the criteria of the publicly-offered
securities exception to the look-through rule. First we anticipate that the
shares will be considered to be freely transferable, as the only restriction
upon our transfer are those required under federal tax laws to maintain our
status as a REIT. Second, we believe that the shares will be held by 100 or more
investors and that at least 100 or more of these investors will be independent
of us and of one another. Third, the shares will be part of an offering of
securities to the public pursuant to an effective registration statement by the
Securities and Exchange Commission after the end of the fiscal year during which
the offering of such securities to the public occurs. Moreover, we believe that
ownership of our equity by Plans will not be significant as defined by the
Regulations. Accordingly, we believe that if a Plan purchases the shares, our
assets should not be deemed to be Plan assets and, therefore, that any person
who exercises authority or control with respect to our assets should not be a
Plan fiduciary.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 undesignated shares, of
which our board of directors has established that 30,000,000 shares are Common
Stock, par value of $0.01 per share. Pursuant to our articles of incorporation,
our board of directors has the authority to divide the balance of the authorized
capital stock into classes and series with relative rights and preferences and
at such par value as the board of directors may establish from time to time.
Each share of Common Stock is entitled to participate equally in dividends when
and as declared by the directors and in the distribution of our assets upon
liquidation. Each authorized share is entitled to one vote and will be fully
paid and nonassessable upon issuance and payment therefor. Each authorized share
has no preference, conversion, exchange, preemptive or cumulative voting rights.
There are no cumulative voting rights in electing directors.
Repurchase of Shares and Restrictions on Transfer
Two of the requirements for qualification for the tax benefits accorded by
the real estate investment trust provisions of the Internal Revenue Code are
that (i) during the last half of each taxable year not more than 50% of the
outstanding capital stock may be owned directly or indirectly by five or fewer
individuals and (ii) there must be at least 100 shareholders for at least 335
out of 365 days of each taxable year or the proportionate amount for any partial
taxable year.
Our articles of incorporation prohibit any person or group of persons from
holding, directly or indirectly, ownership of a number of shares in excess of
9.8% of the outstanding capital stock. Shares owned by a person or group of
persons in excess of such amounts are referred to in the articles of
incorporation and herein as "excess shares." For this purpose, shares shall be
deemed to be owned by a person if they are constructively owned by such person
under the provisions of Section 544 of the Code (as modified by Section 856(h)
of the Code) or are beneficially owned by such person under the provisions of
Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The term "group" has the same meaning as that term has for
purposes of Section 13(d)(3) of the Exchange Act. Accordingly, shares owned or
deemed to be owned by a person who individually owns less than 9.8% of the
outstanding capital stock may nevertheless be Excess Shares if such person is a
member of a group which owns more than 9.8% of the outstanding capital stock.
Our articles of incorporation provide that in the event any person acquires
excess shares, we may redeem such Excess Shares, at the discretion of the board
of directors. Except as set forth below, the redemption price for excess shares
is, the closing price as reported on the NASDAQ System on the last business day
prior to the redemption date or, if the shares are listed on an exchange, the
closing price on the last business day prior to the redemption date or, if
neither listed on an exchange nor quoted on the NASDAQ System, the net asset
value of the excess shares as determined in good faith by the board of
directors. In no event, however, may the purchase price of the shares redeemed
be greater than their net asset value as determined by the board of directors in
good faith. To redeem excess shares, the board of directors must give a notice
of redemption to the holder of such excess shares not less than 30 days prior to
the date fixed by the board of directors for redemption. The redemption price
for excess shares will be paid on the redemption date fixed by the board of
directors and included in such notice. Excess shares cease to be entitled to any
distribution and other benefits from and after the date fixed for redemption,
except the right to payment of the redemption price for such shares.
49
Under our articles of incorporation, any transfer of shares that would
result in our disqualification as a real estate investment trust under the Code
is void to the fullest extent permitted by law. The board of directors is
authorized to refuse to transfer shares to a person if, as a result of the
transfer, that person would own excess shares. Upon demand by the board of
directors, a shareholder is required to provide us with an affidavit setting
forth, as to that shareholder, the information required to be reported in
returns filed by shareholders under the Treasury Regulation Section 1.857-9 and
in reports filed under Sections 13(d) and 16(b) of the Exchange Act. Each
proposed transferee of shares, upon demand of the board of directors, also may
be required to provide us with a statement or affidavit setting forth the number
of shares already owned by the transferee and any related persons. The transfer
or sale of shares also are subject to compliance with applicable state "Blue
Sky" laws.
Dividend Reinvestment Program
Our Dividend Reinvestment Program (the "DRP") allows our shareholders to
automatically reinvest dividends by purchasing additional shares directly from
us. Purchases under the DRP are not subject to selling commissions or other
distribution-type fees and costs. If a shareholder elects to take part in the
DRP, we will use dividends payable to the shareholder to purchase additional
shares. However, shareholders will not be able to acquire shares under the DRP
to the extent such purchase would cause them to own, directly of indirectly,
more than 9.8% of our outstanding common stock. Only shareholders are eligible
to participate in the DRP.
Participants in the DRP may purchase fractional shares so that 100% of
dividends will be used to acquire shares. Shares will be purchased under the DRP
on the record date for the dividend used to purchase shares. The record date for
dividends for shares acquired under the DRP will be on the first day of the
month subsequent to the month of purchase. Each shareholder electing to
participate in the DRP agrees to promptly notify us in writing if, at any time
prior to listing of the shares on a national securities exchange or market, the
shareholder fails to meet our suitability requirements for making an investment
or cannot make the other representations or warranties set forth in the
subscription agreement.
Our dividend reinvestment agent will vote all shares held in your account
in the same way in which you vote shares standing of record in your name by the
regular proxy you return to us. If the dividend reinvestment agent sends you a
separate proxy covering the shares credited to your dividend reinvestment
account, then your shares will be voted as designated in the separate proxy. If
you do not direct the voting of your shares by regular or separate proxy, then
the shares credited to your dividend reinvestment account will not be voted.
Stock dividends or stock splits we distribute on shares held by the dividend
reinvestment agent for you will be credited to your account.
If we make available to our shareholders rights to purchase additional
shares or other of our securities, the dividend reinvestment agent will sell
rights accruing to shares held by the dividend reinvestment agent for you and
will combine the resultant funds with the next regular dividend for reinvestment
at that time. If a participant desires to exercise such rights, you must request
that certificates be used for full shares, as described below.
The reinvestment of dividends does not relieve you of income tax payable on
such dividends. Our dividend reinvestment agent will report the amount of
dividends credited to your account. Participants in the DRP may not sell,
pledge, hypothecate or otherwise assign or transfer their account, any interest
therein or any cash or shares credited to the participant's account. No attempt
at any such sale, pledge, hypothecation or other assignment or transfer will be
effective.
During the offering period and until such time as a market develops for the
shares (of which there can be no assurance) you will acquire shares through the
DRP at a fixed price of $10.00 per share. In the event that a secondary market
develops for the shares, shares may be bought and sold on the secondary market
at prices lower or higher than the $10.00 per share price which will be paid
under the DRP. We will receive no fee for selling shares under the DRP. We do
not warrant or guarantee that you will be acquiring shares at the lowest
possible price. You may terminate your participation in the DRP at any time
without penalty, by delivering written notice to us a minimum of ten business
days prior to the record date for the next dividend. Upon termination, dividends
will be distributed to you instead of being used to purchase shares under the
DRP.
Within 90 days after the end of our fiscal year, we will provide you with
an individualized report of your investment, including the purchase date(s),
purchase price and number of shares owned, as well as the dates of distribution
and amounts of dividends received during the prior fiscal year. You will also
receive quarterly statements showing activity since the last statement and
current shares in your DRP account. Your individualized statement will include
receipts and purchases relating to your participation in the DRP. The dividend
reinvestment agent will hold the shares purchased until termination of your
participation in the DRP. At your request, certificates for full shares held by
the dividend reinvestment agent may be issued at any time or on a
50
continuous basis as they are credited to your DRP account. The servicing agent
for our DRP program is Computershare Trust Company, Inc., 350 Indiana Street
Suite 800, Golden, CO 80401, telephone: (303) 262-0600.
Repurchase of Shares by Us
Although our shares are not redeemable, we may at our complete discretion,
repurchase shares offered to us by shareholders. We may pay whatever price our
advisor deems appropriate and reasonable and is acceptable to the selling
shareholder and us. Any shares repurchased will be re-designated as "unissued,"
will no longer be entitled to distribution of dividends, and will cease to have
voting rights.
Transfer Agent and Registrar
The transfer agent and registrar for our capital stock is Computershare
Trust Company, Inc., 350 Indiana Street Suite 800, Golden, CO 80401, telephone:
(303) 262-0600.
DESCRIPTION OF THE CERTIFICATES
General. The certificates we are offering by this prospectus are secured
debt obligations of American Church Mortgage Company. We will issue the
certificates under an indenture between us and The Herring National Bank, as
trustee. The terms and conditions of the certificates include those stated in
the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939. The following is a summary of some, but not all,
provisions of the certificates, the indenture and the Trust Indenture Act. For a
complete understanding of the certificates, you should review the terms and
conditions contained the global certificate that we will issue to the trustee,
the indenture and the Trust Indenture Act, which include definitions of certain
terms used below. Copies of the form of the certificates and the indenture are
available from us at no charge upon request.
The certificates are secured by our assignment to the trustee of mortgage
backed promissory notes which we own or will receive as a result of loans we
make to churches and other nonprofit religious organizations. The mortgages
securing the promissory notes will not be assigned to the trustee. Further, we
are not required to establish or maintain a sinking fund to provide for payment
of maturing certificates.
You may determine the amount (any multiple of $1,000) and term (2, 3, 4, 5,
or 7 years) of the certificates you would like to purchase when you subscribe,
subject to availability. However, we may not always offer certificates of each
maturity, depending on market conditions and our capital requirements. Each
certificate will mature on the anniversary of the last day of the fiscal quarter
in which the certificate is purchased. We will set interest rates based on
current market conditions and our need for capital. Interest rates will not be
derived from any reference or published interest rate.
The interest rate will be fixed for the term of your certificate. Currently
available rates will be set forth in a supplement to this prospectus. The
interest rate will vary based on the term to maturity of the certificate you
purchase.
Upon acceptance of your subscription to purchase certificates, the trustee,
who is also acting as our servicing agent, will create an account in our
book-entry registration system for you and credit the principal amount of your
subscription to your account. Our trustee will send you a book-entry receipt
that will indicate our acceptance of your subscription. If we reject your
subscription, all funds deposited will be promptly returned to you without any
interest. Investors whose subscriptions for certificates have been accepted and
anyone who subsequently acquires certificates in a qualified transfer are
referred to as "holders" or "registered holders" in this document and in the
indenture.
We may modify or supplement the terms of the certificates described in this
prospectus from time to time in a supplement to this prospectus. Except as set
forth under "Amendment, Supplement and Waiver" below, any modification or
amendment will not affect then-outstanding certificates.
Denomination. You may purchase certificates in principal amount of
multiples of $1,000. You will determine the original principal amount of each
certificate you purchase when you subscribe.
51
Term and Maturity. We are offering certificates with terms ranging from two
years to seven years as follows:
o two years o five years
o three years o seven years
o four years
You will select the term of each certificate you purchase when you subscribe,
depending on availability. You may purchase multiple certificates with different
terms by filling in investment amounts for more than one term.
The maturity date will be the anniversary of the last day of the calendar
quarter in which you purchase your certificate. For example, if you purchase a
three year certificate on July 10, 2003, the certificate will mature on
September 30, 2006. We may cease offering specified maturities, and re-continue
their offering, at any time during the offering period.
Collateral. We will assign to the trustee to secure the certificates
mortgage-secured promissory notes and bonds issued by churches and other
nonprofit religious organizations evidencing loans made by us which have an
aggregate unpaid principal balance of at least 120% of the aggregate outstanding
principal amount of the certificates. We will not assign the mortgages securing
the assigned promissory notes and bonds to the trustee.
We will be obligated to replace a promissory note or bond that we have
assigned to the trustee if the church obligor prepays the promissory note or
bond or if it defaults in the payment of principal or interest on the promissory
note or bond and the default continues for at least 90 days. We will assign
additional promissory notes and bonds to the trustee as necessary to maintain
the aggregate outstanding principal balance of the assigned notes at a level of
at least 120% of the outstanding principal balance of the certificates sold in
this offering.
We will furnish the following to the trustee in connection with our
assigning mortgage-secured promissory notes to the trustee:
o An opinion of counsel to the effect that all necessary action has been
taken to create and perfect a first lien and security interest in favor of
the trustee in the assigned promissory notes and bonds.
o Annual opinions of counsel to the effect that all necessary action has been
taken to maintain a first lien and security interest in favor of the
trustee in the assigned promissory notes and bonds.
o Annual certification of our officers that all provisions of the indenture
relating the deposit, release and substitution of collateral have been
complied with.
Generally, neither we nor the trustee will be required to provide reports
to holders concerning the deposit, release or substitution of promissory notes
and bonds securing the certificates. However, the trustee will be required to
report to holders if we default in our obligations to maintain the 120%
collateral coverage requirement and that default has not been cured within 60
days.
Interest Rate. The interest rate on a particular certificate will be the
interest rate for the particular term of the certificate at the time of
subscription or renewal. We publish currently effective interest rates in a
supplement to this prospectus. The interest rate will remain fixed for the
original or renewal term of the certificate. We will set interest rates based on
current market conditions and our need for capital. Interest rates will not be
derived from any reference or published interest rate. We will establish and may
change the interest rates payable for unsold certificates of various terms in a
supplement to this prospectus.
Computation of Interest. We will compute interest on certificates on the
basis of an actual calendar year. Interest will accrue from the date of
purchase, but will not be compounded. The date of purchase will be the first
business day immediately following the date we receive funds. Our business days
are Monday through Friday, except for legal holidays recognized by the National
Association of Securities Dealers, Inc.
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Interest Payment Dates. Interest will be payable quarterly and interest
checks will be mailed to certificate holders on the last day of each calendar
quarter (i.e., March 31, June 30, September 30 and December 31). If the last day
of a quarter falls on a weekend or a holiday, we will pay interest on the next
business day.
Place And Method Of Payment. We will pay principal and interest on the
certificates through the trustee, who will act as our paying agent, by check
mailed on each interest payment date to your address appearing in the
certificate register. If the foregoing payment method is not available,
principal and interest on the certificates will be payable at our principal
executive office or at such other place as we may designate for payment
purposes. We will not wire interest payments to holders of certificates.
Servicing Agent. We have engaged The Herring National Bank, who is also
acting as the trustee in this offering, to act as our servicing agent for the
certificates. The trustee's responsibilities as servicing agent will include
serving as our registrar and transfer agent and fulfilling certain of our
responsibilities to the holders.
You may contact the trustee as follows with any questions about the
certificates:
The Herring National Bank
1001 South Harrison Street
Amarillo, TX 79101
(800) 753-1439
Book-Entry Registration and Transfer. You will not receive or be entitled
to receive physical delivery of a certificate. The issuance and transfer of
certificates will be accomplished exclusively through the crediting and debiting
of the appropriate accounts in our book-entry registration and transfer system.
However, you will receive a book-entry acknowledgement from the trustee that
will show all pertinent information regarding your certificate, including the
principal amount of your certificate, its interest rate and maturity, and
verification of its registration. The trustee will maintain our book-entry
system.
The holders of the accounts established upon the purchase or transfer of
certificates will be deemed to be the owners of the certificates under the
indenture. The holders of certificates must rely upon the procedures established
by the trustee to exercise any rights of a holder of certificates under the
indenture. The servicing agent will determine the interest payments to be made
to the book-entry accounts and maintain, supervise and review any records
relating to book-entry beneficial interests in the certificates.
Book-entry notations in the accounts evidencing ownership of the
certificates are exchangeable for actual certificates only if: (i) we, at our
option, advise the trustee in writing of our election to terminate the
book-entry system, or (ii) after the occurrence of an event of default under the
indenture, holders of the certificates aggregating more than 50% of the
aggregate outstanding amount of the certificates advise the trustee in writing
that the continuation of a book-entry system is no longer in the best interests
of the holders of certificates and the trustee notifies all registered holders
of the occurrence of any such event and the availability of definitive
certificates. Subject to the exceptions described above, the book-entry
interests in these securities will not be exchangeable for fully registered
certificates. The trustee will also issue fully registered certificates if
required by the administrator of an Individual Retirement Account or similar tax
deferred account in which a holder has acquired a certificate. The trustee may
charge a $10 fee per certificate issuance.
Right To Reject Subscriptions. We may reject any subscription for
certificates in our sole discretion.
Renewal Or Payment On Maturity. Approximately 30 days prior to maturity of
your certificate, you will be notified that your certificate is about to mature
and whether we will allow you to renew the certificate. If we are offering
renewal of certificates, we will provide you with a schedule of interest rates
then in effect, which will apply if you elect to renew your certificate, along
with a form on which you may elect to renew or not to renew your certificate.
You will have until 10 days prior to the maturity date to exercise one of the
following options:
o You can inform us in writing on or before 10 days prior to the scheduled
maturity date that you would like to renew the certificate, in which case
the principal amount of your certificate will be renewed for the same term
at the interest rate we are offering at the time of renewal and we will pay
you accrued interest through the maturity date of your certificate.
53
o You can do nothing or inform us that you would like us to pay the
certificate in full; in either case we will pay the principal amount and
accrued interest when due.
We reserve the right to stop offering the option to renew certificates and
to refuse to renew any certificate in our complete discretion. Interest will
accrue from the first day of each renewed certificate term. Each renewed
certificate will continue in all its provisions, including provisions relating
to payment, except that the interest rate payable during any renewed term will
be the interest rate that we are then offering at the time of renewal.
If your certificate is not renewed for any reason, no interest will accrue
after the stated date of maturity and we will pay you the principal and unpaid
accrued interest on your certificate within 5 business days of the stated
maturity date.
Redemption Prior To Stated Maturity. The certificates may be redeemed prior
to stated maturity only as set forth below. You will have no right to require us
to prepay any certificate prior to its maturity date except as indicated below.
Redemption By Us On Change of Control. We have the option to redeem all
outstanding certificates in the event that we are subject to a change of
control. If we exercise this option, we will give all certificate holders 30
days notice that we intend to redeem all outstanding certificates. A change of
control will be deemed to have occurred if any person is or becomes the
beneficial owner (as defined in Rule 13d-3 of the Securities Exchange Act of
1934, as amended) of shares of our capital stock entitling such person to
exercise 50% or more of the total voting power of all shares of our capital
stock entitled to vote in elections of directors (or the capital stock of any
successor of ours in the case of a merger or transfer of all or substantially
all of our assets).
Redemption By Us If Required By Our Bylaws. Our bylaws place certain
limitations on the amount of debt that we may have outstanding at any time. If
the aggregate amount of the certificates outstanding causes us to be in
violation of these limitations, we may redeem a sufficient amount of
certificates so that we will be brought back into compliance with these
limitations. We may redeem any of the certificates pursuant to this option, and
need not redeem the certificates on a pro rata basis. We will provide you with a
notice that your certificate has been selected for redemption because of these
limitations.
Offer to Redeem By Us Upon a Change of Our Advisor. Our advisor is
currently Church Loan Advisors, Inc. If we terminate our advisory agreement with
our current advisor for any reason, we will offer to redeem all certificates
outstanding as of the date of such termination. In such case, certificates will
be redeemable at the option of the holders. If we terminate our advisory
agreement with our current advisor, we will provide our certificate holders with
notices offering to redeem all outstanding certificates within 10 days of the
termination. Holders of outstanding certificates will have 30 days after the
date of the notice to inform us in writing whether they will require us to
redeem their certificates. The redemption price will be the principal amount of
the certificate, plus interest accrued and not previously paid up to the date of
redemption.
Redemption By The Holder Upon Death. Certificates may be redeemed upon the
death of a holder who is a natural person (including certificates held in an
individual retirement account), by his or her estate giving us written notice
within 45 days following his or her death. The redemption price will be the
principal amount of the certificate, plus interest accrued and not previously
paid up to the date of redemption. Subject to the limitations described below,
we will pay the redemption price within 10 days of receiving notice of the
holder's death. If spouses are joint registered holders of a certificate, the
election to redeem will apply when either registered holder dies. If the
certificate is held by a person who is not a natural person such as a trust,
partnership, corporation or other similar entity, the right of redemption upon
death does not apply. In addition, we will not be required to redeem any
certificates at the request of the holder in excess of $25,000 aggregate
principal amount for all holders per calendar quarter. For purposes of the
$25,000 limit, redemption requests will be honored in the order in which they
are received and any redemption request not honored in a calendar quarter will
be honored, to the extent possible, in the next calendar quarter. Redemptions in
the next calendar quarter are also subject to the $25,000 limitation. We will
not redeem certificates in connection with a holder's death if an uncured event
of default exists with respect to the outstanding certificates.
Discretionary Redemption. If you request us to redeem your certificate
prior to maturity, we may do so and charge you early redemption penalties, both
at our complete discretion.
Transfers. The certificates are not negotiable debt instruments and,
subject to certain exceptions, will be issued only in book-entry form. The
book-entry receipt issued upon our acceptance of a subscription is not a
negotiable instrument, and no rights of record ownership can be transferred
without our advisor's prior written consent. Transfers of certificates will
generally be
54
prohibited. However, our advisor intends to approve transfers of certificates
upon a demonstrated need for liquidity, such as upon the death or bankruptcy of
a certificates holder, or to facilitate estate planning objectives. Ownership of
certificates may be transferred on our register only as follows:
o The holder must deliver written notice requesting a transfer to the trustee
signed by the holder(s) or such holder's duly authorized representative on
a form to be supplied by our servicing agent.
o Our advisor must provide its written consent to the proposed transfer.
o The trustee may require a signature guarantee in connection with such
transfer.
Upon transfer of a certificate, the trustee will provide the new holder of
the certificate with a book-entry receipt which will evidence the transfer of
the account on our records. The record date of any transfer will be the last day
of the quarter in which the transfer is made. The transferee will be entitled to
all interest accruing in the quarter in which the transfer is made.
No Sinking Fund. We will not contribute funds to a separate account,
commonly known as a sinking fund, to repay principal or interest on the
certificates upon maturity or default.
Restrictive Covenants. The indenture contains certain covenants that
require us to maintain certain financial standards and restrict us from certain
actions as set forth below.
Maintenance of Certain Financial Standards. The indenture provides that, so
long as the certificates are outstanding:
o we will maintain a positive net worth, which includes shareholders' equity
and subordinated debt; and
o our long-term liabilities, will not exceed our shareholders' equity at the
end of any fiscal year.
Prohibition on Certain Actions. The indenture provides that, so long as the
certificates are outstanding:
o we will not pay any dividends on our common or preferred stock unless there
is no uncured event of default with respect to the certificates;
o we will not allow any other lien to be created or maintained on the
collateral securing the certificates; and o we will not guarantee, endorse
or otherwise become liable for any obligations of any of our control
persons, or other parties controlled by or under common control with any of
our control persons.
Consolidation, Merger Or Sale. The indenture generally permits a
consolidation or merger between us and another entity. It also permits the sale
or transfer by us of all or substantially all of our property and assets. These
transactions are permitted if:
o the resulting or acquiring entity, if other than us, is organized and
existing under the laws of a domestic jurisdiction and assumes all of our
responsibilities and liabilities under the indenture, including the payment
of all amounts due on the certificates and performance of the covenants in
the applicable indenture; and
o immediately after the transaction, and giving effect to the transaction, no
event of default under the indenture exists.
If we consolidate or merge with or into any other entity or sell or lease
all or substantially all of our assets, according to the terms and conditions of
the indenture, the resulting or acquiring entity will be substituted for us in
the indenture with the same effect as if it had been an original party to the
indenture. As a result, such successor entity may exercise our rights and powers
under the indenture, in our name and, except in the case of a lease, we will be
released from all our liabilities and obligations under the indenture and under
the certificates.
55
Events Of Default. The indenture provides that each of the following
constitutes an event of default:
o any default for thirty days in the payment of interest when due on the
certificates;
o any default for thirty days in payment of principal when due on the
certificates;
o if we default in our obligations to maintain the 120% collateral coverage
requirement and that default has not been cured within 60 days;
o our failure to observe or perform any material covenant or our breach of
any material representation or warranty, but only after we have been given
notice of such failure or breach and such failure or breach is not cured
within 30 days after our receipt of notice;
o defaults in certain of our other financial obligations; and
o certain events of bankruptcy or insolvency with respect to us.
If any event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then-outstanding certificates
may declare the unpaid principal of and any accrued interest on the certificates
to be due and payable immediately. In the case of an event of default arising
from certain events of bankruptcy or insolvency, with respect to us, all
outstanding certificates will become due and payable without further action or
notice. Holders of the certificates may not enforce the indenture or the
certificates except as provided in the indenture. Subject to certain
limitations, holders of a majority in principal amount of the then-outstanding
certificates may direct the trustee in its exercise of any trust or power. The
trustee may withhold from holders of the certificates notice of any continuing
default or event of default (except a default or event of default relating to
the payment of principal or interest) if the trustee determines that withholding
notice is in the interest of the holders.
The holders of a majority in aggregate principal amount of the certificates
then outstanding by notice to the trustee may, on behalf of the holders of all
of the certificates, waive any existing default or event of default and its
consequences under the indenture, except a continuing default or event of
default in the payment of interest on, or the principal or, the certificates.
Amendment, Supplement And Waiver. Except as provided in this prospectus or
the indenture, the terms of the certificates then outstanding may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the certificates then outstanding, and any existing default or
compliance with any provision of the indenture or the certificates may be waived
with the consent of the holders of a majority in principal amount of the then
outstanding certificates.
Notwithstanding the foregoing, an amendment or waiver will not be effective
with respect to certificates held by a holder who has not consented if it has
any of the following consequences, unless holders of at least 80% of the
outstanding principal amount of the certificates consent to the amendment or
waiver:
o reduces the principal of or changes the fixed maturity of any certificate
or alters the redemption provisions or the price at which we shall offer to
redeem the certificate;
o reduces the interest rate of or changes the time for payment of interest on
any certificate;
o waives a default or event of default in the payment of principal or
premium, if any, or interest on or redemption payment with respect to the
certificates except a rescission of acceleration of the certificates by the
holders of at least a majority in aggregate principal amount of the then
outstanding certificates and a waiver of the payment default that resulted
from such acceleration;
o makes any certificate payable in money other than United States currency;
o makes any change in the provisions of the indenture relating to waivers of
past defaults or the rights of holders of certificates to receive payments
of principal of or interest on the certificates;
56
o modifies or eliminates holders' redemption rights; or
o makes any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of the
certificates, we or the trustee may amend or supplement the indenture or the
certificates:
o to cure any ambiguity, defect or inconsistency;
o to provide for assumption of our obligations to holders of the certificates
in the case of a merger or consolidation; o to make any change that would
provide any additional rights or benefits to the holders of the
certificates or that does not materially adversely affect the legal rights
under the indenture of any such holder, including an increase in the
aggregate dollar amount of certificates which may be outstanding under the
indenture;
o to modify our policy regarding redemptions elected by a holder of
certificates and our policy regarding redemptions of the certificates upon
the death of any holder of the certificates, but such modifications shall
not materially adversely affect any then outstanding certificates;
o to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act; or
o to maintain our status as a REIT.
The Trustee. The Herring National Bank has agreed to be the trustee under
the indenture. The indenture contains certain limitations on the rights of the
trustee, should it become one of our creditors, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
claim as security or otherwise. The trustee will be permitted to engage in other
transactions with us.
The indenture provides that in case an event of default specified in the
indenture shall occur and not be cured, the trustee will be required, in the
exercise of its power, to use the degree of care of a reasonable person in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of certificates, unless the holder has offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Resignation Or Removal Of The Trustee. The trustee may resign at any time,
or may be removed by the holders of a majority of the principal amount of
then-outstanding certificates. In addition, upon the occurrence of contingencies
relating generally to the insolvency of the trustee or the trustee's
ineligibility to serve as trustee under the Trust Indenture Act of 1939, as
amended, we may remove the trustee or a court of competent jurisdiction may
remove the trustee upon petition of a holder of certificates. However, no
resignation or removal of the trustee may become effective until a successor
trustee has been appointed.
No Personal Liability Of Directors, Officers, Employees, Stockholders and
Servicing Agent. No director, officer, employee, incorporator or stockholder of
ours or our servicing agent, will have any liability for any of our obligations
under the certificates, the indenture or for any claim based on, in respect to,
or by reason of, these obligations or their creation. Each holder of the
certificates waives and releases these persons from any liability. The waiver
and release are part of the consideration for issuance of the certificates. We
have been advised that the waiver may not be effective to waive liabilities
under the federal securities laws since it is the view of the SEC that such a
waiver is against public policy.
Service Charges. We and the trustee may assess service charges for changing
the registration of any certificate to reflect a change in name of the holder or
transfers (whether by operation of law or otherwise) of a certificate.
Variations By State. We may offer different securities and vary the terms
and conditions of the offer (including, but not limited to, different interest
rates and maturity dates) depending upon the state where the purchaser resides.
57
Interest Withholding. We or the trustee will withhold the required portion
of any interest paid to any investor who has not provided us with a Social
Security Number, Employer Identification Number, or other satisfactory
equivalent in the subscription agreement (or another document) or where the
Internal Revenue Service has notified us that back-up withholding is otherwise
required.
Liquidity. There is no market for the certificates. We do not believe that
a public market will develop for the certificates. You will not be able to sell
your certificates. You should be prepared to hold any certificates you purchase
until maturity.
Reports. We publish and file with the Securities and Exchange Commission
annual reports on form 10-KSB containing financial statements and quarterly
reports on 10-QSB containing financial information for the first three quarters
of each fiscal year. We will send copies of our reports at no charge to any
certificate holder who requests them in writing.
58
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS
Our organizational documents, consisting of Amended and Restated Articles
of Incorporation and Amended and Restated Bylaws, were reviewed and ratified by
our directors (including our independent directors) on May 19, 1995. The
following is a summary of certain provisions of these documents. This summary is
qualified in its entirety by specific reference to the organizational documents
filed as exhibits to the registration statement of which this prospectus is a
part.
Certain Articles of Incorporation and Bylaws Provisions
Shareholders' rights and related matters are governed by the Minnesota
Business Corporation Act, our Amended and Restated Articles of Incorporation and
the Amended and Restated Bylaws. Certain provisions of our articles of
incorporation and bylaws, which are summarized below, may make it more difficult
to change the composition of our board and may discourage an attempt by a person
or group to obtain control of us through acquisitions of shares.
Shareholder Meetings
Our bylaws provide for annual meetings of shareholders. Special meetings of
shareholders may be called by (i) our Chief Executive Officer, (ii) a majority
of the members of our board of directors or a majority of our independent
directors, or (iii) shareholders holding at least 10% of the outstanding shares
of common stock entitled to vote at the meeting.
Board of Directors
Our bylaws provide that our board establishes the number of our directors,
which may not be fewer than three (3) nor more than nine (9), and a majority of
which must be independent directors. Any vacancy will be filled by a majority of
the remaining directors, except that a vacancy of an independent director
position must follow a nomination by the remaining independent directors. The
directors may leave a vacancy unfilled until the next regular meeting of the
shareholders.
Limitations on Director Actions
Without concurrence of a majority of the outstanding shares, the directors
may not: (i) amend our articles or bylaws, except for amendments which do not
adversely affect the rights, preferences and privileges of shareholders
including amendments to provisions relating to, director qualifications,
fiduciary duty, liability and indemnification, conflicts of interest, investment
policies or investment restrictions; (ii) sell all or substantially all of our
assets other than in the ordinary course of our business or in connection with
liquidation and dissolution; (iii) cause us to merge with another entity or
otherwise reorganize; or (iv) cause us to dissolve or liquidate.
A majority of the then outstanding shares may, without the necessity for
concurrence by our directors, vote to: (i) amend the bylaws; (ii) terminate the
corporation; or (iii) remove the directors.
Minnesota Anti-Takeover Law
We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act. In general, Section 302A.671 provides that
the shares of a corporation acquired in a "control share acquisition" have no
voting rights unless voting rights are approved in a prescribed manner. A
"control share acquisition" is an acquisition, directly or indirectly, of
beneficial ownership of shares that would, when added to all other shares
beneficially owned by the acquiring person, entitle the acquiring person to have
voting power of 20% or more in the election of directors. In general, Section
302A.673 prohibits a public Minnesota corporation from engaging in a "business
combination" with an "interested shareholder" for a period of four years after
the date of the transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's stock.
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Restrictions on Roll-Ups
"Roll-up" means a transaction involving our acquisition, merger,
conversion, or consolidation (either directly or indirectly) and the issuance of
securities of a roll-up entity. Such term does not include: (i) a transaction
involving our securities that have been for at least 12 months listed on a
national securities exchange or traded through the NASDAQ National Market
System; or (ii) a transaction involving the conversion to corporate, trust, or
association form if, as consequence of the transaction, there will be no
significant adverse change in any of the following: (a) shareholders' voting
rights; (b) our term of existence; (c) sponsor or advisor compensation; (d) our
investment objectives. "Roll-up entity" means a partnership, real estate
investment trust, corporation, trust, or other entity created or surviving after
the completion of a roll-up transaction.
In connection with a roll-up, an appraisal of all of our assets would be
required to be obtained from a competent independent expert. The appraiser would
evaluate all relevant information, indicate the value of the assets as of a date
immediately prior to the announcement of the roll-up and assume an orderly
liquidation of the assets over a 12-month period. Notwithstanding the foregoing,
we may not participate in any proposed roll-up which would:
>> result in our shareholders having rights to meeting less frequently or
which are more restrictive to shareholders than those provided in our
bylaws;
>> result in our shareholders having voting rights that are less than those
provided in our bylaws;
>> result in our shareholders having greater liability than as provided in our
bylaws;
>> result in our shareholders having rights to receive reports that are less
than those provided in our bylaws;
>> result in our shareholders having access to records that are more limited
than those provided in our bylaws;
>> include provisions which would operate to materially impede or frustrate
the accumulation of shares by any purchaser of the securities of the
roll-up entity (except to the minimum extent necessary to preserve the tax
status of the roll-up entity);
>> limit the ability of an investor to exercise the voting rights of its
securities in the roll-up entity on the basis of the number of the shares
held by that investor;
>> result in investors in the roll-up entity having rights of access to the
records of the roll-up entity that are less than those provided in our
bylaws; or
>> place upon us any of the costs of the transaction if the roll-up is not
approved by the shareholders.
Nothing prevents our participation in any proposed roll-up resulting in
shareholders having rights and restrictions comparable to those contained in our
bylaws, with the prior approval of a majority of our shareholders.
Shareholders voting against a proposed roll-up have the choice of (i)
accepting the securities of the roll-up entity offered in the proposed roll-up;
or (ii) one of either: (a) remaining as our shareholders and preserving their
interests therein on the same terms and conditions as previously existed, or (b)
receiving cash in an amount equal to the shareholders' pro rata share of the
appraised value of our net assets. We do not intend to participate in a roll-up
transaction.
Limitation on Total Operating Expenses
Our bylaws provide that, subject to the conditions described in this
paragraph, our annual total operating expenses cannot exceed the greater of 2%
of our average invested assets or 25% our net income, computed before interest
expense. The independent directors have a fiduciary responsibility to limit our
annual total operating expenses to amounts that do not exceed the foregoing
limitations. The independent directors may determine that a higher level of
operating expenses is justified for such period because of unusual and
non-recurring expenses. Any such finding by the independent directors and the
reasons in support thereof must be recorded in the minutes of the meeting of the
board of directors. We will send a written disclosure to our shareholders within
60 days after the end of any fiscal quarter for which operating expenses (for
the 12 months then ended) exceed 2% of the average invested assets or 25% of net
income. In the event the operating expenses exceed the limitations described
above and if our directors are unable to conclude that such excess was justified
then within 60 days after the end of our fiscal year,
60
our advisor must reimburse us for the amount by which the aggregate annual total
operating expenses paid or incurred by us exceed the limitation.
Transactions with Affiliates
Our bylaws restrict our dealings with our advisor, sponsor and any director
or affiliates thereof. In approving any transaction or series of transactions
with such persons or entities, a majority of our directors not otherwise
interested in such transaction, including a majority of the independent
directors must determine that:
(a) the transaction as contemplated is fair and reasonable to us and our
shareholders and its terms and conditions are not less favorable to us than
those available from unaffiliated third parties;
(b) if the transaction involves compensation to any advisor or its affiliates
for services rendered in a capacity other than contemplated by the advisory
arrangements, such compensation is not greater than the customary charges
for comparable services generally available from other competent
unaffiliated persons and is not in excess of compensation paid to any
advisor and its affiliates for any comparable services;
(c) if the transaction involves the making of loans (other than in the ordinary
course of our business) or the borrowing of money, the transaction is fair,
competitive, and commercially reasonable and no less favorable to us than
loans between unaffiliated lenders and borrowers under the same
circumstances; and
(d) if the transaction involves the investment in a joint venture, the
transaction is fair and reasonable and no less favorable to us than to
other joint venturers.
If the proposed transaction involves a loan to any advisor, director or any
affiliate thereof, or to a wholly-owned subsidiary of ours, a written appraisal
of the underlying property must be obtained from an independent expert. The
appraisal must be maintained in our records for at least five years and be
available for inspection and duplication by any shareholder. Such loan is
subject to all requirements of our Financing Policy.
We cannot borrow money from any advisor, director or any affiliate thereof,
unless a majority of our directors (including a majority of the independent
directors) not otherwise interested in the transaction approve the transaction
as being fair, competitive, and commercially reasonable and no less favorable to
us than loans between unaffiliated parties under the same circumstances.
We cannot make or invest in any mortgage loans subordinate to any mortgage
or equity interest of our advisor, directors, sponsors or any of our affiliates.
Restrictions on Investments
The investment policies and restrictions set forth in our bylaws have been
approved by a majority of our independent directors. In addition to other
investment restrictions imposed by the directors consistent with our objective
to qualify as a REIT, we will observe the guidelines and prohibitions on our
investments set forth in our bylaws. These guidelines and prohibitions are
discussed at the section headed "Our Business-Prohibited Investments and
Activities."
61
PLAN OF DISTRIBUTION
General
The underwriter is offering the shares and certificates pursuant to the
terms and conditions of a distribution agreement (a copy of which is filed as an
exhibit to the Registration Statement of which this prospectus is a part). The
underwriter is offering 1,500,000 shares and $15,000,000 principal amount of
certificates on our behalf on a "best efforts" basis. "Best efforts" means that
the underwriter is not obligated to purchase any shares or certificates. This is
a "no minimum" offering. No minimum number of shares and no minimum principal
amount of certificates must be sold, and we will receive the proceeds from the
sale of shares and certificates as they are sold. This offering became effective
April 30, 2002, and as of March 31, 2003, 516,379.5 shares have been sold and
$9,299,000 in principal amount of certificates has been sold. This offering will
be conducted on a continuous basis pursuant to applicable rules of the
Securities and Exchange Commission and will terminate upon completion of the
sale of all shares and certificates. We may terminate this offering at any time.
Compensation
Compensation on Sale of Shares. We will pay the underwriter a commission of
5.95% of the proceeds from the sale of the shares sold (up to $892,500). We have
agreed to pay the underwriter a non-accountable expense allowance of up to
$133,000 to reimburse the underwriter for certain expenses incurred by it in
connection with the offer and sale of the shares, $30,000 of which is payable
upon the sale of 100,000 shares, and the balance ($103,000) is payable ratably
based on the number of shares sold thereafter.
Compensation on Sale of Certificates. We will pay to the underwriter a
commission based on the principal amount and maturity of the certificates sold.
We will also pay the underwriter an underwriter's management fee upon original
issuance of each certificate. The following table sets forth the commission that
we will pay the underwriter on the sale and renewal of certificates:
=================== ============= =============== =============== ================ ===============
Maturity: 2 Years 3 Years 4 Years 5 Years 7 Years
------------------- ------------- --------------- --------------- ---------------- ---------------
------------------- ------------- --------------- --------------- ---------------- ---------------
Commission: 2.50% 2.75% 3.25% 3.50% 4.125%
------------------- ------------- --------------- --------------- ---------------- ---------------
------------------- ------------- --------------- --------------- ---------------- ---------------
Underwriter's 0.50% 0.50% 0.50% 0.50% 0.50%
Management Fee on
Sale (1)
------------------- ------------- --------------- --------------- ---------------- ---------------
------------------- ------------- --------------- --------------- ---------------- ---------------
Commission on 1.25% 1.75% 2.25% 2.75% 3.75%
Renewal
=================== ============= =============== =============== ================ ===============
(1) We will not pay the underwriter an underwriter's management fee on renewals
of certificates.
We have agreed to pay the underwriter a non-accountable expense allowance
of up to $100,000 to reimburse the underwriter for certain expenses incurred by
it in connection with the offer and sale of the shares, $20,000 of which is
payable upon the sale of $1,000,000 of certificates, and the balance ($80,000)
is payable ratably based on the principal amount of certificates sold
thereafter.
Other Compensation Information. The underwriter may award sales incentive
items to soliciting dealers, and persons associated with it as licensed
registered representatives, in connection with its sales activities. The value
of each item will be less than $50. The underwriter may pay incentive
compensation to regional marketing representatives for their activities as
wholesalers in connection with the distribution of the shares or certificates,
subject to the overall restrictions on commissions described herein.
We will not pay or award any commissions or other compensation to any
person engaged by a potential investor for investment advice to induce such
person to advise the investor to purchase shares or certificates. This provision
does not prohibit the normal sales commission payable to a registered
broker-dealer or other properly licensed person for selling shares or
certificates.
62
Subscription Process
Our shares and certificates will be offered to the public through the
underwriter and soliciting dealers. The shares and certificates are being sold
when, as and if we receive and accept subscriptions. We have the right to accept
or reject any subscription. If we reject your subscription, your funds will be
returned to you, without interest. We will not accept subscriptions for less
than 250 shares (200 for IRA accounts). We will not accept subscriptions for
less than $1,000 for each maturity term of certificates.
The underwriter may offer the shares and certificates through its own
registered representatives and broker-dealers who are members of the NASD
("soliciting dealers"). The underwriter may re-allow to soliciting dealers a
portion of its commissions, fees and reimbursable expenses payable to it under
the distribution agreement. In no event will the compensation re-allowed by the
underwriter to soliciting dealers exceed the total of compensation payable to
the underwriter under the distribution agreement.
Clients of soliciting dealers who wish to purchase shares or certificates
will receive a confirmation of their purchase directly from the underwriter and
must remit payment for the purchase of shares or certificates directly to the
underwriter payable to "American Investors Group, Inc."
A sale will be deemed to have been made on the date reflected in the
written confirmation. The confirmation will be sent to each purchaser by the
underwriter on the first business day following the date upon which we advise
the underwriter in writing that a subscription has been accepted. Generally,
payment for shares or certificates should accompany the subscription agreement.
However, the underwriter must receive payment of the purchase price by the
settlement date set forth in the confirmation. You may rescind your purchase of
shares or certificates for up to five (5) business days after you receive a
final prospectus.
The distribution agreement provides for reciprocal indemnification between
us and the underwriter against certain liabilities in connection with this
offering, including liabilities under the Securities Act of 1933.
The foregoing discussion of the material terms and provisions of the
distribution agreement is qualified in its entirety by reference to the detailed
terms and provisions of the distribution agreement, a copy of which has been
filed as an exhibit to the registration statement of which this prospectus is a
part.
Determination of Investor Suitability
We, the Underwriter and each soliciting dealer will make reasonable efforts
to determine that those persons being offered or sold the shares or certificates
are appropriate in light of the suitability standards set forth herein and are
appropriate to such investor's investment objectives and financial situation.
The soliciting dealer must ascertain that you can reasonably benefit from an
investment in our shares or certificates. The following shall be relevant to
such determination: (i) you are capable of understanding the fundamental aspects
of our business, which capacity may be evidenced by the following: (a)
employment experience; (b) educational level achieved; (c) access to advice from
qualified sources, such as attorneys, accountants, tax advisors, etc.; and (d)
prior experience with similar investments; (ii) you have apparent understanding
of (a) the fundamental risk and possible financial hazards of this type of
investments; (b) the lack of liquidity of this investment; (c) that the
investment will be directed and managed by the Advisor; and (d) the tax
consequences of the investment; and (iii) you have the financial capability to
invest in our shares or certificates.
By executing your subscription agreement, each soliciting dealer
acknowledges its determination that the shares or certificates are a suitable
investment for you, and will be required to represent and warrant its compliance
with the applicable laws requiring the determination of the suitability of the
shares or certificates as an investment for you. In addition to the foregoing,
we will coordinate the processes and procedures utilized by the Underwriter and
soliciting dealers and, where necessary, implement additional reviews and
procedures deemed necessary to determine that you meet the suitability standards
set forth herein. The Underwriter and/or the soliciting dealers must maintain
for at least six (6) years a record of the information obtained to determine
that you meet the suitability standards imposed on the offer and sale of shares
or certificates and your representation that you are investing for your own
account or, in lieu of such representation, information indicating that you met
the suitability standards.
63
Suitability of the Investment
Suitability Standards for Shares. Our shares are suitable only for
long-term investment by persons who have adequate financial means. Shares will
be sold to you only if you meet one of the following standards: (i) a net worth
(excluding home, home furnishings and automobiles) of at least $45,000 and
estimated gross income during the current year (without regard to investment in
our shares) of at least $45,000; or (ii) a net worth (excluding home, home
furnishings and automobiles) of at least $150,000. In the case of gifts to
minors or purchases in trusts, the suitability standards must be met by the
custodian or the grantor. By acceptance of the confirmation of purchase or
delivery of the shares, you will represent satisfaction of the applicable
suitability standards.
Suitability standards may be higher in certain states. You must meet all of
the applicable requirements set forth in the subscription agreement. Under the
laws of certain states, you may transfer shares only to persons who meet similar
standards, and we may require certain assurances that these standards are met.
Suitability Standards for Certificates. Our certificates are suitable only
for investment by persons who have adequate financial means and can commit their
investment for the full term of the certificates purchased. You will be required
to provide us with certain financial information in your subscription form. You
may purchase up to $5,000 of certificates if you meet one of the following
standards: (i) a net worth (excluding home, home furnishings and automobiles) of
at least $30,000 and an estimated gross income in the current year (without
regard to investment in the certificates) of at least $30,000; or (ii) a net
worth (excluding home, home furnishings and automobiles) of at least $100,000.
To purchase in excess of $5,000 of certificates, you must meet one of the
following standards: (i) a net worth (excluding home, home furnishings and
automobiles) of at least $45,000 and estimated gross income during the current
year (without regard to investment in the certificates) of at least $45,000; or
(ii) a net worth (excluding home, home furnishings and automobiles) of at least
$150,000. In the case of gifts to minors or purchases in trusts, the suitability
standards must be met by the custodian or the grantor. By acceptance of the
confirmation of purchase or delivery of the certificates, you will represent
satisfaction of the applicable suitability standards.
Suitability standards may be higher in certain states. You must meet all of
the applicable requirements set forth in the subscription agreement.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons pursuant to our
bylaws, or otherwise, we have 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.
LEGAL MATTERS
Certain legal matters, including the legality of the shares and
certificates being offered hereby and certain federal income tax matters, are
being passed upon for us by Leonard, Street and Deinard Professional
Association, Minneapolis, Minnesota.
EXPERTS
Our balance sheets as of December 31, 2002 and 2001 and related statements
of operations, stockholder's equity and cash flows for the years ended December
31, 2002, 2001, and 2000 included in this prospectus have been audited by
Boulay, Heutmaker, Zibell and Company, P.L.L.P., independent certified public
accountants, as set forth in the report thereon appearing elsewhere herein, and
are included herein in reliance upon such report given on the authority of said
firm as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION
Our advisor will keep, or cause to be kept, full and true books of account
on an accrual basis of accounting, in accordance with generally accepted
accounting principles ("GAAP"). All books of account, together with a copy of
our Articles and any amendments thereto, will be maintained at our principal
office, and will be open to inspection, examination and duplication at
reasonable times by our shareholders or their agents. We will provide to
shareholders, upon request, a list of the names and addresses of all of our
shareholders by mail. The shareholders will also have the right to inspect our
records in the same manner as
64
shareholders of any other Minnesota corporation. Our shareholders have rights
under our bylaws to inspect our records that are in addition to those available
under applicable federal and state law.
We will send an annual report to shareholders in connection with our annual
meeting. We prepare our annual report on Securities and Exchange Commission Form
10-KSB.
Our regular accountants will prepare our federal and state tax returns. We
will submit tax information to shareholders within 90 days following the end of
each fiscal year. A specific reconciliation between GAAP and income tax
information will not be provided to the shareholders. Reconciling information
will be available in our office for inspection and review by any shareholder.
Dividend check statements will reflect the number of shares owned by each of our
shareholders, including shares purchased under our dividend reinvestment plan.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission in Washington,
D.C., a registration statement (as amended) on Form S-11 (of which this
prospectus is a part) under the Securities Act of 1933, as amended, with respect
to the shares and certificates offered hereby. This prospectus does not contain
all the information set forth in the registration statement. Statements
contained in the prospectus as to the contents of any contract or other document
are not necessarily complete. In each instance reference is made to the copy of
such contract or document filed as an exhibit to the registration statement. The
registration statement and to the exhibits and schedules thereto contain further
information regarding us.
We are subject to the information requirements of the Exchange Act, and in
accordance therewith file reports and other information with the Commission.
Reports and other information we have filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth St. N.W., Washington, DC 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other materials that
are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval system. This Web site can be accessed at http://www.sec.gov.
65
AMERICAN CHURCH MORTGAGE COMPANY
INDEX TO FINANCIAL STATEMENTS
Annual Financial Statements
Report of Independent Auditors F-2
Balance Sheet at December 31, 2001 and 2002 F-3
Statements of Operations for years ended December 31, 2000, 2001 and F-5
2002 Statements of Stockholders' Equity for the years ended December 31, F-6
2000, 2001 and 2002 Statements of Cash Flows for the years ended F-7
December 31, 2000, 2001 and 2002 Notes to Financial Statements F-9
F-1
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
We have audited the accompanying balance sheet of American Church Mortgage
Company as of December 31, 2002 and 2001 and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2002, 2001 and 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Church Mortgage
Company as of December 31, 2002 and 2001, and the results of its operations and
its cash flows for the years ended December 31, 2002, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Boulay, Heutmaker, Zibell & Co., P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
February 28, 2003
F-2
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- -----------------------------------------------------------------------------------------------------------------------------------
December 31
ASSETS 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and equivalents $ 7,852,220 $ 1,256,556
Accounts receivable 63,602 58,008
Interest receivable 94,385 66,236
Current maturities of mortgage loans receivable, net of
allowance of $112,111 and $11,111 at
December 31, 2002 and 2001 290,759 298,921
Current maturities of bond portfolio 47,000 144,000
Deferred equity offering costs 28,293
--------- ---------
Total current assets 8,347,966 1,852,014
Mortgage Loans Receivable, net of current maturities 16,140,961 11,724,272
Deferred Investors Saver Certificates Offering Costs,
net of accumulated amortization of $29,875 and $0 at
December 31, 2002 and December 31, 2001 377,174 28,294
Bond Portfolio, net of current maturities 4,309,637 3,018,511
Other 60,000 60,000
---------- -------------
Total assets $29,235,738 $16,683,091
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-3
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable $ 39,690 $ 4,350
Mortgage loan commitment 1,243,827
Deferred income 18,247 17,039
Dividends payable 361,941 344,504
--------- -------
Total current liabilities 1,663,705 365,893
Deferred Income, net of current maturities 346,722 243,903
Investors Saver Certificates 7,428,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,205,568 at December 31, 2002
and 1,769,774 shares at December 31, 2001 22,056 17,698
Additional paid-in capital 20,182,798 16,256,712
Accumulated deficit (407,543) (201,115)
----------- ----------
Total stockholders' equity 19,797,311 16,073,295
---------- ----------
Total liabilities and equity $29,235,738 $16,683,091
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-3
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 1,785,443 $1,525,562 $1,407,414
Operating Expenses 482,785 220,717 201,879
--------- ---------- ----------
Operating Income 1,302,658 1,304,845 1,205,535
Other Income (Expense)
Interest expense (12,717) (26,835) (65,282)
Income Taxes - - -
----------- ---------- ----------
Net Income $ 1,289,941 $1,278,010 $1,140,253
========= ========= =========
Basic and Diluted Income Per Common Share $ .66 $ .80 $ .81
=========== ========= ==========
Weighted Average Common Shares Outstanding 1,964,428 1,593,568 1,414,275
========= ========= =========
Notes to Financial Statements are an integral part of this Statement.
F-5
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 1,322,289 $13,223 $12,070,410 ($ 130,314)
Issuance of 169,868 shares of
common stock, net of offering
costs 169,868 1,698 1,607,513
Redemption of 22,340 shares of
common stock (22,340) (223) (223,177)
Net income 1,140,253
Dividends declared (1,164,973)
--------- ------ --------- ---------
Balance, December 31, 2000 1,469,817 14,698 13,454,746 ( 155,034)
Issuance of 325,651 shares of
common stock, net of offering
costs 325,651 3,256 3,058,649
Redemption of 25,694 shares of
common stock (25,694) (256) (256,683)
Net income 1,278,010
Dividends declared (1,324,091)
--------- ------ ---------- ---------
Balance, December 31, 2001 1,769,774 17,698 16,256,712 (201,115)
Issuance of 464,544 shares of
common stock, net of offering
costs 464,544 4,645 4,194,541
Redemption of 28,750 shares of
common stock (28,750) (287) (268,455)
Net income 1,289,941
Dividends declared (1,496,369)
--------- ------ ----------- ---------
Balance, December 31, 2002 2,205,568 $22,056 $20,182,798 ( $407,543)
========= ======= -========== ========
Notes to Financial Statements are an integral part of this Statement.
F-6
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income $1,289,941 $1,278,010 $1,140,253
Adjustments to reconcile net income to net cash
from operating activities:
Provision for losses on mortgage loans receivable 101,000 11,111
Amortization of deferred bond offering costs 29,875
Deferred income 104,027 47,883 25,068
Change in assets and liabilities
Accounts receivable (5,594) (48,116) (4,110)
Interest receivable (28,149) (50,585) (15,651)
Prepaid expenses 9,110 (6,193)
Accounts payable 35,340 (76,425) 80,755
Management fees payable (36,222) 36,222
---------- --------- ----------
Net cash from operating activities 1,526,440 1,134,766 1,256,364
Cash Flows from Investing Activities
Investment in mortgage loans receivable (5,261,000) (1,248,000) (1,675,000)
Collections of mortgage loans receivable 1,995,300 953,745 342,878
Investment in bond portfolio (2,048,000) (1,905,605) (250,763)
Proceeds from bond portfolio called/sold 853,874 1,033,056 17,000
---------- --------- --------
Net cash used for investing activities (4,459,826) (1,166,804) (1,565,885)
Cash Flows from Financing Activities
Proceeds from investors savers certificates 7,428,000
Net payments on note payable, line of credit (399,653) (100,347)
Proceeds from stock offering, net of offering costs 4,199,186 3,061,905 1,609,211
Payments for deferred saver certificate offering costs (378,755) (28,294)
Deferred equity offering costs (28,293) (28,293)
Stock redemptions (268,74) (256,940) (223,400)
Dividends paid (1,478,932) (1,273,215) (1,145,624)
--------- --------- ---------
Net cash from financing activities 9,529,050 1,075,510 139,840
--------- --------- ---------
Net Increase (Decrease) in Cash and Equivalents 6,595,664 1,043,472 (169,681)
Cash and Equivalents - Beginning of Year 1,256,556 213,084 382,765
--------- ------- -------
Cash and Equivalents - End of Year $7,852,220 $1,256,556 $213,084
========= ========= =======
Notes to Financial Statements are an integral part of this Statement.
F-7
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Cash Flows - Continued
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental Schedule of Noncash Financing and
Investing Activities
Offering costs reclassified and charged to additional
paid-in capital $182,628 $ 42,443 $ 20,702
======= ======== ========
Dividends payable $361,941 $344,504 $293,629
======= ======= =======
Mortgage loan commitment $1,243,827
=========
Supplemental Cash Flow Information
Cash paid during the year for
Interest $131,367 $ 26,835 $ 65,282
======= ======== ========
Notes to Financial Statements are an integral part of this Statement.
F-8
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company was organized to engage primarily in the business of
making mortgage loans to churches and other nonprofit religious organizations
throughout the United States, on terms that it establishes for individual
organizations.
Accounting Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates. The most
sensitive estimates relate to the allowance for mortgage loans, and the
valuation of the bond portfolio.
Cash
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
The Company maintains its accounts primarily at two financial institutions. At
times throughout the year, the Company's cash and equivalents balances may
exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in
money market funds is not Federally insured. At December 31, 2002 and 2001, such
investments were $1,852,548 and $940,000 respectively. The Company has not
experienced any losses in such accounts.
Bond Portfolio
The Company accounts for its bond portfolio under Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company classifies its bond portfolio as "available-for sale."
Available-for-sale bonds are carried at fair value. Although no ready public
market for these bonds exists, management believes that their cost approximates
their fair value. During 2002, the Company sold $497,000 of its bonds at par, to
an affiliate of the Advisor. During 2001, the Company sold $716,000 of its bonds
at par or above cost, to an affiliate of the Advisor (see Note 5). During 2000
the Company did not sell any bonds. There were no losses on the sale of the
bonds in 2002, 2001 or 2000.
F-9
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
Allowance for Mortgage Loans Receivable
The Company records its loans at their estimated net realizable value. The
Company's loan policy provides an allowance for estimated uncollectible loans
based on its evaluation of the current status of its loan portfolio. This policy
reserves for principal amounts outstanding on a particular loan if cumulative
interruptions occur in the normal payment schedule of a loan. The Company policy
will reserve for the outstanding principal amount of a loan in the Company's
portfolio if the amount is in doubt of being collected. Additionally, no
interest income is recognized on impaired loans. At December 31, 2002, the
Company reserved $112,111 for two mortgage loans which are three or more
mortgage payments in arrears, one of which is in the process of being
foreclosed. At December 31, 2001, the Company reserved $11,111 for one mortgage
loan in arrears. The total impaired loans were $228,441 and $277,787 at December
31, 2002 and 2001, respectively.
Deferred Offering Costs
Deferred equity offering costs are charged to stockholders' equity when equity
subscriptions are received.
Deferred investors saver certificates offering costs are amortized over the term
of the certificates using the straight line method which approximates the
effective interest method.
Revenue Recognition
Interest income on mortgage loans is recognized as earned. Interest income on
the bond portfolio is recognized on the interest payable date.
Deferred income represents loan origination fees which are recognized over the
life of the loan as an adjustment to the yield on the loan.
Dividend Re-investment Plan
Dividends re-invested to purchase common stock were $217,419, $202,095 and
202,322 for the years ended December 31, 2002, 2001 and 2000, respectively.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences in recognition of income from loan origination
fees for financial and income tax reporting.
F-10
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
The Company has elected to be taxed as a Real Estate Investment Trust (REIT).
Accordingly, the Company will not be subject to Federal income tax to the extent
of distributions to its shareholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.
Income Per Common Share
No adjustments were made to income for the purpose of calculating earnings per
share. Stock options had no effect on the weighted average number of shares
outstanding.
2. MORTGAGE LOANS AND BOND PORTFOLIO
At December 31, 2002, the Company had first mortgage loans receivable totaling
$16,543,831. The loans bear interest ranging from 8.50% to 12.00%. At December
31, 2001, the Company had first mortgage loans receivable totaling $12,034,304
which bore interest ranging from 9.50% to 12.00%. Included in mortgage loans
receivable is $1,243,827, representing loans which were closed in 2002 and the
proceeds disbursed in 2003.
The Company also had a portfolio of secured church bonds at December 31, 2002
and 2001, which are carried at cost plus amortized interest income. The bonds
pay either semi-annual or quarterly interest ranging from 6.00% to 10.50%. The
combined principal of $4,395,000 at December 31, 2002 is due at various maturity
dates between February 15, 2003 and June 15, 2021. Six bond issues comprised 86%
of the total bond portfolio at December 31, 2002. Four bond issues comprised 87%
of the Company's bond portfolio at December 31, 2001.
The maturity schedule for mortgage loans and bonds receivable as of December 31,
2002 is as follows:
Mortgage Loans Bond Portfolio
2003 $ 402,876 $ 47,000
2004 437,041 70,000
2005 482,933 100,000
2006 532,986 65,000
2007 588,272 107,000
Thereafter 14,099,719 4,006,000
---------- ---------
16,543,831 4,395,000
Less loan loss reserves (112,111)
Less Discount from par (38,363)
---------- --------
Totals $16,431,720 $4,356,637
========== =========
F-11
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
3. INVESTORS SAVER CERTIFICATES
Investors savers certificates (see Note 7) are collateralized by certain
mortgage loans receivable of approximately the same value as the certificates.
Additionally, the Company incurred deferred offering costs related to the debt
offering. The maturity schedule for the investors saver certificates and
deferred offering costs at December 31, 2002, is as follows:
Investor Saver Deferred
Certificates Offering Costs
2003 $ 78,033
2004 $ 684,000 72,652
2005 1,005,000 62,983
2006 987,000 52,825
2007 887,000 44,677
Thereafter 3,865,000 66,004
--------- ------
$ 7,428,000 $ 377,174
========= ========
Interest expense related to these certificates for the year ended December 31,
2002 is $118,650 and is included in operating expenses.
4. STOCK OPTION PLAN
The Company adopted a Stock Option Plan granting each member of the Board of
Directors and the president of the Advisor (Note 5) an option to purchase 3,000
shares of common stock annually upon their re-election. The purchase price of
the stock is the fair market value at the grant date. Options outstanding are
99,000 shares at a price of $10 per share at December 31, 2002 and 2001,
respectively. The options were exercisable November 15, 1996 and incrementally
at one year intervals after the date of grant and expire November 15, 2002
through November 15, 2006. No options were exercised as of December 31, 2002.
The Stock Option Plan was terminated by the Company's Board of Directors in
January 2003 and all outstanding stock options were cancelled. No options were
exercised during the Plan's existence.
The Company has chosen to account for stock based compensation in accordance
with APB Opinion 25. Management believes that the disclosure requirements of
Statement of Financial Accounting Standards No. 123, as amended, are not
material to its financial statements.
F-12
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
5. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc.,
Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day
operations of the Company and provides office space, administrative services and
personnel.
Under the terms of the Advisory Agreement, the Company pays the Advisor an
annual base management fee of 1.25 percent of average invested assets (generally
defined as the average of the aggregate book value of the assets invested in
securities and equity interests in and loans secured by real estate), which is
payable on a monthly basis. The Advisor will also receive one-half of the
origination fees paid by a mortgage loan borrower in connection with a mortgage
loan made or renewed by the Company. The Company has expensed Advisor management
and origination fees of approximately $291,000, $199,000 and $176,000 during
2002, 2001, and 2000, respectively.
The Advisor and the Company are related through common ownership and common
management. See Notes 1 and 7 for additional transactions.
6. INCOME TAXES
As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to its shareholders. In order to maintain
its status as a REIT, the Company is required to distribute at least 90% of its
taxable income (95% in 2000). In 2002, the Company had pretax income of
$1,289,941 and distributions to shareholders in the form of dividends during the
tax year of $1,496,369. The expected tax expense to the Company, pre-dividends
would have been $438,580. In 2001, the Company had pretax income subject to tax
of $1,278,010 and distributions to shareholders in the form of dividends during
the tax year of $1,324,091. The expected tax expense to the Company,
pre-dividends, would have been $434,523 in 2001. In 2000, the Company had pretax
income of $1,140,253 and distributions to shareholders in the form of dividends
during the tax year of $1,164,973. The expected tax expense to the Company,
pre-dividends, would have been $387,686.
The following reconciles the income tax benefit with the expected provision
obtained by applying statutory rates to pretax income:
2002 2001 2000
---- ---- ----
Expected tax expense $438,580 $434,523 $387,686
Benefit of REIT distributions (508,289) (453,909) (400,798)
Valuation allowance 69,709 19,386 13,112
------- ------- ------
Totals $ - $ - $ -
====== ====== ======
F-13
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
The components of deferred income taxes are as follows:
2002 2001
---- ----
Loan origination fees $124,089 $88,720
Loan loss allowance 38,118 3,778
Valuation allowance (102,207) (32,498)
------- ------
$60,000 $60,000
====== ======
The total deferred tax assets are as follows:
2002 2001
---- ----
Deferred tax assets $162,207 $92,498
Deferred tax asset valuation allowance (102,207) (32,498)
------- -------
Net deferred tax asset $60,000 $60,000
====== ======
The change in the valuation allowance was $69,709, $19,386 and 13,112 for 2002,
2001 and 2000, respectively.
7. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK
The Company filed a Registration Statement with the Securities and Exchange
Commission for a third public offering of its common stock in August 1999. The
Company offered 1,500,000 shares of its common stock at a price of $10 per
share. The offering was underwritten by an underwriter (an affiliate of the
Advisor) on a "best efforts" basis, and no minimum sale of stock was required.
The stock sale commenced on September 23, 1999 and concluded September 23, 2001.
A total of 569,207 shares were sold during the Company's third public offering.
In December 2001, the Company filed a Registration Statement with the Securities
and Exchange Commission for a fourth public offering of its common stock and its
first public offering of debt securities, which the Securities and Exchange
Commission declared effective April 30, 2002. The Company is offering 1,500,000
shares of its common stock at a price of $10 per share and $15,000,000 principal
amount of its Series "A" secured investor certificates. The certificates pay
quarterly interest with two, three, four, five and seven year maturities with
interest rates ranging from 5.00% to 7.00%. Certificates may be purchased in any
multiple of $1,000. The offering is being underwritten by American Investors
Group, Inc. (an affiliate of the Advisor) on a "best efforts" basis, and no
minimum sale of stock or certificates will be required. As of December 31, 2002
the Company has sold 452,424 shares and $7,428,000 of its Series "A" secured
investor certificates.
F-14
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2002, 2001 and 2000
Pursuant to the terms of the Underwriting Agreement, the Company incurred
expense to the managing underwriter and participating broker-dealers commissions
and non-reimbursable expenses of approximately $669,579, $217,000 and $94,000
during 2002, 2001 and 2000, respectively, in connection with these last two
public offerings.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows at December 31, 2002 and 2001:
2002 2001
------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and equivalents $ 7,852,220 $ 7,852,220 $ 1,256,556 1,256,556
Accounts receivable 63,602 63,602 58,008 58,008
Interest receivable 94,385 94,385 66,236 66,236
Mortgage loans receivable 16,431,720 16,431,720 12,023,193 12,023,193
Bond portfolio 4,356,637 4,356,637 3,162,511 3,162,511
Investors saver certificates 7,428,000 7,428,000
The carrying value of cash and equivalents approximates fair value. The fair
value of the mortgage loans receivable and the bond portfolio are estimated by
discounting future cash flows using current discount rates that reflect the
risks associated with similar types of loans.
9. LINE OF CREDIT
The Company obtained a $1,000,000 line of credit with its bank on July 22,
1999 which was increased to $2,000,000 on March 18, 2002, subject to certain
borrowing base limitations, through August 1, 2003. Interest is charged at 1/2%
over the prime rate totaling 4.75% and 5.25% at December 31, 2002 and 2001,
respectively. The line of credit is collateralized by the mortgage secured bonds
held by the Company. There was no balance outstanding at December 31, 2002 and
2001. Interest expense related to the line of credit was $12,717, $26,835 and
$65,282 for December 31, 2002, 2001 and 2000, respectively.
F-15
Exhibit A
American Church Mortgage Company
Subscription Agreement
To purchase either Common Stock or Series A Secured Investor Certificates,
please complete this form and write a check made payable to American Investors
Group, Inc. Send the entire form with your check along with any other documents
in the envelope provided. We will return your copy to you once your subscription
agreement has been reviewed and accepted. If you have any questions regarding
this form, please contact your account representative or our customer service
department at 1-800-815-1175. This Subscription Agreement must be accompanied by
a Suitability Certificate (Exhibit B).
Ownership Registration:
- -------------------------------------------------------------------------------
Name(s): _________________________________________________________________
- -------------------------------------------------------------------------------
Address: _________________________________________________________________
City: _____________________________________________ State: ________________ Zip: _______________
Tax I.D./ S.S. Number: ______________________________ Date(s) of Birth: ________ / _______ / ___________
Phone Number: ( _____ ) ____________________________ ________ / _______ / ___________
Form of Ownership: (please select one): |_| Tenants in Common |_| IRA |_| Partnership/LLC
|_| Individual |_| Corporation |_| Trust |_| Pension Plan
|_| Joint Tenants w/Right of Survivorship |_| Transfer on Death |_| Custodian |_| Profit Sharing
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
American Investors Account Number (if known): ________________ Account Representative:___________________________________
- -------------------------------------------------------------------------------
Mailing Address for Correspondence: (if different from above)
- -------------------------------------------------------------------------------
Name(s): ________________________________________________________________________________________
Address: ________________________________________________________________________________________
City: _____________________________________________ State: ________________ Zip: _______________
- -------------------------------------------------------------------------------
A dividend/interest order form will need to be completed if you elect to have
your interest or dividends directed to another source other than shown above. A
dividend order form can be obtained from your account representative or our
customer service department at 1-800-815-1175.
- -------------------------------------------------------------------------------
Complete this section if you are purchasing Common Stock:
- --------------------------------------------------------------------------------
Number of Shares: ________________ X $10.00 per share = $ ___________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(250 share minimum; 200 share minimum for IRA accounts)
- --------------------------------------------------------------------------------
Does this purchase add to an existing purchase of shares? Yes: |_| No: |_|
Do you want your dividends reinvested into the Companys Dividend Reinvestment Plan? Yes: |_| No: |_|
- --------------------------------------------------------------------------------
(If boxes are left unchecked , will assume No)
- --------------------------------------------------------------------------------
Complete this section if you are purchasing Secured Investor Certificates:
- -------------------------------------------------------------------------------
Maturity (Two Years) (Three Years) (Four Years) (Five Years) (Seven Years) Total
- --------------------------------------------------------------------------------
Principal
-------------------------------------------------------------------------------
Amount: $________ + $________ + $________ + $________ + $________ = $___________
- --------------------------------------------------------------------------------
(Certificates are issued in $1,000 increments and multiples thereof)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Certification: I hereby certify that (i) I am a bona fide resident of the state
listed in the Ownership Registration: (ii) the social security number or tax
identification number listed above is correct; and (iii) I am not subject to
backup withholding either because the Internal Revenue Service has not notified
me that I am subject to backup withholding as a result of failure to report all
interest and dividends or I have been notified that I am no longer subject to
backup withholding. I understand that this purchase offer is subject to the
terms and contained in the prospectus and may be rejected in whole or in part
and will not become effective until accepted by American Investors Group, Inc.
and American Church Mortgage Company's Advisor. ------------------
- ----------------------------------------------------
- ----------------------------------------------------------------------- ----------------------------------------------------
Signature of Individual Investor/Custodian/Authorized Person (Date) Signature of Joint Tenant(if applicable) (Date)
- -------------------------------------------------------------------------------------------------------------------
Office Use Only: Broker Dealer: (Accepted |_| Rejected |_| Date: _______________ ) Advisor: (Accepted
|_| Rejected |_| Date: _____________ )
White: Issuer Yellow: Investor Pink: Broker/Dealer Gold: Account Representative
Exhibit B
American Church Mortgage Company
Suitability Certificate
Please return the entire form to our offices in the envelope provided. We will
return your copy to you once your certificate has been reviewed and approved.
This suitability certificate must be accompanied by a Subscription Agreement
(Exhibit A). In the case fiduciary accounts, these minimum standards must be met
by the beneficiary of the fiduciary account or by the donor or grantor who
directly or indirectly supplies the funds to purchase the shares or certificates
if the donor or grantor is the fiduciary.
Please complete this section if you are purchasing Common Stock:
- -------------------------------------------------------------------------------
You should make an investment in the shares only as a long-term investment, only
if you have significant financial means and only if you have no immediate need
for liquidity of your investment. You must purchase a minimum of 250 shares
($2,500). IRAs and qualified plans must purchase a minimum of 200 shares
($2,000). We have established financial suitability standards for investors
desiring to purchase shares. Please check one of the two boxes below.
- --------------------------------------------------------------------------------
|_| I either individually or with my spouse had an annual income (without
regard to investment in the shares or certificates) of at least $45,000
during the previous calendar year, have a net worth of at least $45,000
(exclusive of my (our) principal residence and its furnishings and
automobiles) and am purchasing Common Stock for my (our) own account or for
my (our) retirement plan or trust.
|_| I either individually or with my spouse have a net worth of at least
$150,000 (exclusive of my (our) principal resident and its furnishings and
automobiles) and am purchasing Common Stock for my (our) own account or for
my (our) retirement plan or trust.
Please complete this section if you are purchasing Secured Investor
Certificates:
- --------------------------------------------------------------------------------
You should purchase certificates only if you are prepared to hold the
certificates until maturity, only if you have significant financial means and
only if you have no immediate need for liquidity of your investment. We have
established financial suitability standards for investors desiring to purchase
certificates. You must purchase at least $1,000 worth of certificates. Please
refer to the applicable section listed below.
- --------------------------------------------------------------------------------
If you are purchasing $5,000 of certificates or less please check one of the two
boxes below:
- --------------------------------------------------------------------------------
|_| I either individually or with my spouse had an annual income (without
regard to investment in the shares or certificates) of at least $30,000
during the previous calendar year, have a net worth of at least $30,000
(exclusive of my (our) principal residence and its furnishings and
automobiles) and am purchasing Certificates for my (our) own account or for
my (our) retirement plan or trust.
|_| I either individually or with my spouse have a net worth of at least
$100,000 (exclusive of my (our) principal residence and its furnishings and
automobiles) and am purchasing Certificates for my (our) own account or for
my (our) retirement plan or trust.
If you are purchasing over $5,000 of certificates, or a resident of AR, IA, MO
or NM, please check one of the two boxes below:
|_| I either individually or with my spouse had an annual income (without
regard to investment in the shares or certificates) of at least $45,000
during the previous calendar year, have a net worth of at least $45,000
(exclusive of my (our) principal residence and its furnishings and
automobiles) and am purchasing Certificates for my (our) own account or for
my (our) retirement plan or trust.
|_| I (either individually or with my spouse have a net worth of at least
$150,000 (exclusive of my (our) principal residence and its furnishings and
automobiles) and am purchasing Certificates for my (our) own account or for
my (our) retirement plan or trust.
If a subscription is rejected, the Company will promptly refund to the investor
the consideration paid for the shares or certificates without deduction or
interest. You may rescind your purchase of shares or certificates for up to five
(5) business days after you receive a final prospectus.
- ----------------------------------------------------------- -----------------------------------------------------
Please Print Name Please Print Name- Joint Tenant (If Applicable)
- ----------------------------------------------------------- ------------------------------------------------------
Signature of Individual/Custodian/Authorized Person (Date) Signature of Joint Tenant (If Applicable) (Date)
Office Use Only: Broker Dealer: (Accepted |_| Rejected |_|
Date: ___________ )
Advisor: (Accepted |_|Rejected |_|
Date: __________ ).
White: Issuer Yellow: Investor Pink: Broker/Dealer Gold: Account Representative
================================================================== ==============================================================
Prospective investors may rely only on the information contained
in this prospectus. Neither American Church Mortgage Company American Church
nor the Underwriter has authorized anyone to provide any other Mortgage Company
information. This prospectus isn't an offer to sell to - nor is
it seeking an offer to buy these shares from - any person in any
jurisdiction in which it is illegal to make an offer or
solicitation. The information here is correct only on the date
of this prospectus, regardless of the time of the delivery of
this prospectus or any sale of these securities.
TABLE OF CONTENTS
Prospectus Summary 1
Risk Factors 6
Who May Invest 12 1,500,000 Shares of Common Stock
Use of Proceeds 13 and
Compensation to Advisor and Affiliates 14 $15,000,000 of Series A Investor Certificates
Conflicts of Interest 16
Distributions 18
Capitalization 20
Selected Financial Data 21 PROSPECTUS
Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Our Business 26
Management 38
Security Ownership of Management and Others 41
Certain Relationships and Transactions With Management 42
The Advisor and the Advisory Agreement 43
Federal Income Tax Consequences Associated With
the Certificates 45
Federal Income Tax Consequences Associated With REITS 46
ERISA Consequences 48
Description of the Capital Stock 49
Description of the Certificates 51
Summary of the Organizational Documents 59
Plan of Distribution 62
Commission Position on Indemnification for Securities Act
Liabilities 64
Legal Matters 64
Experts 64
Reports to Shareholders and Rights of Examination 64
Additional Information 65
Index to Financial Statements F-1
Dealers effecting transactions in the shares offered by this prospectus, whether
or not participating in the offering, may be required to deliver a prospectus
until 45 days after completion of this offering. Dealers may also be required to
deliver a prospectus when acting as underwriters and for their unsold allotments
or subscriptions.
American Investors Group, Inc.
May 5, 2003
================================================================== ==============================================================
II-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Item Estimated Cost
---- --------------
SEC Registration Fee......................... ..... $ 2,998.00
NASD Filing Fee.................................... $ 3,500.00
Blue Sky Qualification Fees and Expenses*.......... $ 14,000.00
Underwriter's Expense Allowance** $ 233,000.00
Printing and Engraving*............................ $ 2,000.00
Legal Fees and Expenses*........................... $ 69,630.50
Accounting Fees and Expenses*...................... $ 5,000.00
Miscellaneous*..................................... $ 2,971.50
----------
Total.......................................... $ 333,000.00
----------
* Estimated
** Assumes sale of all securities offered
Item 32. Sales to Special Parties.
None.
Item 33. Recent Sales of Unregistered Securities.
None.
Item 34. Indemnification of Directors and Officers.
Our articles require us to indemnify and pay or reimburse reasonable
expenses to any individual who is our present or former director, advisor or
affiliate, provided that: (i) the director, advisor or affiliate seeking
indemnification has determined, in good faith, that the course of conduct which
caused the loss or liability was in our best interest; (ii) the director,
advisor or affiliate seeking indemnification was acting on our behalf or
performing services on our behalf; (iii) such liability or loss was not the
result of negligence or misconduct on the part of the indemnified party, except
that in the event the indemnified party is or was an independent director, such
liability or loss shall not have been the result of gross negligence or willful
misconduct; and (iv) such indemnification or agreement to be held harmless is
recoverable only out of our assets and not from our shareholders directly.
We may advance amounts to persons entitled to indemnification for legal and
other expenses and costs incurred as a result of legal action instituted against
or involving such person if: (i) the legal action relates to the performance of
duties or services by the indemnified party for or on our behalf; (ii) the legal
action is initiated by a third party who is not a shareholder, or the legal
action is initiated by shareholder acting in his or her capacity as such and a
court specifically approves such advancement; and (iii) the indemnified party
receiving such advances undertakes, in writing, to repay the advanced funds,
with interest at the rate we determined, in cases in which such party would not
be entitled to indemnification.
Notwithstanding the foregoing, we may not indemnify our directors, advisor,
or affiliates and any persons acting as a broker-dealer for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities by such party unless one or more of the following conditions
are met: (i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as the particular indemnitee;
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee; or (iii) a court of
competent jurisdiction approves a settlement of the claims against a
II-1
particular indemnitee and finds that indemnification of the settlement and
the related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission and of the published position of any state securities regulatory
authority in which our securities were offered or sold as to indemnification for
violations of securities laws.
Subject to the limitations described above, we have the power to purchase
and maintain insurance on behalf of an indemnified party. We may procure
insurance covering our liability for indemnification. The indemnification
permitted by our Articles is more restrictive than permitted under the Minnesota
Business Corporation Act.
Item 35. Treatment of Proceeds From Stock Being Registered.
None.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements:
Annual Financial Statements
Report of Independent Auditor
Balance Sheet at December 31, 2001 and 2002
Statements of Operations for years ended December 31, 2000,
2001 and 2002 Statements of Stockholders' Equity for the years
ended December 31, 2000, 2001 and 2002 Statements of Cash
Flows for the years ended December 31, 2000, 2001 and 2002
Notes to Financial Statements
(b) Exhibits:
See attached exhibit index.
Item 37. Undertakings.
The undersigned registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. 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) (ss.
230.424(b) of this chapter) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2) That, for the purpose 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.
II-2
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.
4) To deliver or cause to be delivered with the prospectus, to each person to
whom the prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and furnished
pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under
the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not
set forth in the prospectus, to deliver, or cause to be delivered to each
person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide
such interim financial information.
5) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
6) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
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.
7) The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Minnetonka, state of Minnesota, on May 5, 2003.
AMERICAN CHURCH MORTGAGE COMPANY
By /s/ Philip J. Myers
----------------------------------
Philip J. Myers, President
II-3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Philip J. Myers his true and lawful
attorneys-in-fact and agents with full power of substitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
subsequent registration statements filed by the Registrant pursuant to Rule
426(b) of the Securities Act of 1933, which relates to this Registration
Statement, and to file same, with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
/s/ Kirbyjon H. Caldwell* Director May 5, 2003
- ---------------------------------------------------
Kirbyjon H. Caldwell
/s/ Dennis J. Doyle* Director May 5, 2003
- ---------------------------------------------------
Dennis J. Doyle
Director, President,
/s/ Philip J. Myers Secretary and Treasurer May 5, 2003
- ---------------------------------------------------
Philip J. Myers
/s/ Robert O. Naegele, Jr.* Director May 5, 2003
- ---------------------------------------------------
Robert O. Naegele, Jr.
*By Philip J. Myers, attorney-in-fact
II-4
INDEX TO EXHIBITS
Exhibit No. Title
1 Distribution Agreement 7
3.1 Amended and Restated Articles of Incorporation 4
3.2 Second Amended and Restated Bylaws 6
4.1 Specimen Common Stock Certificate 4
4.2 Trust Indenture 7
5 Opinion Letter of Leonard, Street and Deinard, Professional Association as to the legality of 7
the securities
8 Opinion Letter of Leonard, Street and Deinard, Professional Association as to certain tax 7
matters relating to the securities
10.1 Amended and Restated REIT Advisory Agreement Between the Company and Church Loan Advisory, Inc. 6
10.2 Amendment No. 1 to Advisory Agreement Between the Company and Church Loan Advisors, Inc. 1
10.3 Line of Credit Agreement with Beacon Bank dated March 18, 2002 7
10.4 $2,000,000 Promissory Note and Combined Security Agreement between the Company and Beacon Bank 7
dated March 18, 2002
10.5 Security Agreement between the Company and The Herring National Bank, as Trustee 7
12 Statements Regarding Computation of Ratios 2
21 Subsidiaries of the Registrant 3
23.1 Consent of Counsel (included in Exhibit 5 and 8) 7
23.2 Consent of Auditor 2
24 Power of Attorney (included on signature page) 2
25 Statement of Eligibility of Trustee 7
- -----------------
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-11 filed June 29, 1999 (Commission File
No. 333-81819).
(2) Filed herewith.
(3) None.
(4) Incorporated herein by reference to the Company's Registration Statement on Form 8-A filed April 30, 1999.
(5) Incorporated herein by reference to the Company's Registration Statement on Form S-11/A filed August 26, 1999 (Commission
File No. 333-81819).
(6) Incorporated herein by reference to the Company's Registration Statement on
Form S-11 filed December 21, 2001 (7) Incorporated herein by reference to the
Company's Registration Statement on Form S-11/A filed April 26, 2002.
II-5
Exhibit 12
STATEMENTS REGARDING COMPUTATION OF RATIOS
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
2002
1998 1999 2000 2001 2002 (pro forma)
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Revenues
Interest Income Loans $ 655,219 $ 848,346 $1,160,113 $1,195,464 $1,322,220 $1,322,220
Interest Income Other 76,444 200,165 219,857 295,302 406,345 406,345
Capital Gains Realized 9,138 14,828 1,293 5,839 7,208 7,208
Origination Income 40,338 45,690 25,223 27,070 49,543 49,543
Income Other Sources 874 407 928 1,887 127 127
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Total Revenues 782,013 1,109,436 1,407,414 1,525,562 1,785,443 1,785,443
Operating Expenses
Professional Fees 8,988 11,351 21,241 20,606 24,690 24,690
Director Fees 3,200 3,200 3,200 3,200 3,800 3,800
Amortization 303 833 2,917 0 29,874 115,992
Interest Expense 0 0 65,282 26,835 131,367 975,217
Advisory Fees 52,944 116,293 154,389 162,131 172,151 172,151
Loan Loss Reserve 0 0 0 13,889 101,000 101,000
-----------------------------------------------------------------------------------------------------
Other 11,213 25,880 20,132 20,891 32,620 32,620
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Total Expenses 76,648 157,557 267,161 247,552 495,502 1,425,470
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Operating Income 705,365 951,879 1,140,253 1,278,010 1,289,941 359,973
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Add Back Fixed Charges
Certificates Interest
Expense (1) 0 0 0 0 118,650 962,500
Amortization related to line
of credit 0 833 2,917 0 0 0
Amortization related to
debt offering (2) 0 0 0 0 29,874 115,992
Interest Expense 0 0 65,282 26,835 12,717 12,717
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Total Fixed Charges 0 833 68,199 26,835 161,241 1,091,209
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Earnings $ 705,365 $952,712 $1,208,452 $1,304,845 $1,451,182 $1,451,182
===========================================================================================================
(1) Interest expense is adjusted to reflect the sale of all certificates
offered and assumes a weighted average interest rate of 6.42% per year
(962,500 total). Actual interest rates we will pay on certificates will be
set forth in a supplement to this prospectus. Further assumes that we
derive no income from the application of certificate sale proceeds to new
mortgage loans.
(2) Assumes all certificates are sold and underwriting fees are amortized over
the life of the certificates which amounts to $115,992 per year.
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion of our report dated February 28, 2003 on the
financial statements of American Church Mortgage Company as of December 31, 2002
and 2001 and for the years ended December 31, 2002, 2001 and 2000 in the Post
Effective Amendment No. 1 to Form S-11 Registration Statement of American Church
Mortgage Company dated on or about April 30, 2003 and to the reference to our
Firm under the caption "Experts" in the Prospectus included therein.
/S/ Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
April 30, 2003