SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB - ------------------------------------------------------------------------------- [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 or [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ------------to------------ - ------------------------------------------------------------------------------- Commission File Number 33-87570 I.R.S. Employer Identification Number 41-1793975 AMERICAN CHURCH MORTGAGE COMPANY Incorporated Under the Laws of the State of Minnesota 10237 Yellow Circle Drive Minnetonka, MN 55343 Telephone: (612) 945-9455 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's stock as of October 31, 1998 was: 999,017 Shares of Common Stock Outstanding 1 AMERICAN CHURCH MORTGAGE COMPANY INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets September 30, 1998 and 1997.......................... 3 Statements of Operations Nine Month Periods Ending September 30, 1998 and 1997... 4 Interim Three Month Periods Ending September 30, 1998 and 1997...................... 4 Statements of Cash Flows Nine Months Ended September 30, 1998 and 1997........... 5 Statement of Stockholders Equity.......................... 6 Notes to Financial Statements ............................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.......12 Item 6. Exhibits and Reports on Form 8-K .........................12 Signatures'...............................................12 2 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED BALANCE SHEETS - ------------------------------------------------------------------------------- September 30, September 30, 1998 1997 ASSETS: CURRENT ASSETS Cash and Cash Equivalents.............................. $ 1,904,250 $ 99,536 Current Maturities of Loans Receivable................ 244,076 61,543 --------- --------- Total current Assets: 2,148,326 161,079 LOANS RECEIVABLE, net of current maturities............ 6,764,508 3,184,573 BONDS RECEIVABLE....................................... 134,274 124,668 DEFERRED OFFERING COSTS................................ 665 30,558 DEFERRED TAX ASSET..................................... 33,000 15,000 Organizational Expenses, (net of accumulated amortization September 30, 1998, $1,315; September 30, 1997, $1,011).................................... 237 540 --------- ---------- Total Assets: $ 9,081,010 $ 3,516,418 ========= ========== LIABILITIES AND SHAREHOLDER'S EQUITY: CURRENT LIABILITIES: Accounts Payable....................................... $ 24,820 $ 36,129 Deferred Income........................................ 22,948 11,066 Dividends Payable...................................... 191,298 87,103 --------- --------- Total current Liabilities:......................... 239,066 134,298 DEFERRED INCOME, net of current deferred Income........ 78,130 36,717 SHAREHOLDER'S EQUITY Common stock, par value $.01 per share; authorized 30,000,000 shares; issued and outstanding 962,376 as of September 30, 1998, 368,066 shares as of September 30, 1997................................ 9,624 3,681 Additional Paid in Capital............................. 8,820,204 3,389,106 Accumulated Deficit.................................... (66,014) (47,384) --------- --------- Total Shareholders Equity: 8,763,814 3,345,403 --------- --------- $ 9,081,010 $ 3,516,418 ========= ========= Notes to Financial Statements are an integral part of this Statement. 3 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- Nine Months Ended Three Months Ended September 30, September 30, 1998 1997 1998 1997 -------- --------- --------- ------- REVENUES Interest Income Loans........................... $ 470,297 $ 230,245 $ 184,643 $ 88,414 Interest Income Other........................... 43,400 17,437 19,553 3,460 Capital Gains Realized.......................... 5,885 3,157 3,372 1,097 Origination Income.............................. 31,126 8,347 16,687 2,824 ------- ------- ------- ------ Total Revenues: 550,708 259,186 224,255 95,795 EXPENSES Professional Fees............................... 7,780 7,862 - 0 - 1,062 Director Fees................................... 2,400 1,600 800 - 0 - Amortization.................................... 228 228 76 76 Advisory Fees................................... 40,185 4,700 10,558 4,700 Other........................................... 8,437 5,246 2,486 1,108 ------- ------- ------- ------ Total Expenses: 59,030 19,636 13,920 6,946 NET OPERATING INCOME (loss).......................... $ 491,678 $ 239,550 $ 210,335 $ 88,849 ------- ------- ------- ------ Provision for (Benefit from ) Income Taxes....................................... - 0 - 5,000 - 0 - - 0 - -------- ------- ------- ------- Net Income (loss).................................... $ 491,678 $ 234,550 $ 210,335 $ 88,849 ======= ======== ======= ======= Income (Loss) Per Common Share....................... $ .65 $ .64 $ .23 $ .24 Weighted Average Common Shares Outstanding.................................... 758,709 364,540 896,182 365,212 Dividends Declared................................... $ 508,673 $ 252,040 $191,298 $ 87,103 Notes to Financial Statements are an integral part of this Statement. 4 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- For the Nine For the Nine Months Ended Months Ended September 30, September 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 491,678 $ 234,550 Adjustments to reconcile net income (loss) to net cash used in operating activities: Deferred income taxes - 0 - 5,000 Amortization 227 228 Earnings on Bonds (5,885) (3,157) Change in assets and liabilities: Increase (Decrease) in accounts payable 8,665 (2,911) Increase (Decrease) in deferred income 22,650 1,853 ----------- --------- Net cash used in operating activities 517,335 235,563 CASH FLOWS FROM INVESTING ACTIVITIES Investment in mortgage loans (2,800,000) (626,712) Collections of mortgage loans 703,724 41,420 Investment in bonds (2,580) (871) ----------- --------- Net cash used for investing activities (2,098,856) (586,163) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from stock offering 3,492,293 - 0 - Dividends Paid (298,337) (162,608) Net cash from (used for) financing activities 3,193,956 (162,608) ---------- --------- NET INCREASE (DECREASE) IN CASH 1,612,435 (513,208) CASH Beginning of period 291,815 612,744 ---------- ---------- End of period $ 1,904,250 $ 99,536 ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH Financing Activities Dividends declared but not paid $ 191,298 $ 87,103 Deferred offering costs financed through accounts payable $ 665 $ 30,558 Dividends reinvested $ 146,937 $ 87,750 SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for Interest - 0 - - 0 - Income Taxes - 0 - - 0 - Notes to Financial Statements are an integral part of this Statement. 5 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENT OF STOCKHOLDER'S EQUITY - ------------------------------------------------------------------------------- Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit BALANCE, DECEMBER 31, 1997 571,615 $ 5,716 $ 5,184,882 $ (49,019) Issuance of 390,671 shares of common stock, net of through offering costs 390,761 3,908 3,635,322 Net Income 491,678 Dividends declared (508,673) ------- ------ --------- -------- BALANCE, SEPTEMBER 30, 1998 962,376 $ 9,624 $ 8,820,204 $ (66,014) (unaudited) Notes to Financial Statements are an integral part of this Statement. 6 AMERICAN CHURCH MORTGAGE COMPANY NOTES TO UNAUDITED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with the instructions for interim statements and, therefore, do not include all information and disclosures necessary for a fair presentation of results of operations, financial position, and changes in cash flow in conformity with generally accepted accounting principles. However, in the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the period presented. The unaudited consolidated financial statements of the Company should be read in conjunction with its December 31, 1997, audited financial statements included in the Company's Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission for the year ended December 31, 1997. Nature of Business American Church Mortgage Company, a Minnesota corporation, was incorporated on May 27, 1994. The Company was organized to engage in the business of making mortgage loans to churches an 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 principals. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Cash The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Company maintains some cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Marketable Securities The Company accounts for its debt securities under Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company classifies its marketable debt securities as "held-to-maturity" because it has the intent and ability to hold the securities to maturity. Securities classified as held-to-maturity are carried at amortized cost. Allowance for Loans Receivable The Company follows a policy of providing an allowance for loans receivable. However, at September 30, 1998, management believes the loans receivable to be collectible in all material respects. Deferred Income Deferred income represents loan origination fees which are recognized over the life of the loan as an adjustment to the yield on the loan. 7 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences in recognition of income from loan origination fees for financial and income tax reporting. Deferred taxes are recognized for operating losses that are available to offset future taxable income. For the fiscal year 1998, the Company will elect 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 (Loss) Per Common Share Income (loss) per common share is computed based upon the weighted average number of common and dilutive common equivalent shares outstanding during the period. Fully diluted and primary income (loss) per common share are the same for the periods presented. Newly Issued Accounting Standards In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" was approved for issuance. The Company will adopt this Statement in fiscal 1998. The effect of this Statement has not been determined, however, the impact on the Company's financial position and results of operations is not expected to be material. 2. MORTGAGE AND BONDS RECEIVABLE At September 30, 1998, the Company had funded seven first mortgage loans and two second mortgage loan to churches for an aggregate amount of $2,800,000. The first mortgage loans made by the Company range in interest rates charged to the borrowers from 9.75% for annually adjustable 20 year amortized loans to 11.25% for 15 year fixed interest rate loans. The second mortgage loan made by the Company bears interest at the rate of 15% (adjusting to 12% upon occurrence of a continency). The maturity schedule for those loans as of September 30, 1998 is as follows: 1998 $ 36,614 1999 256,824 2000 174,835 2001 194,919 2002 217,315 Thereafter 6,128,077 --------- Total $7,008,584 The Company also has five bonds receivable, which are carried at cost plus amortized interest income. The bonds pay quarterly interest ranging from 7.75% to 10.70%. The combined principal of $157,000 is due at various maturity dates between June 1, 1999 and January 1, 2012. 3. STOCK OPTION PLAN The Company has adopted a Stock Option Plan granting each member of the Board of Directors and the president of the Advisor (Note 5) an option to purchase 3,000 shares of common stock annually upon their re-election. The purchase price of the stock will be the fair market value at the grant date. On November 15, 1994, the Company granted options to purchase an aggregate of 21,000 shares of common stock at $10 per share. These options became exercisable November 15, 1995 and expire November 15, 1999. No options have been exercised as of September 30, 1998. The Company has chosen to account for stock based compensation in accordance with APB Opinion 25. Management believes that the disclosure requirements of Statement of Financial Accounting Standards No. 123 are not material to its financial statements. 8 4. TRANSACTIONS WITH AFFILIATES The Company has an Advisory Agreement with Church Loan Advisors, Inc. (Advisor). The Advisor is responsible for the day-to-day operations of the Company and provides administrative services and personnel. Upon non-renewal or termination of the Advisory Agreement, the Company maybe required to pay the Advisor a termination fee equal to two percent of the value of the average invested assets of the Company as of the date of termination, subject to limitations set forth in the Advisory Agreement. The Company pays the Advisor an annual base management fee of 1.25 percent of average invested assets (generally defined as the average of the aggregate book value of the assets invested in securities and equity interests in and loans secured by real estate), which is payable on a monthly basis. The Advisor will also receive one-half of the origination fees paid by a mortgage loan borrower, in connection with a mortgage loan made or renewed by the Company. The Company paid $40,185 in advisory fees and $53,775 in origination fees from January 1 through September 30, 1998. The Advisor and the Company are related through common ownership and common management. 5. PUBLIC OFFERING OF THE COMPANY'S COMMON STOCK The Company filed a Registration Statement with the Securities and Exchange Commission for a public offering of its common stock in 1997. The Company offered to sell 1,500,000 shares of its common stock at a price of $10 per share. The offering was underwritten by a managing underwriter (an affiliate of the Advisor) and a co-underwriter on a "best efforts basis, and no minimum sale of stock was required. The stock sale commenced on September 26, 1997 and will continue through January of 1999. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments, none of which are held for trading purposes, are as follows at September 30, 1998 and 1997: SEPTEMBER 30, 1998 1997 ------------------------ -------------------- Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $ 1,904,250 $ 1,904,250 $ 99,536 $ 99,536 Loans receivable 7,008,584 7,008,854 3,246,116 3,246,116 Bonds receivable 134,274 134,274 124,668 124,668 The carrying value of cash and equivalents approximates fair value. The fair value of the loans receivable and the bonds receivable are estimated by discounting future cash flows using current discount rates that reflect the risks associated with similar types of loans. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AMERICAN CHURCH MORTGAGE COMPANY PLAN OF OPERATION The Company was founded in May 1994, began a "best efforts" offering of its common stock on July 11, 1995, and commenced active business operations on April 15, 1996 after completion of the "Minimum Amount" in its initial public offering (described below). Consequently, for the years ended December 31, 1994 and 1995, the Company had no operating revenues, and expenses were limited to organizational and offering-related costs. On July 11, 1995, the Securities and Exchange Commission declared effective the Company's offering of 2,000,000 common shares at a price of $10.00 per share. The Company achieved the Minimum Offering of at least 200,000 shares ($2,000,000) sold to not less than 100 individuals (the "Minimum Offering") on April 15, 1996. Until the Minimum Offering was achieved, the Company could not commence its active business of making mortgage loans to churches. Consequently, business operations from inception (May 27, 1994) to completion of the Minimum Offering (April 15, 1996) were limited to daily business organizational efforts, activities relating to the offering, reviewing potential candidates for church mortgage loans to be made by the Company once the Minimum Offering was achieved, and conducting informational meetings with brokers and broker-dealers identified to the Company by the Dealer/Manager-- American, an affiliate of the Company. The Company concluded its initial public offering on November 8, 1996. As of such date, the Company had sold 335,481 shares to approximately 281 individuals, not including 20,000 shares ($200,000) previously purchased by the Company's initial shareholder -- DRM Holdings, Inc. On September 26, 1997, the Securities and Exchange Commission declared effective the Company's secondary offering of 1,500,000 common shares at a price of $10.00 per share ($15,000,000) under SEC File 33-87570. The Offering is currently being co-underwritten by American Investors Group, Inc. ("American") and LaSalle St. Securities, Inc., ("LaSalle"). American is the Managing Underwriter and is an affiliate of the Company. This Offering is being conducted on a"best-efforts" basis pursuant to applicable rules of the Securities and Exchange Commission and will terminate no later than 365 days from September 26, 1997, subject to extension by mutual agreement of the Company and the Managing Underwriter for an additional 120 days, or until completion of the sale of all Shares, whichever first occurs. The Company reserves the right to terminate this Offering at any time. As of October 31, 1998 the Company has sold 999,017 shares of its common stock. Between the date upon which the Company began active business operations (April 15, 1996), and as of the date of this Report, the Company has made loans to twenty four churches in the aggregate amount of $7,801,000, with the average size being $325,041. The Company has also purchased in the secondary market for $57,846 (which includes $407 in accrued interest) first mortgage church bonds in the face amount of $65,300 and $72,805 second mortgage church bonds in the face amount of $100,000. Funding of additional first mortgage loans is expected to continue on an on-going basis as the Company's investable assets become available through (i) the sale of additional shares in its current public offering; (ii) prepayment and repayment at maturity of existing loans; (iv) borrowed funds; and (v) dividends reinvested under the Company's Dividend Reinvestment Plan. As of the date of this report, one first mortgage loan and one second mortgage loan have been repaid. The loan amounts were $270,000 and $350,000 respectively. In addition, one first mortgage church bond has been called for redemption effective July 20, 1998. The total principal amount of the bond was $8,300. RESULTS OF OPERATIONS During the nine month period ended September 30, 1998 total assets of the Company increased by $3,717,614 due primarily to sale of the Company's common stock. Total liabilities increased by $182,360 due to deferred income and dividends declared but not yet paid as of September 30, 1998. During the nine month period ending September 30, 1998 the Company funded six additional first mortgage loans and two second mortgage loans to churches for an aggregate amount of $2,095,000 and $570,000 respectively. In addition, the Company purchased $13,300 principal amount of first mortgage church bonds for a purchase price of $10,975. All loans made by the Company range in interest rate charged to the borrowers from 9.75% for annually adjustable, 20 year amortized loans, 11.25% for fixed 15 year amortized loans to 12.00% for a 2-year interim loan. As of September 30, 1998, the average, principal-adjusted interest rate on the Company's portfolio of loans was 10.91%. The Company's portfolio of bonds has an average current yield of 11.11% . 10 Net operating income for the Company's nine and three month periods ended September 30, 1998 was $491,678 and $210,335 respectively. Total revenues for the six and three month periods ending September 30, 1998 was $550,708 and $259,186 respectively. Interest income earned on the Company's portfolio of loans was $470,297 and $230,245 for the six month and three month periods ended September 30, 1998 respectively. Excluded from revenue for the nine month period ended September 30, 1998 is $39,286 of origination income, or "points," received by the Company, recognition of which under generally accepted accounting principles ("GAAP") must be deferred over the expected life of each loan. However, under tax principles, origination income is recognized in the period received. Accordingly, because the status of the Company as a real estate investment trust requires, among other things, the distribution to shareholders of at least 95% of "Taxable Income," the dividends declared and paid to Shareholders for the quarter ended September 30, 1998 included origination income even though it is not recognized in its entirety for the period under GAAP. The Company's Board of Directors declared a dividend of $.2125 for each share held of record on September 30, 1998. During the Company's public offering, dividends are computed and paid to each Shareholder based on the number of days during a quarter that the Shareholder owned his or her shares. The dividend, which was paid October 31, 1998 represents a 8.50% annual rate of return on each share of common stock owned and purchased for $10 per share. Total assets of the Company for the three month period ended September 30, 1998 increased $936,855 to $9,081,010 primarily as a result of the sale and issuance of the Company's common stock pursuant to its current public offering, the proceeds of which were deployed into two new mortgage loans. Shareholders' Equity rose $1,330,246 to $8,763,814 for the same reason. Company liabilities at the end of the nine month period ended September 30, 1998 are primarily comprised of a "Deferred Income", reflecting the practice of the Company of recognizing its origination income -- fees charged to borrowers at the commencement of its loans -- over the life of each loan and dividends declared as of September 30, 1998 but not yet paid. LIQUIDITY AND CAPITAL RESOURCES The Company's revenue is derived principally from interest income, and secondarily, origination fees and renewal fees generated by mortgage loans made by it. The Company also earns income through interest on funds that are invested pending their use in funding mortgage loans or distributions of dividends to its Shareholders, and on income generated on church bonds it may purchase and own. The Company generates revenue through (i) permitted temporary investments of the net proceeds from the sale of the shares, and (ii) implementation of its business plan of making mortgage loans to churches and other non-profit religious organizations. The principal expenses of the Company will be Advisory Fees, legal and accounting fees, communications costs with its Shareholders, and the expenses of its stock transfer agent, registrar and dividend reinvestment agent. The Company's future capital needs are expected to be met by (i) additional sale of its shares to the public (ii) prepayment, repayment at maturity and renewal of mortgage loans made by the Company, and (iii) borrowed funds. The Company believes that the "rolling" effect of mortgage loans maturing, together with dividends reinvested under the Company's Dividend Reinvestment Plan, will provide a supplemental source of capital to fund its business operations in future years. Nevertheless, the Company believes that it may be desirable, if not necessary, to sell additional shares of common stock, in order to enhance its capacity to make mortgage loans on a continuous basis. There can be no assurance that the Company will be able to raise additional capital on terms acceptable for such purposes. Although the Company may borrow funds in an amount not to exceed 50% of its Average Invested Assets in order to increase its lending capacity, it has no present intention of doing so, nor has it secured a source for such borrowing. 11 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the quarter ended September 30, 1998. Item 6. Exhibits and Reports on Form 8-K a) Exhibits filed with Form 10-QSB None b) Reports on Form 8-k None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 13, 1998 AMERICAN CHURCH MORTGAGE COMPANY By: /s/ V. James Davis V. James Davis Chief Executive Officer, Treasurer (and Chief Financial Officer) By: /s/ David G. Reinhart David G. Reinhart Vice President and Secretary 12