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 March 31, 1999 or [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ------------to------------ - -------------------------------------------------------------------------------- Commission File Number 33-87570 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 o o The number of shares outstanding of the Registrant's stock as of April 30, 1999 was: 1,189,967 Shares of Common Stock Outstanding 1 AMERICAN CHURCH MORTGAGE COMPANY INDEX Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets March 31, 1999 and 1998................. 3 Statements of Operations Three Month Periods Ended March 31, 1999 and 1998.... 4 Statements of Cash Flows Three Months Ended March 31, 1999 and 1998........... 5 Statement of Stockholder's 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 ITEM 1. FINANCIAL STATEMENTS AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED BALANCE SHEETS - -------------------------------------------------------------------------------- March 31, March 31, 1999 1998 Assets: Current Assets Cash and Cash Equivalents.............................. $ 2,410,735 $ 1,080.850 Current Maturities of Loans Receivable................ 156,748 114,819 Current Maturities of Bonds Receivable................. 24,000 - 0 - ----------- ----------- Total current Assets: 2,591,483 1,195,669 Loans Receivable, net of current maturities............ 6,684,045 5,367,610 Bonds receivable....................................... 1,857,144 131,722 Deferred Tax Asset..................................... 40,000 33,000 Organizational Expenses, (net of accumulated amortization March 31, 1999, $1,466; March 31, 1998, $1,163).................................... 86 389 ----------- ---------- Total Assets: $ 11,172,758 $ 6,728,390 =========== ========= Liabilities and Shareholders' Equity: Current Liabilities: Accounts Payable....................................... $ 26,295 $ 234,295 Management Fee Payable................................. 22,384 14,130 Deferred Income........................................ 22,963 69,473 Dividends Payable...................................... 217,828 142,743 ---------- --------- Total current Liabilities:......................... 289,470 460,641 Deferred Income........................................ 104,193 16,473 Shareholders' Equity Common stock, par value $.01 per share; authorized 30,000,000 shares; issued and outstanding 1,183,879 as of March 31, 1999, 692,992 shares as of March 31, 1998.................................... 11,839 6,930 Additional Paid in Capital............................. 10,874,383 6,308,630 Net Income .......................................... (107,127) (64,284) ----------- --------- Total Shareholders' Equity: 10,779,095 6,251,276 ----------- --------- $ 11,172,758 $ 6,728,390 =========== ========= Notes to Financial Statements are an integral part of this Statement. 3 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- Three Months Ended March 31, March 31, 1999 1998 Revenues Interest Income Loans........................... $ 164,508 $ 131,755 Interest Income Other....................... 44,794 8,281 Capital Gains Realized.......................... 1,460 1,194 Origination Income.............................. 6,536 4,410 -------- ------- Total Revenues: 217,298 145,640 Expenses Professional fees............................... 24,715 14,968 Director fees................................... 800 800 Amortization.................................... 76 76 Other........................................... 3,313 2,318 -------- --------- Total Expenses: 28,904 18,162 Provision for Income Taxes........................... - 0 - - 0 - ---------- --------- Net Income .......................................... $ 188,394 $ 127,478 ========= ========= Income (Loss) Per Common Share....................... $ .16 $ .22 Weighted Average Common Shares Outstanding.................................... 1,160,225 591,640 Dividends Declared................................... $ 217,828 $ 142,743 Notes to Financial Statements are an integral part of this Statement. 4 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- For the Three For the Three Months Ended Months Ended March 31, March 31, 1999 1998 Cash Flows From Operating Activities Net Income $ 188,394 $ 127,478 Adjustments to reconcile net income (loss) to net cash used in operating activities: Deferred income taxes - 0 - - 0 - Amortization 76 76 Change in assets and liabilities: Deferred income 12,976 7,517 Accounts receivable 28,777 - 0 - Increase (Decrease) in accounts payable 35,920 232,935 ---------- --------- Net cash used in operating activities 266,143 368,006 Cash Flows From Investing Activities Investment in mortgage loans (990,000) (595,000) Collections of mortgage loans 381,067 24,879 Investment in bonds (857,147) (5,913) ---------- -------- Net cash used for investing activities (1,466,080) (576,034) Cash Flows From Financing Activities Proceeds from stock offering 902,146 1,124,962 Dividends Paid (233,004) (127,899) ---------- -------- Net cash from (used for) financing activities 669,142 997,063 Net increase (decrease) in cash (530,795) 789,035 Cash Beginning of period 2,941,530 291,815 ---------- ---------- End of period $ 2,410,735 $ 1,080,850 ========= ========== Supplemental Schedule of Noncash Financing Activities: Dividends declared but not paid $ 217,828 $ 142,743 --------- --------- Notes to Financial Statements are an integral part of this Statement. 5 AMERICAN CHURCH MORTGAGE COMPANY UNAUDITED STATEMENT OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------- Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Balance, December 31, 1998 1,087,646 $ 10,876 $ 9,973,200 $ (77,693) Issuance of 963 shares of common stock, net of offering costs 96,233 963 901,183 Net Income 188,394 Dividends declared (217,828) Balance, March 31, 1999(unaudited) 1,183,879 $ 11,839 $10,874,383 $ (107,127) 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, 1998, 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, 1998. 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 March 31, 1999, management believes the loans receivable to be collectible in all material respects, and therefore, no allowances is presently provided. Organizational Expenses Organizational expenses are stated at cost and are amortized using the straight-line method over five years. Deferred Income Deferred income represents loan origination fees which are recognized over the life of the loan as an adjustment to the yield on the loan. 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. 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 in either year for the purpose of calculating earnings per share. Stock options were not included in computing earnings per share because their effects were antidilutive. 2. MORTGAGE AND BONDS PORTFOLIO As of March 31, 1999, the Company had seventeen first mortgage loans receivable totaling $6,232,750 in principal amount and three second mortgage loans aggregating $745,000 in principal amount. The loans bear interest ranging from 9.85% to 12.00% The Company also has purchased $1,907,000 principal amount mortgage backed bonds issued by churches. The bonds pay either quarterly or semi-annual interest ranging from 6.35% to 10.70%. The combined principal of $1,907,000 is due at various maturity dates between June 1, 1999 and February 1, 2019. The maturity schedule for mortgage loans and bonds receivable as of March 31, 1999 is as follows: Mortgage Loans Bond Portfolio 1999 $ 112,512 $ 12,000 2000 169,681 17,000 2001 189,179 125,000 2002 217,075 21,000 2003 235,295 23,000 Thereafter 5,917,051 1,709,000 --------- --------- 1,907,000 Less discounts from par (25,856) Total $6,840,793 $1,881,144 ========= ========= 3. STOCK OPTION PLAN The Company has adopted a Stock Option Plan granting each member of the Board of Directors and the president of the Advisor (Note 4) an option to purchase 3,000 shares of common stock annually upon their re-election. The purchase price of the stock will be the fair market value at the grant date. On November 15, 1994, the Company 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 March 31, 1999. 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., Minnetonka, Minnesota (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 is required to pay the Advisor a termination fee equal to two percent of the value of the average invested assets of the Company as of the date of termination, subject to limitations set forth in the Advisory Agreement. 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 advisory and origination fees from January 1 through March 31, 1999 of $22,384. The Advisor and the Company are related through common ownership and common management. See Note 5. 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, 1997and concluded January 22, 1999. A total of 799,759 shares were sold in the Company's public offering. The Company intends to file a Registration Statement with the Securities and Exchange Commission for a third public offering of its common stock in 1999. 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 March 31, 1999 and 1998: March 31, 1999 1998 -------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $ 2,410,735 $ 2,410,735 $ 1,080,850 $ 1,080,850 Loans receivable 6,840,793 6,840,793 5,482,429 5,482,429 Bonds receivable 1,881,144 1,881,144 131,722 131,722 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 Investors Group, Inc. ("American"), an affiliate of the Company. The Company concluded its initial public offering on November 8, 1996. As of such date the Company had sold 335,481 shares to approximately 281 individuals, not including 20,000 shares ($200,000) previously purchased by the Company's initial shareholder -- DRM Holdings, Inc., an affiliate of the Company. On September 26, 1997, the Securities and Exchange Commission declared effective the Company's second public offering of 1,500,000 common shares at a price of $10.00 per share ($15,000,000) under SEC File 333-27601. The Offering was co-underwritten by American Investors Group, Inc. and LaSalle St. Securities, Inc., ("LaSalle"). American acted in the capacity of the Managing Underwriter and is an affiliate of the Company. The Offering was conducted on a"best-efforts" basis pursuant to applicable rules of the Securities and Exchange Commission. The Company concluded it second public offering on January 22, 1999. The Company sold 799,759 shares during its second public offering. As of March 31, 1999 the Company has 1,183,879 shares outstanding and approximately 775 individual shareholders. Between the date upon which the Company began active business operations (April 15, 1996), and March 31, 1999, the Company has made 28 loans to 25 churches in the aggregate amount of $8,489,750, with the average size being $303,205. Of the 28 loans made by the Company, five loans totaling $1,442,000, have been repaid by the borrowing churches. The Company has also purchased in the secondary market for $1,825,443 (which includes $407 in accrued interest) First Mortgage Church Bonds in the face amount of $1,840,300 and purchased for $72,800 Second Mortgage Church Bonds in the face amount of $100,000. Two of the First Mortgage Church Bonds in the face amount of $33,300 have been called for redemption by the issuing organizations. 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 future public offerings; (ii) prepayment and repayment at maturity of existing loans; (iv) borrowed funds; and (v) dividends reinvested under the Company's Dividend Reinvestment Plan. Results of Operations During the three month period ended March 31, 1999 total assets of the Company increased by $906,431 due primarily to sale of the Company's common stock. Total liabilities increased by $33,720 due to deferred income and dividends declared but not yet paid as of March 31, 1999. During the three month period ending March 31, 1999 the Company funded two additional first mortgage loan and one second mortgage loan to churches for an aggregate amount of $755,000 and $235,000 respectively. In addition, the Company purchased $863,000 principal amount of first mortgage church bonds for a purchase price of $855,720. All loans made by the Company range in interest rate charged to the borrowers from 9.85% for fixed 20 year amortized loans, 11.25% for fixed 15 year amortized loans to 12.00% for a 5-year interim loan. As of March 31, 1999, the average, principal-adjusted interest rate on the Company's portfolio of loans was 10.83%. The Company's portfolio of bonds has an average current yield of 9.39% . Net operating income for the Company's three month period ended March 31, 1999 was $188,394 on total revenues of $217,298. Interest income earned on the Company's portfolio of loans was $164,508. Excluded from revenue for the three month period ended March 31, 1999 is $19,479 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 10 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 March 31, 1999 included origination income even though it is not recognized in its entirety for the period under GAAP. The Company's Board of Directors declared dividends of $.1875 for each share held of record on March 31, 1999. 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 April 30, 1999 represents a 7.50% 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 March 31, 1998 increased $906,431 to $11,172,758 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 three new mortgage loans, church bonds purchased in the secondary market, and cash and cash equivalent money market obligations. Shareholders' Equity rose $872,711 to $10,779,095 for the same reason. Company liabilities at the end of the three month period ended March 31, 1999 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 March 31, 1999 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 March 31, 1999. 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: May 14, 1999 AMERICAN CHURCH MORTGAGE COMPANY By: /s/ David G. Reinhart David G. Reinhart Chief Executive Officer, Treasurer (and Chief Financial Officer) By: /s/ V. James Davis V. James Davis Vice President and Secretary file:f:\acmc\10q1st99.wpd 12