Pre-Effective Amendment to Registration Statement by a Real Estate Company — Form S-11
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-11/A Pre-Effective Amendment to Registration Statement 111 612K
by a Real Estate Company
2: EX-1.1 Form of Distribution Agreement 29 129K
3: EX-1.2 Soliciting Dealers Agreement 5 26K
4: EX-4.1 Form of Trust Indenture 41 194K
5: EX-5 Opinion Letter as to the Legality of the 2 14K
Securities
6: EX-8 Opinion Letter of Winthrop & Weinstine, P.A. 4 21K
7: EX-10.5 Form of Security Agreement 10 38K
8: EX-21 Subsidiaries of the Registrant 1 4K
9: EX-23.2 Consent of Auditor 1 7K
10: EX-25 Statement of Eligibility of Trustee 28 137K
S-11/A — Pre-Effective Amendment to Registration Statement by a Real Estate Company
Document Table of Contents
As Filed with the Securities and Exchange Commission On March 30, 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 4 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:
Philip T. Colton, Esq.
Winthrop & Weinstine, P.A.
225 South Sixth Street, Suite 3500
Minneapolis, MN 55402
(612) 604-6400
Approximate date of commencement of proposed sale to the public: As soon
as practicable after 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. [X]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," and "accelerated filer," and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
CALCULATION OF REGISTRATION FEE
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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
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Series C Secured Investor Certificates 20,000 $1,000(1) $20,000,000 $786(2)
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(1) Certificates may be purchased in any multiple of $1,000.
(2) 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.
PROSPECTUS DATED MARCH 30, 2009
AMERICAN CHURCH MORTGAGE COMPANY
$20,000,000 of Series C Secured Investor Certificates
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American Church Mortgage Company has operated as 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 our Series C Secured Investors Certificates.
Best efforts offering. The underwriters are not required to sell any
specific number or dollar amount of securities but will use their best efforts
to sell the securities offered.
We may offer new certificates with maturities ranging from approximately
thirteen (13) to twenty (20) 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 can be found in the "Description of the
Certificates" section of this prospectus. Investors are advised to check for
prospectus supplements as interest rates are subject to change. However, 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. The certificates will not be listed on any securities exchange or
NASDAQ. Our investors may have difficulty selling certificates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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 involves risks and conflicts of interest. See
"Risk Factors" beginning on p. 10 and "Conflicts of Interest" beginning on p.
21. Those risks include the following:
o If we fail to maintain our REIT status, we will be taxed as a
corporation, which could affect adversely our ability to make
interest payments to holders of certificates.
o We have conflicts of interest with the underwriter and our advisor,
which are under common control.
o You may have difficulty selling your certificates because there is
no public market and our advisor must approve all transfers of
certificates.
o Our mortgages and bonds are secured by church property, which is
typically limited purpose collateral.
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.
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Selling Commission and
Series C Secured Investor Certificates Price to Public Offering Expenses (2) Proceeds to Us
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Minimum Purchase $ 1,000 (1) $ 46.00 $ 954
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Total $20,000,000 $920,000 $ 19,080,000
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(1) Certificates may be purchased in any multiple of $1,000.
(2) Assumes the sale of all certificates offered hereby, of which there can be
no assurance. Estimated for purposes of this table based on a 2.75%
underwriter's commission, a .75% underwriter's management fee, a $120,000
non-accountable expense fee payable to the underwriter, and $100,000 in
other offering expenses.
AMERICAN INVESTORS GROUP, INC.
Minnetonka, Minnesota
_________ ___, 2009
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Table of Contents
PROSPECTUS SUMMARY ........................................................ 4
RISK FACTORS .............................................................. 10
WHO MAY INVEST ............................................................ 17
USE OF PROCEEDS ........................................................... 18
COMPENSATION TO ADVISOR AND AFFILIATES .................................... 19
CONFLICTS OF INTEREST ..................................................... 21
DISTRIBUTIONS ............................................................. 23
CAPITALIZATION ............................................................ 25
SELECTED FINANCIAL DATA ................................................... 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS .......................................................... 27
OUR BUSINESS .............................................................. 32
MANAGEMENT ................................................................ 49
EXECUTIVE COMPENSATION AND EQUITY COMPENSATION PLANS; DIRECTOR
COMPENSATION ........................................................... 52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS .................................................... 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE .. 54
THE ADVISOR AND OUR ADVISORY AGREEMENT .................................... 55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH THE
CERTIFICATES ........................................................... 57
QUALIFICATION AS A REIT FOR FEDERAL INCOME TAX PURPOSES ................... 58
ERISA CONSIDERATIONS ...................................................... 59
DESCRIPTION OF CAPITAL STOCK .............................................. 60
DESCRIPTION OF THE CERTIFICATES ........................................... 61
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS ................................... 67
PLAN OF DISTRIBUTION ...................................................... 70
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES ..... 72
LEGAL MATTERS ............................................................. 72
EXPERTS ................................................................... 72
ADDITIONAL INFORMATION .................................................... 72
INDEX TO FINANCIAL STATEMENTS ............................................. F-1
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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 has operated as a real estate investment
trust, or REIT. We make mortgage-backed loans from $100,000 to $2,000,000 to
churches and other non-profit religious organizations for the purchase,
construction or refinancing of real estate and improvements. As of September 30,
2008 we had 76 mortgage loans outstanding in the original aggregate principal
amount of $33,841,353, and own church bonds having a face value of $12,018,000.
The principal balance of our loan and bond portfolios outstanding at September
30, 2008, were $33,770,318 and $11,682,585, respectively. We intend to continue
to lend funds pursuant to our business plan as funds from the sale of our
securities become available and as funds become otherwise available, for example
through the repayment of loans.
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. In addition, our advisor receives up to one-half of any origination
fees associated with a mortgage loan made or renewed by us. Our advisor is
affiliated by common ownership with American Investors Group, Inc., which is the
underwriter of this offering (the "Underwriter").
More Information
We have filed a registration statement on Form S-11 with the Securities
and Exchange Commission (the "SEC") with respect to the secured investor
certificates to be issued in the offering. This prospectus is a part of that
registration statement.
The registration statement is, and all of our filings with the SEC (some
of which include our financial statements) are, available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You can also access many
of the documents that are referred to in this prospectus at the web site we
maintain at http://www.church-loans.net under the heading "Regulatory Filings."
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The Certificates Offered
Issuer ...................... American Church Mortgage Company
Trustee ..................... Herring Bank, Amarillo, Texas
Securities Offered .......... Series C Secured Investor Certificates
Offering Price .............. 100% of the principal amount per certificate;
multiples of $1,000 per certificate.
Maturity .................... 13, 14, 15, 16, 17, 18, 19 and 20-year
maturities. Each certificates will mature on the
anniversary of the last day of the fiscal
quarter in which the certificate is purchased.
We may cease offering specified maturities, and
begin re-offering any unavailable maturity, at
any time.
Interest Rates .............. As of the offering date, the interest rates we
will pay for each maturity of certificates are
set forth in the section entitled "Description
of the Certificates" to this prospectus.
However, investors are advised to check for
prospectus supplements as interest rates are
subject to change.
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 may redeem
outstanding certificates in the following cases:
o In our sole discretion, at any time upon
30 days' notice.
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 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 (but are
permitted to redeem fewer than all).
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 100% of the
aggregate outstanding principal amount of the
certificates. We may, in our discretion,
substitute cash or cash equivalents. Unless
there is an event of default, we will not assign
underlying mortgages securing the assigned
promissory notes. To the extent not
collateralized, the certificates will constitute
a subordinated claim against the issuer.
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, Fees ...... We will pay the underwriter a commission for
assisting us in selling the certificates. The
underwriter will receive a sales commission of
up to 2.75% and an underwriting management fee
equal to .75% of
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the principal amount of certificates sold. We
will also pay to the underwriter a
non-accountable expense fee of up to $120,000,
as further described herein at the section
entitled "Use of Proceeds."
Outstanding Indebtedness .... Our bylaws prohibit us from borrowing in excess
of 300% of shareholders' equity, except under
certain circumstances.
On September 12, 2008, we entered into a Loan
and Security agreement with Beacon Bank as
lender, and a Revolving Note evidencing an $8
million revolving loan. Approximately $4.2
million was advanced under the Revolving Note at
closing. Of this amount, approximately $4.2
million was used to pay off the Company's
previous credit facility with KeyBank National
Association. Advances under the Loan and
Security Agreement are based upon, among other
things, a borrowing base calculation and are
available to the Company for use in connection
with its general business purposes. Total
availability under the Revolving Note is
initially limited to $4.5 million, which amount
shall be increased to $8 million at such time as
one or more participants purchase an interest in
the Revolving Note.
At September 30, 2008, the Company also had
$7,258,000 worth of Series A Secured Investor
Certificates and $14,695,000 worth of Series B
Secured Investor Certificates outstanding.
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Use of Proceeds
We will use the proceeds received from the sale of 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
The Company was formed as a Real Estate Investment Trust ("REIT") in 1994
and began active operations in 1996. 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 taxable 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 certificates involves a degree of risk. See "Risk
Factors" for a more complete discussion of factors you should consider before
purchasing certificates. Some of the significant risks include:
o As a "best efforts" offering, all or a material amount of the
certificates may not be sold, and consequently, some or all of the
additional funds we are seeking may not be available to us.
o As a "no minimum" offering, there is no minimum number of principal
amount of certificates that must be sold. We will receive the
proceeds from the sale of certificates as they are sold.
o If we fail to maintain our REIT status, we will be taxed as a
corporation, which could adversely affect our ability to make
interest payments to holders of certificates.
o 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.
o There is no public trading market for the certificates. It is not
likely that a market for the certificates will develop after this
offering.
o Fluctuations in interest rates or default in repayment of loans by
borrowers could adversely affect our ability 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:
o Our President is the President of both our advisor and the
underwriter and thus is in a position of control of both entities.
o The underwriter for this offering and our advisor are also under
common control.
o Agreements between us and our advisor and the underwriter were not
negotiated at arm's-length.
o We and the underwriter have common business interests.
o Negotiations between us and our advisor during the organization and
structuring of our operations were not at arm's length.
o The advisory agreement was not negotiated at arm's-length, but is
subject to annual renewal by our Board of Directors.
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o 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.
Our Investment Objectives
Our investment objectives are to provide our certificate holders with:
o a higher level of distributable income or interest rate than is
available in guaranteed or government-backed fixed-income
investments;
o preservation of their investment capital through portfolio
diversification (lending funds to many different borrowers and
purchasing bonds issued by numerous issuers);
o 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
o 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 make mortgage loans from $100,000 to $2,000,000 to churches and other
non-profit religious organizations throughout the United States. We seek to:
o find qualified borrowers and make loans in accordance with out
Lending Guidelines;
o lend at rates of interest in excess of our cost of funds;
o offer competitively attractive mid-term (5-15 years) loans and
long-term (20-30 year) loans (although there is no limit on the term
of our loans);
o charge origination fees (i.e. "points") from the borrower at the
outset of a loan and upon any renewal of a loan;
o make a limited amount of higher-interest rate and increased risk
second mortgage loans and short-term construction loans to qualified
borrowers; and
o purchase a limited amount of mortgage-secured debt securities issued
by churches and other non-profit religious organizations, typically
at 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 thirty years. We may borrow up to 300% of
our shareholders' equity, unless greater amounts are permitted under certain
circumstances.
Lending Guidelines
We follow specified lending guidelines and criteria in evaluating the
creditworthiness of potential borrowers. These guidelines and criteria include:
o Loans we make cannot exceed 75% of the appraised value of the real
property and improvements securing the loan.
o We may not loan more than $2,000,000 to a single borrower.
o We require appraisals of the property securing our loans.
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o The borrower must furnish us with a mortgagee title policy insuring
our interest in the collateral.
o 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 (12) months.
o The borrower must furnish us with financial statements (balance
sheet and income and expense statement) for its last three (3)
complete fiscal years and current financial statements for the
period within ninety (90) days of the loan closing date. A borrower
must have the last complete fiscal year financial statements
reviewed by a certified public accountant (CPA) engaged by the
borrower and who is independent of the borrower. On loans in excess
of $500,000 our advisor may require the last complete fiscal year be
audited by a CPA engaged by the borrower and who is independent of
the borrower. In lieu of the above requirement, we or our advisor
may employ a qualified accountant. The qualified accountant we
employ would be required to be independent of the borrower. Our
employed qualified accountant would not be independent of us.
Compiled financial statements of the borrower are acceptable from
our employed qualified accountant. Along with the compiled financial
statements of the borrower, our employed qualified accountant would
perform partial and targeted review examination procedures for
borrowers. On loans in excess of $500,000 the advisor may require
partial and targeted audit examination procedures for borrowers.
o Borrowers in existence for less than three (3) fiscal years must
provide financial statements since inception. No loan will be
extended to a borrower in operation less than two (2) calendar years
absent express approval by our Board of Directors.
Who May Invest
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 our shares
or certificates) of 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. 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 our shares or certificates) of at
least $70,000 and a net worth (exclusive of home, home furnishings and
automobiles) of at least $70,000; or (ii) a net worth (determined with the
foregoing exclusions) of at least $250,000. Suitability standards may be higher
in certain states. Potential investors who are residents of Idaho, Iowa, Kansas
or Washington should read Exhibit B for suitability requirements particular to
their state.
The Office of the Kansas Securities Commissioner recommends that you
should limit your aggregate investment in our Certificates and other similar
investments to not more than 10% of your liquid net worth. Liquid net worth is
defined as that portion of your total net worth (total assets minus total
liabilities) that is comprised of cash, cash equivalents and readily marketable
securities.
In addition to the above suitability standards, residents of Iowa and
Texas are limited to investing no more than 10% of their net worth (exclusive of
home, home furnishings and automobiles) in our shares or certificates.
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.
The underwriter's account application to be signed by all purchasers of
the Series C Secured Investors Certificates contains an arbitration agreement
for disputes by the underwriter. By this agreement, each purchaser agrees that
all controversies with the underwriter relating to the Certificates will be
determined by arbitration before the Financial Industry Regulatory Authority
("FINRA") (f/k/a the National Association of Securities Dealers, Inc. or
"NASD").
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RISK FACTORS
An investment in our 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 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 certificates requires only its
best efforts to locate purchasers on our behalf. The underwriter is not
obligated to purchase any certificates. Less than all of the certificates
offered may be sold. If less than all the certificates offered are sold, we will
have less cash for working capital and 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
certificates be sold before we receive proceeds from their sale. We will receive
proceeds from the sale of 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 working capital and investment.
Risks Related to Us
Our Failure to Qualify as a Real Estate Investment Trust Could Reduce the
Funds We Have Available for Investment.
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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 many 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 (including any applicable minimum tax) on our
taxable income computed in the usual manner for corporate taxpayers without any
deduction for distributions to our shareholders. Unless entitled to relief under
specific statutory provisions, we would be disqualified from treatment as a REIT
for the four taxable years following the year of losing our REIT status. To
renew our REIT qualification 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.
We intend to continue to operate as a REIT. However, future economic,
market, legal, tax or other consequences may disqualify us as a REIT or may
cause our board of directors to revoke the REIT election. Loss of REIT status
from either our disqualification as a REIT or our revocation of REIT status
would not affect whether the certificates are classified as debt for federal
income tax purposes, the anticipated federal income tax consequences to U.S.
persons who hold the certificates, or whether we may deduct interest paid to
certificate holders for United States federal income tax purposes. To generate
funds with which to pay federal income taxes because of the loss of REIT status,
however, could reduce our funds that are available for investment, could cause
us to incur additional indebtedness, or could cause us to liquidate investments,
each of which could affect adversely our ability to make interest payments to
holders of certificates.
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Conflicts of Interest Arise From Our Relationship with Our Advisor and the
Underwriter.
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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 the underwriter and their affiliates must be approved by our board of
directors, including a majority of our independent directors.
We Have Identified Material Weaknesses in Our Disclosure Controls and
Procedures and Have Concluded That Our Internal Controls over Financial
Reporting Are Not Effective. In Addition, We May Experience Additional
Material Weaknesses in the Future.
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We have identified material weaknesses in our disclosure controls and
procedures relating to our lack of sufficient internal accounting personnel and
segregation of duties necessary to ensure that adequate review of our financial
statements and notes thereto is performed and have concluded that our internal
control over financial reporting is not effective. In addition, we have
identified a material weakness due to our restatement of financial statements
related to the reclassification of interest expense within operating income in
our statements of operations for the fiscal year ended December 31, 2007 and
2006, and the quarterly financial statements for the fiscal quarters ended March
31, 2008, June 30, 2008 and September 30, 2008.
Material weaknesses in our disclosure controls and procedures could result
in material misstatements in our financial statements not being prevented or
detected. We may experience difficulties or delays in completing remediation or
may not be able to successfully remediate material weaknesses at all. Any
material weakness or unsuccessful remediation could affect investor confidence
in the accuracy and completeness of our financial statements, which in turn
could harm our business and have an adverse effect on our ability to raise
additional funds, including through this offering. If under such circumstances
the Company's financial condition is adversely affected, it could negatively
impact the Company's ability to pay interest on the certificates.
Risks Related to the Certificates
We May Incur More Indebtedness.
------------------------------
We had, at September 30, 2008, $4.2 million outstanding on our credit
facility with Beacon Bank and $7,258,000 worth of Series A Secured Investor
Certificates and $14,695,000 worth of Series B Secured Investor Certificates
outstanding. 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 300% of our Shareholders' Equity by our
bylaws, unless an increased amount is approved by a majority of our Independent
Directors and disclosed and justified to our shareholders. Once the threshold is
reached (or if approval is not obtained), 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.
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. The indenture
governing the certificates does not prohibit additional indebtedness. While the
certificates are secured debt obligations, if the Company takes on additional
indebtedness, the Company's risk of default on the certificates may increase. 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. The effect of each of these is
that recovery of your investment could be difficult if there is a default.
There Are Potential Adverse Effects Associated with Lending Borrowed
Funds.
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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 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.
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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 may 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 certificates issued by the Company. It is unlikely
that a market will develop. The certificates will not be listed on any exchange
and will not be qualified for quotation
- 11 -
on any NASDAQ market. 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.
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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. 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 or
cash equal to at least 100% 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.
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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.
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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 Series C certificates for all holders during the calendar
quarter in which your representative notifies us of your death and requests
redemption.
We Are Able to Redeem Certificates at Any Time.
----------------------------------------------
While we are obligated to redeem certificates in limited circumstances, we
are permitted to redeem all or a portion of the outstanding certificates at any
time upon thirty (30) days' notice. While we have no current plans to redeem
certificates, and possibly may not redeem any prior to maturity (except in the
case of death), there is no guarantee that investors will be able to hold their
certificates until maturity.
We May Not Have Sufficient Available Cash to Redeem Certificates if We
Terminate Our Advisory Agreement with Our Current Advisor.
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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.
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 bond portfolio selection and investment
o mortgage loan underwriting
o mortgage loan servicing
o money management
o developing and maintaining business relationships
o maintaining "goodwill"
o managing relationships with our accountants and attorneys
o corporate management including payment of office rent, etc.
o bookkeeping
o reporting to state, federal, tax and other regulatory authorities
o reports to shareholders and shareholder relations
- 12 -
Certificate Holders Will Have No Right to Participate in Our Management.
-----------------------------------------------------------------------
Only debt securities are being offered hereby; investors participating in
this offering will not become shareholders and will have extremely limited
voting rights with respect to matters relating only to the Certificates, and
will have virtually no input regarding management of the Company. You should not
purchase certificates unless you are willing to entrust our management to our
advisor and our board of directors.
Our Directors May Not Be Held Personally Liable for Certain Actions, Which
Could Discourage Shareholder Suits against Them.
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Minnesota law and our articles of incorporation and bylaws provide that
our directors shall not be personally liable to us or our shareholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage shareholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on behalf of us against a
director. In addition, our bylaws provide for mandatory indemnification of
directors and officers to the fullest extent permitted by Minnesota law.
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 President, Philip Myers is the President of our advisor and the
underwriter and thus could be considered to be in a position of control of both
entities. 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. 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 adversely affect the
credit quality of our portfolio, and decreases to the value of our portfolio
could negatively impact the Company's ability to pay interest on the
certificates.
Redemption Obligations Relating to the Certificates May Affect Our Ability
to Replace our Advisor.
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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 interest rate and real estate valuation fluctuations
o changes in the level of consumer confidence
o availability of credit-worthy borrowers
o demographic and population patterns
o zoning regulations
o taxes and tax law changes
o availability of alternative financing and competitive conditions
o factors affecting specific borrowers
o national and local economic conditions
o state and federal laws and regulations
o bankruptcy or insolvency of a borrower
o borrower misrepresentation(s) and/or fraud
Losses Associated with Default, Foreclosure of a Mortgage and Sale of
Mortgaged Property Pose Additional Risks.
--------------------------------------------------------------------------
We have experienced losses associated with default, foreclosure of
mortgages, and sales of mortgaged properties. The time frame to foreclose on a
property varies from state to state, and delays can occur due to backlog in
court dockets; we have experienced delays from 12 to 18 months. Such delays have
and can cause the value of the mortgaged property to further deteriorate due to
lack of maintenance. Theft and vandalism have also occurred on our foreclosed
properties. Some borrowers have removed fixtures and furnishings including sound
systems, chairs, pulpits, appliances, mechanical and electrical systems prior to
vacating the facility which further reduces the value of our collateral. The
properties also incur operating expenses pending their sale (property insurance,
security, repairs and maintenance) and these expenses could be substantial if we
cannot readily dispose of the property. Expenses related to the foregoing could
prevent us from recovering the full value of a loan in
- 13 -
the event of foreclosure, which shortfall would decrease the value of assets
held by the Company and could negatively impact the Company's ability to pay
interest on the certificates.
Real Estate Taxes Resulting from a Foreclosure May Prevent Us from
Recovering the Full Value of a Loan.
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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. 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, which shortfall would decrease the value of assets held by the
Company and could negatively impact the Company's ability to pay interest on the
certificates.
Second Mortgage Loans Pose Additional Risks.
-------------------------------------------
Our Lending Guidelines 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 the certificates. Neither we nor our advisor can predict changes in
interest rates. We attempt to reduce this risk by borrowing through the issuance
of intermediate and long term certificates with set interest rates and making
loans with this capital for intermediate and long terms that lock in certain
target interest rate spreads. 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, credit unions, insurance companies, pension funds and
fraternal organizations for mortgage loans. Many competitors have greater
financial resources, access to lower-cost capital, larger staffs and longer
operating histories than we have, and thus may be a more attractive lender to
potential borrowers.
Fluctuations in Interest Rates May Affect Our Ability to Repay the
Certificates.
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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.
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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. In addition, during such economic times we may be unable to
locate as many credit-worthy borrowers. In addition, we believe the risks
associated with our business are more severe during periods of economic slowdown
or recession if these periods are accompanied by declining values in real
estate. For example, declining real estate values would likely reduce the level
of new loan originations, since borrowers often use increases in the value of
their existing properties to support the purchase of or investment in additional
properties. Borrowers may also be less able to pay principal and interest on our
loans if the real estate economy weakens, which could result in higher default
rates. Higher default rates could adversely affect the Company's results of
operations, which could negatively impact the Company's ability to pay interest
on the certificates. Further, declining real estate values significantly
increase the likelihood that we will incur losses in the event of default
because the value of our collateral may be insufficient to cover our basis in
the investment.
The Company Faces Certain Risks and Uncertainties Related to Financing and
Liquidity, and These Volatilities Could Have an Impact on Its Operations
and Its Ability to Maintain its Long-term Capital Needs and/or Secure
Additional Financing.
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The Company faces certain risks and uncertainties, particularly during
volatile market conditions, such as the dramatic changes in interest rates that
have occurred recently. In addition, liquidity has tightened in all financial
markets, including the debt and equity markets. These volatilities could have an
impact on operations to the extent that the Company experiences slower
maturities or repayment of mortgage loans, illiquid markets for our bond
portfolio, or a higher redemption rates on our secured investor certificates
than has been the case historically.
The Company's operating performance is affected by our ability to earn
interest and origination fees in excess of what we pay and to match maturities
of our long-term debt with maturities of our mortgage loans and bond portfolio,
as well as
- 14 -
available amounts from our line of credit. While we currently do not expect any
difficulties, it is possible in these uncertain times that the Company's
revolving line of credit could fail to fund a borrowing request or that Beacon
Bank would be unable to find funding participants. Such events could adversely
affect our ability to access funds or increased amounts of funds from the
revolving credit facility when needed. In addition, the Company may incur
additional indebtedness, particularly through the sale of its secured investor
certificates, but the success of such an offering is uncertain in the current
economic climate. Moreover, the Company may need to increase the size of its
offering in order to meet its capital needs, which could harm our financial
condition or creditworthiness.
Our Business May Be Adversely Affected if Our Borrowers Become Insolvent
or Bankrupt.
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If any of our borrowers become insolvent or bankrupt, the borrower's
mortgage payments will be delayed and may cease entirely. For example, due to
the difficult and uncertain national and economic conditions, many companies
have been forced to cut employee salaries and many jobs have been either
temporarily or permanently eliminated. Because our borrowers are churches and
other religious organizations who generally receive financing through charitable
contributions, if their members experience a decrease in pay or lose their jobs
and are unable to secure new ones, they may make fewer or no contributions to
our borrowers, which could result in the borrower's inability to make mortgage
payments or make them on time. In those situations, 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. Such
increased expenses paired with possible lower real estate values (having been
reduced by the foregoing expenses) could adversely affect the Company's results
of operations, which could negatively impact the Company's ability to pay
interest on the certificates.
We Have Fluctuating Earnings.
----------------------------
As mortgage lenders, we make provision for losses relating to our loan
portfolio and sometimes take impairment charges due to our borrowers defaulting
or declaring bankruptcy. As the national and local economies have worsened,
increases in the occurrence of such events have resulted in greater fluctuation
of our earnings, which can reduce our net income. Our earnings are also impacted
by non-performing assets and the carrying cost of maintaining such assets
(taxes, insurance and maintenance). Inconsistent earnings could adversely affect
the Company's financial condition and results of operations, which could
increase the risk of the Company's defaulting on the indenture, and/or could
negatively impact the Company's ability to pay interest on the certificates or
to pay such interest in a timely manner.
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. For example, due to the current difficult economic
conditions, church members may have reduced pay or may be unemployed and unable
to find new employment. As such, members may make fewer or no contributions to
our borrowers. 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 interest due on 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.
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
- 15 -
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. We require an
environmental database check on all properties to be used as collateral for our
mortgage loans.
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 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, continuing
qualification as a REIT may vary substantially from the treatment we describe in
this prospectus, which may impact the consequences of purchasing certificates.
- 16 -
WHO MAY INVEST
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
$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. 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 $70,000 and a net worth
(exclusive of home, home furnishings and automobiles) of $70,000; or (ii) a net
worth (determined with the foregoing exclusions) of at least $250,000.
Suitability standards may be higher in some states. Potential investors who are
residents of Idaho, Iowa, Kansas or Washington should read Exhibit B for
suitability requirements particular to their state.
In addition to the above suitability standards, the Office of the Kansas
Securities Commissioner recommends that you should limit your aggregate
investment in our Certificates and other similar investments to not more than
10% of your liquid net worth. Liquid net worth is defined as that portion of
your total net worth (total assets minus total liabilities) that is comprised of
cash, cash equivalents and readily marketable securities.
In addition to the above suitability standards, residents of Iowa and
Texas are limited to investing no more than 10% of their net worth (exclusive of
home, home furnishings and automobiles) in our certificates.
We may not complete a sale of 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.
- 17 -
USE OF PROCEEDS
The following represents our estimate of the use of the offering proceeds
from the sale of the certificates, assuming that all the offered certificates
are sold.
Total Percent
----------- -----------
Gross Offering Proceeds (1) $20,000,000 100.00%
Less Expenses 700,000 3.50%
Selling Commissions (2)
Underwriter's Expense Allowance (3) 120,000 .60%
Offering Expenses (4) 100,000 .50%
----------- -----------
Total Public Offering-Related Expenses 920,000 4.60%
----------- -----------
Amount Available for Investment (5) $19,080,000 95.40%
=========== ===========
----------
(1) We are offering the certificates on a "best efforts" basis through the
underwriter. There is no assurance that any shares or certificates will be
sold.
(2) We will pay the underwriter a sales commission of 2.75% and an
underwriting management fee equal to .75% of the principal amount of
certificates sold.
(3) We will pay the underwriter a non-accountable expense allowance of up to
$120,000, if all of the certificates are sold, payable as follows: (i)
$10,000 is payable upon the sale of each $1,000,000 of certificates up to
the sale of $10,000,000 of certificates; and (ii) $2,000 is payable upon
the sale of each additional $1,000,000 of certificates up to completion of
the sale of all certificates offered hereby or the termination of this
offering, whichever is first.
(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) The principal purpose of this offering is to raise capital to allow us to
make mortgage loans to churches and/or to other non-profits and to
purchase mortgage bonds issued by churches. We presently expect to use all
of the net proceeds for this purpose, regardless of the amount of proceeds
raised in this offering. Because it is possible that it may take time to
invest the proceeds in this manner, however, we would in that case invest
the net proceeds in permitted temporary investments and may use some
portion for working capital purposes including, but not limited to: paying
down our line of credit, redeeming our equity securities and repaying
maturing certificates. Our line of credit has an adjustable interest rate
that at September 30, 2008 was 5.0% on the $4.2 million outstanding. The
Series A and Series B Secured Investor Certificates bear interest at rates
ranging from 4.50% to 7.50% and have maturities ranging from 3 months
years to 12 years. However, we will use no more than 15% of the gross
proceeds of this offering to pay interest on certificates and repay
principal to certificate holders.
- 18 -
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
[Enlarge/Download Table]
ITEM OF
COMPENSATION RECIPIENT AMOUNT OR METHOD OF COMPENSATION
------------ --------- --------------------------------
Advisory Fee Advisor 1.25% annually, paid monthly, of our average invested assets up to $35 million.
This fee is reduced to 1.00% on assets from $35 million to $50 million and to
.75% on assets over $50 million. Our advisor received advisory fees in the amount
of $382,112 for the year ended December 31, 2005, $386,461 for the year ended
December 31, 2006, $413,007 for the year ended December 31, 2007, and $299,771
for the nine months ended September 30, 2008. Assuming all of the certificates
are sold and our average invested assets were $50,000,000, the advisory fee would
be $587,500 per year. In addition, assuming we had borrowed the maximum amount
permitted under our bylaws (not in excess of 300% of shareholders' equity, except
under certain circumstances), which at September 30, 2008 would have been an
additional $35,000,000 and assuming our average invested assets were $69,000,000,
the advisory fee would be $730,000 per year.
Acquisition
Fees/Expenses Advisor In connection with mortgage loans we make, borrowers may be required to pay our
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
Origination Fee Advisor Up to one-half of the origination fees collected from the borrower at closing in
connection with each mortgage loan we make. Our advisor received origination fees
in the amount of $78,820 for the year ended December 31, 2005, $187,021 for the
year ended December 31, 2006, $36,514 for the year ended December 31, 2007, and
$27,549 for the nine months ended September 30, 2008. We cannot estimate the
total amount of loan origination fees that may be realized by our advisor, but
assuming all of the certificates are sold and we invest in that one-year period
net proceeds of $19,080,000 in mortgage loans with an average origination fee of
3%, the loan origination fees payable to our advisor in such year could be up to
$286,200. 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 with these
loans.
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AFFILIATE COMPENSATION
[Enlarge/Download Table]
ITEM OF
COMPENSATION RECIPIENT AMOUNT OR METHOD OF COMPENSATION
------------ --------- --------------------------------
Commissions on the Underwriter 2.75% of the principal amount of the certificates. The underwriter may re-allow
Sale of Certificates all or a portion of this amount to other participating broker-dealers who are
in this Offering members of the Financial Industry Regulatory Authority ("FINRA").
Non-Accountable Underwriter Up to $120,000 to cover the underwriter's costs and expenses relating to the
Expense Allowance offer and sale of the certificates in this offering, payable as follows: (i)
Relating to the Sale $10,000 paid upon the sale of each $1,000,000 of certificates up to the sale of
of Certificates in this $10,000,000 of certificates, and (ii) $2,000 payable upon the sale of each
Offering additional $1,000,000 of certificates up to the completion of sale of all
certificates offered hereby or the termination of this offering, whichever occurs
first.
Underwriter's Underwriter .75% of the principal amount of the certificates, payable only upon original
Management Fee issuance.
Commissions and Expenses Underwriter Customary mark-ups and mark-downs on first mortgage church bonds we purchase and
on First Mortgage Bonds sell through the underwriter on the secondary market, and commissions earned
Purchased through the underwriter on church bonds we purchase in the primary market.
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CONFLICTS OF INTEREST
We are subject to various conflicts of interest arising from our
relationship with our advisor and the underwriter. Our President, Philip J.
Myers, is the President of both our advisor and the underwriter and thus is in a
position of control of both entities. In addition, Mr. Myers owns 20% of 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, and our principals and our advisor may receive a
benefit in connection with such transactions due to their affiliation with the
underwriter.
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 up to $35 million. This fee is reduced to 1.0% on assets from
$35 million to $50 million and to .75% on assets over $50 million. The fee is
not dependent on our advisor's performance. Our advisor receives a portion of
the fees we make 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 gross amount 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
incented to sell certificates at a time when we may not be able to immediately
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. However, there have been no
personal business interests of our officers or directors which have conflicted
with the Company's interests thus far.
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, though we are permitted to make loans up to
$2,000,000. 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
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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.
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 are 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 seeks 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
The law firm of Winthrop & Weinstine, P.A., Minneapolis, Minnesota, is
counsel to us in connection with this offering and may in the future act as
counsel to us, the underwriter, our advisor, our affiliates, and various
affiliates of our advisor with respect to other matters. There is a possibility
that in the future the interests of the various parties may become adverse. In
the event that a dispute were to arise between us and the underwriter, our
advisor or any of its affiliates, or our affiliates, separate counsel for such
matters will be retained as and when appropriate.
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.
Market for Common Equity and Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities.
Outstanding Securities
As of February 29, 2008, 2,493,595 shares of our common stock and
$22,831,000 of secured investor certificates were issued and outstanding. We did
not sell any securities in 2007.
Holders of Our Common Shares
As of February 29, 2008, we had 1,043 record holders of our $.01 par
common stock.
Lack of Liquidity and Inconsistent Public Market Price
Our common stock is not currently listed or traded on any exchange or
market and is not quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ"), and it is not expected that a material
market for the shares will develop any time soon. "Pink Sheet" price quotations
for our stock under the symbol "ACMC" were made at certain isolated times during
2007 by other broker-dealers at prices as low as $4.45 per share and as high as
$7.80 per share. In addition, the market for REIT securities historically has
been less liquid than non-real estate types of publicly-traded equity
securities. Because of such illiquidity and the fact that the shares would be
valued by market-makers (if a material market develops) based on market forces
which consider various factors beyond our control, there can be no assurance
that the market value of the shares at any given time would be the same or
higher than the public purchase price of our shares. In addition, the market
price, if a material market develops, could decline if the yields from other
competitive investments exceed the actual dividends paid by us on our shares.
- 22 -
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.
Note: 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.
We began making regular quarterly distributions to our shareholders for
the period of operations ended June 30, 1996. Distributions for prior years, and
the period ended September 30, 2008, and the yield and annualized yield,
respectively, represented by such distributions (assuming shares were purchased
for $10.00 per share), are as follows:
--------------------------------------------------------------------
Dollar Amount Yield
Distributed Per Share
For Year Ended: Per Share(1): Represented:
--------------------------------------------------------------------
December 31, 1996 0.6646 9.375%
--------------------------------------------------------------------
December 31, 1997 0.9475 9.475%
--------------------------------------------------------------------
December 31, 1998 0.8906 8.906%
--------------------------------------------------------------------
December 31, 1999 0.8500 8.50%
--------------------------------------------------------------------
December 31, 2000 0.8250 8.25%
--------------------------------------------------------------------
December 31, 2001 0.8313 8.3125%
--------------------------------------------------------------------
December 31, 2002 0.7688 7.6875%
--------------------------------------------------------------------
December 31, 2003 0.6500 6.50%
--------------------------------------------------------------------
December 31, 2004 0.6688 6.6875%
--------------------------------------------------------------------
December 31, 2005 0.6188 6.1875%
--------------------------------------------------------------------
December 31, 2006 0.5875 5.875%
--------------------------------------------------------------------
December 31, 2007 0.2625 2.625%
--------------------------------------------------------------------
September 30, 2008 0.3000 4.00% (2)
--------------------------------------------------------------------
----------
(1) Yield for shares purchased for $10.00 per share.
(2) Represents annualized yield for the nine months ended September 30,
2008.
As a Real Estate Investment Trust, we make regular quarterly distributions
to shareholders. The amount of distributions to our shareholders must equal at
least 90% of our "real estate investment trust taxable income" in order for us
to retain REIT status. Shareholder distributions are estimated for our first
three quarters each fiscal year and adjusted annually based upon our audited
year-end financial report. Cash available for distribution to our shareholders
is derived primarily from the interest portion of monthly mortgage payments we
receive from churches borrowing money from us, from origination and other fees
paid to us by borrowers in connection with loans we make, interest income from
mortgage-backed securities issued by churches and other non-profit religious
organizations purchased and held by us for investment purposes, and earnings on
any permitted temporary investments made us. All dividends are paid by us at the
discretion of the Board of Directors and will depend upon our earnings and
financial condition, maintenance of real estate investment trust status, funds
available for distribution, results of operations, economic conditions, and such
other factors as our Board of Directors deems relevant.
During any period where our shares of common stock are being offered and
sold and the proceeds therefrom accumulated for the purpose of funding loans to
be made by us, the relative yield generated by such capital, and, thus,
dividends (if any) to shareholders, could be less than expected until we have
fully invested such funds into loans. We seek to address this issue by (i)
collecting from borrowers an origination fee at the time a loan is made, (ii)
timing our lending activities to coincide as much as possible with sales of our
securities, and (iii) investing our undeployed capital in permitted temporary
investments that offer the highest yields together with safety and liquidity.
However, there can be no assurance that these strategies will improve current
yields to our shareholders. In order to qualify for the beneficial tax treatment
afforded real estate investment trusts by the Internal Revenue Code, we are
required to pay dividends to holders of our shares in annual amounts which are
equal to at least 90% of our "real estate investment trust taxable income." For
the fiscal year ended December 31, 2007, we distributed substantially all of our
taxable income to our shareholders in the form of quarterly dividends. We intend
to continue distributing virtually all of such income to our shareholders on a
quarterly basis, subject to (i) limitations imposed by
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applicable state law, and (ii) the factors identified above. The portion of any
dividend that exceeds our earnings and profits will be considered a return of
capital and will not currently be subject to federal income tax to the extent
that such dividends do not exceed a shareholder's basis in their shares.
Funds available to us from the repayment of principal (whether at maturity
or otherwise) of loans made by us, or from sale or other disposition of any
properties or any of our other investments, may be reinvested in additional
loans to churches, invested in mortgage-backed securities issued by churches or
other non-profit organizations, or in permitted temporary investments, rather
than distributed to the shareholders. We can pass through the capital gain
character of any income generated by computing its net capital gains and
designating a like amount of our distribution to our shareholders as "capital
gain dividends." The distribution requirement to maintain qualification as a
real estate investment trust does not require distribution of net capital gains,
if generated. Thus, if we have a choice of whether to distribute any such gains,
undistributed net capital gains (if any) will be taxable to us. The Board of
Directors, including a majority of the Independent Directors, will determine
whether and to what extent the proceeds of any disposition of property will be
distributed to our shareholders.
Equity Compensation Plans
We do not have any equity compensation plans under which equity securities
of the Company are authorized for issuance.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2007 and
September 30, 2008 and as of December 31, 2007 and September 30, 2008 as
adjusted to give effect to the sale of all of the certificates offered hereby,
of which there can be no assurance.
[Enlarge/Download Table]
December 31, December 31, September 30, September 30,
2007 2007 2008 2008
Actual As Adjusted(1) Actual As Adjusted(1)
-------------- -------------- ------------- --------------
Long Term Debt $ 20,634,000 $ 40,634,000 $ 19,451,000 $ 39,451,000
Current Liabilities 5,799,055 5,799,055 7,588,296 7,588,296
Deferred Income 596,164 596,164 577,614 577,614
Shareholder's Equity 24,936 24,936 24,721 24,721
Common Stock, $.01 par value per
share; 30,000,000 shares
authorized; issued and outstanding
2,493,595 shares at December 31,
2007 and 2,472,081 shares at
September 30, 2008
Additional Paid-In Capital 22,927,644 22,927,644 22,814,911 22,814,911
Accumulated Deficit (1,699,000) (1,699,000) (2,382,046) (2,382,046)
-------------- -------------- ------------- --------------
Total Shareholder's Equity 21,253,580 21,253,580 20,457,586 20,457,586
============== ============== ============= ==============
Total Capitalization $ 48,282,799 $ 68,282,799 $ 48,074,496 $ 68,074,496
============== ============== ============= ==============
(1) This is a best-efforts, no minimum offering. If less than all of the
certificates offered hereby are sold, then the Long Term Debt figures in the "As
Adjusted" columns would be reduced in proportion to the reduced sales.
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SELECTED FINANCIAL DATA
The selected financial data presented below is derived from our audited
financial statements at and for the years ended December 31, 2006 and 2007. The
selected financial data is from our unaudited financial statement information at
and for the nine months ended September 30, 2008. 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.
[Enlarge/Download Table]
Year Ended December 31, Nine Months
--------------------------- Ended
September 30,
2006 2007 2008
------------ ------------ -------------
Statement of Operations Data
Interest Income $ 3,927,765 $ 3,947,690 $ 2,801,558
Interest Expense 1,724,986 1,778,715 1,286,118
------------ ------------ -------------
Net Interest Income 2,202,779 2,168,975 1,515,440
Provision for losses on mortgage loans receivable
and bonds 8,682 133,101 231,730
------------ ------------ -------------
Net Interest Income after provision for losses on
mortgage loans receivable and bonds 2,194,097 2,035,874 1,283,710
Operating Expenses 1,039,929 1,182,684 1,222,981
------------ ------------ -------------
Net Income $ 1,154,168 $ 853,190 $ 60,729
============ ============ =============
Income per Common Share $ .46 $ .34 $ .02
Weighted Average Common Shares Outstanding 2,536,351 2,493,595 2,483,231
Dividends Declared $ 1,485,275 $ 654,572 $ 743,776
Dividends Declared per Share $ .59 $ .26 $ .30
[Enlarge/Download Table]
Nine Months
Year Ended December 31, Ended
--------------------------- September 30,
2006 2007 2008
------------ ------------ -------------
Balance Sheet Data:
Assets:
Cash and Cash Equivalents $ 232,258 $ 285,118 $ 516,190
Current maturities of loans receivable 3,073,619 907,812 646,016
Current maturities of bond portfolio 79,000 41,000 53,000
Loans Receivable, net of current maturities 34,779,117 33,061,115 33,124,302
Bonds Receivable, net of current maturities 9,471,697 11,222,713 11,629,585
Accounts Receivable 136,709 112,546 119,189
Interest Receivable 164,923 151,105 153,595
Prepaid Expense 8,372 7,072 15,358
Real-Estate Held for Sale 1,125,190 1,566,561 1,165,125
Deferred Offering Costs 852,720 927,757 652,136
Deferred Tax Asset 60,000 -0- -0-
------------ ------------ -------------
Total Assets $ 49,983,605 $ 48,282,799 $ 48,074,496
============ ============ =============
Liabilities and Shareholder's Equity
Account Payable $ 26,311 $ 46,963 $ 31,328
Investors Saver Certificates 26,638,000 22,831,000 21,953,000
Note payable, line of credit 1,166,000 3,350,000 4,200,000
Mortgage Loan Commitment 27,000 50,000 577,595
Deferred Income 673,914 626,576 607,779
Dividends Payable 397,418 124,680 247,208
Shareholder's Equity 21,054,962 21,253,580 20,457,586
------------ ------------ -------------
$ 49,983,605 $ 48,282,799 $ 48,074,496
============ ============ =============
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained in this section and elsewhere in this
prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve a number of known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, (i) trends affecting our financial condition or results
of operations; (ii) our business and growth strategies; (iii) the mortgage loan
industry and the status of religious organizations; (iv) our financing plans;
and other risks detailed in the Company's other periodic reports filed with the
Securities and Exchange Commission. The words "believe", "expect", "anticipate",
"may", "plan", "should", and similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statements were
made and are not guarantees of future performance.
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.
During the nine months ended September 30, 2008 and the year ended
December 31, 2007 our total assets decreased by $208,000 and $1,701,000,
respectively due to an increase in provisions for losses on our bond portfolio
and a decrease in mortgage loans receivable resulting from payments exceeding
new issuances. Our current liabilities increased by $1,789,000 and $951,000 at
September 30, 2008 and December 31, 2007, respectively due to increased
borrowings on our line of credit. Our non-current liabilities decreased by
$1,202,000 and $2,851,000 at September 30, 2008 and December 31, 2007,
respectively, due to maturation of our secured investor certificates.
Since our inception, we experienced our highest quarterly dividend payment
for the quarter ended December 31, 1997 and our lowest quarterly dividend
payments for the quarters ended June 30, 2007 and September 30, 2007. 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% for each share
purchased at $10 per share. The quarterly dividend payments for each share held
of record on June 30, 2007 and September 30, 2007 were $.025 representing an
annualized yield of 1.00% for each share purchased at $10 per share. 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 and a
corresponding high level of origination income earned 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 generally accepted
accounting principals in the United States of America ("GAAP"). Recognition of
origination income under GAAP must be deferred over the expected life of each
loan. By way of further comparison, the dividend payments made to June 30, 2007
and September 30, 2007 shareholders of record were significantly lower than the
average dividend amount due directly to losses related to the sale of foreclosed
property in Coupland, Texas.
Results of Operations
Fiscal 2008 Nine Months Compared to Fiscal 2007 Nine Months
Net income for the Company's nine month periods ended September 30, 2008
and 2007 was approximately $61,000 and $817,000, respectively, on total revenues
of approximately $2,802,000 and $3,034,000, respectively. Interest income earned
on our portfolio of loans was approximately $2,157,000 and $2,306,000 for the
nine month periods ended September 30, 2008 and 2007, respectively. As of
September 30, 2008 the Company's loans receivable have interest rates ranging
from 5.00% to 12.00%, with an average, principal-adjusted interest rate of
8.70%. The Company's bond portfolio has an average current yield of 7.91% as of
September 30, 2008. As of September 30, 2007, the average, principal-adjusted
interest rate on the Company's portfolio of loans was 8.82% and the Company's
portfolio of bonds had an average current yield of 7.52%. The decrease in
interest income was largely due to the repayment of mortgage loans without new
loans issued and the general decline in interest rates throughout the latter
part of 2007. Interest expense was approximately $1,286,000 and $1,334,000 for
the nine month periods ended September 30, 2008 and 2007, respectively. The
decrease in interest was due to the maturity of secured investor certificates
and the decline in the interest rate on our line of credit.
- 27 -
Net interest income for the nine months ended September 30, 2008 decreased
to approximately $1,284,000 compared to $1,667,000 at September 30, 2007. The
decrease relates to changes in the provision for losses on our bond portfolio of
$200,000, a reduction in interest income on our loan portfolio, due to lower
interest rate and loan balances outstanding and a reduction in income related to
loan originations due to fewer loans being issued.
Operating expenses for the nine months ended September 30, 2008 increased
to approximately $1,223,000 compared to $850,000 at September 30, 2007. The
increase relates to changes in impairment charges for real estate held for sale
of approximately $144,000, professional fees of approximately $69,000, costs
associated with real estate held for sale of approximately $22,000, and
amortization expense of approximately $157,000, which includes the loan costs
related to the previous line of credit which were expensed once the new line of
credit was obtained with Beacon Bank.
The Company distributed virtually all of its cash from operating
activities and investing activities for the nine month period ending September
30, 2008 in the form of dividends to shareholders. Total cash for operating
activities and investing activities totaled $828,251 and $16,519 for the nine
month period ending September 30, 2008, respectively. In addition, the Company
increased its real estate impairment reserve and its bond portfolio reserve by
$306,000 and $200,000 for the nine month period ending September 30, 2008,
respectively. This increase in loan loss reserves was recognized in its entirety
for the period under generally accepted accounting principles ("GAAP"), but does
not affect taxable income distributions we are required to make to maintain our
status as a REIT. We anticipate distributing all of our taxable income (100%) in
the form of dividends to our shareholders in the foreseeable future to maintain
our REIT status and to provide a reliable income source to our shareholders.
Results of Operations - 2007
Since we began active business operations on April 15, 1996, we have paid
46 consecutive quarterly dividend payments to shareholders. These dividend
payments have resulted in an average annual return of 7.482% to shareholders who
purchased shares in our public offerings at $10 per share. 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 generally accepted accounting principles
("GAAP"). We anticipate distributing all of our taxable income (100%) in the
form of dividends to our shareholders in the foreseeable future to maintain our
REIT status and to provide a reliable income source to our shareholders.
Net income under GAAP accounting for our year ended December 31, 2007 was
$853,190 on total revenues of $3,947,690 compared to net income of $1,154,168 on
total revenues of $3,927,765 for the year ended December 31, 2006. This decrease
in net income was primarily due to increased loan loss and real estate
impairment reserves. We disposed of two properties in 2007 and one in January of
2008. We believe due to a general economic downturn in the economy, along with a
depressed real estate market, the availability of qualified buyers for our
current foreclosed properties has been reduced since no viable offers have been
made. We expect to foreclose on three additional properties in 2008 and will
incur costs to secure and prepare these properties for sale. We exhaust all
options available to us to before proceeding to foreclosure. We do not foresee
any additional increase in foreclosures other than these three churches.
Interest income earned on the Company's portfolio of loans was $3,022,695
for the year ended December 31, 2007, compared to $2,854,477 for 2006. This
increase in interest income was due to the fact that 8 new loans were originated
in the fiscal year ended December 31, 2007. Excluded from revenue for the year
ended December 31, 2007 is $107,369 of origination income, or "points," we
received. Recognition of origination income under GAAP must be deferred over the
expected life of each loan. However, under tax principles, origination income is
recognized in the period received. Accordingly, because our status as a REIT
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, 2007, June 30, 2007, September 30, 2007 and December
31, 2007 included origination income even though it was not recognized in its
entirety as income for the period under GAAP.
Net interest income for 2007 decreased to approximately $2,036,000
compared to $2,194,000 for 2006. The decrease in net interest income relates to
the increase in interest expense due to increases in the average amounts
outstanding on the line of credit, partially offset by a reduction in the
outstanding balance of secured investor certificates. The decrease in net
interest income also reflects the reserve for a bond that the Company owns, the
issuer of which had entered into a Chapter 11 bankruptcy.
Our operating expenses for our fiscal year ended December 31, 2007 were
$1,315,785 compared to $1,048,611 for our fiscal year ended December 31, 2006.
This increase in operating expenses was primarily a result of provisions related
to mortgage and bond receivables as well as costs associated with foreclosed
properties.
Our Board of Directors declared dividends of $.1625 for each share of
record on March 31, 2007, $.025 for each share held of record on June 30, 2007,
$.025 for each share held of record September 30, 2007 and $.050 for each share
held of record on December 31, 2007. Based on the quarters ended March 31, 2007,
June 30, 2007, September 30, 2007 and December 31, 2007, the dividends paid
represented a 6.50%, 1.00%, 1.00% and 2.00 % annualized yield to shareholders,
respectively, for an effective overall annual yield of 2.625% in 2007. In 2007,
and especially in the second, third and fourth quarters of 2007, our dividend
yield was significantly lower than in prior periods. This decrease resulted
directly from the loss related to the sale of foreclosed property in Coupland,
Texas. In addition, 58% of dividends paid to shareholders in 2007 was taxable
ordinary dividends, while 42% of the dividends paid to shareholders in 2007 was
return of capital and is reported as non-dividend distributions.
- 28 -
The total amount of dividends paid in 2007 was $927,310 which number
includes $397,418 of dividends declared but not paid in 2006 and $124,680 of
dividends declared but not paid in 2007. In 2007, the total amount of dividends
declared and paid to shareholders was $654,572. Of the $654,572 amount paid,
approximately $379,757, or 58%, was a distribution of taxable income, and
$274,814, or 42%, was a return of capital because it was a distribution of
shareholder equity and not a distribution of taxable income. The Company decided
to pay cash from operating and financing activities to shareholders to provide a
reliable income source to shareholders.
Total cash for operating activities and investing activities totaled
$1,478,000 and $1,271,000 for the period ending December 31, 2007, respectively.
Distribution of virtually all cash from operating activities and investing
activities resulted in a return of capital to shareholders for the period ended
December 31, 2007. Distributions beyond those required to maintain our REIT
status are considered a return of capital to shareholders.
The Company expects dividends to be paid in 2008 will return to normal
historical payout levels prior to 2007. Revenues should increase as we fund
additional loans through our line of credit and we do not expect a substantial
increase in our loan loss or real estate impairment reserves.
Results of Operations - 2006
Net income for our fiscal year ended December 31, 2006 was $1,154,168 on
total revenues of $3,927,765 compared to $737,141 on total revenues of
$3,736,738 for the year ended December 31, 2005. This increase was primarily due
to increased funding of mortgage loans and a decrease in the loan reserve
amount. Interest income earned on the Company's portfolio of loans was
$2,854,477 for the year ended December 31, 2006, compared to $2,748,247 for
2005. This increase was due to the fact that 22 new loans were originated in
fiscal year ended December 31, 2006. Excluded from revenue for the year ended
December 31, 2006 is $234,175 of origination income, or "points," we received.
Recognition of origination income under "GAAP" must be deferred over the
expected life of each loan. However, under tax principles, origination income is
recognized in the period received. Accordingly, because our status as a real
estate investment trust requires, among other things, the distribution to
shareholders of at least 90% of "Taxable Income," the dividends declared and
paid to our shareholders for the quarters ended March 31, 2006, June 30, 2006,
September 30, 2006 and December 31, 2006 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, 2006 were $1,048,611
compared to $1,619,508 for our fiscal year ended December 31, 2005. This
decrease was primarily a result of a decrease in our loan loss reserve amount.
Our Board of Directors declared dividends of $.1375 for each share of
record on March 31, 2006, $.1375 for each share held of record on June 30, 2006,
$.153125 for each share held of record September 30, 2006 and $.159375 for each
share held of record on December 31, 2006. Based on the quarters ended March 31,
2006, June 30, 2006, September 30, 2006 and December 31, 2006, the dividends
paid represented a 5.50%, 5.50%, 6.125% and 6.375 % annualized yield to
shareholders, respectively, for an effective overall annual yield of 5.875% in
2006. In 2006, and especially in the first and second quarters of 2006, our
dividend yield was significantly lower than in prior periods. This decrease
resulted in part from the large cash balances we received from our public
offering of 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 was lower than in prior periods. Dividend yields
in 2006 were also largely influenced by the funding of numerous new loans at
interest rates significantly lower than those funded in earlier years.
We do not expect additional loan loss reserve increases in the first two
quarters of 2007. The Company presently expects that our revenues in 2007 will
be similar to those of the first two quarters of 2006.
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 cash, and (ii) making
mortgage loans to churches and other non-profit religious organizations. Our
principal expenses are advisory fees, legal and auditing fees, communications
costs with our shareholders, and the expenses of our transfer agents and
registrar.
Our loan portfolio consists primarily of long term fixed rate loans. We
currently do not have any short term variable rate loans or renewable loans in
our portfolio. Historically, loans in our portfolio are outstanding for an
average of just under three years. Our borrowers are typically small independent
churches with little or no borrowing history. Once a church establishes a
payment history with us, they look to re-finance their loan with a local bank,
credit union or other financial institution who is willing to provide financing
since the borrower has established a payment history and have demonstrated they
can meet their mortgage debt obligations.
Currently, our bond portfolio comprises 25% of our assets under
management. 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 total principal amount outstanding is
$11,392,790 as of December 31, 2007. We earned approximately $763,000 on our
bond portfolio in 2007. Prior to 2007 we did not experience any loss of income
from our bond portfolio.
We currently own $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes has defaulted on its payment obligations to
bondholders. The church subsequently commenced a Chapter 11 bankruptcy
reorganization proceeding in November 2007. The Company, along with all other
bondholders, has a superior lien over all
- 29 -
other creditors. We did not receive our August or November 2007 interest
payments from St. Agnes. We are not accruing any missed interest payments from
the bonds which totaled approximately $34,000 for both August and November 2007.
We foresee that we will not receive any interest payments from St. Agnes through
the first half of 2008. We have reserved $300,000 against the principal balance
of the bonds at September 30, 2008.
The church has listed all three of its properties for sale for an
aggregate price of $19,166,668. The bondholders are currently owed $13,027,000
excluding any accrued interest, fees or expenses. Herring Bank, Amarillo, Texas
is trustee for the first mortgage bondholders. Herring Bank and its legal
counsel are monitoring the bankruptcy process and will advise the bondholder's
of the church's re-organization plans once they are made available. Once
additional information regarding the Church's reorganization plan is provided,
we will determine whether an additional valuation adjustment for the bond
investment should be recorded.
We match maturities of mortgage loans and bonds to meet the maturities of
our secured investor certificates. We have also used funds from prepayment of
mortgage loans and bonds that have been called for payments on our maturing
secured investor certificates. In addition, if needed, we are able to sell bonds
that we own to meet the maturities of secured investor certificates. In 2007, we
used funds from operating, investing and financing activities to make payments
on maturing secured investor certificates and to make dividend payments to
shareholders. While we have generally paid amounts in excess of the taxable
dividend requirement to maintain our REIT status, in the future, we may have to
reduce these excess amounts in order to maintain our debt service requirements
on our maturing secured investor certificates. As of December 31, 2007, we had
approximately $9,213,000 worth of secured investor certificates that mature
between 2008 and 2012. As noted above, if needed, we are able to sell bonds that
we own to meet the maturities of secured investor certificates.
In addition, we are able to borrow funds in an amount up to 300% of
shareholder's equity (in the absence of a satisfactory showing that a higher
level of borrowing is appropriate; any excess in borrowing over such 300% level
must be approved by a majority of the Independent Directors and disclosed to
shareholders in the next quarterly report along with justification for such
excess) in order to increase our lending capacity. We currently have a
$15,000,000 secured revolving credit facility with KeyBank National Association,
Cleveland, Ohio. As of December 31, 2007 we have an outstanding balance of
$3,350,000 against our line of credit. This credit line is secured by the pledge
of approximately $7,334,000 in principal amount of our first mortgage loans in
addition to any new mortgage loans funded with proceeds from the line. Interest
on our line of credit is payable to KeyBank 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 under this
line of credit is 90-day LIBOR interest rate plus 1.50% and base rate loans at
..25% over prime rate).
Based on the Company's borrowing base adjusted leverage ratio this
applicable margin can be adjusted, on any date of determination, either upward
or downward based on the following schedule:
[Enlarge/Download Table]
Per Annum Percentage for LIBOR Per Annum Percentage for Base
Total Leverage Ratio: Rate Loans: Rate Loans:
---------------------------------------------- ------------------------------ -----------------------------
Greater than or equal to 60% 1.875% 0.50%
Less than 60% but greater than or equal to 55% 1.50% 0.25%
Less than 55% 1.35% 0.00%
The total leverage ratio is determined by dividing total liabilities by total
adjusted tangible asset value.
However, there can be no assurance that we can always lend funds out at
rates higher than the rate at which we borrow the funds. When we do carry an
outstanding balance on this line of credit we plan to "pay-down" any future
borrowings on our line of credit by (i) negotiating a larger, more
cost-advantageous line of credit with another bank and (ii) applying the
proceeds from principal payments on our current loan portfolio payments and any
loan re-payments. Increases or decreases in the lending rates charged by our
bank sources 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.
Our future capital needs are expected to be met by (i) future public
offerings of our shares and/or our certificates; (ii) the repayment of existing
loans and bonds and (iii) borrowing under our existing line of credit.
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. We
record mortgage loans receivable at their estimated net realizable value, which
is the unpaid principal balance less the allowance for mortgage loans. Our loan
policy provides an allowance for estimated uncollectible loans based on an
evaluation of the current status of the 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. Our policy will reserve for the
outstanding principal amount of a loan in our portfolio if the amount is in
doubt of being collected. Additionally, no interest income is recognized on
non-performing loans that are in the foreclosure process. At December 31, 2007,
we reserved $72,056 against fourteen mortgage loans, of which four churches were
three or more mortgage payments in arrears. At September 30, 2008, we reserved
approximately $71,000 for
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eleven mortgage loans, of which five churches are three or more mortgage
payments in arrears and one church is in the foreclosure process.
The total value of non-performing loans, which are loans that are in the
foreclosure process or are no longer performing, was approximately $238,000 and
$1,156,000 at September 30, 2008 and December 31, 2007, respectively. We believe
that the total amount of non-performing loans is adequately secured by the
underlying collateral.
As of December 31, 2007, we had four first mortgage loans that are three
or more payments in arrears. Three of the loans are in the process of being
foreclosed. The first loan has an outstanding balance of approximately $385,000.
The church missed one mortgage payment in 2006 and ten mortgage payments in
2007. We took possession of this property in May 2008 and listed it for sale
through a local realtor.
The second loan has an outstanding balance of approximately $238,000. The
church missed five mortgage payments in 2007. We obtained a deed in lieu of
foreclosure from the church and have recorded the deed in the county where the
church resides. We took possession in May 2008 and listed it for sale through a
local realtor.
The third loan has an outstanding balance of approximately $383,000. The
church missed six mortgage payments in 2007. We initiated the foreclosure
process, but on the day on which we were to take possession through Sheriff
Sale, the church filed bankruptcy. Our attorney is in contact with the
bankruptcy trustee, and we are awaiting the outcome of this process.
The fourth loan has an outstanding balance of approximately $150,000. The
church missed one payment in 2006 and two payments in 2007. The church submitted
a repayment plan which was accepted. We are monitoring the payment process. This
is the smallest loan in our loan portfolio.
We presently expect our loan loss reserves to be adequate to cover all
losses. Listed below is our current loan loss reserve policy:
Percentage of Loan
Incident Reserved Status of Loan
-------- ---------------------- ----------------------------------------------
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. Applies to restructured loans or loans
given forebearance.
3. None Loan current, previous interruptions
experienced, but none in the last 90 day
period.
4. 1.00% Loan serviced regularly, but 1 to 3 payments
cumulative in arrears. Delinquency notice been
sent.
5. 5.00% Loan serviced regularly, but 4 or 5 payments
cumulative in arrears. Repayment plan
requested.
6. The greater of: (i) Loan is declared to be in default. Foreclosure
accumulated reserve proceeding underway or imminent. Reserve
during default period amount dependent on value of collateral. All
equal to principal expenses related to enforcing loan agreements
loan balance in excess are expensed.
of 65% of original
collateral value; or
(ii) 1% of the
remaining principal
balance each quarter
during which the
default remains in
effect.
- 31 -
The Company's Advisor, on an ongoing basis, will review reserve amounts
under the policy stated above and determine the need, if any, to reserve amounts
in excess of its current policy. Any additional reserve amounts will be equal to
or greater than its current reserve policy. Loan loss reserves are recorded on a
quarterly basis.
Bond Loss Policy
Bond loss reserves are estimated by management and are determined by
reviewing: (i) payment history, (ii) our experience with defaulted bond issues,
(iii) the issuers payment history as well as (iv) historical trends.
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 involves 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 do not consider the availability of a market for a loan in
estimating fair value at this time. We estimate the fair value of the bond
portfolio to be the same as the carrying value, because there is no ready public
market for these bonds and the bonds are callable at anytime by the issuer at
par. We do not consider future cash flows, the interest rate or the yield rate
of a loan or bond in estimating fair value. In addition, the loan and bond loss
policy, previously discussed, is a critical accounting policy.
Recognition of origination income under "GAAP" must be deferred over the
expected life of each loan. However, under tax principles, origination income is
recognized in the period received. Accordingly, because our status as a REIT
requires, among other things, the distribution to shareholders of at least 90%
of taxable income, the dividends declared and paid to our shareholders included
origination income even though it was not recognized in its entirety as income
for the period under GAAP.
We estimate the value of real estate we hold pending re-sale on a number
of factors. We look at the current condition of the property as well as current
market conditions in determining a fair value. Since churches are single use
facilities the listing price of the property may be lower than the total amount
owed to us. Attorney fees, taxes, utilities along with real estate commission
fees will also reduce the amount we collect from the sale of a property we have
acquired through foreclosure. The fair value of the real estate held for re-sale
includes estimates of expenses related to the sale of the real estate.
OUR BUSINESS
General
American Church Mortgage Company was established by American Investors
Group, Inc. (the "underwriter" or "American") to service demand that the
principals of American identified through the course of its business for
mortgage lending to church borrowers in the amount of $100,000 to $2,000,000.
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 $2,000,000. 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
- 32 -
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 has underwritten approximately 235 church bond financings, in which
approximately $476,030,000 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 $2,026,000.
Since our establishment, we have funded 165 mortgage loans to churches for
a total amount of $83,340,954. As of September 30, 2008, we had 76 mortgage
loans outstanding in the original aggregate principal amount of $33,841,353 and
own church bonds having a face value of $12,018,000.
Financing Business
We make first mortgage loans in amounts ranging from $100,000 to
$2,000,000, 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:
o find qualified borrowers and make loans in accordance with our
Lending Guidelines;
o lend at rates of interest in excess of our cost of funds;
o offer competitively attractive mid-term (5-15 years) loans and
long-term (20-30 year) loans (although there is no limit on the term
of our loans);
o charge origination fees, or "points," from the borrower at the
outset of a loan and upon any renewal of a loan;
o make a limited amount of higher-interest rate second mortgage loans
and construction loans to qualified borrowers; and
o purchase a limited amount of mortgage-secured debt securities issued
by churches and other non-profit religious organizations, typically
at 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 September 30, 2008, the
percentage of average invested assets in second mortgage loans, and the
percentage of average invested assets in mortgage-secured debt securities, was
less than 1% and 26.1% 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 1.25% 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.
- 33 -
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.
[Download Table]
-----------------------------------------------------------------------------------
Loan Type Interest Rate (1) Origination Fee (2)
-----------------------------------------------------------------------------------
25/30 Year Term (3) Fixed @ 8.75%/8.95% respectively 3.5%
-----------------------------------------------------------------------------------
20 Year Term (3) Variable Annually @ Prime + 2.50% 3.5%
-----------------------------------------------------------------------------------
3 Year Renewable Term (4) Fixed @ 8.25% 3.0%
-----------------------------------------------------------------------------------
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) These are "target" fees; however, negotiation of these fees with borrowers
often occurs. 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 25-year amortization schedule,
and are renewable at the conclusion of their initial term for additional
like terms up to an aggregated maximum of 25 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."
- 34 -
Portfolio of the Company
As of December 31, 2008, we had 76 first mortgage loans aggregating
$36,304,688 in original principal amount, and purchased $12,314,000 original
principal amount first mortgage bonds issued by churches.
The table below identifies, by state, the loan amounts and amounts outstanding
of the Company's first mortgage loans as of December 31, 2008.
American Church Mortgage Company
Current Portfolio
------------------------------------------------------------
Principal Balance Percentage of
State Loan Amount a/o 12/31/2008 Total
------------------------------------------------------------
AR $ 948,829.89 $ 635,912.45 1.90%
AZ $ 1,325,000.00 $ 1,288,384.30 3.85%
CA $ 865,000.00 $ 819,351.93 2.45%
CT $ 435,000.00 $ 400,000.00 1.19%
FL $ 4,001,500.00 $ 3,300,968.70 9.85%
GA $ 1,555,000.00 $ 1,390,174.44 4.15%
IL $ 1,903,406.36 $ 1,816,845.06 5.42%
IN $ 1,505,000.00 $ 1,467,698.45 4.38%
KY $ 620,000.00 $ 590,000.00 1.76%
LA $ 645,000.00 $ 613,910.64 1.83%
MA $ 440,000.00 $ 390,925.42 1.17%
MD $ 1,515,000.00 $ 1,437,193.89 4.29%
MI $ 2,353,500.00 $ 2,285,120.43 6.82%
MN $ 431,250.00 $ 426,977.54 1.27%
NC $ 1,630,915.00 $ 1,533,296.44 4.58%
NJ $ 427,500.00 $ 424,031.66 1.27%
NM $ 625,000.00 $ 612,990.17 1.83%
NV $ 400,786.75 $ 367,872.70 1.10%
NY $ 4,560,000.00 $ 4,208,937.01 12.56%
OH $ 1,920,000.00 $ 1,775,390.00 5.30%
OR $ 445,000.00 $ 409,609.12 1.22%
PA $ 1,300,000.00 $ 1,259,604.25 3.76%
TX $ 4,334,000.00 $ 3,957,232.56 11.81%
VA $ 1,320,000.00 $ 1,311,837.56 3.92%
WV $ 780,000.00 $ 774,103.44 2.31%
----------------------------------
$36,286,688.00 $33,498,368.16 100.00%
- 35 -
The table below identifies the borrowing institutions and certain key terms of
the loans comprising our loan portfolio as of December 31, 2008.
[Enlarge/Download Table]
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Loan Loan Interest Collateral Appraised
Borrowing Church Amount Term Rate Value Funding Date
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Praise Chapel International(1) $ 115,000 5 years 10.00% $ 175,000 03/02/99
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Greater Hill Zion Baptist Church $ 500,000 20 years 9.75% $ 1,040,000 05/20/99
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Freewill Christian Center $ 596,000 20 years 10.00% $ 797,000 06/22/99
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Bethel Temple of Longview $ 500,000 20 years 10.25% $ 1,550,000 06/04/99
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Greater Fort Lauderdale $ 605,000 20 years 9.75% $ 900,000 07/08/99
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Old Morning Star Church (1) $ 280,000 20 years 9.85% $ 356,000 12/21/99
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Praise Christian Center $ 500,000 20 years 9.85% $ 926,000 01/21/00
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St. Paul AME Church $ 200,000 20 years 10.25% $ 325,000 11/02/00
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Second Missionary Baptist Church $ 225,000 20 years 10.25% $ 370,000 06/19/01
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True Vine Gospel Church $ 350,000 25 years 9.95% $ 500,000 11/15/01
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Nehemiah Christian Center $ 115,000 3 years 8.50% $ 140,000 05/30/02
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Eagle Vision Community Church $ 165,000 20 years 9.25% $ 215,000 07/19/02
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Holly Grove Missionary Baptist Church $ 205,000 20 years 9.25% $ 461,900 09/19/02
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House of Joy & Praise Outreach Center $ 435,000 20 years 9.25% $ 780,000 12/30/02
---------------------------------------------------------------------------------------------------------------------------------
Bread of Life Baptist Church $ 763,000 20 years 9.25% $ 1,160,000 02/21/03
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Life Changing Faith Christian Church $ 460,000 20 years 9.00% $ 690,000 03/12/03
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Zion Hill Baptist Church $ 255,000 20 years 8.65% $ 365,000 5/30/03
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Bend Christian Center $ 445,000 25 years 8.65% $ 1,010,00 6/19/03
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Pembroke Park Church of Christ $ 520,000 20 years 8.65% $ 880,000 6/26/03
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Glad Tidings Community Church $ 663,000 25 years 8.75% $ 900,000 6/30/03
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The Apostolic Church of New York $ 335,000 20 years 9.25% $ 537,000 8/18/03
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All Faiths Christian Center $ 645,000 20 years 8.65% $ 922,000 9/11/03
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Landmark Apostolic Church $ 400,000 20 years 8.65% $ 750,000 9/19/03
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Ekklesia Fellowship Ministries $ 227,500 20 years 8.65% $ 335,000 9/25/03
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All Saints Community Church $ 210,000 20 years 8.65% $ 300,000 11/25/03
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Praise Tabernacle Jamaica $ 600,000 20 years 8.65% $ 950,143 11/25/03
---------------------------------------------------------------------------------------------------------------------------------
Praise Tabernacle Deliverance Baptist Church $ 500,000 25 years 8.35% $ 1,058,000 12/19/03
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Loan Loan Interest Collateral Appraised
Borrowing Church Amount Term Rate Value Funding Date
---------------------------------------------------------------------------------------------------------------------------------
Faith Christian Center $ 475,000 20 years 8.65% $ 746,000 04/21/04
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Shiloh Temple House of God $ 500,000 20 years 8.25% $ 710,000 04/29/04
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Fun Family Christian Center $ 873,406 25 years 9.25% $ 1,290,850 05/22/04
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The Lord Jesus Christ Church on the Rock $ 195,000 20 years 8.25% $ 300,000 07/09/04
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New Covenant Christian Fellowship $ 375,000 20 years 8.25% $ 700,000 08/30/04
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Holy Deliverance Ministries $ 238,830 20 years 9.85% $ 360,000 09/14/04
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Holy Tabernacle Ministries $ 325,000 25 years 8.50% $ 500,000 09/16/04
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First Church of the Spirit and Truth $ 530,000 20 years 8.25% $ 750,000 09/30/04
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Bethany Uniting Faith $ 235,000 20 years 8.25% $ 330,000 10/11/04
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Christ Wonderful World Outreach $ 543,000 20 years 8.25% $ 725,000 11/03/04
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Covenant Love Christian Center $ 785,000 20 years 8.25% $ 1,200,000 11/10/04
---------------------------------------------------------------------------------------------------------------------------------
Faith Christian Ministry $ 150,000 20 years 8.25% $ 220,000 11/15/04
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New Life Community Church of Truth $ 570,000 20 years 8.25% $ 790,000 11/30/04
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Lincoln Heights Missionary Baptist Church $ 620,000 20 years 8.25% $ 1,000,000 12/30/04
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Zion Mission $ 410,000 25 years 8.50% $ 800,000 02/04/05
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Inter-Denominational Fellowship Ministries $ 315,000 25 years 8.75% $ 491,000 04/06/05
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Mt. Ararat Baptist Church (2) $ 215,000 25 years 8.95% $ 1,000,000 04/24/05
---------------------------------------------------------------------------------------------------------------------------------
True Vine Baptist Church $ 198,500 25 years 8.75% $ 265,000 06/01/05
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Calvary Baptist Church of Houston $ 250,000 25 years 8.95% $ 350,000 06/29/05
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International Deliverance Center (3) $ 518,000 25 years 8.95% $ 738,000 06/30/05
---------------------------------------------------------------------------------------------------------------------------------
Unity of Faith Worship Center $ 424,915 30 years 8.75% $ 835,150 06/30/05
---------------------------------------------------------------------------------------------------------------------------------
Iglesia de Dios Pentecostal $ 775,000 25 years 8.75% $ 1,008,484 07/13/05
---------------------------------------------------------------------------------------------------------------------------------
Defenders Faith Center $ 260,000 25 years 8.95% $ 470,000 11/29/05
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Abundant Faith Baptist Church $ 206,000 25 years 8.75% $ 500,000 02/15/06
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Grace Christian Church $ 1,600,000 25 years 8.50% $ 2,225,000 03/30/06
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Living Water Seventh-Day Adventist Church $ 640,000 30 years 8.75% $ 855,000 05/23/06
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Serenity Church $ 250,000 30 years 8.95% $ 370,909 06/13/06
---------------------------------------------------------------------------------------------------------------------------------
Evangel Temple $ 1,195,000 30 years 8.50% $ 2,485,000 06/16/06
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Loan Loan Interest Collateral Appraised
Borrowing Church Amount Term Rate Value Funding Date
---------------------------------------------------------------------------------------------------------------------------------
Calvary United Methodist Church of Holly $ 395,000 30 years 8.95% $ 1,600,000 06/23/06
---------------------------------------------------------------------------------------------------------------------------------
Trinity Family Church $ 625,000 30 years 8.75% $ 1,007,000 06/23/06
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Iglesia Nueva Vida en Cristo $ 195,000 30 years 8.75% $ 233,000 06/28/06
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Grace Evangelical Free Church $ 400,786.75 25 years 8.95% $ 900,000 08/11/06
---------------------------------------------------------------------------------------------------------------------------------
Norman Quintero Ministries $ 275,000 25 years 9.00% $ 383,000 08/15/06
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Centro Cristiano Carismatico $ 1,325,000 25 years 8.75% $ 2,640,000 09/29/06
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Church of God of Prophecy of the Last Days $ 497,000 30 years 8.95% $ 710,000 12/07/06
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Sword of the Word Evangelistic Ministry $ 800,000 25 years 8.75% $ 1,650,000 12/20/06
---------------------------------------------------------------------------------------------------------------------------------
Church of the Living God - Full Gospel Ministries $ 1,055,000 30 years 8.75% $ 1,875,000 12/21/06
---------------------------------------------------------------------------------------------------------------------------------
Anchored in Faith Ministries $ 675,000 25 years 9.25% $ 900,000 09/19/07
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New Maranatha-Karibu SDA Church $ 427,500 30 years 8.95% $ 570,000 10/18/07
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Greater St. Andrew's AME Church $ 440,000 30 years 8.95% $ 1,250,000 11/01/07
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Burning Bush Worship Center $ 450,000 30 years 8.95% $ 600,000 12/03/07
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Rock Spring Church $ 780,000 30 years 8.50% $ 1,425,000 12/12/07
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Hope for You Family Life & Worship Center $ 450,000 3 years 7.50% $ 637,000 12/17/07
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Believers New Life Ministries $ 266,000 25 years 8.25% $ 395,000 07/02/08
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Guiding Light Apostolic Church of Christ $ 430,000 25 years 8.25% $ 1,250,000 08/20/08
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Victory Church of Troy, Inc. $ 1,100,000 25 years 7.50% $ 1,500,000 09/05/08
---------------------------------------------------------------------------------------------------------------------------------
Iglesia Pentecostes Alfa y Omega $ 236,250 25 years 8.75% $ 317,000 09/25/08
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Norman Quintero Ministries $ 645,000 5 years 5.00% $ 1,500,000 09/30/08
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New Stranger's Home Baptist Church $ 350,000 30 years 8.50% $ 3,000,000 12/22/08
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(1) Includes an initial loan in the amount of $250,000 and an additional
supplemental loan of $30,000 funded April 2001.
(2) New promissory note signed.
(3) New promissory note signed.
- 38 -
The following church bonds, which are secured by mortgages, were held by the
Company as of December 31, 2008. Each of these bonds is callable at anytime by
the issuer at par.
[Enlarge/Download Table]
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Company Original
Principal Purchase Face Yield Yield to Current Maturity Issue
Issuer Amount Price of Bonds Maturity Yield Date Date
----------------------------------------------------------------------------------------------------------------------------------
From the Heart Ministries, Inc. $ 13,000 $ 13,000 10.40% 10.40% 10.40% From 02/15/19 02/15/01
to 08/15/19
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Abundant Life Family Worship $ 3,000 $ 2,760 10.15% 11.65% 11.03% 02/15/10 10/15/95
----------------------------------------------------------------------------------------------------------------------------------
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 10.15% 10.15% 10.15% 02/15/11 02/15/01
----------------------------------------------------------------------------------------------------------------------------------
Greater Holy Trinity $ 766,000 $ 766,000 From 8.25% N/A 9.30% Serially to 12/15/01
to 9.75% 12/15/21
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Swope Parkway Church of Christ $ 8,000 $ 7,440 9.95% 11.20% 10.70% 11/01/11 11/01/97
----------------------------------------------------------------------------------------------------------------------------------
Harvest Baptist Church $ 10,000 $ 5,073.95 From 5.00% N/A N/A 04/01/19 04/28/03
to 12.00%
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Harvest Baptist Church $ 6,000 $ 3,031.14 From 5.00% N/A N/A 04/01/19 04/28/03
to 12.00%
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Greater St. Matthew's Baptist $ 372,000 $ 372,000 9.00% 9.00% 9.00% From 01/15/23 07/15/03
to 07/15/23
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St. Agnes Missionary Baptist Church $ 2,000,000 $ 2,000,000 From 5.35% N/A 6.71% From 05/15/10 05/15/03
to 7.25% to 05/15/22
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Morning Star Missionary Baptist Church $ 10,000 $ 7,500 9.80% 14.40% 13.07% 09/15/14 09/15/94
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 1,965,000 $ 1,965,000 From 7.25% N/A 7.70% From 03/01/18 03/01/04
to 8.00% to 03/01/29
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Chapel Hill Harvester Church $ 472,000 $ 472,000 7.75% 7.75% 7.75% From 03/01/23 03/01/04
to 09/01/23
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Chapel Hill Harvester Church $ 59,000 $ 59,000 8.00% 8.00% 8.00% From 03/01/24 03/01/04
to 03/01/29
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 17,000 $ 17,000 8.00% 8.00% 8.00% 03/01/24 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 1,000 $ 1,000 8.00% 8.00% 8.00% 03/01/28 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 1,000 $ 1,000 8.00% 8.00% 8.00% 09/01/27 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 1,000 $ 1,000 8.00% 8.00% 8.00% 03/01/25 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 10,000 $ 10,000 8.00% 8.00% 8.00% 03/01/27 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
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Company Original
Principal Purchase Face Yield Yield to Current Maturity Issue
Issuer Amount Price of Bonds Maturity Yield Date Date
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 8,000 $ 8,000 8.00% 8.00% 8.00% 03/01/28 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Full Gospel Holy Temple $ 25,000 $ 23,500 7.25% 7.98% 7.71% 02/15/18 02/15/03
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 796,000 $ 796,000 From 5.75% N/A 6.09% From 09/01/11 03/01/04
to 7.50% to 03/01/21
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Chapel Hill Harvester Church $ 30,000 $ 28,200 7.75% 8.41% 8.24% 03/01/22 03/01/04
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St. Agnes Missionary Baptist Church $ 30,000 $ 27,300 7.00% 8.18% 7.69% 11/15/16 05/15/03
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 400,000 $ 400,000 9.00% 9.00% 9.00% From 06/15/29 12/15/04
to 12/15/29
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Original Holy Ark Missionary Baptist Church $ 2,000 $ 2,000 10.00% 10.00% 10.00% 10/15/13 04/15/97
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 97,000 $ 97,000 9.00% 9.00% 9.00% From 12/15/28 12/15/04
to 06/15/29
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 248,000 $ 248,000 7.75% 7.75% 7.75% From 12/15/20 12/15/04
to 06/15/21
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 150,000 $ 150,000 7.50% 7.50% 7.50% From 12/15/18 12/15/04
to 06/15/19
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 1,000 $ 1,000 6.00% 6.00% 6.00% 05/15/14 05/15/05
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 3,000 $ 3,000 6.50% 6.50% 6.50% 05/15/16 05/15/05
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 5,000 $ 5,000 6.75% 6.75% 6.75% 05/15/17 05/15/05
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 13,000 $ 13,000 7.00% 7.00% 7.00% From 11/15/17 05/15/05
to 11/15/19
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 12,000 $ 12,000 7.25% 7.25% 7.25% 11/15/21 05/15/05
----------------------------------------------------------------------------------------------------------------------------------
United Apostolic Church $ 4,000 $ 4,000 7.50% 7.50% 7.50% 05/15/23 05/15/05
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 24,000 $ 24,000 6.25% 6.25% 6.25% 06/15/12 12/15/04
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 76,000 $ 76,000 6.50% 6.50% 6.50% From 06/15/13 12/15/04
to 12/15/13
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 119,000 $ 119,000 6.75% 6.75% 6.75% From 06/15/14 12/15/04
to 12/15/14
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Company Original
Principal Purchase Face Yield Yield to Current Maturity Issue
Issuer Amount Price of Bonds Maturity Yield Date Date
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 5,000 $ 5,000 7.25% 7.25% 7.25% 12/15/16 12/15/04
----------------------------------------------------------------------------------------------------------------------------------
Christ Bible Teaching Center $ 36,000 $ 36,000 From 5.00% N/A 6.14% From 01/15/10 07/15/05
to 6.75% to 01/15/17
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Brea Baptist Church $ 543,000 $ 543,000 From 4.50% N/A 5.98% From 04/01/09 10/01/05
to 6.75% to 04/01/19
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Grace Community Church $ 214,000 $ 214,000 8.00% 8.00% 8.00% From 08/15/30 02/15/06
to 08/15/32
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Christ Fellowship Baptist Church $ 25,000 $ 25,000 7.50% 7.50% 7.50% 12/01/21 06/01/06
----------------------------------------------------------------------------------------------------------------------------------
Christ Fellowship Baptist Church $ 25,000 $ 25,000 7.75% 7.75% 7.75% 12/01/23 06/01/06
----------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia Miss. Baptist Church $ 1,000 $ 1,000 10.15% 10.15% 10.15% 01/15/11 07/15/00
----------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia Miss. Baptist Church $ 1,000 $ 1,000 10.15% 10.15% 10.15% 07/15/11 07/15/00
----------------------------------------------------------------------------------------------------------------------------------
St. Agnes Missionary Baptist Church $ 5,000 $ 4,850 8.00% 8.30% 8.25% 11/15/27 05/15/03
----------------------------------------------------------------------------------------------------------------------------------
Redeemed Christian Church of God $ 60,000 $ 60,000 9.00% 9.00% 9.00% 11/01/36 11/01/06
----------------------------------------------------------------------------------------------------------------------------------
Oak Grove Missionary Baptist Church $ 993,000 $ 993,000 8.50% 8.50% 8.50% From 02/01/33 08/01/06
to 08/01/36
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Christ Fellowship Baptist Church $ 157,000 $ 157,000 8.00% 8.00% 8.00% From 02/01/10 06/01/06
to 06/01/14
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Chapel Hill Harvester Church $ 10,000 $ 8,900 8.00% 9.27% 8.99% 09/01/24 03/01/04
----------------------------------------------------------------------------------------------------------------------------------
Grace Community Church $ 4,000 $ 3,560 7.75% 8.87% 8.71% 12/15/29 12/15/04
----------------------------------------------------------------------------------------------------------------------------------
United Baptist Church $ 3,000 $ 2,670 5.25% 9.06% 5.90% 06/01/10 06/01/05
----------------------------------------------------------------------------------------------------------------------------------
United Baptist Church $ 3,000 $ 2,670 5.50% 8.53% 6.18% 06/01/11 06/01/05
----------------------------------------------------------------------------------------------------------------------------------
United Baptist Church $ 1,000 $ 890 5.75% 8.12% 6.46% 12/01/12 06/01/05
----------------------------------------------------------------------------------------------------------------------------------
First Love Fellowship $ 5,000 $ 4,450 7.75% 9.02% 8.71% 01/15/24 07/15/06
----------------------------------------------------------------------------------------------------------------------------------
His Tabernacle Family Church $ 240,000 $ 240,000 From 8.25% N/A 8.74% From 09/01/15 03/01/07
to 9.00% to 03/01/22
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New Beginnings Cathedral of Worship $ 281,000 $ 281,000 7.00% 7.00% 7.00% 09/15/36 09/15/06
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Company Original
Principal Purchase Face Yield Yield to Current Maturity Issue
Issuer Amount Price of Bonds Maturity Yield Date Date
----------------------------------------------------------------------------------------------------------------------------------
Redeemed Christian Church of God $ 151,000 $ 151,000 8.25% 8.25% 8.25% From 05/01/34 11/01/06
to 11/01/35
----------------------------------------------------------------------------------------------------------------------------------
Calvary Tabernacle $ 277,000 $ 277,000 8.90% 8.90% 8.90% From 12/15/33 06/15/07
to 06/15/34
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Abundant Life Family Worship Center $ 1,000 $ 940 10.35% 11.49% 11.01% 08/15/15 08/15/96
----------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Worship Center $ 15,000 $ 13,800 10.30% 12.00% 11.20% 08/15/14 08/15/96
----------------------------------------------------------------------------------------------------------------------------------
The House of Refuge Apostolic Church $ 113,000 $ 113,000 8.75% 8.75% 8.75% From 02/15/37 08/15/07
to 08/15/37
----------------------------------------------------------------------------------------------------------------------------------
Full Gospel Holy Temple $ 5,000 $ 4,400 5.25% 12.88% 5.97% 08/15/09 02/15/03
----------------------------------------------------------------------------------------------------------------------------------
The New York Dong Yang Church $ 2,000 $ 1,760 6.00% 8.96% 6.82% 12/01/12 12/01/03
----------------------------------------------------------------------------------------------------------------------------------
Redeemed Christian Church of God $ 211,000 $ 211,000 9.00% 9.00% 9.00% From 11/15/36 11/15/07
to 11/15/37
----------------------------------------------------------------------------------------------------------------------------------
Morning Star Missionary Baptist Church $ 5,000 $ 4,100 9.80% 14.23% 11.95% 03/15/14 09/15/94
----------------------------------------------------------------------------------------------------------------------------------
Morning Star Missionary Baptist Church $ 5,000 $ 4,400 9.50% 22.04% 10.80% 03/15/09 09/15/94
----------------------------------------------------------------------------------------------------------------------------------
Abundant Life Family Worship Center $ 3,000 $ 2,670 10.20% 15.56% 11.46% 08/15/10 08/15/96
----------------------------------------------------------------------------------------------------------------------------------
Bethlehem Missionary Church $ 3,000 $ 2,655 9.20% 11.07% 10.40% 08/15/18 09/14/99
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Copperas Cove Unity Missionary Baptist Church $ 113,000 $ 113,000 8.50% 8.50% 8.50% From 02/15/38 02/15/08
to 02/15/39
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The Church of the Pentecost USA $ 491,000 $ 491,000 From 6.25% N/A 8.19% From 02/15/09 02/15/08
to 8.75% to 02/15/38
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New Community Baptist Church of Pine Bluff, AR $ 5,000 $ 5,000 8.25% 8.25% 8.25% 08/15/35 02/15/08
----------------------------------------------------------------------------------------------------------------------------------
Redeemed Christian Church of God $ 100,000 $ 100,000 9.00% 9.00% 9.00% 01/15/38 11/15/07
----------------------------------------------------------------------------------------------------------------------------------
Redeemed Christian Church of God $ 105,000 $ 105,000 9.00% 9.00% 9.00% 07/15/38 11/15/07
----------------------------------------------------------------------------------------------------------------------------------
Chapel Hill Harvester Church $ 10,000 $ 7,500 8.00% 11.41% 10.67% 09/01/24 03/01/04
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[Enlarge/Download Table]
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Company Original
Principal Purchase Face Yield Yield to Current Maturity Issue
Issuer Amount Price of Bonds Maturity Yield Date Date
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 10,000 $ 7,500 8.00% 11.34% 10.67% 06/15/25 12/15/04
----------------------------------------------------------------------------------------------------------------------------------
Agape Assembly Baptist Church $ 5,000 $ 3,750 7.50% 10.98% 10.00% 12/15/22 12/15/04
----------------------------------------------------------------------------------------------------------------------------------
Greater New Birth Church $ 100,000 $ 100,000 9.00% 9.00% 9.00% 04/01/38 10/01/08
----------------------------------------------------------------------------------------------------------------------------------
Greater New Macedonia Missionary Baptist Church $ 500 $ 420 10.45% 13.28% 12.44% 07/15/19 07/15/00
----------------------------------------------------------------------------------------------------------------------------------
Bethlehem Missionary Church $ 500 $ 420 9.15% 12.40% 10.89% 08/15/16 08/15/99
----------------------------------------------------------------------------------------------------------------------------------
Cullen Missionary Baptist Church $ 85,000 $ 85,000 8.50% 8.50% 8.50% 05/15/38- 11/15/08
11/15/38
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The House of Refuge Apostolic Church $ 125,000 $ 125,000 8.65% 8.65% 8.65% 06/15/38- 12/15/08
12/15/38
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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 Lending Guidelines. 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 Lending Guidelines
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 presented by a loan analyst to our loan committee for
consideration. Our loan committee is usually comprised of both our advisor's
president and our advisor's vice-president, but at times items also includes our
advisor's loan officer/administrator and other officers and employees of the
Advisor and the Advisor's affiliates. Once the loan committee has met and
evaluated and discussed a potential loan, the loan is approved or denied,
typically by consensus. If accepted, the loan, the terms of which may have been
revised by the committee, is then presented to the potential borrower, who may,
from time to time, be permitted to negotiate additional revisions. Once a
borrower has accepted a loan proposal, however, it must submit a good faith
deposit. At that point, a loan officer of our advisor may begin the loan
preparation process by arranging for certain services on behalf of the borrower,
in order to achieve pricing and timing efficiencies. Such services may include,
but are not limited to: the provision of mortgage title insurance and for the
services of professional independent third-party accountants and appraisers
regarding delivery of title commitments, preliminary title reports, title
policies, environmental evaluations, financial statements, and appraisals
meeting our loan lending 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-
- 43 -
half is payable to us and one-half is payable to our advisor. We may charge a
fee to recoup expenses we have incurred. This fee would be calculated based on
funds we have paid for appraisal, accounting and title work. These costs are
usually paid by borrowers from proceeds at closing. We may not recoup these fees
if a commitment fee is not charged.
Loan Commitments
Subsequent to approval by our loan 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.
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, the sale
of certificates and from our line of credit. We will use the proceeds of the
sale of certificates to fund mortgage loans and purchase church bonds. We may
borrow up to 300% of shareholders' equity, unless greater amounts are permitted
under certain circumstances. We have a $4,500,000 secured line of credit 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 the prime interest rate up to a prime rate of 6.00%, and when
above 6.00%, a rate equal to the prime rate less 1/2% but not less than 6.00%,
in addition to a nominal annual renewal fee.
Lending Guidelines
Our business of mortgage lending to churches and other non-profit
religious organizations is managed in accordance with and subject to our Lending
Guidelines. Our Lending Guidelines identify our general business guidelines and
the parameters of our lending business.
o 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 is limited to 20% of our average invested
assets. All other loans and bonds will be secured by first mortgages.
- 44 -
o 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.
o 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.
o The borrower must furnish us with an ALTA (American Land Title
Association) or equivalent mortgagee title policy insuring our mortgage
interest.
o The borrower's long-term debt (including the proposed loan) cannot exceed
four times the borrower's gross income for the previous 12 months.
o The borrower must furnish us with financial statements (balance sheet and
income and expense statement) for its last three (3) complete fiscal years
and current financial statements for the period within ninety (90) days of
the loan closing date. A borrower must have the last complete fiscal year
financial statements reviewed by a certified public accountant (CPA)
engaged by the borrower and who is independent of the borrower. On loans
in excess of $500,000 our advisor may require the last complete fiscal
year be audited by a CPA engaged by the borrower and who is independent of
the borrower. In lieu of the above requirement, we or our advisor may
employ a qualified accountant. The qualified accountant we employ would be
required to be independent of the borrower. Our employed qualified
accountant would not be independent of us. Compiled financial statements
of the borrower are acceptable from our employed qualified accountant.
Along with the compiled financial statements of the borrower, our employed
qualified accountant would perform partial and targeted review examination
procedures for borrowers. On loans in excess of $500,000, the advisor may
require partial and targeted audit examination procedures for borrowers.
o Borrowers in existence for less than three (3) fiscal years must provide
financial statements since their inception. No loan will be extended to a
borrower in operation less than two (2) calendar years absent express
approval by our Board of Directors.
o Our advisor typically requires the borrower to arrange for automatic
electronic or drafting of monthly payments.
o 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.
o 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.
o 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).
o We may make fixed-interest rate loans having maturities of three to thirty
years.
o We may borrow up to 300% of shareholders' equity, unless greater amounts
are permitted under certain circumstances.
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 Lending Guidelines 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:
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o Investing more than 10% of our total assets in unimproved real property or
mortgage loans on unimproved real property;
o Investing in commodities or commodity futures contracts other than
"interest rate futures" contracts intended only for hedging purposes;
o 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;
o Investing in mortgage loans that are subordinate to any mortgage or equity
interest of our advisor or our directors or any of their affiliates;
o Investing in equity securities;
o Engaging in any short sales of securities or in trading, as distinguished
from investment activities;
o Issuing redeemable equity securities;
o Engaging in underwriting or the agency distribution of securities issued
by others;
o 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;
o 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;
o Investing in real estate contracts of sale unless such contracts are in
recordable form and are appropriately recorded in the chain of title;
o 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;
o 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;
o 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
o 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.
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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. Many competitors have greater financial resources, larger staffs and
longer operating histories than we have. We compete in this industry 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.
Allowance for Mortgage Loans Receivable
The Company records loans receivable at their estimated net realizable
value, which is the unpaid principal balance less the allowance for mortgage
loans. The Company's loan policy provides an allowance for estimated
uncollectible loans based on an evaluation of the current status of the 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 reserves for the outstanding principal amount of a loan
in the Company's portfolio if the amount is in doubt of collection.
Additionally, no interest income is recognized on non-performing loans that are
in the foreclosure process. At December 31, 2007, the Company reserved
approximately $72,000 for fourteen mortgage loans, of which four were three or
more mortgage payments in arrears, and three were in the foreclosure process, of
which one has declared bankruptcy. At September 30, 2008, the Company reserved
approximately $71,000 for eleven mortgage loans, of which five churches are
three or more mortgage payments in arrears and one church is in the foreclosure
process.
The total value of non-performing loans, which are loans that are in the
foreclosure process or are no longer performing, was approximately $238,000 and
$1,156,000 at September 30, 2008 and December 31, 2007, respectively, which the
Company believes is adequately secured by the underlying capital.
Loan Loss Provision
Of our significant accounting policies, described in the notes to our
financial statements incorporated by reference hereto, we believe that the
estimation of fair value of our mortgage loans receivable, bond portfolio and
real estate held for sale involve a high degree of judgment. We estimate the
fair value of our mortgage loans receivable based on the average interest rate
for special purpose commercial mortgage rates extracted from the most recent
edition of www.RealtyRates.com. The carrying value of the bond portfolio
approximates amortized cost since our bonds are callable at any time by the
issuer at par and the bond portfolio yield is currently higher than interest
rates on similar instruments. We do consider 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 in estimating fair value. The value of real estate held
for sale is based on management's estimate, real estate appraisals and similar
property market comparisons.
Our loan loss policy results in reserves based on a percentage of the
principal amount outstanding on a loan if cumulative interruptions occur in the
normal payment schedule of a loan. The amount reserved under our loan loss
policy on delinquent loans ranges from 1% to 5% of the outstanding principal
amount of the loan, depending on the number of payments that are delinquent.
Management reviews the amount reserved on payments that are in arrears on an
ongoing basis and may increase the amount reserved to adequately reflect the
amount that is believed to be collectible.
Real Estate Held for Sale/Description of Property Acquired through Foreclosure
As of September 30, 2008, we have five properties acquired through
foreclosure. Each property is valued based on its current listing price less any
anticipated selling costs, including, for example, realtor commissions. The fair
value of our real estate held for re-sale is approximately $1,165,000 and
$1,567,000 as of September 30, 2008 and December 31, 2007, respectively.
- 47 -
Once a property is acquired by us, comparable sales information is
obtained and a local realtor is engaged to determine demand for our properties.
The general competitive conditions surrounding the potential sale of our
properties are tied, in large part, to the fact that they are special-use
properties with variable zoning restrictions. We principally lend to churches,
which are commonly exempt from zoning restrictions. However, while a church
property may be exempt from zoning restrictions, if it is located in a
residential area, it still may only be used as a church, thereby limiting the
pool of potential buyers. On the other hand, a church or other property that is
zoned for commercial use generally experiences higher demand, as potential
buyers can convert the property to their own business use. As such, our
properties that are located in residential areas typically experience less
demand than those zoned for commercial use. Descriptions of the five properties
we have acquired through foreclosure are listed below.
Foreclosure was completed on a church located in Battle Creek, Michigan.
The church congregation disbanded and the church property is currently
unoccupied. The Company owns and has taken possession of the church and has
listed the property for sale through a local realtor. The property has a
commercial store-front building and a single church building located in a
residential area.
Foreclosure was also completed on a church located in Tyler, Texas. The
church congregation is now meeting in a different location and the church
property is currently unoccupied. The Company owns and has taken possession of
the church and has listed the property for sale through a local realtor. This
property is located in a residential area.
Foreclosure was completed on a church located in Dayton, Ohio. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company took possession of the church and listed the
property for sale through a local realtor. This property is located in a
residential area.
Foreclosure was also completed on a church located in Anderson, Indiana.
The Company took possession of the property in May 2008, and is currently
preparing the property to be listed for sale. This property is located in a
residential area.
Foreclosure was completed on a church located in Lancaster, Texas. The
Company took possession of the property in July 2008 and has listed the property
for sale. In order to obtain a certificate of occupancy, a new parking lot must
be completed, as the previous owner began to replace the parking lot without
city approval. The Company will most likely need to reduced the price of the
property by the cost of the new parking lot. This property is located in a
residential area.
Our properties located in Battle Creek, Michigan and Anderson, Indiana
have had roof repair work done due to neglected maintenance. The property
located in Dayton, Ohio had the roof replaced due to storm damage which was
partially paid by insurance. All three properties have current electrical
service and both Dayton, Ohio and Anderson, Indiana have monitored alarm
systems. All five properties have had all water turned off by the respective
municipalities and the three properties in Battle Creek, Dayton and Anderson
have had their heating systems winterized. All properties are secure and are
listed through a local real estate agent and have adequate property insurance in
place.
Listed in the chart below are the foreclosure properties; the city and
state in which the property is located; the principal balance outstanding; the
reserve or write-down amount of the property; and the current value after
realtor fees.
[Download Table]
====================================================================================
Location of Property Obtained Principal Balance
Through Foreclosure Owed Reserve Amount Carrying Value
====================================================================================
Battle Creek, Michigan $ 216,351.70 $ 136,251.70 $ 80,100.00
Tyler, Texas $ 333,294.89 $ 46,634.89 $ 284,660.00
Dayton, Ohio $ 418,577.90 $ 225,393.47 $ 193,184.43
Anderson, Indiana $ 385,418.41 $ 17,418.00 $ 368,000.41
Lancaster, Texas $ 383,323.41 $ 145,043.41 $ 238,280.00
-------------- -------------- --------------
Totals: $ 1,736,966.31 $ 572,741.47 $ 1,164,224.84
====================================================================================
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Our advisor, Church Loan Advisors, Inc., manages our properties held for
sale but receives no additional compensation for this service. The advisor
contracts with realtors to provide comparable sales data and has access to our
properties to show to prospective buyers. We also engage maintenance personnel
recommended by the local listing agent to perform routine maintenance to the
properties including repairs to broken windows or doors and cutting of grass and
management of weeds during the summer months and plowing of snow from parking
lots and sidewalks to our three properties in Michigan, Ohio and Indiana. Our
advisor also pays all bills, at our expense, for items such as insurance, taxes,
utilities, alarm system monitoring Company's and maintenance personnel. Our
advisor can be contacted at: Church Loan Advisors, Inc. 10237 Yellow Circle
Drive Minnetonka, Minnesota 55343; (952) 945-9455. Church Loan Advisors, Inc.
has been our advisor since we began active business operations in April 1996.
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 controlled by Philip
J. Myers, our president and one of our directors. Mr. Myers also controls the
underwriter; both our advisor and the underwriter are under common ownership. 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 has two executive officers but no employees. The advisor
indirectly utilizes the services of three individuals who are employed by the
underwriter. 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 are provided by outside
professionals. We pay for these services directly.
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
May. 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:
[Enlarge/Download Table]
Name Age Office Director Since
---- --- ------ --------------
Philip J. Myers 53 President, Treasurer, Secretary and Chairman 2001
Kirbyjon H. Caldwell 54 Independent Director 1994
Dennis J. Doyle 55 Independent Director 1994
Michael G. Holmquist 58 Independent Director 2003
Philip J. Myers has been our Chairman, President, Treasurer and Secretary
since April 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 American Investors Group, Inc. and engaged directly
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 an inactive member of the New York,
California and Minnesota State Bar Associations. Mr. Myers holds General
Securities Representative and General Securities Principal licenses with the
National Association of Securities Dealers, Inc.
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Kirbyjon H. Caldwell, has served as an independent director of the Company
since 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 Continental Airlines, National Children's Defense Fund, Baylor
College of Medicine, Greater Houston Partnership, Advisory Board of Amergy Bank
of Texas, Reliant Energy, Bridgeway Capital Management and the American Cancer
Society. He is also the founder and member of several foundations and other
community development organizations.
Dennis J. Doyle has served as an independent director of the Company since
1994. He is a 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 1978, and has over 300 employees. Mr.
Doyle is the recipient of numerous civic awards relating to his business skills.
He also is a member of the board of directors on a number of philanthropic
business boards.
Michael G. Holmquist has served as an independent director of the Company
since 2003. Mr. Holmquist is a Certified Public Accountant practicing from his
office in Deephaven, Minnesota. Prior to entering the accounting field in 1977,
he worked for two years as a public school teacher and served four years in the
U.S. Coast Guard. He is a graduate of St. Olaf College. Mr. Holmquist was an
original incorporator of American Investors Group, Inc. and an employee of the
firm from 1986-1989.
Day-to-Day Management of Operations
We have no employees. Our advisor manages our day-to-day operations under
the advisory agreement. 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 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
2007, our directors held four meetings. The attendance policy of the Board
encourages and expects all board members to attend all Board meetings. During
2007, Mr. Myers and Mr. Holmquist attended 100% and 75%, respectively, of the
meetings held. Mr. Caldwell and Mr. Doyle each attended two meetings, and Robert
O. Naegele, Jr. (who is not standing for re-election) attended one.
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
Since inception, the Company has not had employees and the Company has
only one executive officer, Philip J. Myers, who serves in several capacities
and is not compensated for such position. The Company's business is managed by
the Advisor. The actions and decisions of the Company and the Advisor are
governed by the Company's independent directors and by the Company's Bylaws and
the Advisory Agreement. Both of these documents substantially comply with the
NASAA REIT Guidelines, which include substantive limitations on, among other
things, conflicts of interest and related party transactions. As such, the
Company has not adopted a Code of Ethics.
In addition, because the Company has no employees, and because Mr. Myers
is not compensated by the Company, there is no Company compensation committee.
However, we currently pay each independent director $500 for each board meeting
attended ($400 for telephonic meetings), limited to $2,500 per year. We also
reimburse directors for travel expenses
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incurred in connection with their duties as our directors. Please see "Director
Compensation". As a non-independent director, Philip J. Myers receives no
compensation or reimbursements in connection with his service on our Board of
Directors.
Director Independence
The Company's Board of Directors has determined that each of Dennis J.
Doyle, Kirbyjon H. Caldwell, Robert O. Naegele, Jr. and Michael G. Holmquist are
"independent," as that term is defined in NASAA REIT Guidelines and in Rule
4200(a)(15) of the NASDAQ Marketplace Rules. Accordingly, the Board is composed
of a majority of independent directors. There are no transactions with the
directors which were evaluated in connection with the Board's determination of
the independence or which have not already been disclosed elsewhere in this
proxy statement.
Fiduciary Responsibility of Board of Directors and Indemnification
The board of directors and our advisor are accountable to us and to 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 a 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.
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. No options or warrants are
outstanding as of the date of this Prospectus.
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EXECUTIVE COMPENSATION AND EQUITY COMPENSATION PLANS; DIRECTOR COMPENSATION
The Company pays no compensation to its officers and has no other
employees. The Company has no equity compensation plans. Because no compensation
or equity awards have been awarded to, earned by or paid to any executive
officer of the Company, the Company has not included any tables or charts
describing executive compensation. However, compensation paid to our directors
is described below.
[Enlarge/Download Table]
Director Compensation(1)
Fees
Earned Non-Equity Non-Qualified
or Paid Stock Option Incentive Plan Incentive Plan All Other
Name in Cash Awards Awards Compensation Compensation Compensation Total
---- ------- ------ ------ -------------- -------------- ------------- -------
Kirbyjon H. Caldwell $ 1,200 n/a n/a n/a n/a n/a $ 1,200
Dennis J. Doyle $ 1,200 n/a n/a n/a n/a n/a $ 1,200
Michael G. Holmquist $ 1,400 n/a n/a n/a n/a $ 15,199 (2) $16,599
Philip J. Myers n/a n/a n/a n/a n/a n/a --
Robert O. Naegele, Jr. $ 1,000 n/a n/a n/a n/a n/a $ 1,000
(1) All Directors, except Philip J. Myers, are paid $500 per board meeting
attended ($400 for telephonic meetings), limited to $2,500 per year, and
reimbursed for travel expenses incurred in connection with their duties as
directors.
(2) Mr. Holmquist was paid an additional $15,199 during 2007 for auditing and
testing the Company's internal controls to determine if the Company has
established and is maintaining an adequate system of controls as defined
by Section 404 of the Sarbanes-Oxley Act of 2002.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth as of February 27, 2009, the number of
shares beneficially owned by each director and by all executive officers and
directors as a group, and the beneficial owner of 5% or more of our outstanding
stock, based on 2,472,801 shares of common stock outstanding at that date.
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.
[Enlarge/Download Table]
================================================================================================
Number of
Shares of
Common Stock Percent
Beneficially of
Name and address of Beneficial Owner (1) Owned Class
------------------------------------------------------------------------------------------------
Philip J. Myers 26,514 (2) 1.1%
------------------------------------------------------------------------------------------------
Kirbyjon H. Caldwell -- --
------------------------------------------------------------------------------------------------
Dennis J. Doyle -- --
------------------------------------------------------------------------------------------------
Michael H. Holmquist -- --
------------------------------------------------------------------------------------------------
All Executive Officers and Directors as a Group (five individuals) (3) 27,814 1.1%
================================================================================================
(1) The address for the Directors is 10237 Yellow Circle Drive, Minnetonka,
Minnesota 55343.
(2) Number does not include 36,813 shares owned by an affiliate of our
Advisor, which affiliate is 20% indirectly owned by Mr. Myers. Mr. Myers
disclaims beneficial ownership of these shares (representing 20% of the
shares owned by the affiliate), and does not have voting or investment
power over the shares.
(3) Includes 1,300 shares owned by Scott J. Marquis. Mr. Marquis is an officer
of our Advisor.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Our advisor, Church Loan Advisors, Inc., manages our business subject to
the supervision of our board of directors. Our advisor provides us with lending,
marketing, management and administrative services. Our President, Philip J.
Myers, is the President of both our advisor and American Investors Group, Inc.,
the underwriter of this offering, and thus is in a position of control of both
entities. In addition, Mr. Myers owns 20% of the underwriter. On our behalf, our
advisor regularly uses the services of personnel employed by American Investors
Group, Inc., including our President, Philip J. Myers, Scott J. Marquis and
Kristen S. Hurley, a loan officer. We incur no direct cost for such services,
except for the advisory fee we pay to our advisor. While our advisor has no
employees, it does have two executive officers. See section "The Advisor and Our
Advisory Agreement" herein.
Transactions With Our Advisor
We pay our advisor advisory fees and expenses. In addition, our advisor
receives a portion of any origination fees associated with a mortgage loan made
or renewed by us. The Company paid the advisor management and origination fees
of approximately $342,000 and $331,000 for the nine months ended September 30,
2008 and 2007, respectively. For the year ended December 31, 2007, we paid our
advisor advisory fees in the amount of $413,000 and our advisor received loan
origination fee income of $37,000. In 2006, we paid our advisor advisory fees in
the amount of $386,000 and our advisor received loan origination fee income of
$187,000. 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
Effective as of _________ __, 2009, we have entered into a distribution
agreement with the underwriter. Pursuant to the agreement, we will pay the
underwriter a commission based on the gross principal amount of certificates
sold in this offering 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 non-accountable expense reimbursement of up to $120,000, assuming
all of the 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 OUR ADVISORY AGREEMENT
Our Advisor: Church Loan Advisors, Inc.
Subject to the supervision of the Board of Directors, our business is
managed by our advisor, Church Loan Advisors, Inc., which provides investment
advisory and administrative services. Church Loan Advisors, Inc. is a Minnesota
corporation and has acted as our advisor since inception in 1994. Our advisor's
offices are located at 10237 Yellow Circle Drive, Minnetonka (Minneapolis),
Minnesota 55343. Our advisor renders lending and advisory services solely to us,
and administers our business affairs and operations.
The following table sets forth the names and positions of the officers and
directors of the advisor:
Name Position
---- --------
Philip J. Myers President, Treasurer and Director
Scott J. Marquis Vice President, Secretary
Scott J. Marquis, age 51, is Vice-President and Secretary of our advisor,
having served in such capacities since December 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.
Our Advisory Agreement
We have entered into a contract with our advisor (the "Advisory
Agreement") under which our advisor furnishes advice and recommendations
concerning our affairs, provides administrative services to us, and manages our
day-to-day affairs. The Company's and the advisor's activities are governed by
the Company's Bylaws and the Advisory Agreement. Both of these documents
substantially comply with the NASAA REIT Guidelines, which include substantive
limitations on, among other things, conflicts of interest and related party
transactions.
Other than with respect to the purchase and sale of church bonds for our
portfolio in the ordinary course of business, as described below, all future
transactions between us and our officers, directors and affiliates must be
approved, in advance, by a majority of our independent directors. 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 reports to us on its performance of the foregoing services
o furnishes advice and recommendations with respect to other aspects of our
business.
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In performing its services under the Advisory Agreement, our advisor uses
facilities, personnel and support services of its affiliates. Expenses, such as
legal and accounting fees, director fees, stock transfer agent and registrar and
paying agent fees, are our direct expenses and are not provided for by our
advisor as part of its services.
The Advisory Agreement is renewable annually by us for one-year periods,
subject to a determination, including a majority of our independent directors,
that our advisor's performance has been satisfactory and that the compensation
paid by us to our Advisor has been reasonable. The Advisory Agreement was
reviewed and renewed for a one-year period on April 24, 2008. We may terminate
the Advisory Agreement without cause or penalty on 60 days' written notice. Upon
termination of the Advisory Agreement by either party, the advisor may require
us to change our name to a name that does not contain the word "American,"
"America" or the name of the advisor or any approximation or abbreviation
thereof. However, we may continue to use the word "church" in our name. Our
directors must 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.
Pursuant to the Advisory Agreement, our advisor is required to pay all of
the expenses it incurs in providing us services including, but not limited to,
personnel expenses, rental and other office expenses of officers and employees
of the advisor, and all of its overhead and miscellaneous administrative
expenses relating to performance of its functions under the Advisory Agreement.
We are required to pay all other expenses, including the costs and expenses of
reporting to various governmental agencies and our shareholders and of
conducting our operations as a mortgage lender, fees and expenses of appraisers,
directors, auditors, outside legal counsel and transfer agents, and costs
directly relating to the closing of loan transactions.
In the event that our total operating expenses exceed in any calendar year
the greater of (a) 2% of our average invested assets or (b) 25% of our net
income (before interest expense), the advisor is obligated to reimburse us, to
the extent of its fees for such calendar year, for the amount by which the
aggregate annual operating expenses paid or incurred by us exceed the
limitation. Our independent directors may, upon a finding of unusual and
non-recurring factors which they deem sufficient, determine that a higher level
of expenses is justified in any given year.
Our Bylaws provide that our independent directors are to determine, at
least annually, the reasonableness of the compensation which we pay to our
advisor. Factors to be considered in reviewing the advisory fee include the size
of the fees of the advisor in relation to the size and composition of our
assets, our profitability, 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, 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.
Pursuant to the Advisory Agreement, we pay our advisor an annual base
management fee of 1.25% of average invested assets on the first $35 million of
such assets, 1.00% on assets from $35 million to $50 million, and .75% on assets
in excess of $50 million. Although entitled to do so, the advisor does not
assess its management fee on the church bond portion of our portfolio, but
rather only on the church loan portion of our portfolio. For purposes of the
Advisory Agreement, the Company's Invested Assets means outstanding church
loans, and does not include church bonds or cash equivalent temporary
investments. As defined in the Advisory Agreement, we remit to the advisor up to
one-half of any origination fee collected from a borrower in connection with
mortgage loans made or renewed by us. For the years ended December 31, 2007 and
2006, we paid our advisor $456,000 and $573,000, respectively.
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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MATERIAL FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH THE CERTIFICATES
The discussion set forth below of the material United States federal
income tax consequences relating to the acquisition, ownership and disposition
of the certificates is a summary and it is not exhaustive of all possible tax
considerations. This discussion does not provide a discussion of any estate,
state, local, or foreign tax considerations.
Winthrop & Weinstine, P.A. has acted as our special U.S. federal income
tax counsel with respect to this offering, has reviewed this summary discussion
that is titled "Federal Income Tax Consequences Associated with the
Certificates," and is of the opinion that it fairly summarizes the United States
federal income tax consequences that are likely to be material to U.S. persons
that acquire, own, and dispose of our certificates. The opinion of Winthrop &
Weinstine, P.A. will be filed as an exhibit to the registration statement of
which this prospectus is a part. The opinion of Winthrop & Weinstine, P.A. is
based on various assumptions, is subject to limitations, and is not binding on
the Internal Revenue Service or any court.
The information in this summary is based on the Internal Revenue Code (the
"Code"), current and temporary proposed Treasury regulations promulgated under
the Code, the legislative history of the Code, current administrative
interpretations and practices of the Internal Revenue Service ("IRS"), and court
decisions, all as of the date of this prospectus. The administrative
interpretation and practices of the IRS upon which this summary is based
includes the practices and policies as expressed in private letter rulings,
which are not binding on the IRS, except with respect to taxpayers who request
and receive such rulings. No assurance can be given that future legislation,
Treasury regulations, administrative interpretations and practices, and court
decisions will not significantly change current law, or adversely affect the
existing interpretations of current law, on which the information in this
summary is based. Even if there is no change in applicable law, no assurance can
be provided that the statements made in the following summary will not be
challenged by the IRS or will be sustained by a court if so challenged, and we
will not seek a ruling with respect to any part of the information discussed in
this summary. This summary is qualified in its entirety by the applicable Code
provisions, Treasury regulations, and administrative and judicial
interpretations of the Code.
The discussion applies only to original purchasers of certificates at par
value. The discussion is included for general information purposes only and does
not deal with persons in special situations, such as banks or other financial
institutions, insurance companies, regulated investment companies, dealers in
securities or currencies, tax-exempt entities, persons holding certificates in a
tax-deferred or tax-advantaged account, traders in securities that elect to use
a mark-to-market accounting method for securities holdings, expatriates, persons
holding certificates as a hedge against currency or interest-rate risks, as a
position in a "straddle," or as part of a "hedging," "conversion," or integrated
transaction for federal income tax purposes consisting of the certificates and
one or more other investments, holders who are U.S. persons for federal income
tax purposes whose functional currency for federal income tax purposes is not
the U.S. dollar, holders who are not U.S. persons for federal income tax
purposes, trusts and estates, and pass-through entities, any equity holder of
which is any of the foregoing. This discussion also assumes that the
certificates are held as "capital assets" within the meaning of Section 1221 of
the Code.
YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR TO DETERMINE THE
IMPACT OF YOUR PERSONAL TAX SITUATION ON THE ANTICIPATED TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES. THIS INCLUDES THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE ACQUISITION,
OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES AND POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
Tax Classification of the Certificates
We believe that the certificates will be classified as debt of our company
for federal income tax purposes. By your acceptance of a certificate, and by
virtue of any person's acquisition of a beneficial interest in a certificate,
you and or any such beneficial owner agree to treat the certificates as debt for
all tax purposes.
Our characterization of the certificates as debt is not binding on the
IRS, and the IRS could assert that the certificates represent an ownership
interest in the equity of the company or in the mortgage collateral. The IRS's
treatment of the certificates as equity interests could adversely affect our
ability to maintain our REIT status, and could result in collateral tax
consequences to certificate holders, including changes in the characterization
and timing of income received with respect to the certificates and could
adversely affect our cash flow. The remainder of this discussion assumes that
the certificates are treated as debt for federal income tax purposes.
- 57 -
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 (other than any
amounts attributable to, and taxable as, accrued interest) and your adjusted tax
basis in the certificate. Your adjusted tax basis of a 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 long-term, capital gain or loss if the
certificate had been held for more than one year and otherwise short-term
capital gain or loss.
Reporting and Backup Withholding
We will report annual interest income paid, and any other information that
is required to be reported with respect to the certificates, to the Internal
Revenue Service and to holders of record that are not excepted from the
reporting requirements.
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 applied against your United
States federal income tax liability or refunded provided that you furnish the
Internal Revenue Service with certain required information.
QUALIFICATION AS A REIT FOR FEDERAL INCOME TAX PURPOSES
The discussion of an entity's qualification as a real estate investment
trust ("REIT") for federal income tax purposes set forth below is a summary. It
does not address fully all requirements for REIT qualification. The Company's
tax counsel has opined that the Company has been organized in a manner that will
permit it to satisfy the requirements under Sections 856 through 860 of the Code
for qualification and taxation as a REIT for the taxable year 2009 and that the
Company's proposed method of operation, as described herein, will permit the
Company to satisfy the requirements for qualifiction and taxation as a REIT
under Sections 856 through 860 of the Code with respect to 2009 and subsequent
taxable years.
WHETHER THE COMPANY QUALIFIES AS A REIT FOR FEDERAL INCOME TAX PURPOSES
WILL NOT AFFECT WHETHER THE CERTIFICATES ARE CLASSIFIED AS DEBT FOR FEDERAL
INCOME TAX PURPOSES OR THE SUMMARY OF THE ANTICIPATED MATERIAL FEDERAL INCOME
TAX CONSEQUENCES TO U.S. PERSONS WHO HOLD THE CERTIFICATES THAT IS SET FORTH IN
THE PRECEDING DISCUSSION TITLED "MATERIAL FEDERAL INCOME TAX CONSEQUENCES
ASSOCIATED WITH THE CERTIFICATES." IF THE COMPANY WOULD NOT CONTINUE TO QUALIFY
AS A REIT FOR FEDERAL INCOME TAX PURPOSES, IT, HOWEVER, COULD AFFECT ADVERSELY
THE COMPANY'S ABILITY TO MAKE INTEREST PAYMENTS TO HOLDERS OF THE CERTIFICATES.
Qualification as a Real Estate Investment Trust
General. The following is a general summary of the requirements to qualify
as a REIT for federal income tax purposes. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. The
requirements to qualify as a REIT may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time.
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
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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, which we did, 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. During our history of operations, we have operated as a REIT
under the Code. Our ability to continue to qualify to operate as a REIT depends,
in part, on the timing and nature of our investments. There can be no assurance
that we will continue to qualify as a REIT. Qualification as a REIT 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 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 to us at the corporate level
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 REIT for the four taxable years
following the year during which qualification is lost. 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.
Loss of REIT status from either our disqualification as a REIT or our
revocation of REIT status would not affect whether the certificates are
classified as debt for federal income tax purposes, the anticipated federal
income tax consequences to U.S. persons who hold the certificates, or whether we
may deduct interest paid to certificate holders for United States federal income
tax purposes. To generate funds with which to pay federal income taxes because
of the loss of REIT status, however, could reduce our funds that are available
for investment, could cause us to incur additional indebtedness, or could cause
us to liquidate investments, each of which could affect adversely our ability to
make interest payments to holders of certificates.
ERISA CONSIDERATIONS
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 certificates, a
Plan fiduciary should ensure that such investment is in accordance with ERISA's
fiduciary standards and that the investment will comply with the
diversification, prudence, liquidity, and composition requirements of ERISA. A
Plan fiduciary also should consider the prohibitions under ERISA on improper
delegation of control over, or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, or
permits, by action or inaction, the occurrence of, or fails to remedy, a known
breach of duty by another fiduciary with respect to "plan assets," and a Plan
fiduciary should consider the need to value the assets of the Plan annually. A
Plan fiduciary also should ensure that the investment is in accordance with the
governing instruments and the overall policy of the Plan. 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 certificates will not constitute a prohibited
transaction. A Plan fiduciary also should consider the illiquid nature of an
investment in our certificates and that no secondary market will exist for them.
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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.
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.
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.
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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 Series C Certificates we are offering by this prospectus are
secured debt obligations of American Church Mortgage Company. We have issued two
prior series of secured investor certificates: Series A and Series B. The
following chart summarizes the amount of certificates of each series originally
authorized to be sold, the amount actually sold and the amount outstanding as of
September 30, 2008:
-------------------------------------------------------------------
Authorized Amount Amount Sold Amount Outstanding
-------------------------------------------------------------------
Series A $ 15,000,000 $15,000,000 $ 7,258,000
-------------------------------------------------------------------
Series B $ 23,000,000 $14,860,000 $ 14,695,000
-------------------------------------------------------------------
Series C* $ 20,000,000 -- --
-------------------------------------------------------------------
* No amount of Series C Certificates may be sold until the
Registration Statement is declared effective by the Securities and
Exchange Commission.
We will issue the certificates under an indenture between us and Herring
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 in 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 or mortgage secured bonds issued by churches and other
not-for profit religious organizations, which we own or will receive as a result
of loans we make to churches and other nonprofit religious organizations and
bonds we purchase. The mortgages securing the promissory notes will not be
assigned to the trustee nor will any bonds be re-registered 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 (13, 14,
15, 16, 17, 18, 19 or 20 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 and paid
quarterly. As of the date of this prospectus, rates we will pay for each
maturity of certificates are set forth below. The interest rate will vary based
on the term to maturity of the certificate you purchase.
----------------------------------------
Certificate Term Interest Rate %
----------------------------------------
13 Year 6.25%
----------------------------------------
14 Year 6.25%
----------------------------------------
15 Year 6.35%
----------------------------------------
16 Year 6.50%
----------------------------------------
17 Year 6.65%
----------------------------------------
18 Year 6.75%
----------------------------------------
19 Year 7.00%
----------------------------------------
20 Year 7.25%
----------------------------------------
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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. However, investors are
advised to check for prospects supplements as interest rates are subject to
change.
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.
Term and Maturity. We are offering certificates with terms ranging from
thirteen to twenty years as follows:
o thirteen (13) years
o fourteen (14) years
o fifteen (15) years
o sixteen (16) years
o seventeen (17) years
o eighteen (18) years
o nineteen (19) years
o twenty (20) 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 fiscal
quarter in which you purchase your certificate. For example, if you purchase a
thirteen (13) year certificate on November 10, 2008, the certificate will mature
on December 31, 2021. We may cease offering specified maturities, and
re-continue their offering, at any time during the offering period. We may
change the interest rate offered on any unsold certificates without prior
notice.
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 100% of the aggregate outstanding
principal amount of the certificates. Unless there is an event of default, 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 consecutive 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 100% 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.
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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 100%
collateral coverage requirement and that default has not been cured within 90
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. Please see the "Interest Rate" chart above. 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 FINRA.
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 Herring 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:
Herring Bank
1608 S. Polk St.
Amarillo, TX 79102
(806) 378-6655
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
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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 Applications. We may reject any application 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. No
commission will be charged for renewals.
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.
Discretionary Redemption by Us on Thirty Days' Notice. We have the option
to redeem all or a portion of the outstanding certificates at any time, in our
sole discretion. If we exercise this option, we will give affected certificate
holders 30 days' notice that we intend to redeem their outstanding certificates.
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 are required to 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.
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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 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 300% of our shareholders'
equity at the end of any fiscal year, or such higher amount as
authorized by our bylaws from time to time.
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 if
there is an 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
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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.
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 100% collateral
coverage requirement and that default has not been cured within 90
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 a majority 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 of, 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, 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.
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The Trustee. Herring 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 and our affiliates.
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, Shareholders and
Servicing Agent. No director, officer, employee, incorporator or shareholder 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 Securities and
Exchange Commission 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.
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 account application (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 may not be able to sell
your certificates. You should be prepared to hold any certificates you purchase
until maturity.
Reports. We have published and filed with the Securities and Exchange
Commission annual reports on Form 10-KSB, and will publish and file annual
reports on Form 10-K, containing financial statements, and have published and
filed quarterly reports on Forms 10-QSB and 10-Q, and will publish and file
quarterly reports on Forms 10-Q, containing financial information for the first
three quarters of each fiscal year. See "Additional Information." We will send
copies of our reports at no charge to any certificate holder who requests them
in writing.
SUMMARY OF THE ORGANIZATIONAL DOCUMENTS
The following is a summary of certain provisions of our organizational
documents, which consist of our Amended and Restated Articles of Incorporation
("Articles") and the Third Amended and Restated Bylaws ("Bylaws"). 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 Articles and our Bylaws. Certain provisions of our
Articles and Bylaws, which are summarized below, may make it more difficult to
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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. We typically hold
our annual meeting of shareholders during the second quarter of each year.
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.
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:
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o result in our shareholders having rights to meeting less frequently
or which are more restrictive to shareholders than those provided in
our Bylaws;
o result in our shareholders having voting rights that are less than
those provided in our Bylaws;
o result in our shareholders having greater liability than as provided
in our Bylaws;
o result in our shareholders having rights to receive reports that are
less than those provided in our Bylaws;
o result in our shareholders having access to records that are more
limited than those provided in our Bylaws;
o 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);
o 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;
o 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
o 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, 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;
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(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."
PLAN OF DISTRIBUTION
General
The underwriter is offering the 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 $20,000,000 principal amount of certificates on our
behalf on a "best efforts" basis. "Best efforts" means that the underwriter is
not obligated to purchase any certificates. This is a "no minimum" offering. No
minimum principal amount of certificates must be sold, and we will receive the
proceeds from the sale of certificates as they are 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
certificates. We may terminate this offering at any time.
Compensation
We will pay to the underwriter a commission based on the principal amount
of certificates sold. The amount of this commission is 2.75% for sales of new
certificates sold. We will also pay the underwriter a .75% management fee upon
the original issuance of each certificate. No commission will be charged for
renewals. Because there is sharing of employees with the underwriter, the
underwriting compensation described above does not include the salaries or other
amounts that such shared employees will receive from their employer, which
amounts would be paid to those employees whether or not the offering occurred.
This compensation, and all compensation to be received by the underwriter and
related persons, will not exceed ten percent (10%) of the total offering
proceeds. We will allocate $5,000 of the $50,000 of the total estimated legal
fees we expect to pay toward the activities of the underwriter.
We have agreed to pay the underwriter a non-accountable expense allowance
of up to $120,000 to reimburse the underwriter for certain expenses incurred by
it in connection with the offer and sale of the shares, $10,000 of which is
payable upon the sale of each $1,000,000 of certificates up to $10,000,000 of
certificates, and $2,000 for each additional $1,000,000 of certificates offered
hereby up to the completion or termination of this offering, whichever occurs
first.
Other Compensation Information. 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
certificates. This
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provision does not prohibit the normal sales commission payable to a registered
broker-dealer or other properly licensed person for selling certificates.
Subscription Process
Our certificates will be offered to the public through the underwriter and
soliciting dealers. The certificates are being sold when, and if we receive and
accept account applications. We have the right to accept or reject any
application. If we reject your application, your funds will be returned to you,
without interest. We will not accept applications for less than $1,000 for each
maturity term of certificates.
The underwriter may offer the certificates through its own registered
representatives and broker-dealers who are members of the FINRA ("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 certificates must remit
payment for the purchase of certificates directly to the underwriter payable to
"American Church Mortgage Company" and will receive a confirmation of their
purchase directly from the underwriter.
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 an application has been accepted. Generally,
payment for certificates should accompany the account application. You may
rescind your purchase of certificates for up to five (5) business days after you
have received 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 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 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 investment;
(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
certificates.
By executing your account application, each soliciting dealer acknowledges
its determination that the 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 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 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.
Suitability of the Investment
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 account application. You may purchase up to $5,000
of certificates if you meet one of the following standards: (i) a net
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worth (excluding home, home furnishings and automobiles) of at least $45,000 and
a minimum gross income (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. 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 $70,000 and a
minimum gross income (without regard to investment in the certificates) of at
least $70,000; or (ii) a net worth (excluding home, home furnishings and
automobiles) of at least $250,000. 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 and acknowledge receipt of this prospectus.
Suitability standards may be higher in certain states. Potential investors
who are residents of Idaho, Iowa, Kansas or Washington should read Exhibit B for
suitability requirements particular to their state. You must meet all of the
applicable requirements set forth in the account application. Kansas residents
will also be required to complete the Subscription Agreement that is part of the
account application.
The account application to be signed by all purchasers of the Series C
Secured Investors Certificates contains an arbitration agreement. By this
agreement, each purchaser agrees that all controversies relating to the
Certificates will be determined by arbitration before the FINRA (formerly NASD).
However, the arbitration agreement does not preclude investors from contacting
state securities commissioners with respect to compliance with state securities
laws or regulations in relation to a dispute or problem with an investment or
their account.
COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons pursuant to
our bylaws, or otherwise, we have been informed 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 certificates being
offered hereby and certain federal income tax matters, are being passed upon for
us by Winthrop & Weinstine, P.A., Minneapolis, Minnesota.
EXPERTS
Our balance sheets as of December 31, 2007 and 2006 and related statements
of operations, stockholder's equity and cash flows for the years ended December
31, 2007 and 2006 included in this prospectus have been audited by Boulay,
Heutmaker, Zibell and Company, P.L.L.P., independent registered 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.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-11,
including exhibits and schedules filed with the registration statement of which
this prospectus is a part, under the Securities Act of 1933, as amended, with
respect to the Certificates to be sold in this offering. This prospectus does
not contain all of the information set forth in the registration statement and
exhibits and schedules to the registration statement. For further information
with respect to us and the Certificates to be sold in this offering, reference
is made to the registration statement, including the exhibits and schedules to
the registration statement. Copies of the registration statement, including the
exhibits and schedules to the registration statement, may be examined without
charge at the public reference room of the SEC, 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Information about the operation of the public reference
room may be obtained by calling the SEC at 1-800-SEC-0330. Copies of all or a
portion of the registration statement may be obtained from the public reference
room of the SEC upon payment of prescribed fees. Our SEC filings, including our
registration statement, are also available to you, free of charge, on the SEC's
website at www.sec.gov.
We are required to file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
Our current and future SEC filings are and will be made publicly available, free
of charge, on our website at http://www.church-loans.net under the heading
"Regulatory Filings".
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INDEX TO FINANCIAL STATEMENTS
Financial Statements
Audited Financial Statements
Report of Independent Registered Public Accounting Firm................ F-2
Balance Sheets as of December 31, 2007 and 2006........................ F-3
Statements of Operations for the fiscal years ended December 31, 2007
(Restated) and 2006 (Restated)....................................... F-5
Statements of Stockholders' Equity for the fiscal years ended
December 31, 2007 and 2006........................................... F-6
Statements of Cash Flows for the fiscal years ended
December 31, 2007 and 2006........................................... F-7
Notes to Financial Statements.......................................... F-9
Unaudited Interim Financial Statements
Condensed Balance Sheets as of September 30, 2008 and
December 31, 2007.................................................... F-16
Condensed Statements of Operations for the nine-month periods ended
September 30, 2008 (Restated) and 2007(Restated) .................... F-18
Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 2008 and 2007.......................................... F-19
Notes to Unaudited Condensed Financial Statements...................... F-21
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
American Church Mortgage Company
Minnetonka, Minnesota
We have audited the accompanying balance sheets of American Church Mortgage
Company as of December 31, 2007 and 2006 and the related statements of
operations, stockholders' equity, and cash flows for the years then ended.
American Church Mortgage Company's management is responsible for these financial
statements. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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, 2007 and 2006, and the results of their operations
and their cash flows for the years then ended, 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
March 28, 2008, except as to Note 9 which is as of March 4, 2009
F-2
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
[Enlarge/Download Table]
December 31,
2007 2006
ASSETS
Current Assets
Cash and equivalents $ 285,118 $ 232,258
Accounts receivable 112,546 136,709
Interest receivable 151,105 164,923
Current maturities of mortgage loans receivable, net of
allowance of $72,056 and $97,262
at December 31, 2007 and 2006 907,812 3,073,619
Current maturities of bond portfolio 41,000 79,000
Prepaid expenses 7,072 8,372
------------ ------------
Total current assets 1,504,653 3,694,881
Mortgage Loans Receivable, net of current maturities 33,061,115 34,779,117
Real Estate Held for Sale, net of impairment reserve of
$635,286 and $1,196,168 at December 31, 2007 and 2006 1,566,561 1,125,190
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $871,437 and
$706,022 at December 31, 2007 and 2006 700,479 852,720
Deferred Line of Credit Costs, net of accumulated
amortization of $36,652 at December 31, 2007 227,278 --
Bond Portfolio, net of current maturities and allowance
of $100,000 at December 31, 2007 11,222,713 9,471,697
Other -- 60,000
------------ ------------
Total assets $ 48,282,799 $ 49,983,605
============ ============
Notes to Financial Statements are an integral part of this Statement.
F-3
AMERICAN CHURCH MORTGAGE COMPANY
Balance Sheet
[Enlarge/Download Table]
December 31
--------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2007 2006
--------------------------------------------------------------------------------------
Current Liabilities
Current maturities of secured investor certificates $ 2,197,000 $ 3,169,000
Line of credit 3,350,000 1,166,000
Accounts payable 28,941 21,796
Accounts payable - related party -- 4,515
Accrued expenses 18,022 --
Building funds payable 50,000 27,000
Current maturities of deferred income 30,412 62,023
Dividends payable 124,680 397,418
------------- -------------
Total current liabilities 5,799,055 4,847,752
Deferred Income, net of current maturities 596,164 611,891
Secured Investor Certificates, Series A 6,008,000 8,807,000
Secured Investor Certificates, Series B 14,626,000 14,662,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,493,595 at
December 31, 2007 and 2006 24,936 24,936
Additional paid-in capital 22,927,644 22,927,644
Accumulated deficit (1,699,000) (1,897,618)
------------- -------------
Total stockholders' equity 21,253,580 21,054,962
------------- -------------
Total liabilities and equity $ 48,282,799 $ 49,983,605
============= =============
Notes to Financial Statements are an integral part of this Statement.
F-4
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Operations
[Enlarge/Download Table]
--------------------------------------------------------------------------------------------
Years Ended December 31
2007 2006
(Restated) (Restated)
--------------------------------------------------------------------------------------------
Interest Income $ 3,947,690 $ 3,927,765
Interest Expense 1,778,715 1,724,986
----------- -----------
Net Interest Income 2,168,975 2,202,779
Provision for losses on mortgage loans receivable 33,101 8,682
Provision for losses on bonds 100,000 --
----------- -----------
Total provision for losses on mortgage loans and bonds 133,101 8,682
----------- -----------
Net Interest Income after provision for mortgage and bond losses 2,035,874 2,194,097
Operating Expenses
Other operating expenses 965,322 834,764
Real estate impairment loss 217,362 205,165
----------- -----------
Total operating expenses 1,182,684 1,039,929
Income Taxes -- --
----------- -----------
Net Income $ 853,190 $ 1,154,168
=========== ===========
Basic and Diluted Income Per Common Share $ .34 $ .46
=========== ===========
Weighted Average Common Shares Outstanding 2,493,595 2,536,351
=========== ===========
F-5
AMERICAN CHURCH MORTGAGE COMPANY
Statement of Stockholders' Equity
[Enlarge/Download Table]
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit
---------------------------------------------------------------------------------------------------
Balance, December 31, 2005 2,551,568 $ 25,516 $ 23,416,468 ($1,566,511)
Redemption of 57,973 shares of common
stock (57,973) (580) (488,824)
Net income 1,154,168
Dividends declared (1,485,275)
----------- ---------- ------------ -----------
Balance, December 31, 2006 2,493,595 $ 24,936 $ 22,927,644 ($1,897,618)
Net income 853,190
Dividends declared (654,572)
-----------------------------------------------------
Balance, December 31, 2007 2,493,595 $ 24,936 $ 22,927,644 ($1,699,000)
=====================================================
Notes to Financial Statements are an integral part of this Statement.
F-6
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Cash Flows
--------------------------------------------------------------------------------
[Download Table]
Years ended December 31
--------------------------
2007 2006
----------- ------------
Cash Flows from Operating Activities
Net income $ 853,190 $ 1,154,168
Adjustments to reconcile net income to net cash
from operating activities:
Impairment loss on real estate 217,362 205,165
Provision for losses on mortgage loans receivable 33,101 8,682
Provision for losses on bond portfolio 100,000 --
Amortization of deferred costs 202,067 199,373
Other 60,000 --
Change in assets and liabilities
Accounts receivable 24,163 (27,267)
Interest receivable 13,818 (26,781)
Prepaid expenses 1,300 (8,372)
Accounts payable 2,630 6,971
Accrued expenses 18,022 --
Deferred income (47,338) 117,312
----------- ------------
Net cash from operating activities 1,478,315 1,629,251
Cash Flows from Investing Activities
Investment in mortgage loans receivable (6,807,144) (19,699,820)
Collections of mortgage loans receivable 9,891,776 9,944,751
Investments in bond portfolio (2,533,620) (306,850)
Proceeds from bond portfolio called/sold 720,604 658,020
----------- ------------
Net cash from (used for) investing activities 1,271,616 (9,403,899)
Cash Flows from Financing Activities
Proceeds from sale of property 130,343 --
Payments on line of credit, net 61,185 1,166,000
Proceeds from secured investor certificates -- 3,369,000
Payments on secured investor certificate maturities (1,851,000) (1,770,000)
Payments for deferred costs (110,289) (177,987)
Stock redemptions -- (489,404)
Dividends paid (927,310) (1,454,646)
----------- ------------
Net cash (used for) from financing activities (2,697,071) 642,963
----------- ------------
Net Increase (Decrease) in Cash and Equivalents 52,860 (7,131,685)
Cash and Equivalents - Beginning of Year 232,258 7,363,943
----------- ------------
Cash and Equivalents - End of Year $ 285,118 $ 232,258
=========== ============
Notes to Financial Statements are an integral part of this Statement.
F-7
AMERICAN CHURCH MORTGAGE COMPANY
Statements of Cash Flows - Continued
--------------------------------------------------------------------------------
[Enlarge/Download Table]
Years ended December 31
-----------------------
2007 2006
---------- ----------
Supplemental Schedule of Noncash Financing and
Investing Activities
Dividends payable $ 124,680 $ 397,418
========== ==========
Reclassification of mortgage and accounts receivable to
real estate held for sale $ 789,076 $ 573,108
========== ==========
Mortgage loans closed but not paid $ 50,000 $ 27,000
========== ==========
Line of credit borrowings for deferred costs $ 166,815 $ --
========== ==========
Line of credit borrowings used for payment of
secured investor certificates $1,956,000 $ --
========== ==========
Supplemental Cash Flow Information
Cash paid during the year for Interest $1,760,693 $1,724,986
========== ==========
Notes to Financial Statements are an integral part of this Statement.
F-8
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
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 established 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, real estate held
for sale and the valuation of the bond portfolio. It is at least reasonably
possible that these estimates could change in the near term and that the effect
of the change, if any, may be material to the financial statements.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
The Company maintains 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, 2007 and 2006, such
investments were $5,000 and $15,403, respectively. The Company has not
experienced any losses in such accounts.
Bond Portfolio
The Company accounts for the 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 cost approximates fair
value, since the bonds are callable at any time by the issuer at par.
Allowance for Mortgage Loans Receivable
The Company records loans receivable at their estimated net realizable value.
The Company's loan policy provides an allowance for estimated uncollectible
loans based on an evaluation of the current status of the 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 reserves for the outstanding principal amount of a loan in the Company's
portfolio if the amount is in doubt of collection. Additionally, no interest
income is recognized on impaired loans that are in the foreclosure process. At
December 31, 2007, the Company reserved $72,056 for fourteen mortgage loans, of
which four are three or more mortgage payments in arrears. Three of the loans
are in the foreclosure process, of which one has declared bankruptcy. At
December 31, 2006, the Company reserved $97,262 for twelve mortgage loans of
which one was four mortgage payments in arrears and was in the foreclosure
process.
The total impaired loans, which are loans that are in the foreclosure process or
are no longer performing, were approximately $1,156,000 and $1,164,000 at
December 31, 2007 and 2006, respectively.
Real Estate Held for Sale
Foreclosure was completed on a church located in Battle Creek, Michigan. The
church congregation disbanded and the church property is currently unoccupied.
The Company owns and has taken possession of the church and has listed the
property for sale through a local realtor.
F-9
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
Foreclosure was also completed on a church located in Tyler, Texas. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company owns and has taken possession of the church
and has listed the property for sale through a local realtor.
A deed in lieu of foreclosure was received from a church located in Cleveland,
Ohio. The Company took possession of the church and listed the property for sale
through a local realtor. The sale of the property was completed on January 18,
2008. The property sold for approximately $215,000 and the Company received
approximately $182,000 from the sale of the property after closing costs and
realtor fees. The Company subsequently realized a tax deductible loss on the
property totaling approximately $221,000.
Foreclosure was completed on a church located in Dayton, Ohio. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company took possession of the church and listed the
property for sale through a local realtor.
Foreclosure was also completed on a church located in Dallas, Texas. The Company
took possession of the property. The Company received an earnest money deposit
from a buyer who is currently in the process of obtaining a certificate of
occupancy. When the certificate of occupancy is obtained, the sale of the
property will be completed.
The Company recorded the real estate held for sale at fair value, which is net
of the expected expenses related to the sale of the real estate.
Carrying Value of Long-lived Assets
The Company tests long-lived assets or asset groups for recoverability when
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Circumstances which could trigger a review include, but are not
limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed significantly before the end of estimated useful life.
Recoverability is assessed based on the carrying amount of the asset and fair
value which is generally determined based on the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal of the asset, as
well as specific appraisal in certain instances. An impairment loss is
recognized when the carrying amount is not recoverable and exceeds fair value.
Deferred Loan Costs
Deferred loan costs are amortized over the respective terms of the secured
investor certificates and the line of credit using the straight-line method
which approximates the effective interest method.
Revenue Recognition
Interest income on mortgage loans and the bond portfolio is recognized as
earned. Deferred income represents loan origination fees, which are recognized
over the life of the loan as an adjustment to the yield on the loan.
Income Taxes
The Company elected to be taxed as a Real Estate Investment Trust (REIT).
Accordingly, the Company is not subject to Federal income tax to the extent of
distributions to its stockholders if the Company meets all the requirements
under the REIT provisions of the Internal Revenue Code.
F-10
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
Income Per Common Share
No adjustments were made to income for the purpose of calculating earnings per
share, as there were no potential dilutive shares outstanding.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. The statement
is effective for (1) financial assets and liabilities in financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years and (2) certain non-financial assets and liabilities
in financial statements issued for fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. The Company is evaluating
the effect, if any, that the adoption of SFAS 157 will have on its results of
operations, financial position, and the related disclosures.
In February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, (SFAS 159), The Fair Value Option for Financial Assets and Financial
Liabilities - Including an amendment of FASB Statement No. 115 (Accounting for
Certain Investments in Debt and Equity Securities). SFAS 159 provides companies
with an option to report selected financial assets and liabilities at fair value
and is effective for fiscal years beginning after November 15, 2007 with early
adoption permitted. The Company is evaluating the effect, if any, that the
adoption of SFAS 159 will have on its results of operations, financial position,
and the related disclosures.
Repurchase of Common Stock
Although our common shares are not redeemable by us, we may, at our complete
discretion, repurchase shares offered to us from time to time by our
shareholders. In such event, we may pay whatever price Church Loan Advisors,
Inc., the "Advisor" to the Company, deems appropriate and reasonable, and any
such shares repurchased will be re-designated as "unissued," will no longer be
entitled to distribution of dividends and will cease to have voting rights.
Shares that may be purchased are not part of a publicly announced plan to
repurchase shares nor does the Company plan or anticipate any stock repurchase
plans.
2. MORTGAGE LOANS AND BOND PORTFOLIO
At December 31, 2007, the Company had first mortgage loans receivable totaling
$34,040,983. The loans bear interest ranging from 7.50% to 12.00% at December
31, 2007. At December 31, 2006, the Company had first mortgage loans receivable
totaling $37,949,998 that bore interest ranging from 7.75% to 12.00%.
The Company also had a portfolio of secured church bonds at December 31, 2007
and 2006, which are carried at cost plus amortized interest income, which
approximates fair value since the bonds are callable at any time by the issuer
at par. The bonds pay either semi-annual or quarterly interest ranging from
4.50% to 12.00%. The combined principal of $11,392,790 at December 31, 2007 is
due at various maturity dates between February 1, 2008 and November 15, 2037.
Eight bond issues comprised 85% of the Company's bond portfolio at December 31,
2007. Six bond issues comprised 85% of the Company's bond portfolio at December
31, 2006. The Company recorded an allowance of $100,000 at December 31, 2007 for
one bond series that is in default. This bond series is approximately 18% of the
bond portfolio at December 31, 2007. The Company had maturities of bonds of
approximately $730,000 and $658,000 in 2007 and 2006, respectively. The Company
purchased approximately $2,534,000 and $307,000 of bonds in 2007 and 2006,
respectively.
F-11
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
The contractual maturity schedule for mortgage loans and the bond portfolio as
of December 31, 2007, is as follows:
Mortgage Loans Bond Portfolio
-------------- --------------
2008 $ 979,868 $ 41,000
2009 788,205 52,000
2010 1,292,126 164,000
2011 922,221 516,000
2012 998,478 346,000
Thereafter 29,060,085 10,273,790
----------- -----------
34,040,983 11,392,790
Less loan loss and bond reserves (72,056) (100,000)
Less discount from par (29,077)
----------- -----------
Totals $33,968,927 $11,263,713
=========== ===========
The Company currently owns $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church. St. Agnes defaulted on its payment obligations to
bondholders. The church subsequently commenced a Chapter 11 bankruptcy
reorganization proceeding regarding three properties in November 2007. The
Company, along with all other bondholders, has a superior lien over all other
creditors. No accrual for interest receivable from the bonds is recorded by the
Company.
The church listed all three of its properties for sale for an aggregate price of
$19,166,668. The bondholders are currently owed $13,027,000 excluding any
accrued interest, fees or expenses. Herring Bank, Amarillo, Texas is trustee for
the first mortgage bondholders. Herring Bank and its legal counsel are
monitoring the bankruptcy process and will advise the bondholders of the
church's re-organization plans when made available. The Company reserved
$100,000 for the bonds at December 31, 2007. When additional information
regarding the Church's reorganization plan is provided, the Company will
determine whether an additional valuation adjustment for the bond investment
should be recorded.
3. SECURED INVESTOR CERTIFICATES
Secured investor certificates (see Note 6) are collateralized by certain
mortgage loans receivable or secured church bonds of approximately the same
value as the certificates. Additionally, the Company incurred deferred offering
costs related to the debt offerings. The maturity schedule for the secured
investor certificates at December 31, 2007 is as follows:
Secured Investor
Certificates
----------------
2008 $ 2,197,000
2009 4,024,000
2010 1,145,000
2011 680,000
2012 1,167,000
Thereafter 13,618,000
-------------
Totals $ 22,831,000
=============
Interest expense related to these Certificates for the years ended December 31,
2007 and 2006, respectively, is approximately $1,657,000 and $1,724,000. The
weighted average interest rate on the certificates was 7.34% and 7.33% for 2007
and 2006, respectfully.
4. TRANSACTIONS WITH AFFILIATES
The Company has an Advisory Agreement with Church Loan Advisors, Inc.,
Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day
operations of the Company and provides office space, administrative services and
personnel.
F-12
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
Under the terms of the Advisory Agreement, the Company pays the Advisor an
annual base management fee of 1.25% of average invested assets (generally
defined as the average of the aggregate book value of the assets invested in
first mortgage bonds and loans secured by real estate) up to $35 million, 1.00%
of assets from $35 million to $50 million, and 0.75% on assets in excess of $50
million, which is payable on a monthly basis. The Advisor also receives 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 Advisor
management and origination fees of approximately $487,000 and $573,000 during
2007 and 2006, respectively. At December 31, 2006, the Company had a payable of
approximately $5,000 due to the Advisor.
The Advisor and the Company are related through common ownership and common
management. See Notes 1 and 6 for additional transactions.
5. INCOME TAXES
As discussed in Note 1, a REIT is subject to taxation to the extent that taxable
income exceeds dividend distributions to shareholders. In order to maintain
status as a REIT, the Company is required to distribute at least 90% of its
taxable income. In 2007, the Company had pretax income of $853,190 and
distributions to shareholders in the form of dividends during the tax year of
$654,572. The expected tax expense to the Company, pre-dividends would have been
$290,085. In 2006, the Company had pretax income $1,154,168 and distributions to
shareholders in the form of dividends during the tax year of $1,485,275. The
expected tax expense to the Company, pre-dividends, would have been $392,417 in
2006. The Company paid out 100% of taxable income in dividends in 2007 and 2006.
The following reconciles the income tax provision with the expected provision
obtained by applying statutory rates to pretax income:
2007 2006
---------- ----------
Expected tax expense $ 290,085 $ 392,417
Realized Tax Loss (284,427) --
Benefit of REIT distributions (129,118) (504,994)
Valuation allowance 63,460 112,577
---------- ----------
Total provision $ (60,000) $ --
========== ==========
The components of deferred income taxes are as follows:
2007 2006
---------- ----------
Loan origination fees $ 213,036 $ 229,131
Loan loss allowance 58,499 33,069
Real-estate impairment 215,997 406,697
Valuation allowance (487,532) (608,897)
---------- ----------
Total deferred income tax $ -- $ 60,000
========== ==========
The total deferred tax assets are as follows:
2007 2006
---------- ----------
Deferred tax assets $ 487,532 $ 668,897
Deferred tax asset valuation allowance (487,532) (608,897)
---------- ----------
Net deferred tax asset $ -- $ 60,000
========== ==========
The change in the valuation allowance was approximately $63,000 and $113,000 for
2007 and 2006, respectively.
F-13
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
6. PUBLIC OFFERINGS OF THE COMPANY
In July 2004, the Company filed a Registration Statement with the Securities and
Exchange Commission for a second public offering of debt securities, which the
Securities and Exchange Commission declared effective October 7, 2004. The
Company concluded the offering on October 7, 2006. The Company offered
$23,000,000 principal amount of its Series B secured investor certificates.
Certificates could be purchased in any multiple of $1,000. We sold $14,860,000
of secured investor certificates during the offering.
Pursuant to the terms of the Underwriting Agreement, the Company incurred
commissions and non-reimbursable expenses and paid approximately $173,000 during
2006 in connection with these public offerings to the managing underwriter and
participating broker-dealers.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments, none of which
are held for trading purposes, are as follows at December 31, 2007 and 2006:
[Download Table]
2007 2006
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash and equivalents $ 285,118 $ 285,118 $ 232,258 $ 232,258
Accounts receivable 112,546 112,546 136,709 136,709
Interest receivable 151,105 151,105 164,923 164,923
Mortgage loans receivable 33,968,927 33,968,927 37,852,736 37,852,736
Bond portfolio 11,263,713 11,263,713 9,550,697 9,550,697
Secured investor certificates 22,831,000 22,831,000 26,638,000 26,638,000
The carrying value of cash and equivalents approximates fair value. The carrying
value of the mortgage loans receivable approximates fair value because of the
substantial turnover and activity in this portfolio. The carrying value of the
bond portfolio approximates amortized cost since our bonds are callable at any
time by the issuer at par. The carrying value of the secured investor
certificates approximates fair value because the interest rates at which the
certificates have been sold have not changed significantly in the past year.
8. 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 and increased to $3,000,000
on February 13, 2007, subject to certain borrowing base limitations, through
August 1, 2007. Interest was charged at 0.50% over the prime rate, which totaled
8.75% at December 31, 2007. The line of credit was fully paid on July 26, 2007
by the KeyBank facility discussed below, leaving no balance outstanding at
December 31, 2007. There was interest expense in the amount of approximately
$41,000 related to the line of credit for December 31, 2007.
On July 26, 2007, the Company entered into a three-year, adjustable rate, $15
million revolving credit facility with KeyBank National Association. There was a
balance of $3,350,000 outstanding at December 31, 2007. There was interest
expense in the amount of approximately $86,000 related to the facility for
December 31, 2007. Interest is charged at the LIBOR rate plus an applicable
margin, which was 1.50% at December 31, 2007. The total interest rate was 6.56%
at December 31, 2007. The applicable margin is indexed based upon the Company's
financial performance as described below.
The Credit Agreement contains customary affirmative and negative covenants. The
financial covenants include borrowing base restrictions, a maximum indebtedness
to assets ratio, a minimum cash flow coverage ratio, a minimum tangible net
worth ratio, and a maximum non-performing assets ratio. The creation of
indebtedness outside the credit facility, creation of liens, making of certain
investments, sale of assets, and incurrence of debt are all either limited or
require prior approval from KeyBank or the lenders under the Credit Agreement.
The Credit Agreement also contains customary events of default such as
nonpayment, bankruptcy, and change in control, which if they occur may
constitute an event of default. Additionally, under certain circumstances, total
availability under the credit facility can be increased to $25 million. The
revolving credit facility is
F-14
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Financial Statements
December 31, 2007 and 2006
secured by a first priority security interest in substantially all of the
Company's assets other than collateral pledged to secure the Company's Series
"A" and Series "B" secured investor certificates
The Company's applicable margin rate is currently 1.50% over LIBOR for LIBOR
rate loans and 0.25% over prime rate for base rate loans. Based on the Company's
borrowing base adjusted leverage ratio this applicable margin can be adjusted,
on any date of determination, either upward or downward based on the following
schedule:
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
Per Annum Percentage for LIBOR Per Annum Percentage for Base
Total Leverage Ratio: Loans Rate Loans
----------------------------------------------------------------------------------------------------------
Greater than or equal to 60% 1.875% 0.50%
----------------------------------------------------------------------------------------------------------
Less than 60% but greater than or
equal to 55% 1.50% 0.25%
----------------------------------------------------------------------------------------------------------
Less than 55% 1.35% 0.00%
----------------------------------------------------------------------------------------------------------
The total leverage ratio is determined by dividing total liabilities by total
adjusted tangible asset value.
9. AMENDMENT TO FINANCIAL STATEMENT
The Company has changed the presentation of interest expense and the provision
for losses on mortgage loans receivable and bonds on the Statement of Operations
to include these accounts as components of net interest income.
F-15
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheet
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------
ASSETS September 30, 2008 December 31, 2007
---------------------------------------------------------------------------------------------------------
(Unaudited)
Current Assets
Cash and equivalents $ 516,190 $ 285,118
Accounts receivable 119,189 112,546
Interest receivable 153,595 151,105
Current maturities of mortgage loans receivable, net of
allowance of $71,035 at September 30, 2008 and
$72,056 at December 31, 2007 646,016 907,812
Current maturities of bond portfolio 53,000 41,000
Prepaid expenses 15,358 7,072
------------------ -----------------
Total current assets 1,503,348 1,504,653
Mortgage Loans Receivable, net of current maturities 33,124,302 33,061,115
Real-Estate Held for Sale 1,165,125 1,566,561
Deferred Secured Investor Certificates Offering Costs,
net of accumulated amortization of $951,159 at
September 30, 2008 and $841,437 at December 31, 2007 637,042 700,479
Deferred Line of Credit Costs, net of accumulated
amortization of $656 at September 30, 2008 and
$36,652 at December 31, 2007 15,094 227,278
Bond Portfolio, net of current maturities and allowance
of $300,000 at September 30, 2008 and
$100,000 at December 31, 2007 11,629,585 11,222,713
------------------ -----------------
Total assets $ 48,074,496 $ 48,282,799
================== =================
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
F-16
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Balance Sheet
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, 2008 December 31, 2007
---------------------------------------------------------------------------------------------------------
(Unaudited)
Current Liabilities
Current maturities of investor saver certificates $ 2,502,000 $ 2,197,000
Line of credit 4,200,000 3,350,000
Accounts payable 21,995 28,941
Accrued expenses 9,333 18,022
Building funds payable 577,595 50,000
Current maturities of deferred income 30,165 30,412
Dividends payable 247,208 124,680
------------------ -----------------
Total current liabilities 7,588,296 5,799,055
Deferred Income, net of current maturities 577,614 596,164
Secured Investor Certificates, Series A 4,843,000 6,008,000
Secured Investor Certificates, Series B 14,608,000 14,626,000
Stockholders' Equity
Common stock, par value $.01 per share
Authorized, 30,000,000 shares
Issued and outstanding, 2,472,081 at September 30,
2008 and 2,493,595 at December 31, 2007 24,721 24,936
Additional paid-in capital 22,814,911 22,927,644
Accumulated deficit (2,382,046) (1,699,000)
------------------ -----------------
Total stockholders' equity 20,457,586 21,253,580
------------------ -----------------
Total liabilities and equity $ 48,074,496 $ 48,282,799
================== =================
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
F-17
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Operations
[Enlarge/Download Table]
-----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
------------------------------
2008 2007
(Restated) (Restated)
-----------------------------------------------------------------------------------------------------------
(Unaudited)
Revenues
Interest income loans $ 2,156,934 $ 2,306,493
Interest income bonds 553,776 578,891
Capital gains realized 20,890 13,287
Origination income 69,958 135,542
------------ ------------
Total revenues 2,801,558 3,034,213
Interest Expense 1,286,118 1,334,115
------------ ------------
Net interest income 1,515,440 1,700,098
Provision for losses on mortgage loans receivable 31,730 33,101
Provision for losses on bonds 200,000 --
------------ ------------
Total provision for losses on mortgage loans and bonds 231,730 33,101
------------ ------------
Net interest income after provision for mortgage and bond losses 1,283,710 1,666,997
Operating expenses
Professional fees 120,899 52,304
Real estate held for sale impairment 305,779 161,805
Costs associated with real estate held for sale 129,918 107,643
Director fees 3,200 3,600
Advisory fees 299,772 312,905
Amortization expense 307,656 150,914
Other 55,757 60,710
------------ ------------
Total operating expenses 1,222,981 849,881
------------ ------------
Net Income $ 60,729 $ 817,116
============ ============
Basic and Diluted Income Per Common Share $ 0.02 $ 0.33
============ ============
Dividends Declared Per Share $ 0.30 $ 0.21
============ ============
Weighted Average Common Shares Outstanding 2,483,231 2,493,595
============ ============
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
F-18
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2008 2007
------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash Flows from Operating Activities
Net income $ 60,729 $ 817,116
Adjustments to reconcile net income to net cash
from operating activities:
Impairment loss on real estate held for sale 305,779 161,805
Provision for losses on mortgage loans receivable 31,730 33,101
Provision for losses on bond portfolio 200,000
Amortization expense 307,656 150,180
Change in assets and liabilities
Accounts receivable (32,435) (41,147)
Interest receivable (2,490) 24,366
Prepaid expenses (8,286) (3,261)
Accounts payable (6,946) 25,185
Accrued expenses (8,689) --
Deferred income (18,797) (81,783)
------------ -------------
Net cash from operating activities 828,251 1,085,562
Cash Flows from Investing Activities
Investment in mortgage loans (1,309,214) (4,284,088)
Collections of mortgage loans 1,944,605 9,204,813
Investment in bond portfolio (1,069,655) (2,203,460)
Proceeds from bond portfolio 450,783 149,192
------------ -------------
Net cash provided by investing activities 16,519 2,866,457
Cash Flows from Financing Activities
Proceeds from sale of property 180,532 130,343
Proceeds from (payments on) line of credit, net 850,000 (1,488,815)
Payments on secured investor certificate maturities (878,000) (1,595,000)
Payments for deferred costs (32,035) (103,668)
Stock redemptions (112,948) --
Dividends paid (621,247) (864,969)
------------ -------------
Net cash used for financing activities (613,698) (3,922,109)
------------ -------------
Net Increase in Cash and Equivalents 231,072 29,910
Cash and Equivalents - Beginning of Year 285,118 232,258
------------ -------------
Cash and Equivalents - End of Year $ 516,190 $ 262,168
============ =============
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
F-19
AMERICAN CHURCH MORTGAGE COMPANY
Condensed Statements of Cash Flows - Continued
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2008 2007
------------------------------------------------------------------------------------------------------------
(Unaudited)
Supplemental Schedule of Noncash Financing and
Investing Activities
Dividends payable $ 247,208 $ 62,341
============ =============
Mortgage and accounts receivable transferred to
real estate held for sale $ 735,990 $ 1,189,676
============ =============
Reclassification of real estate held for sale transferred to
mortgage receivable $ 645,000 $ --
============ =============
Supplemental Cash Flow Information
Cash paid during the period for
Interest $ 1,294,807 $ 1,334,115
============ =============
Notes to Unaudited Condensed Financial Statements are an integral part of this
Statement.
F-20
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with the instructions for interim statements and, therefore, do not
include all information and disclosures necessary for 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 fair presentation of financial
position, results of operations, and cash flows for the period presented.
The unaudited condensed financial statements of the Company should be read in
conjunction with its December 31, 2007 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, 2007. Operating results for
the periods presented are not necessarily indicative of the results that may be
expected for the year ended December 31, 2008.
Nature of Business
American Church Mortgage Company, a Minnesota corporation, was incorporated on
May 27, 1994. The Company engages primarily in the business of making mortgage
loans to churches and other nonprofit religious organizations throughout the
United States, on terms established 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 realizability of the mortgage loans, the
valuation of real estate held for sale, and valuation of the bond portfolio. It
is at least reasonably possible that these estimates could change in the near
term and that the effect of the change, if any, may be material to the financial
statements.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with
maturities of three months or less to be cash equivalents.
The Company maintains 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 September 30, 2008 and December 31,
2007, such investments were $5,000. The Company has not experienced any losses
in such accounts.
Bond Portfolio
The Company accounts for the 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.
Allowance for Mortgage Loans Receivable
The Company records mortgage loans receivable at their estimated net realizable
value, which is the unpaid principal balance less the allowance for mortgage
loans. The Company's loan policy provides an allowance for estimated
uncollectible loans based on an evaluation of the current status of the 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 reserves for the outstanding principal amount of a loan
in the Company's portfolio if the amount is in doubt of collection.
Additionally, no
F-21
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
interest income is recognized on non-performing loans that are in the
foreclosure process. At December 31, 2007, the Company reserved approximately
$72,000 for fourteen mortgage loans, of which four churches were three or more
mortgage payments in arrears. Three of the loans were in the foreclosure
process, of which one church had declared bankruptcy. At September 30, 2008, the
Company reserved approximately $71,000 for eleven mortgage loans, of which five
churches are three or more mortgage payments in arrears and one church is in the
foreclosure process.
The total value of non-performing loans, which are loans that are in the
foreclosure process or are no longer performing, was approximately $238,000 and
$1,156,000 at September 30, 2008 and December 31, 2007, respectively, which the
Company believes is adequately secured by the underlying collateral.
Real Estate Held for Sale
Foreclosure was completed on a church located in Battle Creek, Michigan. The
church congregation disbanded and the church property is currently unoccupied.
The Company owns and has taken possession of the church and has listed the
property for sale through a local realtor.
Foreclosure was completed on a church located in Tyler, Texas. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company owns and has taken possession of the church
and has listed the property for sale through a local realtor.
A deed in lieu of foreclosure was received from a church located in Cleveland,
Ohio. The Company took possession of the church and listed the property for sale
through a local realtor. The sale of the property was completed on January 18,
2008. The property sold for approximately $215,000 and the Company received
proceeds of approximately $181,000 from the sale of the property after closing
costs and realtor fees. The Company realized a tax deductible loss on the
property totaling approximately $221,000.
Foreclosure was completed on a church located in Dayton, Ohio. The church
congregation is now meeting in a different location and the church property is
currently unoccupied. The Company took possession of the church and listed the
property for sale through a local realtor.
Foreclosure was completed on a church located in Dallas, Texas. The Company took
possession of the property and received an earnest money deposit from a buyer
who needed to obtain a certificate of occupancy. The certificate of occupancy
was obtained, and the sale of the property was completed on September 30, 2008.
The property sold for approximately $645,000. The Company recognized a
tax-deductible loss on the property totaling approximately $180,000.
Foreclosure was completed on a church located in Anderson, Indiana. The Company
took possession of the property in May 2008, and is currently preparing the
property to be listed for sale.
Foreclosure was completed on a church located in Lancaster, Texas. The Company
took possession of the property in July 2008 and has listed the property for
sale. In order to obtain a certificate of occupancy, a new parking lot must be
completed, as the previous owner began to replace the parking lot without city
approval. The Company will most likely need to reduce the price of the property
by the cost of the new parking lot.
The Company recorded the real estate held for sale at fair value, which is net
of the expected expenses related to the sale of the real estate.
Carrying Value of Long-lived Assets
The Company tests long-lived assets or asset groups for recoverability when
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Circumstances which could trigger a review include, but are not
limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition or
construction of the asset; current period cash flow or operating losses combined
with a history of losses or a forecast of continuing losses associated with the
use of the asset; and current expectation that the asset will more likely than
not be sold or disposed of significantly before the end of the estimated useful
life.
F-22
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
Recoverability is assessed based on the carrying amount of the asset and fair
value, which is generally determined based on the sum of the undiscounted cash
flows expected to result from the use and the eventual disposal of the asset, as
well as specific appraisal in certain instances. An impairment loss is
recognized when the carrying amount is not recoverable and exceeds fair value.
Revenue Recognition
Interest income on mortgage loans and the bond portfolio is recognized as
earned. Deferred income represents cash received for loan origination fees,
which are recognized as revenue over the life of the loan as an adjustment to
the yield on the loan.
2. FAIR VALUE MEASUREMENT
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standard No. 157, "Fair Value Measurements" (SFAS 157), as it applies to our
financial instruments, and Statement of Financial Accounting Standard No. 159,
"The Fair Value Option for Financial Assets and Financial Liabilities -
Including an amendment of FASB Statement No. 115" (SFAS 159). SFAS 157 defines
fair value, outlines a framework for measuring fair value, and details the
required disclosures about fair value measurements. SFAS 159 permits companies
to irrevocably choose to measure certain financial instruments and other items
at fair value. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparison between entities that choose
different measurement attributes for similar types of assets and liabilities.
Under SFAS 157, fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date in the principal or most
advantageous market. SFAS 157 establishes a hierarchy in determining the fair
value of an asset or liability. The fair value hierarchy has three levels of
inputs, both observable and unobservable. SFAS 157 requires the utilization of
the lowest possible level of input to determine fair value. Level 1 inputs
include quoted market prices in an active market for identical assets or
liabilities. Level 2 inputs are market data, other than Level 1, that are
observable either directly or indirectly. Level 2 inputs include quoted market
prices for similar assets or liabilities, quoted market prices in an inactive
market, and other observable information that can be corroborated by market
data. Level 3 inputs are unobservable and corroborated by little or no market
data.
Except for the bond portfolio, which is required by authoritative accounting
guidance to be recorded at fair value in our Balance Sheets, the Company elected
not to record any other financial assets or liabilities at fair value, as
permitted by SFAS 159. No events occurred during the nine months ended September
30, 2008 which would require adjustment to the recognized balances of assets or
liabilities which are recorded at fair value on a nonrecurring basis.
The following table summarizes the Company's financial instruments that were
measured at fair value on a recurring basis at September 30, 2008.
Fair Value
Measurement
Fair Value Level 3
----------- -----------
Bond portfolio $11,682,585 $11,682,585
=========== ===========
We determine the fair value of the bond portfolio shown in the table above by
using widely accepted valuation techniques including discounted cash flow
analysis on the expected cash flows of the bonds. The analysis reflects the
contractual terms of the bonds, which are callable by the issuer at any time,
including the period to maturity and the anticipated cash flows of the bonds and
uses observable market-based inputs.
F-23
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
The change in level 3 assets measured at fair value on a recurring basis is
summarized as follows at September 30, 2008:
Bond Portfolio
--------------
Beginning balance January 1, 2008 $ 11,263,713
Purchases 1,069,655
Proceeds (450,783)
Reserves (200,000)
Unrealized gains 245,000
Callability provision (245,000)
--------------
Ending balance September 30, 2008 $ 11,682,585
==============
3. MORTGAGE LOANS AND BOND PORTFOLIO
At September 30, 2008, the Company had first mortgage loans receivable totaling
$33,841,353. The loans bear interest ranging from 5.00% to 12.00% at September
30, 2008.
The Company also had a portfolio of secured church bonds at September 30, 2008.
The bonds pay either semi-annual or quarterly interest ranging from 4.50% to
12.00%. The aggregate principal amount of secured church bonds equaled
$12,018,000 at September 30, 2008. This amount is due at various maturity dates
between December 15, 2008 and February 15, 2039.
The contractual maturity schedule for mortgage loans and the bond portfolio as
of September 30, 2008, is as follows:
[Download Table]
Mortgage Loans Bond Portfolio
-------------- --------------
October 1, 2008 through September 30, 2009 $ 717,051 $ 53,000
October 1, 2009 through December 31, 2009 188,297 27,000
2010 1,216,512 175,000
2011 851,394 525,000
2012 938,452 351,000
Thereafter 29,929,647 10,887,000
-------------- --------------
33,841,353 12,018,000
Less loan loss and bond reserves (71,035) (300,000)
Less discount from par -- (35,415)
-------------- --------------
Totals $ 33,770,318 $ 11,682,585
============== ==============
The Company currently owns $2,035,000 First Mortgage Bonds issued by St. Agnes
Missionary Baptist Church located in Houston, Texas. St. Agnes defaulted on its
payment obligations to bondholders. The church subsequently commenced a Chapter
11 bankruptcy reorganization proceeding regarding the three properties that
secure the church bonds in November 2007, which was dismissed in September 2008,
and the church was subsequently foreclosed upon. The Company, along with all
other bondholders, has a superior lien over all other creditors. No accrual for
interest receivable from the bonds is recorded by the Company. The Company
reserved $300,000 for the bonds at September 30, 2008 and $100,000 at December
31, 2007.
F-24
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
4. SECURED INVESTOR CERTIFICATES
Secured investor certificates are collateralized by certain mortgage loans
receivable or secured church bonds of approximately the same value as the
certificates. The weighted average interest rate on the certificates was 6.79%
at September 30, 2008. The maturity schedule for the secured investor
certificates at September 30, 2008 is as follows:
Secured
Investor
Certificates
------------
October 1, 2008 through September 30, 2009 $ 2,502,000
October 1, 2009 through December 31, 2009 2,058,000
2010 1,151,000
2011 850,000
2012 1,167,000
Thereafter 14,225,000
------------
Totals $ 21,953,000
============
Interest expense related to these certificates was approximately $1,142,000 and
$1,266,000 for the nine months ended September 30, 2008 and 2007, respectively.
In October 2008, the Company filed a registration statement with the Securities
and Exchange Commission to offer Series "C" secured investors certificates of
$20,000,000. Upon being declared effective by the SEC, the certificates will be
offered in multiples of $1,000 with interest rates ranging from 6.25% to 7.25%,
subject to changing market rates, and maturities from 13 to 20 years. The
certificates will be collateralized by certain mortgage loans receivable and
church bonds of approximately the same value.
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. The Advisor and the Company are related through common ownership and
common management. The Company paid the Advisor management and origination fees
of approximately $342,000 and $331,000 for the nine months ended September 30,
2008 and 2007, respectively. The Company repurchased approximately 22,000 common
stock shares from American Investors Group, Inc. for approximately $5.25 per
share in the nine months ended September 30, 2008. American Investors Group,
Inc. is related to the Company through common management.
6. 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 September 30, 2008 and December
31, 2007:
[Download Table]
September 30, 2008 December 31, 2007
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash and equivalents $ 516,190 $ 516,190 $ 285,118 $ 285,118
Accounts receivable 119,189 119,189 112,546 112,546
Interest receivable 153,595 153,595 151,105 151,105
Mortgage loans receivable 33,770,318 32,819,125 33,968,927 33,968,927
Bond portfolio 11,682,585 11,682,585 11,263,713 11,263,713
Secured investor certificates 21,953,000 21,953,000 22,831,000 22,831,000
F-25
AMERICAN CHURCH MORTGAGE COMPANY
Notes to Unaudited Condensed Financial Statements
September 30, 2008
At September 30, 2008, the fair value of the mortgage loan portfolio is less
than the carrying value as the portfolio is currently yielding a lower rate than
similar mortgages with similar terms for borrowers with similar credit quality.
The changes in the credit markets in which we transact has experienced an
increase in interest rates resulting in the fair value of the mortgage loans
falling during the nine months ended September 30, 2008. The carrying value of
the bond portfolio approximates amortized cost since our bonds are callable at
any time by the issuer at par and the bond portfolio yield is currently lower
than the interest rates on similar instruments. The carrying value of the
secured investor certificates approximates fair value because the interest rates
at which the certificates have been sold have not changed significantly.
7. LINE OF CREDIT
The Company obtained an $8,000,000 line of credit with Beacon Bank replacing the
$15 million revolving credit facility with KeyBank National Association.
Advances on the new line of credit are available up to $4,500,000, subject to
borrowing base limitations, until Beacon Bank participates out the remaining
portion of the line of credit up to $8,000,000. Interest on the new line of
credit is charged monthly at the prime rate with minimum interest of 5.00%. When
the prime rate is greater than 6.00%, the interest rate will be the prime rate
less .50%, subject to a minimum interest rate of 6.00%. The line of credit is
secured by a first priority security interest in substantially all of the
Company's assets other than collateral pledged to secure the Company's Series
"A" and Series "B" secured investor certificates. At September 30, 2008, the
interest rate on the facility is 5.00% and we had an outstanding balance of
$4,200,000.
8. AMENDMENT TO FINANCIAL STATEMENT
The Company has changed the presentation of interest expense and the provision
for losses on mortgage loans receivable and bonds on the Statement of Operations
to include these accounts as components of net interest income.
F-26
Exhibit A
[Enlarge/Download Table]
---------------------------------------------------------------------------------
[LOGO] AMERICAN INVESTORS GROUP, INC. Account Application Account Number:
[ ] New Account (Check One| _______________________
10237 Yellow Circle Drive [ ] Update Years Known:______
Minnetonks, MN 55343
---------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
1. Account Registration: (Check One):
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
[ ] Individual [ ] Joint Tenants with Rights of Survivorship [ ] Corporate* [ ] Non-Profit*
[ ] Custodial [ ] Community Property [ ] Partnership* [ ] Trust*
[ ] Investment Club* [ ] Pension/Profit Sharing Plan* [ ] Sole Proprietorship* [ ] Estate*
[ ] IRA* [ ] Joint Tenants in Common (50%/50% unless otherwise noted ____% ____%) [ ] TOD/POD
* Additional Paperwork May Be Required
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
2. Account Registration:
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
________________________________________________________________________________________________________________________________
Full Legal Name: Individual/Corporation/Trust/IRA Trustee Social Security Number
________________________________________________________________________________________________________________________________
Full Legal Name: Co-Applicant/Minor/Trustees Social Security Number
________________________________________________________________________________________________________________________________
Home Address: (P.O. Box Unacceptable) City State Zip Length at Residence
________________________________________________________________________________________________________________________________
Alternate Mailing Address (P.O. Box Acceptable) City State Zip
_____________________ ____________________________ _______________________ ___________________________________
Date of Birth Date of Birth (Co-Applicant) Daytime Phone Evening Phone
______________________________ __________________________________________________ ___________________________________
Fax Number E-mail Address Name of your Bank
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
3. Customer Identification Program (CIP)
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
To help the United States fight the funding of terrorism and money laundering activities. Federal law requires us to obtain,
verify and record information that identifies each person who opens an account with us.
Individuals: [ ] Driver's License [ ] Govt. or State Issued I.D. [ ] Passport Entities: [ ] Trust Agreement Dated: _______
Issuer: ______________________________________________________________________ [ ] Articles of Incorporation
I.D. Number: _________________________________________________________________ [ ] Partnership Agreement
Date of Issuance: _______________ Date of Expiration ________________________ Other: _____________________________________
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
4. Investor Information
--------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------
Marital Status: [ ] Single [ ] Married [ ] Divorced [ ] Widowed Number of Dependents: __________ U.S. Citizen? [ ] Yes [ ] No*
Employment Information: (Please specify if unemployed, retired, homemaker or student. If unemployed or retired please indicate
your former occupation)
________________________________________________________________________________________________________________________________
Employer (If self-employed, please specify name of business.) Occupation or former Occupation
____________________________
Length of current Employment
Co-Applicant's Employment Information: (Please specify if unemployed, retired, homemaker or student. If unemployed or retired
please indicate your former occupation)
________________________________________________________________________________________________________________________________
Employer (If self-employed, please specify name of business.) Occupation or former Occupation
____________________________
Length of Current Employment
Office Use Only: ACCT.#: _______ CONS. ACCT #: ________ LAST NAME: _____________
FIRST NAME: ___________ REP NO. ________ REP. LAST NAME: ________________
--------------------------------------------------------------------------------
American Investors Group, Inc. (10/07/03)
[Enlarge/Download Table]
-----------------------------------------------------
[LOGO] AMERICAN INVESTORS GROUP, INC. Account Application Account Number:
[Continued:] ___________________
10237 Yellow Circle Drive -----------------------------------------------------
Minnetonka, MN 55343
--------------------------------------------------------------------------------
4. Investor Information (Continued):
--------------------------------------------------------------------------------
Investment Objectives [Check all that apply]:
[ ] Capital Preservation: Preserving the value of your existing assets by
investing in securities with a smaller degree of risk
of loss of principal.
[ ] Income: Generating current income rather than generating capital
appreciation.
[ ] Growth: Generating capital appreciation by investing in securities with a
higher degree of volatility and risk of loss of principal, which
will generate little if any current income.
[ ] Speculation: Trading volatile securities with a higher than average
possibility of loss of principal with the hope of achieving
significant capital appreciation.
[Enlarge/Download Table]
Financial Information - Primary Applicant: [ ] Check Here If You Are Combining Financial Information
------------------------------------------------------------------------------------------------------------------------------------
Estimated Liquid Net Worth
Investment Experience (Cash, Bank C.D.'S,
(# of Years) Estimated Annual Income Estimated Net Worth Liquid Securities) Tax Bracket
------------------------------------------------------------------------------------------------------------------------------------
[ ] Stocks _____ [ ] Under $25,000 [ ] Under $50,000 [ ] Under $50,000 [ ] 10%
[ ] Bonds _____ [ ] $25,001 - $50,000 [ ] $50,000 - $100,000 [ ] $50,000 - $100,000 [ ] 15%
[ ] Mutual Funds _____ [ ] $50,001 - $75,000 [ ] $100,001 - $150,000 [ ] $100,001 - $150,000 [ ] 25%
[ ] Municipal Bonds _____ [ ] $75,001 - $100,000 [ ] $150,001 - $250,000 [ ] $150,001 - $250,000 [ ] 28%
[ ] Limited Partnerships _____ [ ] $100,001 - $175,000 [ ] $250,001 - $500,000 [ ] $250,001 - $500,000 [ ] 33%
[ ] $175,001 - $250,000 [ ] $500,001 - $1,000,000 [ ] $500,001 - $1,000,000 [ ] 35%
[ ] $250,001 - $500,000 [ ] Over $1,000,000 [ ] Over $1,000,000
[ ] Over $500,001
------------------------------------------------------------------------------------------------------------------------------------
Financial Information - Co-Applicant (If Applicable):
[Enlarge/Download Table]
------------------------------------------------------------------------------------------------------------------------------------
Estimated Liquid Net Worth
Investment Experience (Cash, Bank C.D.'S,
(# of Years) Estimated Annual Income Estimated Net Worth Liquid Securities) Tax Bracket
------------------------------------------------------------------------------------------------------------------------------------
[ ] Stocks _____ [ ] Under $25,000 [ ] Under $50,000 [ ] Under $50,000 [ ] 10%
[ ] Bonds _____ [ ] $25,001 - $50,000 [ ] $50,000 - $100,000 [ ] $50,000 - $100,000 [ ] 15%
[ ] Mutual Funds _____ [ ] $50,001 - $75,000 [ ] $100,001 - $150,000 [ ] $100,001 - $150,000 [ ] 25%
[ ] Municipal Bonds _____ [ ] $75,001 - $100,000 [ ] $150,001 - $250,000 [ ] $150,001 - $250,000 [ ] 28%
[ ] Limited Partnerships _____ [ ] $100,001 - $150,000 [ ] $250,001 - $500,000 [ ] $250,001 - $500,000 [ ] 33%
[ ] $150,001 - $250,000 [ ] $500,001 - $1,000,000 [ ] $500,001 - $1,000,000 [ ] 35%
[ ] $250,001 - $500,000 [ ] Over $1,000,000 [ ] Over $1,000,000
[ ] Over $500,001
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5. Account Agreement (Please read and sign)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Certification of Taxpayer ID Number (Substitute W-9): Under penalty of perjury,
you certify that (1) the number shown on this form is your correct taxpayer
identification number and (2) you are not subject to backup withholding because
(i) you are exempt from backup withholding, or (ii) you have not been notified
by the Internal Revenue Service (IRS) that you are subject to backup withholding
as a result of a failure to report all interest and dividends, or (iii) the IRS
has notified you that you are no longer subject to backup withholding and (3)
you are a U.S. person (including a U.S. resident alien).
--------------------------------------------------------------------------------
Arbitration Agreement: The customer agrees, and by carrying an account for the
customer, American Investors Group, Inc. agrees that all controversies which may
arise between us concerning any transaction or the construction, performance, or
breach of this or any other agreement between us pertaining to securities,
whether entered into prior, on or subsequent to the date hereof, shall be
determined by arbitration. Any arbitration under this agreement shall be
conducted pursuant to the federal arbitration act before the National
Association of Securities Dealers, Inc. in accordance with the rules then
prevailing at the organization. Both parties agree that (i) arbitration is final
and binding on the parties. (ii) The parties are waiving their right to seek
remedies in court, including the right to jury trial. (iii) Pre-arbitration
discovery is generally more limited than and different from court
Proceedings. (iv) The arbitrators' award is not required to include factual
findings or legal reasoning and the party's right to appeal or seek modification
of rulings by the arbitrators is strictly limited. (v) The panel of arbitrators
will typically include a minority of arbitrators who were or are affiliated with
the securities industry.
--------------------------------------------------------------------------------
x _________________________________ x _________________________________________
Applicant's Signature (Date) Co-Applicant's Signature (Date)
--------------------------------------------------------------------------------
FOR BROKER USE ONLY
Rep Last Name: ______________ Rep #: _______________
x ____________________________________________ x ______________________________
Registered Representative Signature (Date) Principal's Signature (Date)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Office Use Only: ACCT.#: ____________ CONS. ACCT #: _______ LAST NAME: ________
FIRST NAME: ____________________ REP NO. _________ REP. LAST NAME: _____________
--------------------------------------------------------------------------------
American Investors Group, Inc. (10/07/03)
American Church Mortgage Company
Subscription Agreement for Kansas Residents
To purchase Series C Secured Investor Certificates, and you are a Kansas
resident, please complete this Subscription Agreement, which is a part of the
Account Application, and write a check made payable to "American Church Mortgage
Company" or to "American Investors Group, Inc." as applicable. Send the entire
Account Application, including this Subscription Agreement, with your check
along with any other documents in the envelope provided. We will return your
copy to you once your Account Application has been reviewed and accepted.
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
also note that the Office of the Kansas Securities Commissioner recommends that
you should limit your aggregate investment in our Certificates and other similar
investments to not more than 10% of your liquid net worth. Liquid net worth is
defined as that portion of your total net worth (total assets minus totally
liabilities) that is comprised of cash, cash equivalents and readily marketable
securities. If you have any questions regarding this form, please contact your
account representative or our customer service department at 1-800-815-1175.
-------------------------------------------------------------
Investor Name(s)/Entity Name(s) (print)
-----------------------------------------------------------
THE UNDERSIGNED acknowledges and/or represents (or in the case of
fiduciary accounts, the person authorized to sign on such Investor's
behalf) the following:
[ ] (A) Acknowledges receipt, not less than five (5) business days prior
Initial to the signing of this Subscription Agreement, of the Prospectus
of the Company relating to the Certificates, wherein the terms and
conditions of the offering of the Certificates are described,
including among other things, the restrictions on ownership and
transfer of Certificates, which require, under certain
circumstances, that a holder of Certificates shall give written
notice and provide certain information to the Company.
[ ] (B) The arbitration agreement included in the Account Application does
Initial not preclude investors from contacting the Kansas Securities
Commissioner with respect to compliance with Kansas securities
laws or regulations in relation to a dispute or problem with an
investment or their account.
[ ] (C) Represents that I (we) either: (i) have a net worth (excluding
Initial home, home furnishings and automobiles) of at least $70,000 and
estimate that (without regard to investment in the Company) I (we)
have gross income due in the current year of at least $70,000; or
(ii) have a net worth (excluding home, home furnishings and
automobiles) of at least $250,000; and have considered the
recommendation of the Office of the Kansas Securities Commissioner
above with respect to limiting my (our) aggregate investment to
not more than 10% of my (our) liquid net worth; in the case of
sales to fiduciary accounts, the suitability standards must be met
by the beneficiary, the fiduciary account or by the donor or
grantor who directly or indirectly supplies the funds for the
purchase of the shares.
[ ] (D) Represents that the investor is purchasing the Certificates for
Initial his or her own account and if I am (we are) purchasing
Certificates on behalf of a trust or other entity of which I am
(we are) trustee(s) or authorized agent(s) I (we) have due
authority to execute the Subscription Agreement and do hereby
legally bind the trust or other entity of which I am (we are)
trustee(s) or authorized agent(s).
[ ] (E) Acknowledges that the Certificates are not liquid, there is no
Initial current market for the Certificates and the investors may not be
able to sell the securities.
[ ] (F) If an employee or affiliate of the Company, represents that the
Initial Certificates are being purchased for investment purposes only and
not for immediate resale; if not an employee or affiliate, I
acknowledge that I have read this item.
---------------------------------------- -------------------------------------
Signature -- Investor Date
---------------------------------------- -------------------------------------
Signature -- Co-Investor (If Applicable) Authorized Signature (Custodian or
Trustee If Applicable)
If a subscription is rejected, the Company will promptly refund to the investor
the consideration paid for the certificates without deduction or interest. You
may rescind your purchase of certificates for up to five (5) business days after
you receive a final prospectus.
Exhibit B
STATE SUITABILITY REQUIREMENTS
If you are a resident of one of the states listed below, you must be able to
represent that you meet the financial suitability requirements for the state in
which you live to invest in the Series C Secured Investor Certificates being
offered by American Church Mortgage Company. The investment firms that solicit
purchases are required by law to ask you whether you meet these requirements to
determine whether a purchase of the certificates is suitable for you. Kansas
residents will also be required to complete the Subscription Agreement that is
part of the Account Application.
IF YOU ARE A RESIDENT OF ONE OF THE STATES BELOW, YOU MUST SATISFY THE NET WORTH
REQUIREMENT OR THE COMBINED NET WORTH- NET INCOME REQUIREMENT SET FORTH OPPOSITE
THE STATE. When considering the net worth standards, you cannot include the
value of your home, furnishings and automobiles.
--------------------------------------------------------------------------------
ALTERNATIVE 2
ALTERNATIVE 1 NET INCOME + NET MINIMUM MAXIMUM
STATE NET WORTH WORTH INVESTMENT INVESTMENT
--------------------------------------------------------------------------------
Idaho $ 250,000 $70,000 net income N/A N/A
PLUS $70,000 net
worth
--------------------------------------------------------------------------------
Iowa $ 250,000 $70,000 net income N/A 10% of Net Worth
PLUS $70,000 net
worth
--------------------------------------------------------------------------------
Kansas $ 250,000 $70,000 net income N/A It is recommended
PLUS $70,000 net that Kansas
worth investors limit
their investment
to no more than
10% of their
liquid net worth.
--------------------------------------------------------------------------------
Washington $ 250,000 $70,000 net income N/A N/A
PLUS $70,000 net
worth
--------------------------------------------------------------------------------
================================================================================
Prospective investors may rely only on the information contained in this
prospectus. Neither American Church Mortgage Company nor the Underwriter has
authorized anyone to provide any other information. This prospectus is not an
offer to sell to - nor is it seeking an offer to buy securities 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 ....................................................... 4
Risk Factors ............................................................. 10
Who May Invest ........................................................... 17
Use of Proceeds .......................................................... 18
Compensation to Advisor and Affiliates ................................... 19
Conflicts of Interest .................................................... 21
Distributions ............................................................ 23
Capitalization ........................................................... 25
Selected Financial Data .................................................. 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................ 27
Our Business ............................................................. 32
Management ............................................................... 49
Executive Compensation and Equity Compensation Plans; Director
Compensation .......................................................... 52
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ................................................... 53
Certain Relationships and Related Transactions and Director
Independence .......................................................... 54
The Advisor and Our Advisory Agreement ................................... 55
Material Federal Income Tax Consequences Associated with the
Certificates .......................................................... 57
Qualification as a REIT for Federal Income Tax Purposes .................. 58
ERISA Considerations ..................................................... 59
Description of Capital Stock ............................................. 60
Description of the Certificates .......................................... 61
Summary of the Organizational Documents .................................. 67
Plan of Distribution ..................................................... 70
Commission Position on Indemnification for Securities Act Liabilities .... 72
Legal Matters ............................................................ 72
Experts .................................................................. 72
Additional Information ................................................... 72
Index to Financial Statements ............................................ F-1
Until [______ __, 200_], all dealers effecting transactions in the securities
offered by this prospectus, whether or not participating in the offering, may be
required to deliver a prospectus. Dealers may also be required to deliver a
prospectus when acting as underwriters and for their unsold allotments or
subscriptions.
================================================================================
================================================================================
American Church
Mortgage Company
[LOGO]
$20,000,000 of Series C Investor Certificates
----------------
PROSPECTUS
----------------
American Investors Group, Inc.
March 30, 2009
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Item Estimated Cost
---- --------------
SEC Registration Fee .......................... $ 786
FINRA Filing Fee .............................. $ 2,500
Blue Sky Qualification Fees and Expenses* ..... $ 15,000
Underwriter's Expense Allowance** ............. $ 120,000
Printing and Engraving* ....................... $ 2,000
Legal Fees and Expenses* ...................... $ 50,000
Accounting Fees and Expenses* ................. $ 12,000
--------------
Total ...................................... $ 202,286
==============
* 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 a 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 to 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.
II-1
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:
Audited Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2007 and 2006
Statements of Operations for the fiscal years ended December 31, 2007
(Restated) and 2006 (Restated)
Statements of Stockholders' Equity for the fiscal years ended December 31,
2007 and 2006
Statements of Cash Flows for the fiscal years ended December 31, 2007 and
2006
Notes to Financial Statements
Unaudited Interim Financial Statements
Condensed Balance Sheets as of September 30, 2008 and December 31, 2007
Condensed Statements of Operations for the nine-month periods ended
September 30, 2008 (Restated) and 2007 (Restated)
Condensed Statements of Cash Flows for the nine-month periods ended
September 30, 2008 and 2007
Notes to Unaudited Condensed 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)
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.
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.
II-2
4) That, for the purpose of determining liability under the Securities Act of
1933 to any purchaser:
a. If the registrant is relying on Rule 430B:
i. Each prospectus filed by the registrant pursuant
to Rule 424(b)(3) shall be deemed to be part of
the registration statement as of the date the
filed prospectus was deemed part of and included
in the registration statement; and
ii. Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5), or (b)(7) as part of a
registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section
10(a) of the Securities Act of 1933 shall be
deemed to be part of and included in the
registration statement as of the earlier of the
date such form of prospectus is first used after
effectiveness or the date of the first contract of
sale of securities in the offering described in
the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person
that is at that date an underwriter, such date
shall be deemed to be a new effective date of the
registration statement relating to the securities
in the registration statement to which that
prospectus relates, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof. Provided,
however, that no statement made in a registration
statement or prospectus that is part of the
registration statement or made in a document
incorporated or deemed incorporated by reference
into the registration statement or prospectus that
is part of the registration statement will, as to
a purchaser with a time of contract of sale prior
to such effective date, supersede or modify any
statement that was made in the registration
statement or prospectus that was part of the
registration statement or made in any such
document immediately prior to such effective date;
or
b. If the registrant is subject to Rule 430C, each prospectus
filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part of
and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first
use.
5) That, for the purpose of determining liability of the registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of the
securities: The undersigned registrant undertakes that in a primary
offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
a. Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed
pursuant to Rule 424;
b. Any free writing prospectus relating to the offering prepared
by or on behalf of the undersigned registrant or used or
referred to by the undersigned registrant;
c. The portion of any other free writing prospectus relating to
the offering containing material information about the
undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
d. Any other communication that is an offer in the offering made
by the undersigned registrant to the purchaser.
6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in
II-3
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
7) 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.
8) 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.
9) 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 March 30, 2009.
AMERICAN CHURCH MORTGAGE COMPANY
By /s/ Philip J. Myers
----------------------------------
Philip J. Myers, President,
Chief Executive Officer and
Chief Financial Officer
II-4
POWER OF ATTORNEY
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.
Director, President,
Secretary and Treasurer
(principal executive officer;
principal financial and
/s/ Philip J. Myers accounting officer March 30, 2009
---------------------------------
Philip J. Myers
/s/ Kirbyjon H. Caldwell* Director March 30, 2009
---------------------------------
Kirbyjon H. Caldwell
/s/ Dennis J. Doyle* Director March 30, 2009
---------------------------------
Dennis J. Doyle
/s/ Michael G. Holmquist* Director March 30, 2009
---------------------------------
Michael G. Holmquist
*By Philip J. Myers and Scott J. Marquis, Attorneys-in-Fact
INDEX TO EXHIBITS
[Enlarge/Download Table]
Exhibit
No. Title
------- -----
1.1 Form of Distribution Agreement by and between the Company and American Investors Group,
Inc. 1
1.2 Form of Soliciting Dealers Agreement 1
3.1 Amended and Restated Articles of Incorporation 2
3.2 Third Amended and Restated Bylaws 3
4.1 Form of Trust Indenture 1
5 Opinion Letter of Winthrop & Weinstine, P.A. as to the legality of the securities 1
8 Opinion Letter of Winthrop & Weinstine, P.A. as to certain tax matters relating to
the securities 1
10.1 Amended and Restated REIT Advisory Agreement by and between the Company and Church Loan
Advisory, Inc. dated January 22, 2004 4
10.2 Form of Loan and Security Agreement by and between the Company and Beacon Bank 5
10.3 Form of Revolving Note 5
10.4 Form of Securities Account Control Agreement by and among the Company, Herring Bank, as
Trustee and Beacon Bank 5
10.5 Form of Security Agreement by and between the Company and Herring Bank, as Trustee 1
21 Subsidiaries of the Registrant 1
23.1 Consent of Counsel (included in Exhibit 5 and 8) 1
23.2 Consent of Independent Registered Public Accounting Firm 1
25 Statement of Eligibility of Trustee 1
-----------------
(1) Filed herewith.
(2) Incorporated herein by reference to the Company's Registration Statement
on Form 8-A filed April 30, 1999 (Commission File No. 000-25919).
(3) Incorporated herein by reference to the Company's Current Report on Form
8-K filed July 3, 2007.
(4) Incorporated herein by reference to the Company's Current Report on Form
8-K filed August 1, 2007.
(5) Incorporated herein by reference to the Company's Current Report on Form
8-K filed September 17, 2008.
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘S-11/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 11/15/37 | | 83 |
| | 12/31/21 | | 62 |
| | 10/1/09 | | 96 | | 97 |
| | 9/30/09 | | 96 | | 97 | | | 10-Q |
| Filed on: | | 3/30/09 | | 1 | | 110 | | | CORRESP |
| | 3/4/09 | | 74 |
| | 2/27/09 | | 53 |
| | 12/31/08 | | 35 | | 93 | | | 10-K |
| | 12/15/08 | | 96 | | | | | 4 |
| | 11/15/08 | | 83 |
| | 11/10/08 | | 62 |
| | 10/1/08 | | 96 | | 97 |
| | 9/30/08 | | 4 | | 107 | | | 10-Q, 10-Q/A |
| | 9/17/08 | | 111 | | | | | 8-K |
| | 9/12/08 | | 6 | | | | | 8-K |
| | 6/30/08 | | 11 | | | | | 10-Q, 10-Q/A |
| | 4/24/08 | | 56 |
| | 3/31/08 | | 11 | | | | | 10-Q, 10-Q/A |
| | 3/28/08 | | 74 | | | | | 10KSB |
| | 2/29/08 | | 22 |
| | 2/1/08 | | 83 |
| | 1/18/08 | | 82 | | 94 |
| | 1/1/08 | | 95 | | 96 |
| | 12/31/07 | | 11 | | 107 | | | 10KSB, 10KSB/A, DEF 14A, PRE 14A |
| | 11/15/07 | | 83 |
| | 9/30/07 | | 27 | | 107 | | | 10QSB |
| | 8/1/07 | | 86 | | 111 | | | 8-K, 8-K/A |
| | 7/26/07 | | 86 | | | | | 8-K, 8-K/A |
| | 7/3/07 | | 111 | | | | | 8-K |
| | 6/30/07 | | 27 | | 28 | | | 10QSB |
| | 3/31/07 | | 28 | | | | | 10QSB |
| | 2/13/07 | | 86 |
| | 12/31/06 | | 11 | | 107 | | | 10KSB, DEF 14A |
| | 10/7/06 | | 86 |
| | 9/30/06 | | 29 | | | | | 10QSB |
| | 6/30/06 | | 29 | | | | | 10QSB |
| | 3/31/06 | | 29 | | | | | 10QSB |
| | 12/31/05 | | 19 | | 29 | | | 10KSB, DEF 14A |
| | 10/7/04 | | 86 |
| | 3/18/02 | | 86 |
| | 7/22/99 | | 86 |
| | 4/30/99 | | 111 | | | | | 8-A12G |
| | 12/31/97 | | 27 | | | | | 10KSB |
| | 6/30/96 | | 23 |
| | 4/15/96 | | 28 |
| | 5/27/94 | | 4 | | 93 |
| List all Filings |
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