-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AR6vo9RVafDczgSyrE5WCSx3jGzLDRCMGbqTNBojZ4zq2lLGOwCuFDtuuCr59cE1 7+S4dAwM4ZvBizE4GIX9gA== 0000897101-09-000459.txt : 20090309 0000897101-09-000459.hdr.sgml : 20090309 20090309165004 ACCESSION NUMBER: 0000897101-09-000459 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20090309 DATE AS OF CHANGE: 20090309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CHURCH MORTGAGE CO CENTRAL INDEX KEY: 0000934543 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 411793975 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-11/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-154831 FILM NUMBER: 09666626 BUSINESS ADDRESS: STREET 1: 10237 YELLOW CIRCLE DRIVE STREET 2: STE 700 CITY: MINNEAPOLIS STATE: MN ZIP: 55343 BUSINESS PHONE: 6129459455 MAIL ADDRESS: STREET 1: 10237 YELLOW CIRCLE DR CITY: MINNEAPOLIS STATE: MN ZIP: 55343 S-11/A 1 acmc091072_s11a.txt FORM S-11/A As Filed with the Securities and Exchange Commission On March 9, 2009 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Amendment No. 2 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 ================================================================================================================= Amount Proposed Maximum Proposed Maximum Title Of Each Class Of Securities to be Offering Price Aggregate Offering Amount Of To Be Registered Registered Per Unit Price Registration Fee - ----------------------------------------------------------------------------------------------------------------- Series C Secured Investor Certificates 20,000 $1,000(1) $20,000,000 $786(2) =================================================================================================================
(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 9, 2009 AMERICAN CHURCH MORTGAGE COMPANY $20,000,000 of Series C Secured Investor Certificates ---------- 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: - 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. - We have conflicts of interest with the underwriter and our advisor, which are under common control. - You may have difficulty selling your certificates because there is no public market and our advisor must approve all transfers of certificates. - 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.
=================================================================================================== Selling Commission and Series C Secured Investor Certificates Price to Public Offering Expenses (2) Proceeds to Us - --------------------------------------------------------------------------------------------------- Minimum Purchase $1,000(1) $46.00 $954 - --------------------------------------------------------------------------------------------------- Total $20,000,000 $920,000 $19,080,000 ===================================================================================================
(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 - 2 - 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 - 3 - 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." - 4 - 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
- 5 - 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.
- 6 - 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: - 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. - 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. - 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. - Conflicts of interest with the underwriter and our advisor in connection with this offering and our on-going business operations could affect decisions made by our advisor on our behalf. - There is no public trading market for the certificates. It is not likely that a market for the certificates will develop after this offering. - 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: - Our President is the President of both our advisor and the underwriter and thus is in a position of control of both entities. - The underwriter for this offering and our advisor are also under common control. - Agreements between us and our advisor and the underwriter were not negotiated at arm's-length. - We and the underwriter have common business interests. - Negotiations between us and our advisor during the organization and structuring of our operations were not at arm's length. - The advisory agreement was not negotiated at arm's-length, but is subject to annual renewal by our Board of Directors. - 7 - - 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: - a higher level of distributable income or interest rate than is available in guaranteed or government-backed fixed-income investments; - preservation of their investment capital through portfolio diversification (lending funds to many different borrowers and purchasing bonds issued by numerous issuers); - greater security for our portfolio through investment only in mortgage-backed loans and securities (providing us with collateral in the event of a borrower's default); and - greater security for our certificate holders by our pledging mortgage-secured promissory notes or debt securities that we hold to secure our obligations under the certificates (providing certificate holders with a stream of revenue and potential sale proceeds in the event of our default). Business Objectives and Policies We 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: - find qualified borrowers and make loans in accordance with out Lending Guidelines; - lend at rates of interest in excess of our cost of funds; - 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); - charge origination fees (i.e. "points") from the borrower at the outset of a loan and upon any renewal of a loan; - make a limited amount of higher-interest rate and increased risk second mortgage loans and short-term construction loans to qualified borrowers; and - 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: - Loans we make cannot exceed 75% of the appraised value of the real property and improvements securing the loan. - We may not loan more than $2,000,000 to a single borrower. - We require appraisals of the property securing our loans. - 8 - - The borrower must furnish us with a mortgagee title policy insuring our interest in the collateral. - The borrower's long-term debt (including the proposed loan) as of the date of the mortgage loan may not exceed four times the borrower's gross income for its most recent twelve (12) months. - 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. - 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"). - 9 - 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. -------------------------------------------------------------------------- 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. - 10 - Conflicts of Interest Arise From Our Relationship with Our Advisor and the Underwriter. -------------------------------------------------------------------------- The terms of transactions involving our formation and the formation of our advisor, and our contractual relationship with our advisor, were not negotiated at arm's-length. Our non-independent directors and officers may have conflicts of interest in enforcing agreements between us and our advisor or the underwriter. Future business arrangements and agreements between us and our advisor or 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. -------------------------------------------------------------------------- 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. 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- The certificates are not negotiable debt instruments. Rights of record ownership of the certificates may be transferred only with our advisor's prior written consent. You will not be able to freely transfer the certificates. We Are Obligated to Redeem Certificates Only in Limited Circumstances. --------------------------------------------------------------------- You will have no right to require us to prepay or redeem any certificate prior to its maturity date, except in the case of your death or if we replace our current advisor. Further, even in the event of your death, we will not be required to redeem your certificates if we have redeemed at least $25,000 of principal amount of 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- Prevailing market interest rates impact borrower decisions to obtain new loans or to refinance existing loans, possibly having a negative effect upon our ability to originate mortgage loans. If interest rates decrease and the economic advantages of refinancing mortgage loans increase, then prepayments of higher interest mortgage loans in our portfolio would likely reduce our portfolio's overall rate of return (yield). We Are Subject to the Risks Associated with Fluctuations in National and Local Economic Conditions. -------------------------------------------------------------------------- The mortgage lending industry is subject to increased credit risks and rates of foreclosures during economic downturns. In addition, because we provide mortgages to churches and other religious organizations who generally receive financing through charitable contributions, our financial results are subject to fluctuations based on a lack of consumer confidence or a severe or prolonged national or regional recession. As a result of these and other circumstances, our potential borrowers may decide to defer or terminate plans for financing their properties. 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. -------------------------------------------------------------------------- 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. -------------------------------------------------------------------------- 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 Selling Commissions (2) 700,000 3.50% 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
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.
- 19 - AFFILIATE COMPENSATION
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 all or a Sale of Certificates in portion of this amount to other participating broker-dealers who are members of the this Offering Financial Industry Regulatory Authority ("FINRA"). Non-Accountable Underwriter Up to $120,000 to cover the underwriter's costs and expenses relating to the offer and sale Expense Allowance of the certificates in this offering, payable as follows: (i) $10,000 paid upon the sale of Relating to the Sale each $1,000,000 of certificates up to the sale of $10,000,000 of certificates, and (ii) of Certificates in this $2,000 payable upon the sale of each additional $1,000,000 of certificates up to the Offering 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 issuance. Management Fee Commissions and Underwriter Customary mark-ups and mark-downs on first mortgage church bonds we purchase and sell Expenses on First through the underwriter on the secondary market, and commissions earned through the Mortgage Bonds underwriter on church bonds we purchase in the primary market. Purchased
- 20 - 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 - 21 - 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 - 23 - 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. - 24 - 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.
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. - 25 - 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.
Nine Months Year Ended December 31, 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
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 ============ ============ =============
- 26 - 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. 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 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. 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:
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 - 30 - 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. accumulated reserve Foreclosure proceeding underway or imminent. during default period Reserve amount dependent on value of equal to principal collateral. All expenses related to enforcing loan balance in loan agreements are expensed. excess 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.
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.
Loan Loan Interest Collateral Appraised Borrowing Church Amount Term Rate Value Funding Date - ------------------------------------------------- ----------- -------- -------- -------------------- ------------ Praise Chapel International(1) $ 115,000 5 years 10.00% $ 175,000 03/02/99 Greater Hill Zion Baptist Church $ 500,000 20 years 9.75% $1,040,000 05/20/99 Freewill Christian Center $ 596,000 20 years 10.00% $ 797,000 06/22/99 Bethel Temple of Longview $ 500,000 20 years 10.25% $1,550,000 06/04/99 Greater Fort Lauderdale $ 605,000 20 years 9.75% $ 900,000 07/08/99 Old Morning Star Church (1) $ 280,000 20 years 9.85% $ 356,000 12/21/99 Praise Christian Center $ 500,000 20 years 9.85% $ 926,000 01/21/00 St. Paul AME Church $ 200,000 20 years 10.25% $ 325,000 11/02/00 Second Missionary Baptist Church $ 225,000 20 years 10.25% $ 370,000 06/19/01 True Vine Gospel Church $ 350,000 25 years 9.95% $ 500,000 11/15/01 Nehemiah Christian Center $ 115,000 3 years 8.50% $ 140,000 05/30/02 Eagle Vision Community Church $ 165,000 20 years 9.25% $ 215,000 07/19/02 Holly Grove Missionary Baptist Church $ 205,000 20 years 9.25% $ 461,900 09/19/02 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 Life Changing Faith Christian Church $ 460,000 20 years 9.00% $ 690,000 03/12/03 Zion Hill Baptist Church $ 255,000 20 years 8.65% $ 365,000 5/30/03 Bend Christian Center $ 445,000 25 years 8.65% $ 1,010,00 6/19/03 Pembroke Park Church of Christ $ 520,000 20 years 8.65% $ 880,000 6/26/03 Glad Tidings Community Church $ 663,000 25 years 8.75% $ 900,000 6/30/03 The Apostolic Church of New York $ 335,000 20 years 9.25% $ 537,000 8/18/03 All Faiths Christian Center $ 645,000 20 years 8.65% $ 922,000 9/11/03 Landmark Apostolic Church $ 400,000 20 years 8.65% $ 750,000 9/19/03 Ekklesia Fellowship Ministries $ 227,500 20 years 8.65% $ 335,000 9/25/03 All Saints Community Church $ 210,000 20 years 8.65% $ 300,000 11/25/03 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 Shiloh Temple House of God $ 500,000 20 years 8.25% $ 710,000 04/29/04 Fun Family Christian Center $ 873,406 25 years 9.25% $1,290,850 05/22/04 The Lord Jesus Christ Church on the Rock $ 195,000 20 years 8.25% $ 300,000 07/09/04 New Covenant Christian Fellowship $ 375,000 20 years 8.25% $ 700,000 08/30/04 Holy Deliverance Ministries $ 238,830 20 years 9.85% $ 360,000 09/14/04 Holy Tabernacle Ministries $ 325,000 25 years 8.50% $ 500,000 09/16/04 First Church of the Spirit and Truth $ 530,000 20 years 8.25% $ 750,000 09/30/04 Bethany Uniting Faith $ 235,000 20 years 8.25% $ 330,000 10/11/04 Christ Wonderful World Outreach $ 543,000 20 years 8.25% $ 725,000 11/03/04 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 New Life Community Church of Truth $ 570,000 20 years 8.25% $ 790,000 11/30/04 Lincoln Heights Missionary Baptist Church $ 620,000 20 years 8.25% $1,000,000 12/30/04 Zion Mission $ 410,000 25 years 8.50% $ 800,000 02/04/05 Inter-Denominational Fellowship Ministries $ 315,000 25 years 8.75% $ 491,000 04/06/05 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 Calvary Baptist Church of Houston $ 250,000 25 years 8.95% $ 350,000 06/29/05 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 Abundant Faith Baptist Church $ 206,000 25 years 8.75% $ 500,000 02/15/06 Grace Christian Church $ 1,600,000 25 years 8.50% $2,225,000 03/30/06 Living Water Seventh-Day Adventist Church $ 640,000 30 years 8.75% $ 855,000 05/23/06 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 Iglesia Nueva Vida en Cristo $ 195,000 30 years 8.75% $ 233,000 06/28/06 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 Centro Cristiano Carismatico $ 1,325,000 25 years 8.75% $2,640,000 09/29/06 Church of God of Prophecy of the Last Days $ 497,000 30 years 8.95% $ 710,000 12/07/06 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 New Maranatha-Karibu SDA Church $ 427,500 30 years 8.95% $ 570,000 10/18/07 Greater St. Andrew's AME Church $ 440,000 30 years 8.95% $1,250,000 11/01/07 Burning Bush Worship Center $ 450,000 30 years 8.95% $ 600,000 12/03/07 Rock Spring Church $ 780,000 30 years 8.50% $1,425,000 12/12/07 Hope for You Family Life & Worship Center $ 450,000 3 years 7.50% $ 637,000 12/17/07 Believers New Life Ministries $ 266,000 25 years 8.25% $ 395,000 07/02/08 Guiding Light Apostolic Church of Christ $ 430,000 25 years 8.25% $1,250,000 08/20/08 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 Norman Quintero Ministries $ 645,000 5 years 5.00% $1,500,000 09/30/08 New Stranger's Home Baptist Church $ 350,000 30 years 8.50% $3,000,000 12/22/08
(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.
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 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 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% Harvest Baptist Church $ 6,000 $ 3,031.14 From 5.00% N/A N/A 04/01/19 04/28/03 to 12.00% 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 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 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 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 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 Chapel Hill Harvester Church $ 30,000 $ 28,200 7.75% 8.41% 8.24% 03/01/22 03/01/04 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 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 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 Grace Community Church $ 214,000 $ 214,000 8.00% 8.00% 8.00% From 08/15/30 02/15/06 to 08/15/32 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 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 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 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 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 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 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 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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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 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
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. - 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 - - The total principal amount of mortgage-secured debt securities we purchase from churches and other non-profit religious organizations is limited to 30% of our average invested assets. - The loan amount cannot exceed 75% of the appraised value of the real estate and improvements securing each loan. On all loans, we require a written appraisal certified by a member of the Appraisal Institute or a state-certified appraiser. - The borrower must furnish us with an ALTA (American Land Title Association) or equivalent mortgagee title policy insuring our mortgage interest. - The borrower's long-term debt (including the proposed loan) cannot exceed four times the borrower's gross income for the previous 12 months. - 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. - 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. - Our advisor typically requires the borrower to arrange for automatic electronic or drafting of monthly payments. - Our advisor may require (i) key-person life insurance on the life of the senior pastor of a church; (ii) personal guarantees of church members and/or affiliates; and (iii) other security enhancements for our benefit. - The borrower must agree to provide us with annual financial statements within 120 days of each fiscal year end during the term of the loan. - Our advisor may require the borrower to grant to us a security interest in all personal property located and to be located upon the mortgaged premises (excluding property leased by the borrower). - We may make fixed-interest rate loans having maturities of three to thirty years. - 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: - 45 - - Investing more than 10% of our total assets in unimproved real property or mortgage loans on unimproved real property; - Investing in commodities or commodity futures contracts other than "interest rate futures" contracts intended only for hedging purposes; - Investing in mortgage loans (including construction loans) on any one property which in the aggregate with all other mortgage loans on the property would exceed 75% of the appraised value of the property unless substantial justification exists because of the presence of other underwriting criteria; - Investing in mortgage loans that are subordinate to any mortgage or equity interest of our advisor or our directors or any of their affiliates; - Investing in equity securities; - Engaging in any short sales of securities or in trading, as distinguished from investment activities; - Issuing redeemable equity securities; - Engaging in underwriting or the agency distribution of securities issued by others; - Issuing options or warrants to purchase our shares at an exercise price less than the fair market value of the shares on the date of the issuance or if the issuance thereof would exceed 10% in the aggregate of our outstanding shares; - Issuing debt securities unless the debt service coverage for the most recently completed fiscal year, as adjusted for known changes, is sufficient to properly service the higher level of debt; - Investing in real estate contracts of sale unless such contracts are in recordable form and are appropriately recorded in the chain of title; - Selling or leasing to our advisor, a director or any affiliate thereof unless approved as being fair and reasonable by a majority of directors (including a majority of independent directors), not otherwise interested in such transaction; - Acquiring property from our advisor or any director, or any affiliate thereof (other than church bonds from American Investors Group, Inc. in the ordinary course of our investing activities), unless a majority of our directors (including a majority of our independent directors) not otherwise interested in such transaction approve the transaction as being fair and reasonable and at a price no greater than the cost of the asset to our advisor, director or any affiliate thereof, or if the price is in excess of such cost, that substantial justification for such excess exists and such excess is reasonable. In no event shall the cost of such asset exceed its current appraised value; - Investing or making mortgage loans unless a mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or condition of title is obtained; or - Issuing our shares on a deferred payment basis or other similar arrangement. We do not intend to invest in the securities of other issuers for the purpose of exercising control, to engage in the purchase and sale of investments other than as described in this prospectus, to offer securities in exchange for property unless deemed prudent by a majority of our directors, to repurchase or otherwise reacquire our shares or to make loans to other persons except in the ordinary course of our business as described herein. We will not make loans to or borrow from, or enter into any contract, joint venture or transaction with, any director or officer of ours, our advisor or any affiliate of any of the foregoing unless a majority of our directors, including a majority of the independent directors, approves the transaction as fair and reasonable to us and the transaction is on terms and conditions no less favorable to us than those available from unaffiliated third parties. If we invest in any property, mortgage or other real estate interest pursuant to a transaction with our advisor or any directors or officers thereof, then the investment will be based upon a current appraisal of the underlying property from an independent qualified appraiser selected by the independent directors and will not be made at a price greater than fair market value as determined by such appraisal. - 46 - 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.
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
- 48 - 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 nine 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:
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. - 49 - 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 - 50 - 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. - 51 - 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.
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. - 52 - 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. 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. - 53 - 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. - 54 - 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. - 55 - 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. - 56 - 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. 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 - 58 - 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. - 59 - 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. - 60 - 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% - 61 - 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. - 62 - 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 - 63 - 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. - 64 - 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 - 65 - 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. - 66 - 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 - 67 - 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: - 68 - 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; - 69 - (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. 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. In no event or circumstance will the compensation paid to the underwriter in connection with the offer and sale of the certificates exceed ten percent (10%) commission and a due diligence fee, which, when aggregated with all other non-accountable expenses, will not exceed three percent (3%) of the offering proceeds. 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 provision does not prohibit the normal sales commission payable to a registered broker-dealer or other properly licensed person for selling certificates. - 70 - 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 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 - 71 - (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". - 72 - 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 and 2006 .......................................................... 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 and 2007 ....................................... 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
December 31, ASSETS 2007 2006 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
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
- ---------------------------------------------------------------------------------------------------------- Years Ended December 31 2007 2006 - ---------------------------------------------------------------------------------------------------------- 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
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 - --------------------------------------------------------------------------------
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 - --------------------------------------------------------------------------------
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 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:
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:
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
- -------------------------------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------------------------------- 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
- --------------------------------------------------------------------------------------------------- Nine Months Ended September 30, ------------------------- 2008 2007 - --------------------------------------------------------------------------------------------------- (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 ----------- ----------- 1,515,440 1,700,098 Net interest income 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
- -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- 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
- -------------------------------------------------------------------------------------------------------- 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: 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:
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 -------------------------------------------------------------------------------- [LOGO] AMERICAN INVESTORS GROUP, INC. Account Application Account Number: [ ] New Account (check one) ___________________ 10237 Yellow Circle Drive [ ] Update Years Known: _______ Minnetonka, 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/TRA 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)
-------------------------------------------------------------------------------- [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 or 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. 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): - -------------------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- 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 to Initial 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 home, Initial 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 his Initial 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 investors worth 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 9, 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 and 2006 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 and 2007 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 9, 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 /s/ Philip J. Myers financial and accounting officer March 9, 2009 - ------------------------------- Philip J. Myers /s/ Kirbyjon H. Caldwell* Director March 9, 2009 - ------------------------------- Kirbyjon H. Caldwell /s/ Dennis J. Doyle* Director March 9, 2009 - ------------------------------- Dennis J. Doyle /s/ Michael G. Holmquist* Director March 9, 2009 - ------------------------------- Michael G. Holmquist
* By Philip J. Myers and Scott J. Marquis, Attorneys-in-Fact INDEX TO EXHIBITS
Exhibit Title No. - ------- ----- 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 Form of Opinion Letter of Winthrop & Weinstine, P.A. as to the legality of the securities 1 8 Form of 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. EX-1.1 2 acmc091072_ex1-1.txt FORM OF DISTRIBUTION AGREEMENT EXHIBIT 1.1 DISTRIBUTION AGREEMENT $20,000,000 SERIES C SECURED INVESTOR CERTIFICATES AMERICAN CHURCH MORTGAGE COMPANY (THE "COMPANY") AMERICAN INVESTORS GROUP, INC. (THE "UNDERWRITER") ___________ ____, 2009 TABLE OF CONTENTS
Page ---- ARTICLE I. DEFINITIONS ......................................................... 1 Section 1.01. Defined Terms ............................................... 1 Section 1.02. Accounting Terms ............................................ 3 ARTICLE II. APPOINTMENT OF UNDERWRITER AND RELATED AGREEMENTS .................. 3 Section 2.01. Appointment; Exclusivity .................................... 3 Section 2.02. Compensation to Underwriter ................................. 3 Section 2.03. Brokers and Dealers ......................................... 4 Section 2.04. Underwriter's Unrelated Activities .......................... 4 Section 2.05. Best Efforts; Independent Contractor ........................ 4 ARTICLE III. SERVICES; STANDARD OF CARE ........................................ 5 Section 3.01. Services .................................................... 5 Section 3.02. Reports to the Company ...................................... 5 ARTICLE IV. REPRESENTATIONS AND COVENANTS OF THE COMPANY ....................... 6 Section 4.01. Representations, Warranties and Agreements of the Company ... 6 Section 4.02. Covenants of the Company .................................... 11 ARTICLE V. REPRESENTATIONS AND COVENANTS OF UNDERWRITER; CONDITIONS ............ 13 Section 5.01. Representations and Warranties of Underwriter ............... 13 Section 5.02. Covenants of Underwriter .................................... 14 ARTICLE VI. CONDITIONS ......................................................... 15 Section 6.01. Conditions of the Underwriter's Obligations ................. 15 ARTICLE VII. INDEMNIFICATION AND CONTRIBUTION .................................. 16 Section 7.01. Company's Indemnification of Underwriter .................... 16 Section 7.02. Underwriter's Indemnification of the Company ................ 17 Section 7.03. Notice of Indemnification Claim ............................. 18 Section 7.04. Contribution ................................................ 18 Section 7.05. Notice of Contribution Claim ................................ 19 Section 7.06. Reimbursement ............................................... 20 Section 7.07. Arbitration ................................................. 20 ARTICLE VIII. TERM AND TERMINATION ............................................. 20 Section 8.01. Effective Date of this Agreement ............................ 20 Section 8.02. Termination Prior to Effective Date ......................... 20 Section 8.03. Notice of Termination ....................................... 21 Section 8.04. Termination After Effective Date ............................ 21
ARTICLE IX. MISCELLANEOUS ...................................................... 22 Section 9.01. Survival .................................................... 22 Section 9.02. Notices ..................................................... 22 Section 9.03. Successors and Assigns; Transfer ............................ 22 Section 9.04. Cumulative Remedies ......................................... 23 Section 9.05. Attorneys' Fees ............................................. 23 Section 9.06. Entire Agreement ............................................ 23 Section 9.07. Choice of Law ............................................... 23 Section 9.08. Confidentiality ............................................. 23 Section 9.09. Rights to Investor Lists .................................... 23 Section 9.10. Waiver: Subsequent Modification ............................. 23 Section 9.11. Severability ................................................ 23 Section 9.12. Joint Preparation ........................................... 24 Section 9.13. Captions .................................................... 24 Section 9.14. Counterparts ................................................ 24
- ii - DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT is entered into as of this _____ day of ___________, 2009, by and between American Church Mortgage Company, a Minnesota corporation (the "Company"), and American Investors Group, Inc., a Minnesota corporation, as underwriter (the "Underwriter"). RECITALS WHEREAS, the Company proposes to register and publicly offer and sell up to $20,000,000 aggregate principal amount of Series C Secured Investor Certificates of the Company (the "Certificates"); WHEREAS, the Company desires to appoint the Underwriter to act as the Company's exclusive selling agent in connection with the offer, sale and renewal of the Certificates on a best efforts basis, and the Underwriter desires to accept such appointment, all as provided for by the terms of this Agreement. NOW, THEREFORE, in consideration of the above and for other good and valuable consideration, receipt of which is acknowledged, and in consideration of the mutual promises, covenants, representations and warranties hereinafter set forth, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.01. Defined Terms. Whenever used in this Agreement, the following terms have the respective meanings set forth below. The definitions of such terms are applicable to the singular as well as to the plural forms of such terms. (a) Advisor. Church Loan Advisors, Inc., or any successor or subsequent advisor of the Company's business activities. (b) Agreement. This Distribution Agreement, including any exhibits or attachments hereto, as originally executed, and as amended or supplemented from time to time in accordance with the terms hereof. (c) Blue Sky laws. State laws and regulations governing the sale of securities. (d) Blue Sky Memorandum. Memorandum compiling the results of a review of Blue Sky laws and the application of such laws in connection with the Offering. (e) Certificate Holder. The purchaser of any Certificate or any subsequent transferee or other holder thereof. (f) Certificates. Up to $20,000,000 aggregate principal amount of Series C Secured Investor Certificates of the Company with substantially the same terms as are described in the Prospectus, and any additional principal amount of Certificates as may be registered from time to time pursuant to the Registration Statement. (g) Commission or SEC. The Securities and Exchange Commission. (h) Company. American Church Mortgage Company, or its successors in interest. (i) Effective Date. The date and time the Registration Statement is or was declared effective by the Commission. (j) Exchange Act. The Securities Exchange Act of 1934, as amended. (k) FINRA. The Financial Industry Regulatory Agency. (l) Governmental Rule. Any law, rule, regulation, ordinance, order, code, interpretation, judgment, decree, policy, decision or guideline by any governmental authority. (m) Indenture. That certain Indenture dated on or about _______ __, 2009, by and between the Company and the Trustee with respect to the Certificates. (n) Offering. The offer and sale of the Certificates in accordance with the terms and subject to the conditions set forth in the Registration Statement. (o) Preliminary Prospectus. Any preliminary prospectus included in the Registration Statement prior to the time it becomes or became effective under the Securities Act, including the respective copies thereof filed with the Commission. (p) Prospectus. The prospectus included in the Registration Statement at the time it is or was declared effective by the Commission, except that if any prospectus provided to the Underwriter by the Company for use in connection with the offering of the Certificates differs from the prospectus as filed with the Commission, the term "Prospectus" shall refer to such differing prospectus from and after the time such prospectus is first provided to the Underwriter by the Company for such use, including the respective copies thereof filed with the Commission. (q) Registration Statement. That certain Registration Statement on Form S-11 (File No. 333-154831) of the Company with respect to the Certificates filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended and declared effective on the date hereof, including the respective copies thereof filed with the Commission. (r) Rules and Regulations. The rules and regulations under the Securities Act. (s) Securities Act. The Securities Act of 1933, as amended. (t) Trustee. Herring Bank, or its successors or assigns. - 2 - (u) Underwriter. American Investors Group, Inc., a Minnesota corporation, or its successors in interest. Section 1.02. Accounting Terms. Unless otherwise specified in this Agreement, all accounting terms used in this Agreement shall be interpreted, all accounting determinations under this Agreement shall be made, and all financial statements required to be delivered by any person pursuant to this Agreement shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time applied on a consistent basis. To the extent generally accepted accounting practices do not apply to certain reports or accounting practices of the Underwriter, the parties will mutually agree on the accounting practices and assumptions. ARTICLE II. APPOINTMENT OF UNDERWRITER AND RELATED AGREEMENTS Section 2.01. Appointment; Exclusivity. Subject to the terms and conditions set forth herein, the Company appoints the Underwriter as its exclusive agent to sell the Certificates upon the terms and conditions set forth herein. The Underwriter agrees to use its best efforts as such agent to procure purchasers for the Certificates until the later of the termination of the Offering or the sale of all offered Certificates. It is understood and agreed that there is no firm commitment on the part of the Underwriter to purchase any of the Certificates. The Company agrees to direct to the Underwriter all inquiries it receives with respect to the Certificates. Section 2.02. Compensation to Underwriter. (a) Underwriter's Commissions. In consideration of the agreement of the Underwriter to provide its services of the Underwriter as set forth in this Agreement, the Company will pay the Underwriter a commission based on the gross proceeds received on the sale of each Certificate, both in accordance with the schedule set forth as Exhibit A hereto. (b) Underwriter's Expenses. Whether or not this Agreement becomes effective or is terminated or cancelled or the sale of the Certificates hereunder is consummated, and regardless of the reason for or cause of any such termination, cancellation, or failure to consummate, the Company will pay or cause to be paid: (i) all expenses of the Underwriter incurred in connection with the offer and sale of the Certificates, including, but not limited to, designing, printing and mailing all offering and advertising materials; advertisements in newspapers, on the radio, on the internet and through direct mail; and operating a toll-free telephone number; (ii) all fees and expenses (including, without limitation, fees and expenses of the Company's auditors and legal counsel) in connection with the preparation, printing, filing, and delivery of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto; - 3 - (iii) all fees and expenses incurred in connection with the qualification of the Securities for offer and sale under the securities or Blue Sky laws of the states and other jurisdictions which the Underwriter may designate; (iv) all expenses in connection with the preparation, printing, filing, and delivery of materials to be sent to Certificate Holders; (v) all fees and expenses of the Trustee in connection with the Certificates; and (vi) all costs and expenses incident to the performance of the Company's obligations hereunder with respect to the Offering that are not otherwise specifically described herein. (c) Non-Accountable Expenses. To compensate the Underwriter for its other expenses incurred in connection with the Offering, the Company agrees to pay the Underwriter a non-accountable expense allowance of up to $120,000, 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 or the termination of this offering, whichever is first. Section 2.03. Brokers and Dealers. The Underwriter may, in its sole discretion and at no additional obligation to the Company, use the services of other brokers or dealers who are members of FINRA in connection with the offer and sale of the Certificates. The Underwriter may enter into agreements with any such broker or dealers to act as sub-agents for the sale of the Certificates and pay any portion of the Underwriter's compensation hereunder to such brokers or dealers. Section 2.04. Underwriter's Unrelated Activities. The Underwriter may sell other securities in offerings similar to the Offering for other issuers during the course of the Offering. The Underwriter shall have the right to advertise or otherwise disclose to unrelated prospective issuers, at its own expense, its relationship with the Company, the services it provides in connection with the Certificates and the amount of money that it raised through the Offering. Section 2.05. Best Efforts; Independent Contractor. Anything in this Agreement to the contrary notwithstanding, the Underwriter shall have no obligation to sell any minimum principal amount of Certificates or to purchase Certificates for its own account, for resale or for any other purpose. All actions taken by the Underwriter pursuant to this Agreement shall be in the capacity of an independent contractor, all sales of Certificates conducted by the Underwriter shall be solely for the account and at the risk of the Company, and in no event shall the Underwriter have any obligations with regard to or under the Certificates. - 4 - ARTICLE III. SERVICES; STANDARD OF CARE Section 3.01. Services. The services to be provided to the Company by the Underwriter pursuant to this Agreement shall include the following: (a) Corporate Finance. The Underwriter shall advise the Company regarding the structure of the Certificates and provide sample document forms. Throughout the Offering, the Underwriter shall assist the Company in determining appropriate Certificate interest rates based on current market conditions and the Company's capital goals. (b) Marketing. The Underwriter shall develop and execute a direct response marketing strategy for the Certificates designed to meet the Company's capital goals in a timely manner. The Underwriter shall manage the process of creating, producing and placing any newspaper, radio, Internet and direct mail advertisements. The Underwriter shall also oversee designing and printing all marketing materials, in accordance with applicable SEC and FINRA rules and regulations. (c) Company Logo, Etc. During the term of this Agreement, Company shall allow the Underwriter to use the Company's logo, corporate colors, trademarks, tradenames, fonts, and other aspects of corporate identity in advertisements and marketing materials related to the Certificates. (d) Securities Issuance; Registrar; Transfer Agent. Upon delivery of each completed subscription agreement for Certificates to the Underwriter, the Underwriter shall deliver such subscription agreement to the Advisor for acceptance or rejection. The Underwriter shall return funds accompanying each rejected subscription to the person submitting the subscription. The Underwriter shall pay funds, net of commissions and expenses, to the Company in connection with accepted subscriptions as received. Certificates shall be issued by the Trustee on the Company's behalf in book-entry form only and the Trustee shall deliver written book entry receipts with respect to all accepted subscription agreements. (e) Investor Relations. The Underwriter shall handle all inquiries from prospective investors, mail investment kits, meet with prospective investors, process subscription agreements and respond to all written or telephonic questions by prospective investors relating to the Certificates. Section 3.02. Reports to the Company. From time to time as requested by the Company, the Underwriter shall provide the Company with reports and analysis regarding the status of the offering, the marketing efforts and the principal amount of Certificates remaining available for sale under the Registration Statement. - 5 - ARTICLE IV. REPRESENTATIONS AND COVENANTS OF THE COMPANY Section 4.01. Representations, Warranties and Agreements of the Company. The Company represents and warrants to and agrees with the Underwriter as follows, which representations and warranties shall be deemed to be made continuously throughout the term of this Agreement: (a) The Registration Statement on Form S-11 (File N 333-154831) with respect to the Certificates, including the Prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act, and the Rules and Regulations of the Commission thereunder and has been filed with the Commission under the Securities Act. (b) As of the Effective Date, and at all times subsequent thereto until the termination of the Offering, the Registration Statement and Prospectus, and all amendments thereof and supplements thereto, will comply or complied with the provisions and requirements of the Securities Act and the Rules and Regulations. Neither the Commission nor any state securities authority has issued any order preventing or suspending the use of any Preliminary Prospectus or requiring the recirculation of a Preliminary Prospectus, or issued a stop order with respect to the offering of the Certificates (if the Registration Statement has been declared effective), or instituted or, to the Company's knowledge, threatened the institution of, proceedings for any of such purposes. When the Registration Statement shall become effective and when any post-effective amendment thereto shall become effective, the Registration Statement will not or did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. When the Registration Statement is or was declared effective by the Commission and at all times subsequent thereto until the termination of the offering, the Prospectus (as amended or supplemented, if the Company shall have filed with the Commission any amendment thereof or supplement thereto) will not or did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Minnesota, with full power and authority to own, lease and operate its properties and conduct its business as described in the Registration Statement and Prospectus. The Company is duly qualified to do business and is in good standing in each jurisdiction in which the ownership or lease of its properties or the conduct of its business requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company, and no proceeding has been instituted in - 6 - any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (d) The Company has operated and is operating in material compliance with all authorizations, licenses, certificates, consents, permits, approvals and orders of and from all state, federal and other governmental regulatory officials and bodies necessary to own its properties and to conduct its business as described in the Registration Statement and Prospectus, all of which are, to the Company's knowledge, valid and in full force and effect. The Company is conducting its business in substantial compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, and the Company is not in material violation of any applicable law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties. (e) The Company is not in violation of its articles of incorporation or bylaws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, lease, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which it is a party or by which it or its properties are bound. (f) The Company has full requisite power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under: (i) any indenture, mortgage, deed of trust loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, any lease, contract, joint venture or other agreement or instrument to which the Company is a party or by which the Company or its properties may be bound; (ii) the articles of incorporation or bylaws of the Company: or (iii) any applicable law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties. (g) No consent, approval, authorization or order of or qualification with any court, governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Securities Act, the - 7 - Exchange Act, or under state or other securities or Blue Sky laws, all of which requirements have been satisfied. (h) Except as is otherwise expressly described in the Registration Statement or Prospectus, there is neither pending nor, to the best of the Company's knowledge, threatened, any action, suit, claim or proceeding against the Company or any of its officers or any of its properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its officers or properties or otherwise which (A) might result in any material adverse change in the condition (financial or otherwise), earnings, operations or business of the Company or might materially and adversely affect its properties, assets or rights, or (B) might prevent consummation of the transactions contemplated hereby. (i) The Certificates to be sold hereunder by the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and non-assessable and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right exists with respect to any of the Certificates to be sold hereunder by the Company or the issuance and sale thereof. The Indenture has been duly authorized, executed and delivered by the Company and the Trustee and is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms. The Certificates will comply as to form with all applicable laws. (j) Boulay, Heutmaker, Zibell and Company, P.L.L.P. which has expressed its opinion with respect to certain of the financial statements included as a part (whether filed or incorporated by reference) of the Registration Statement, is an independent registered public accounting firm within the meaning of the Securities Act, the Public Company Accounting Oversight Board (PCAOB), and the Rules and Regulations. The financial statements of the Company set forth in the Registration Statement and Prospectus (or incorporated therein by reference) comply in all material respects with the requirements of the Securities Act and fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply in accordance with generally accepted accounting principles consistently applied throughout the periods involved; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The selected and summary financial included in the Registration Statement (or incorporated therein by reference) present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required by the Securities Act or the Rules and Regulations to be included in the Registration Statement. - 8 - (k) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, except as is otherwise disclosed in the Registration Statement or Prospectus, there has not been: (i) any change in the capital stock or long term debt (including any capitalized lease obligation) or material increase in the short-term debt of the Company; (ii) any material adverse change, or any development involving a material adverse change, in or affecting the condition (financial or otherwise), earnings, operations, business or business prospects, management, financial position, shareholders' equity, results of operations or general condition of the Company; (iii) any transaction entered into by the Company that is material to the Company; (iv) any obligation, direct or contingent, incurred by the Company, except obligations incurred in the ordinary course of business that, in the aggregate, are not material; or (v) any loss or damage (whether or not insured) to the property of the Company which reasonably could be expected to have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. (l) Except as is otherwise expressly disclosed in the Registration Statement or Prospectus: (i) the Company has good and marketable title to all of the property, real and personal, and assets described in the Registration Statement or Prospectus as being owned by it, free and clear of any and all pledges, liens, security interests, encumbrances, equities, charges or claims, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company; (ii) the agreements to which the Company is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by judicial limitations on the right of specific performance; and (iii) the Company has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by judicial limitations on the right of specific - 9 - performance. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted. (m) The Company was organized and has been operated to qualify as a real estate investment trust under Section 856 of the Internal Revenue Code and, to the knowledge of the Company, no event has occurred that would cause the Company to fail to so qualify. (n) The Company has timely filed (or has timely requested an extension of time to file) all necessary federal and state income and franchise tax returns and has paid all taxes shown thereon as due; there is no tax deficiency that has been or, to the best of the Company's knowledge, could be asserted against the Company that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or properties of the Company, and all tax liabilities are adequately provided for in the books of the Company. (o) The Company owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, technology, service marks, trade names, copyrights, trademarks and proprietary rights or information which are necessary for the conduct of its present or intended business as described in the Registration Statement or Prospectus. The expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with the asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, technology, trademarks, service marks, trade names or copyrights that, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (p) The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers, members or others) which has constituted or is designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation, as defined in the Exchange Act or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Certificates. The Company has not distributed and will not distribute prior to the completion of the distribution of the Certificates, any offering material in connection with the offering and sale of the Certificates other than any Preliminary Prospectus, the Prospectus, the Registration Statement and other materials, if any, permitted by the Securities Act. (q) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorizations and transactions are recorded as - 10 - necessary to permit preparation of financial statements in conformity with generally accepted accounting principles. To maintain accountability for assets, access to assets is permitted only in accordance with management's general or specific authorization, and the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) Except as set forth in the Registration Statement and Prospectus: (i) the Company and each entity that owns or possesses real property in which the Company holds a security interest is in material compliance with all material rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment (the "Environmental Laws") which are applicable to its business; (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus; (iii) the Company will not be required to make any future material capital expenditures to comply with Environmental Laws; and (iv) no property which is owned, leased or occupied by the Company or in which the Company holds a security interest has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (s) No person or entity other than the Underwriter is entitled to any compensation or other payments from either the Company or the Underwriter, as a finder, underwriter or agent in connection with the Offering or any other proposed transaction between the Company and the Underwriter. The Company agrees to promptly notify the Underwriter of any such relationships, including consulting or prior agency agreements entitling other parties to compensation for the transaction described herein and agrees to provide the Underwriter with a copy of such agreements. (t) Any certificate signed by any officer of the Company and delivered to the Underwriter or to the Underwriter's Counsel shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. Section 4.02. Covenants of the Company. The Company hereby covenants and agrees with the Underwriter as follows: (a) If the Registration Statement has not already been declared effective by the Commission, the Company will use its best efforts to cause the Registration - 11 - Statement and any post-effective amendments thereto to become effective as promptly as possible. The Company will notify the Underwriter promptly of the time when the Registration Statement or any post-effective amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or Prospectus or additional information. The Company will prepare and file with the Commission, promptly upon the Underwriter's request, any amendments or supplements to the Registration Statement or Prospectus that, in the Underwriter's opinion, may be necessary or advisable in connection with the distribution of the Certificates by the Underwriter. The Company will not file any amendment or supplement to the Registration Statement or Prospectus to which the Underwriter shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing. (b) The Company will advise the Underwriter, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Certificates for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose. The Company will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued. (c) Within the time during which a prospectus relating to the Certificates is required to be delivered under the Securities Act, the Company will comply as far as it is able with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Certificates as contemplated by the provisions hereof and the Prospectus. If, during the longer of such period or the term of this Agreement, any event or change occurs that could reasonably be considered material to the Offering or that causes any of the representations and warranties of the Company contained herein to be untrue, or as a result of which the Prospectus would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if, during such period, it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Securities Act, the Company will promptly notify the Underwriter, and will amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. (d) The Company will use its best efforts to arrange for the qualification of the Certificates for offering and sale under the securities laws of such jurisdictions as the Underwriter may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Certificates. In each jurisdiction in which the Certificates shall have been qualified as herein - 12 - provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (e) The Company will furnish to the Underwriter copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as the Underwriter may from time to time reasonably request. (f) At all times during the term of this Agreement, the Company shall provide all information reasonably requested by the Underwriter in a timely manner and shall use its best efforts to insure that such information is complete and accurate. (g) The Company will apply the net proceeds from the sale of the Certificates substantially in the manner set forth under the caption "Use of Proceeds" in the Prospectus. ARTICLE V. REPRESENTATIONS AND COVENANTS OF UNDERWRITER; CONDITIONS Section 5.01. Representations and Warranties of Underwriter. The Underwriter hereby represents and warrants to the Company as follows, which representations and warranties shall be deemed to be made continuously throughout the term of this Agreement. (a) The Underwriter (i) has been duly organized, is validly existing and in good standing as a Delaware corporation, (ii) has qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties or the nature of its activities makes such qualification necessary, and (iii) has full power, authority and legal right to own its property, to carry on its business as presently conducted, and to enter into and perform its obligations under this Agreement. (b) The execution and delivery by the Underwriter of this Agreement are within the power of the Underwriter and have been duly authorized by all necessary corporate action on the part of the Underwriter. Neither the execution and delivery of this Agreement nor the consummation of the transactions herein contemplated, nor compliance with the provisions hereof, will conflict with or result in a breach of, or constitute a default under, any of the provisions of any Governmental Rule binding on the Underwriter, the charter or by-laws of the Underwriter, or any of the provisions of any indenture, mortgage, contract or other instrument to which the Underwriter is a party or by which it is bound; nor will they result in the creation or imposition of any lien, charge or encumbrance upon any of the Underwriter's property pursuant to the terms of any indenture, mortgage, contract or other instrument. (c) The Underwriter has all governmental consents, licenses, approvals and authorizations, registrations and declarations which are necessary for the - 13 - execution, delivery, performance, validity and enforceability of the Underwriter's obligations under this Agreement. (d) This Agreement has been duly executed and delivered by the Underwriter and, constitutes a legal, valid and binding instrument enforceable against the Underwriter in accordance with its terms. (e) There are no actions, suits or proceedings pending or, to the knowledge of the Underwriter, threatened against or affecting the Underwriter, before or by any court, administrative agency, arbitrator or governmental body with respect to any of the transactions contemplated by this Agreement, or which will, if determined adversely to the Underwriter, materially and adversely affect it or its business, assets, operations or condition, financial or otherwise, or adversely affect the Underwriter's ability to perform its obligations under this Agreement. The Underwriter is not in default with respect to any order of any court, administrative agency, arbitrator or governmental body so as to materially and adversely affect the transactions contemplated by this Agreement. Section 5.02. Covenants of Underwriter. The Underwriter hereby covenants to the Company as follows, which covenants shall be deemed in force unless and until this Agreement is terminated as provided herein: (a) The Underwriter shall keep in full effect its existence, rights and franchises as a corporation under the laws of the State of Delaware and retain and preserve its right to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Certificates and this Agreement and shall hold all licenses in all jurisdictions which are necessary to perform its obligations under this Agreement. (b) The Underwriter shall punctually perform and observe all of its obligations and agreements contained in this Agreement. (c) Except as provided in this Agreement, the Underwriter shall not take any action, or permit any action to be taken by others, which would excuse any person from any of its covenants or obligations under any of the Certificates, or under any other instrument related to the Certificates, or which would result in the amendment, hypothecation, subordination, termination or discharge of, or impair the validity or effectiveness of, any of the Securities or any such instrument or any right in favor of the Company in any of the Certificates or such instrument, without the written consent of the Company. (d) The Underwriter shall not assign this Agreement or any of its rights, powers, duties or obligations hereunder without the express prior written consent of the Company, which shall not be unreasonably withheld; provided that the Underwriter may assign its rights, powers, duties or obligations hereunder to an affiliate of the Underwriter or pursuant to a sale of all or substantially all of the Underwriter's assets without the prior written consent of the Company. - 14 - (e) The Underwriter shall take such additional action as is reasonably requested by the Company in order to carry out the purposes of this Agreement. ARTICLE VI. CONDITIONS Section 6.01. Conditions of the Underwriter's Obligations. The obligation of the Underwriter to sell the Certificates on a best efforts basis as provided herein shall be subject to the accuracy of the representations and warranties of the Company, to the performance by the Company of its obligations hereunder, and to the satisfaction of the following additional conditions: (a) The Registration Statement shall have become effective not later than 4:00 p.m. Minneapolis, Minnesota time on the date of this Agreement, or such later date or time as shall be consented to in writing by the Underwriter (the "Effective Date"), and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, or the Underwriter, threatened by the Commission or any state securities commission or similar regulatory body. Any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Underwriter and the Underwriter's counsel. (b) The Underwriter shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains any untrue statement of a fact which is material or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. (c) Subsequent to the Effective Date and prior to termination of the offering, there shall not have occurred any change, or any development involving a prospective change, which materially and adversely affects the Company's condition (financial or otherwise), earnings, operations, properties, business or business prospects from that set forth in the Registration Statement or Prospectus, and which, in the Underwriter's sole judgment, is material and adverse and that makes it, in the Underwriter's sole judgment, impracticable or inadvisable to proceed with the offering of the Certificates as contemplated by the Prospectus and this Agreement. (d) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Certificates shall have been reasonably satisfactory to the Underwriter's counsel, and the Underwriter's counsel shall have been furnished with such papers and information as it may - 15 - reasonably have requested to enable it to pass upon the matters referred to in this Section. (e) At the time of execution of this Agreement, the Underwriter shall have received from Boulay, Heutmaker, Zibell and Company, P.L.L.P. a letter dated the date of such execution, in form and substance satisfactory to the Underwriter, to the effect that they are independent registered public accountants with respect to the Company within the meaning of the Securities Act, the PCAOB, and the applicable published instructions, and the Rules and Regulations thereunder, and further stating in effect that in their opinion, the audited financial statements included (or incorporated by reference) in the Registration Statement and Prospectus covered by their report included therein comply as to form in all material respects with the applicable requirements of the Securities Act, the PCAOB, the published instructions and the Rule and Regulations. (f) Winthrop & Weinstine, P.A. shall have delivered to the Underwriter a Blue Sky Memorandum reasonably satisfactory to the Underwriter confirming that all requisite actions for the offer and sale of the Certificates in all jurisdictions requested by the Underwriter have been taken. (g) The Company shall have furnished to the Underwriter such additional certificates, documents and evidence as the Underwriter shall reasonably request. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Underwriter and the Underwriter's counsel. All statements contained in any certificate, letter or other document delivered pursuant hereto by, or on behalf of, the Company shall be deemed to constitute representations and warranties of the Company. The Underwriter may waive in writing the performance of any one or more of the conditions specified in this Section or extend the time for their performance. If any of the conditions specified in this Section shall not have been fulfilled when and as required by this Agreement to be fulfilled and if the fulfillment of said condition has not been waived by the Underwriter, this Agreement and all obligations of the Underwriter hereunder may be canceled at, or at any time prior to, the Effective Date by the Underwriter. Any such cancellation shall be without liability of the Underwriter to the Company and shall not relieve the Company of its obligations under Article VII hereof. Notice of such cancellation shall be given to the Company as specified in Section 8.03. ARTICLE VII. INDEMNIFICATION AND CONTRIBUTION Section 7.01. Company's Indemnification of Underwriter. The Company hereby agrees to indemnify and hold harmless the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Underwriter or each such controlling person - 16 - may become subject under the Securities Act, the Exchange Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, (i) any breach of any representation, warranty, agreement or covenant of the Company contained in this Agreement; (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or supplement thereto, or the omission or alleged omission to state in the Registration Statement or any amendment thereof or supplement thereto a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, if used prior to the Effective Date of the Registration Statement, or in the Prospectus (as amended or as supplemented), or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Certificates under, or exempt the Certificates or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will reimburse the Underwriter and each such controlling person for any legal or other expenses incurred by the Underwriter or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. However, the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Underwriter specifically for use in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Preliminary Prospectus, or the Prospectus, or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or the Underwriter filed in any jurisdiction in order to qualify the Certificates under, or exempt the Certificates or the sale thereof from qualification under, the securities laws of such jurisdiction. This indemnity agreement is in addition to any liability which the Company may otherwise have. Section 7.02. Underwriter's Indemnification of the Company. The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person who controls the Company within the meaning of Section 15 of the Securities Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Securities Act, the Exchange Act, common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or supplement thereto, or the omission or alleged omission to state in the Registration Statement or any amendment thereof or supplement thereto, a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, if used prior to the Effective Date of the Registration Statement, or in the Prospectus (as amended or as supplemented), or the omission or alleged omission to - 17 - state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or by the Underwriter and filed in any jurisdiction in order to qualify the Certificates under, or exempt the Certificates or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, the Underwriter specifically for use in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Preliminary Prospectus, or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or by the Underwriter and filed in any jurisdiction. The Underwriter will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement is in addition to any liability which the Underwriter may otherwise have. Section 7.03. Notice of Indemnification Claim. Promptly after receipt by an indemnified party under Section 7.01 or 7.02 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under Section 7.01 or 7.02, notify in writing the indemnifying party of the commencement thereof. Failure to so notify the indemnifying party will relieve it from any liability under Section 7.01 or 7.02 as to the particular item for which indemnification is then being sought, but not from any other liability which it may have to any indemnified party. In case any such action is brought against any indemnified party, and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, to assume the defense thereof, with counsel who shall be reasonably satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under Section 7.01 or 7.02 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party, and the indemnified party shall have reasonably concluded that there may be legal defenses available to it or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select as separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties, in which event the fees and expenses of such separate counsel shall be borne by the indemnifying party. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party. Section 7.04. Contribution. In order to provide for just and equitable contribution in any action in which the Underwriter or the Company (or any person who controls the Underwriter or - 18 - the Company within the meaning of Section 15 of the Securities Act) makes claim for indemnification pursuant to Section 7.01 or 7.02 hereof, but such indemnification is unavailable or insufficient to hold harmless and indemnify a party under Section 7.01 or 7.02, as applicable, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in Section 7.01 or 7.02, as applicable, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriter on the other from the offering of the Securities hereunder or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of the Company on the one hand and the Underwriter on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Securities (before deducting expenses) received by the Company bear to the total commissions received by the Underwriter. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriter agree that it would not be just and equitable if contributions pursuant to this Section 7.04 were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this Section 7.04. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this Section 7.04 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this Section 7.04. Notwithstanding the provisions of this Section, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Securities distributed to the public were offered to the public exceeds the amount of any damages that the Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Section 7.05. Notice of Contribution Claim. Promptly after receipt by a party to this Agreement of notice of the commencement of any action, suit or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof, but the failure to so notify the Contributing Party will not relieve the Contributing Party from any liability which it may have to any party other than under Section 7.04. Any notice given pursuant to Section 7.03 hereof shall be deemed to be like notice under this Section 7.05. In case any such action, suit or proceeding is brought against any party, and such person notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. - 19 - Section 7.06. Reimbursement. In addition to its other obligations under Section 7.01 and 7.04 hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 7.01, it will reimburse the Underwriter on a monthly basis for all legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter shall promptly return such payment to the Company. Section 7.07. Arbitration. It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Section 7.06 hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of FINRA. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Section 7.06 hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Section 7.01 and 7.02 hereof or the obligation to contribute to expenses which is created by the provisions of Section 7.04 hereof. ARTICLE VIII. TERM AND TERMINATION Section 8.01. Effective Date of this Agreement. This Agreement shall become effective on the Effective Date immediately after the time at which the Registration Statement shall become effective under the Securities Act. Section 8.02. Termination Prior to Effective Date. This Agreement may be terminated by the Underwriter, at its option, by giving notice to the Company, if (i) the Company shall have failed, refused, or been unable, at or prior to the Effective Date, to perform any agreement on its part to be performed hereunder; (ii) any other condition of the Underwriter's obligations hereunder is not fulfilled or waived by the Underwriter; (iii) a banking moratorium shall have been declared by federal, New York or Minnesota authorities; (iv) there shall have been such a serious, unusual and material change in general economic, monetary, political or financial conditions, or the effect of international conditions on the financial markets in the United States shall be such as, in the judgment of the Underwriter, makes it inadvisable to proceed with the delivery of the Certificates; (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which, in the judgment of the Underwriter, materially and adversely affects or will materially and adversely affect the business or operations of the Company; or (vi) there shall be a material outbreak of hostilities or material escalation and deterioration in the political and military - 20 - situation between the United States and any foreign power, or a formal declaration of war by the United States of America shall have occurred. Any such termination shall be without liability of any party to any other party, except as provided in Sections 7.01, 7.02 and 7.04 hereof; provided, however, that the Company shall remain obligated to pay costs and expenses of the Company and the Underwriter (but only to the extent of actual accountable out-of-pocket expenses) to the extent provided in Section 2.02 hereof. Section 8.03. Notice of Termination. If the Underwriter elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in Section 8.02, it shall notify the Company and the Company's counsel promptly by telephone or transmitted by any standard form of telecommunication, confirmed by letter sent to the address specified in Section 9.02 hereof. If the Company shall elect to prevent this Agreement from becoming effective, it shall notify the Underwriter promptly by telephone or transmitted by any standard form of telecommunication, confirmed by letter sent to the addresses specified in Section 9.02 hereof. Section 8.04. Termination After Effective Date. The Company or the Underwriter may terminate this Agreement at any time subsequent to the Effective Date as provided below, and in such case, the Underwriter will be paid fees and commissions accrued up to the date of such termination plus its expenses accrued as of such date within thirty (30) days of such termination: (a) The Company will have the ability to terminate this Agreement by notice to the Underwriter upon the occurrence of any of the following: (i) any of the circumstances described in clauses (iii) through (vi) of Section 8.02; (ii) the Company has given the Underwriter notice of the Underwriter's default in any material term of this Agreement, or material non-compliance with any representation or warranty of the Underwriter contained herein, and such default or non-compliance is not cured within 30 days of such notice; or (iii) termination of the Offering by the Company. (b) The Underwriter will have the ability to terminate this Agreement by notice to the Company upon the occurrence of any of the following: (i) any of the circumstances described in clauses (iii) through (vi) of Section 8.02; (ii) the Underwriter has given the Company notice of the Company's default in any material term of this Agreement, or material non-compliance with any representation or warranty of the Underwriter contained herein, and such default or non-compliance is not cured within thirty (30) days of such notice; or (iii) termination of the Offering by the Company. - 21 - ARTICLE IX. MISCELLANEOUS Section 9.01. Survival. The respective indemnity and contribution agreements of the Company and the Underwriter contained in the representations, warranties, covenants, and agreements of the Company set forth in Article IV hereof, shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the Underwriter, the Company, any of its officers and directors, or any controlling person referred to in Article VII and shall survive the sale of the Certificates. The aforesaid indemnity and contribution agreements shall also survive any termination or cancellation of this Agreement. Any successor of any party or of any such controlling person, or any legal representative of such controlling person, as the case may be, shall be entitled to the benefit of the respective indemnity and contribution agreements. Section 9.02. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed, delivered or transmitted by any standard form of telecommunication, as follows: If to the Underwriter, to: American Investors Group, Inc. 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 Attention: Philip Myers Tel. (952) 945-9455 x 126 If to the Company, to: American Church Mortgage Company 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 Attention: Philip Myers Tel. (952) 945-9455 x 126 In either case with a copy to: Winthrop & Weinstine, P.A. 225 South Sixth Street Suite 3500 Minneapolis, Minnesota 55402 Attention: Philip T. Colton Tel. (612) 604-6729 Section 9.03. Successors and Assigns; Transfer. This Agreement shall inure to the benefit of and be binding upon the Underwriter and the Company and their respective successors and assigns, and the officers, directors and controlling persons referred to in Article VII. Nothing expressed in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto, their respective successors and assigns, and the controlling persons, officers and directors referred to in Article VII, any legal or equitable right, remedy or claim under, or in respect of, this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole - 22 - and exclusive benefit of the parties hereto and their respective executors, administrators, successors, assigns and such controlling persons, officers and directors, and for the benefit of no other person or corporation. No purchaser of any Certificates shall be construed a successor, assignee or third party beneficiary of this Agreement merely by reason of such purchase. Except as provided in Section 5.02(d), neither party may assign its rights and obligations under this Agreement without the written consent of the other party. Section 9.04. Cumulative Remedies. Unless otherwise expressly provided herein, the remedies of the parties provided for herein shall be cumulative and concurrent, and may be pursued singularly, successively or together, at the sole discretion of the party for whose benefit such remedy is provided, and may be exercised as often as occasion therefor shall arise. Section 9.05. Attorneys' Fees. In the event of any action to enforce or interpret this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs, whether or not such action proceeds to judgment. Section 9.06. Entire Agreement. Except as otherwise expressly provided herein, this Agreement constitutes the entire agreement of the parties hereto with respect to the matters addressed herein and supersedes all prior or contemporaneous contracts, promises, representations, warranties and statements, whether written or oral, with respect to such matters. Section 9.07. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to conflict of law principles. Section 9.08. Confidentiality. The Company agrees to keep confidential all non-public information concerning the marketing, selling and administration of the Certificates, except as disclosure may be required by law. The Underwriter agrees to keep confidential all non-public information supplied to it by the Company, including without limitation, all non-public information obtained during any due diligence investigation of the Company. Section 9.09. Rights to Investor Lists. The Offering will produce a list of investors that purchase Certificates, a list of prospects that respond to advertisements but do not purchase any Certificates and a list of former investors whose Certificates have been repaid by the Company. Both the Company and the Underwriter shall be able to use these lists for their own business purposes as long as doing so does not interfere with the marketing, sale or administration of the Certificates. Section 9.10. Waiver: Subsequent Modification. Except as expressly provided herein, no delay or omission by any party in insisting upon the strict observance or performance of any provision of this Agreement, or in exercising any right or remedy, shall be construed as a waiver or relinquishment of such provision, nor shall it impair such right or remedy, and no waiver by any party or any failure or refusal of the other party to comply with its obligations under this Agreement shall be deemed a waiver of any other or subsequent failure or refusal to so comply by such other party. No waiver or modification of the terms hereof shall be valid unless in writing and signed by the party to be charged, and then only to the extent therein set forth. Section 9.11. Severability. If any term or provision of this Agreement or application thereof to any person or circumstance shall, to any extent, be found by a court of competent - 23 - jurisdiction to be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby and each term or provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. Section 9.12. Joint Preparation. The preparation of this Agreement has been a joint effort of the parties and the resulting document shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. Section 9.13. Captions. The title of this Agreement and the headings of the various articles, section and subsections have been inserted only for the purpose of convenience, are not part of this Agreement and shall not be deemed in any manner to modify, explain, expand or restrict any of the provisions of this Agreement. Section 9.14. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. [Remainder of page intentionally left blank] - 24 - IN WITNESS WHEREOF, this Distribution Agreement is hereby entered into by the undersigned parties as of the date first set forth above. THE COMPANY: AMERICAN CHURCH MORTGAGE COMPANY By: -------------------------------- Philip J. Myers, President THE UNDERWRITER: AMERICAN INVESTORS GROUP, INC. By: -------------------------------- Philip J. Myers, President - 25 - EXHIBIT A COMPENSATION TO THE UNDERWRITER Compensation for Sale of Certificates: The Company shall pay the Underwriter a commission and an underwriter's management fee upon each sale of a Certificate based on the principal amount of the Certificates sold in the Offering as follows: o upon an original issuance, the commission shall be 2.75% plus an additional 0.75% underwriter's management fee on the sale. EX-1.2 3 acmc091072_ex1-2.txt SOLICITING DEALERS AGREEMENT EXHIBIT 1.2 AMERICAN CHURCH MORTGAGE COMPANY SOLICITING DEALERS AGREEMENT Ladies and Gentlemen: We have entered into an agreement (the "Distribution Agreement") which is a part hereof and attached hereto, with American Church Mortgage Company, a Minnesota corporation (the "Company"), under which we have agreed to use our best efforts to solicit subscriptions for the Series C Secured Investor Certificates (the "Certificates") of the Company. The Company is offering to the public an aggregate maximum of $20,000,000 worth of Certificates at a price of $1,000 per Certificate (the "Offering"). In connection with the performance of our obligations under Section 2 of the Distribution Agreement, we are authorized to use the services of securities dealers who are members of the Financial Industry Regulatory Agency (the "Soliciting Dealers") to solicit subscriptions. You are hereby invited to become a Soliciting Dealer and, as such, to use your best efforts to solicit subscribers for Certificates, in accordance with the following terms and conditions: 1. A registration statement (the "Registration Statement") with respect to $20,000,000 worth of Certificates has been filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and has become effective. Additional copies of the Prospectus will be supplied to you in reasonable quantities upon request. We will also provide you with reasonable quantities of any supplemental literature prepared by the Company in connection with the offering of the Certificates. 2. Solicitation and other activities by the Soliciting Dealers hereunder shall be undertaken only in accordance with the Distribution Agreement, this Agreement, the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the applicable rules and regulations of the Commission, the Blue Sky Memorandum hereinafter referred to and the Rules of FINRA. In offering the sale of Certificates to any person, each Soliciting Dealer shall have reasonable grounds to believe (based on such information as the investment objectives, other investments, financial situation and needs of the person or any other information known by you after due inquiry) that: (i) such person is or will be in a financial position appropriate to enable such person to realize to a significant extent the benefits described in the Prospectus and has a net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity, (ii) the purchase of the Certificates is otherwise suitable for such person, and each Soliciting Dealer shall maintain records disclosing the basis upon which each Soliciting Dealer determined the suitability of any persons offered Certificates; and (iii) such person meets the suitability standards established for the offering in the states in which the Soliciting Dealer is soliciting transactions. Each Soliciting Dealer agrees: (i) to deliver to each person who subscribes for the Certificates, a Prospectus, as then supplemented or amended, prior to the tender of his account application (the "Account Application"); (ii) to comply promptly with the written request of any person for a copy of the Prospectus during the period between the effective date of the Registration Statement and the later of the termination of the distribution of the Certificates or the expiration of 90 days after the first date upon which the Certificates were offered to the public; (iii) deliver in accordance with applicable law or as prescribed by any state securities administrator to any person a copy of any document included within the Registration Statement, including delivering the Articles and Bylaws (as each is defined in the Prospectus) to investors who are residents of states which we advise you in writing require delivery of such additional documents to prospective investors resident in their states; and (iv) to maintain in its files for at least six years documents disclosing the basis upon which the determination of suitability was reached as to each purchaser of Certificates. 3. Subject to the terms and conditions set forth herein and in the Distribution Agreement, the Company shall pay to you (i) a selling commission of ____% per Share for all Certificates sold for which you have acted as Soliciting Dealer pursuant to this Agreement. Notwithstanding the foregoing, it is understood and agreed that no commission shall be payable with respect to particular Certificates if the Company rejects a proposed subscriber's Account Application. 4. We reserve the right to notify you by telegram or by other means of the number of Certificates reserved for sale by you. Such Certificates will be reserved for sale by you until the time specified in our notification to you. Sales of any reserved Certificates after the time specified in the notification to you or any requests for additional Certificates will be subject to rejection in whole or in part. 5. Payments for Certificates shall be made payable to "American Church Mortgage Company" and forwarded together with a copy of the Account Application, which is attached to the Prospectus, executed by the subscriber, to American Investors Group, Inc., 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343, shall be transmitted not later than noon of the next business day after receipt of such Account Application and check (when your internal supervisory procedures are completed at the site at which the Account Application and check were received by you) or, when your internal supervisory procedures are performed at a different location (the "Final Review Office"), you shall transmit the check and Account Application to the Final Review Office by noon of the next business day following your receipt of the Account Application and check. The Final Review Office will, by noon of the next business day following its receipt of the Account Application and check, forward both to the Underwriter as processing broker-dealer. If any Account Application solicited by you is rejected by the Company, the Account Application and check will be forwarded by the Company back to us for prompt return to the rejected subscriber. 6. We will inform you in writing as to the jurisdictions in which we have been advised by the Company that the Certificates have been qualified for sale or are exempt under the respective securities or "blue sky" laws of such jurisdictions; but we have not assumed and will not assume any obligation or responsibility as to your right to act as a broker with respect to the Certificates in any such jurisdiction. You agree that you will not make any offers except in states in which we may advise you that the Offering has been qualified or is exempt and further agree to assure that each person to whom you sell Certificates (at both the time of the initial purchase as well as at the time of any subsequent purchases) meets any special suitability standards which apply to sales in a particular jurisdiction, as described in the Blue Sky Memorandum and the Account Application. Neither we, nor the Company assume any -2- obligation or responsibility in respect of the qualification of the Certificates covered by the Prospectus under the laws of any jurisdiction or your qualification to act as a broker with respect to the Certificates in any jurisdiction. The Blue Sky Memorandum which has been or will be furnished to you indicates the jurisdictions in which it is believed that the offer and sale of Certificates covered by the Prospectus is exempt from, or requires action under, the applicable blue sky or securities laws thereof, and what action, if any, has been taken with respect thereto. It is understood and agreed that under no circumstances will you, as a Soliciting Dealer, engage in any activities hereunder in any jurisdiction in which you may not lawfully so engage or in any activities in any jurisdiction with respect to the Certificates in which you may lawfully so engage unless you have complied with the provisions hereof. 7. Neither you nor any other person is authorized by the Company or by us to give any information or make any representations in connection with this Agreement or the offer of Certificates other than those contained in the Prospectus, as then amended or supplemented, or any sales literature approved by us and the Company. You agree not to publish, circulate or otherwise use any other advertisement or solicitation material without our prior written approval. You are not authorized to act as our agent in any respect, and you agree not to act as such agent and not to purport to act as such agent. 8. We shall have full authority to take such action as we may deem advisable with respect to all matters pertaining to the Offering or arising thereunder. We shall not be under any liability (except for our own want of good faith and for obligations expressly assumed by us hereunder) for or in respect of the validity or value of or title to, the Certificates; the form of, or the statements contained in, or the validity of, the Registration Statement, the Prospectus or any amendment or supplement thereto, or any other instrument executed by Church Loan Advisors, Inc., the Company's advisor (the "Advisor"), the Company or by others; the form or validity of the Distribution Agreement or this Agreement; the delivery of the Certificates; the performance by the Advisor, the Company or by any of them of any agreement on its or their part; the qualification of the Certificates for sale under the laws of any jurisdiction; or any matter in connection with any of the foregoing; provided, however, that nothing in this paragraph shall be deemed to relieve the Company or the undersigned from any liability imposed by the Act. No obligations on the part of the Company or the undersigned shall be implied or inferred herefrom. 9. Under the Distribution Agreement, the Company has agreed to indemnify you and us and each person, if any, who controls you or us, in certain instances and against certain liabilities, including liabilities under the Act in certain circumstances. You agree to indemnify the Company and each person who controls it as provided in the Distribution Agreement and to indemnify us to the extent and in the manner that you agree to indemnify the Company in such Distribution Agreement. 10. Each Soliciting Dealer hereby authorizes and ratifies the execution and delivery of the Distribution Agreement by us as Distribution for ourselves and on behalf of the Soliciting Dealers and authorizes us to agree to any variation of its terms or provisions and to execute and deliver any amendment, modification or supplement thereto. Each Soliciting Dealer hereby agrees to be bound by all provisions of the Distribution Agreement relating to Soliciting Dealers. Each Soliciting Dealer also authorizes us to exercise, in our discretion, all the authority or discretion now or hereafter vested in us by the provisions of the Distribution Agreement and to -3- take all such action as we may believe desirable in order to carry out the provisions of the Distribution Agreement and of this Agreement. 11. This Agreement, except for the provisions of Sections 8 and 9 hereof, may be terminated at any time by either party hereto by two days' prior written notice to the other party and, in all events, this Agreement shall terminate on the termination date of the Distribution Agreement, except for the provisions of Sections 8 and 9 hereof. 12. Any communications from you should be in writing addressed to us at American Investors Group, Inc., 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343, Attention: Philip J. Myers. Any notice from us to you shall be deemed to have been duly given if mailed, telegraphed or delivered by overnight courier to you at your address shown below. 13. Nothing herein contained shall constitute the Soliciting Dealers or any of them as an association, partnership, limited liability company, unincorporated business or other separate entity. 14. Prior to offering the Certificates for sale, each Soliciting Dealer shall have conducted an inquiry such that you have reasonable grounds to believe, based on information made available to you by the Company or the Advisor through the Prospectus or other materials, that all material facts are adequately and accurately disclosed and provide a basis for evaluating a purchase of Certificates. In determining the adequacy of disclosed facts pursuant to the foregoing, each Soliciting Dealer may obtain, upon request, information on material facts relating at a minimum to the following: (1) items of compensation; (2) loan policies and investment guidelines; (3) tax aspects; (4) financial stability and experience of the Company and the Advisor; (5) conflicts and risk factors; and (6) other pertinent reports. Notwithstanding the foregoing, each Soliciting Dealer may rely upon the results of an Inquiry conducted by another Soliciting Dealer, provided that: (i) such Soliciting Dealer has reasonable grounds to believe that such inquiry was conducted with due care; (ii) the results of the inquiry were provided to you with the consent of the Soliciting Dealer conducting or directing the inquiry; and (iii) no Soliciting Dealer that participated in the inquiry is an affiliate of the Company. Prior to the sale of the Certificates, each Soliciting Dealer shall inform the prospective purchaser of all pertinent facts relating to the liquidity and marketability of the Certificates during the term of the investment. -4- If the foregoing is in accordance with your understanding, please sign and return the attached duplicate. Your indicated acceptance thereof shall constitute a binding agreement between you and us. Very truly yours, AMERICAN INVESTORS GROUP, INC. - --------------------------- By - --------------------------- ------------------------------------------- Philip J. Myers Its President Dated: ------------------- We confirm our agreement to act as a Soliciting Dealer pursuant to all the terms and conditions of the above Soliciting Dealer Agreement and the attached Distribution Agreement. We hereby represent that we will comply with the applicable requirements of the Act and the Exchange Act and the published Rules and Regulations of the Commission thereunder, and applicable blue sky or other state securities Laws. We confirm that we are a member in good standing of the FINRA. We hereby represent that we will comply with the FINRA rules and all rules and regulations promulgated by the FINRA. Dated: -------------------- ------------------------------------------- Name of Soliciting Dealer ------------------------------------------- Address of Soliciting Dealer - -------------------- Federal Tax Identification Number By: ------------------------------------------ Authorized Signature Title: --------------------------------------- Kindly have checks representing commissions forwarded as follows (if different than above): Name of Firm: -------------------------------------------- Address: -------------------------------------------- -------------------------------------------- -------------------------------------------- Telephone: -------------------------------------------- Attention: -------------------------------------------- -5- EX-4.1 4 acmc091072_ex4-1.txt FORM OF TRUST INDENTURE EXHIBIT 4.1 INDENTURE AMERICAN CHURCH MORTGAGE COMPANY, as obligor Series C Secured Investor Certificates $20,000,000 HERRING BANK, as trustee Dated as of ________ ___, 2009 TABLE OF CONTENTS CROSS-REFERENCE TABLE .................................................... IV ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE ............. 1 SECTION 1.1 DEFINITIONS ............................................ 1 SECTION 1.2 OTHER DEFINITIONS ...................................... 4 SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT ...... 4 SECTION 1.4 RULES OF CONSTRUCTION .................................. 5 ARTICLE II. THE SECURITIES ......................................... 5 SECTION 2.1 UNLIMITED AMOUNT; ACCOUNTS; INTEREST; MATURITY ......... 5 SECTION 2.2 TRANSACTION STATEMENT; RESCISSION ...................... 6 SECTION 2.3 REGISTRAR AND PAYING AGENT ............................. 6 SECTION 2.4 DEPOSIT OF PRINCIPAL AND INTEREST WITH PAYING AGENT .... 6 SECTION 2.5 LIST OF HOLDERS ........................................ 7 SECTION 2.6 TRANSFER AND EXCHANGE .................................. 7 SECTION 2.7 PAYMENT OF PRINCIPAL AND INTEREST; PRINCIPAL AND INTEREST RIGHTS PRESERVED .............................. 7 SECTION 2.8 RESERVED ............................................... 8 SECTION 2.9 OUTSTANDING SECURITIES ................................. 8 SECTION 2.10 TREASURY SECURITIES .................................... 9 SECTION 2.11 RESERVED ............................................... 9 SECTION 2.12 RESERVED ............................................... 9 SECTION 2.13 DEFAULTED INTEREST ..................................... 9 SECTION 2.14 BOOK-ENTRY REGISTRATION ................................ 9 SECTION 2.15 INITIAL AND PERIODIC STATEMENTS ........................ 10 ARTICLE III. REDEMPTION ............................................. 10 SECTION 3.1 REDEMPTION OF SECURITIES AT THE COMPANY'S ELECTION ..... 10 SECTION 3.2 REDEMPTION OF SECURITIES AT THE HOLDER'S ELECTION ...... 11 SECTION 3.3 OFFER TO REDEEM SECURITIES UPON CHANGE OF THE COMPANY'S ADVISOR ...................................... 11 ARTICLE IV. COVENANTS .............................................. 12 SECTION 4.1 PAYMENT OF SECURITIES .................................. 12 SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY ........................ 12 SECTION 4.3 SEC REPORTS AND OTHER REPORTS .......................... 13 SECTION 4.4 COMPLIANCE CERTIFICATE ................................. 13 SECTION 4.5 STAY, EXTENSION AND USURY LAWS ......................... 14 SECTION 4.6 LIQUIDATION ............................................ 14 SECTION 4.7 FINANCIAL COVENANTS .................................... 14 SECTION 4.8 RESTRICTIONS ON DIVIDENDS AND CERTAIN TRANSACTIONS WITH AFFILIATES ........................................ 14 SECTION 4.9 COLLATERAL ............................................. 15 SECTION 4.10 APPOINTMENT AS ATTORNEY-IN-FACT ........................ 16 ARTICLE V. SUCCESSORS ............................................. 18 SECTION 5.1 WHEN THE COMPANY MAY MERGE, ETC. ....................... 18 SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED ...................... 18 ARTICLE VI. DEFAULTS AND REMEDIES .................................. 19 SECTION 6.1 EVENTS OF DEFAULT ...................................... 19 SECTION 6.2 ACCELERATION ........................................... 20 SECTION 6.3 OTHER REMEDIES ......................................... 20 SECTION 6.4 WAIVER OF PAST DEFAULTS ................................ 21 SECTION 6.5 CONTROL BY MAJORITY .................................... 21 SECTION 6.6 LIMITATION ON SUITS .................................... 21 SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT ................... 21 SECTION 6.8 COLLECTION SUIT BY TRUSTEE ............................. 22 SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM ....................... 22 SECTION 6.10 PRIORITIES ............................................. 22 SECTION 6.11 UNDERTAKING FOR COSTS .................................. 23 ARTICLE VII. TRUSTEE ................................................ 23 SECTION 7.1 DUTIES OF TRUSTEE ...................................... 23 SECTION 7.2 RIGHTS OF TRUSTEE ...................................... 24 SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE ........................... 25 SECTION 7.4 TRUSTEE'S DISCLAIMER ................................... 25 SECTION 7.5 NOTICE OF DEFAULTS ..................................... 25 SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS .......................... 25 SECTION 7.7 COMPENSATION AND INDEMNITY ............................. 26 SECTION 7.8 REPLACEMENT OF TRUSTEE ................................. 27 SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. ...................... 27 SECTION 7.10 ELIGIBILITY; DISQUALIFICATION .......................... 28 SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY ...... 28 ARTICLE VIII. DISCHARGE OF INDENTURE ................................. 28 SECTION 8.1 TERMINATION OF COMPANY'S OBLIGATIONS ................... 28 SECTION 8.2 APPLICATION OF TRUST MONEY ............................. 29 SECTION 8.3 REPAYMENT TO COMPANY ................................... 29 SECTION 8.4 REINSTATEMENT .......................................... 30 ARTICLE IX. AMENDMENTS ............................................. 30 SECTION 9.1 WITHOUT CONSENT OF HOLDERS ............................. 30 SECTION 9.2 WITH CONSENT OF HOLDERS ................................ 30 SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT .................... 31 SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS ...................... 31 SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES .................. 31 SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. ....................... 31 ARTICLE X. MISCELLANEOUS .......................................... 32 SECTION 10.1 TRUST INDENTURE ACT CONTROLS ........................... 32 ii SECTION 10.2 NOTICES ................................................ 32 SECTION 10.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS ............ 33 SECTION 10.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT ..... 33 SECTION 10.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION .......... 33 SECTION 10.6 RULES BY TRUSTEE AND AGENTS ............................ 33 SECTION 10.7 LEGAL HOLIDAYS ......................................... 34 SECTION 10.8 NO RECOURSE AGAINST OTHERS ............................. 34 SECTION 10.9 DUPLICATE ORIGINALS .................................... 34 SECTION 10.10 GOVERNING LAW .......................................... 34 SECTION 10.11 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS .......... 34 SECTION 10.12 SUCCESSORS ............................................. 34 SECTION 10.13 SEVERABILITY ........................................... 34 SECTION 10.14 COUNTERPART ORIGINALS .................................. 34 SECTION 10.15 TABLE OF CONTENTS, HEADINGS, ETC. ...................... 35 SIGNATURES ........................................................ 36 iii CROSS-REFERENCE TABLE *Trust Indenture Act Section ............................... Indenture Section 310(a)(1) .................................................. 7.10 (a)(2) ..................................................... 7.10 (a)(3) ..................................................... N.A. (a)(4) ..................................................... N.A. (a)(5) ..................................................... N.A. (b) ........................................................ 7.8; 7.10 (c) ........................................................ N.A. 311(a) ..................................................... 7.11 (b) ........................................................ 7.11 (c) ........................................................ N.A. 312(a) ..................................................... 2.5 (b) ........................................................ 11.3 (c) ........................................................ 11.3 313(a) ..................................................... 7.6 (b)(1) ..................................................... N.A. (b)(2) ..................................................... 7.6 (c) ........................................................ 7.6; 11.2 (d) ........................................................ 7.6 314(a) ..................................................... 4.3; 4.4; 11.2 (b) ........................................................ 4.9(c) (c)(1) ..................................................... 11.4 (c)(2) ..................................................... 11.4 (c)(3) ..................................................... N.A. (d) ........................................................ N.A. (e) ........................................................ 11.5 (f) ........................................................ N.A. 315(a) ..................................................... 7.1(b) (b) ........................................................ 7.5; 11.2 (c) ........................................................ 7.1(a) (d) ........................................................ 7.1(c) (e) ........................................................ 6.11 316(a)(last sentence) ...................................... 2.10 (a)(1)(A) .................................................. 6.5 (a)(1)(B) .................................................. 6.4 (a)(2) ..................................................... N.A. (b) ........................................................ 6.7 (c) ........................................................ N.A. 317(a)(1) .................................................. 6.8 (a)(2) ..................................................... 6.9 (b) ........................................................ 2.4 318(a) ..................................................... 11.1 N.A. means not applicable * This Cross Reference Table is not part of the Indenture iv THIS INDENTURE is hereby entered into as of _____ __, 2009, by and between American Church Mortgage Company, a Minnesota corporation (the "Company"), and Herring Bank, as trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Series C Secured Investor Certificates of the Company issued pursuant to the Company's registration statement on Form S-11 (Reg. No. 333-154831) declared effective by the Securities and Exchange Commission on _____ __, 2009 (the "Registration Statement"): ARTICLE I. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1 Definitions. "Account" means the record of beneficial ownership of a Security maintained by the Registrar. "Advisor" means Church Loan Advisors, Inc., the Company's advisor. "Advisory Agreement" means the Company's advisory agreement with the Advisor pursuant to which the Advisor manages the business and affairs of the Company, as the same has been or may be amended from time to time. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "Agent" means any Registrar, Paying Agent or co-registrar of the Securities. "Board of Directors" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "Business Day" means any day other than a Legal Holiday. "Company" means American Church Mortgage Company, unless and until replaced by a successor in accordance with Article V hereof and thereafter means such successor. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is originally dated, located at 1608 S. Polk St., Amarillo, Texas 79102, Attention: Catana Gray, Vice-President. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fiscal Year" means initially a December 31 year end. "GAAP" means, as of any date, generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, which are in effect from time to time. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Holder" means a Person in whose name a Security is registered. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or representing the balance deferred and unpaid of the purchase price of any property (including capital Lease obligations) or representing any hedging obligations, except any such balance that constitutes an accrued expense or a trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and hedging obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, and also includes, to the extent not otherwise included, (a) the Guarantee of items that would be included within this definition, and (b) liability for items that would arise by operation of a Person's status as a general partner of a partnership. "Indenture" means, this Indenture as amended or supplemented from time to time. "Interest Accrual Period" means, as to each Security, the period from the later of the Issue Date of such Security or the day after the last Payment Date upon which an interest payment was made until the following Payment Date during which interest accrues on each Security with respect to any Payment Date. "Issue Date" means, with respect to any Security, the date on which such Security is deemed registered on the books and records of the Registrar, which shall be the date the Company accepts funds for the purchase of the Security if such funds are received prior to 12:01 p.m. (Central Time) on a Business Day, or if such funds are received after such time, on the next Business Day. "Maturity Date" means, with respect to any Security, the date on which the principal of such Security becomes due and payable as therein provided. 2 "Maturity Record Date" means, with respect to any Security, as of 11:59 p.m. on the date fifteen (15) days prior to the Maturity Date or Redemption Date applicable to such Security. "Obligations" means any principal, interest (including Post-Petition Interest), penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means the Chairman of the Board or principal executive officer of the Company, the President or operating officer of the Company, the Chief Financial Officer or principal financial officer of the Company, the Treasurer, any Assistant Treasurer, Controller or principal officer of the Company, Secretary or any Vice-President of the Company. "Officer's Certificate" means a certificate signed by an Officer. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Payment Date" means the last day of each calendar quarter, or if such day is not a Business Day, the Business Day immediately following such day and, with respect to a specific Security, the Maturity Date or Redemption Date of such Security. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Post-Petition Interest" means interest accruing after the commencement of any bankruptcy or insolvency case or proceeding with respect to the Company or any receivership, liquidation, reorganization or other similar case or proceeding in connection therewith, at the rate applicable to such Indebtedness, whether or not such interest is an allowable claim in any such proceeding. "Prospectus" means the prospectus relating to the Securities, including any prospectus supplement, forming part of the Registration Statement. "Redemption Date" has the meaning given in Article III hereof. "Redemption Price" means, with respect to any Security to be redeemed, the principal amount of such Security plus the interest accrued but unpaid during the Interest Accrual Period up to the Redemption Date for such security. "Regular Record Date" means, with respect to each Payment Date, as of 11:59 p.m. on the date fifteen (15) days prior to such Payment Date. "Responsible Officer" when used with respect to the Trustee, means any officer in its Corporate Trust Office, or any other assistant officer of the Trustee in its Corporate Trust Office customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. 3 "SEC" means the U.S. Securities and Exchange Commission. "Security" or "Securities" means, the Company's Series C Secured Investor Certificates issued under this Indenture pursuant to the Registration Statement. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss. 77aaa-77bbbb) as in effect on the date on which this Indenture is qualified under the TIA. "Trustee" means Herring Bank, until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "U.S. Government Obligations" means direct obligations of the United States of America, or any agency or instrumentality thereof for the payment of which the full faith and credit of the United States of America is pledged. Section 1.2 Other Definitions. Term .................................. Defined in Section "Bankruptcy Law" ...................... 6.1 "Collateral" .......................... 4.9(a) "Custodian" ........................... 6.1 "Event of Default" .................... 6.1 "Legal Holiday" ....................... 10.7 "Paying Agent" ........................ 2.3 "Registrar" ........................... 2.3 "Registration Statement" .............. Introduction "Securities Register" ................. 2.3 "Transfer" ............................ 4.9(h) Section 1.3 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means any Holder of the Securities; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Securities means the Company or any successor obligor upon the Securities. 4 All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) references to GAAP, as of any date, shall mean GAAP in effect in the United States as of such date and consistently applied; (d) "or" is not exclusive; (e) words in the singular include the plural, and in the plural include the singular; and (f) provisions apply to successive events and transactions. ARTICLE II. THE SECURITIES Section 2.1 Unlimited Amount; Accounts; Interest; Maturity. (a) The outstanding aggregate principal amount of Securities outstanding at any time is limited to $20,000,000, provided, however, that the Company and the Trustee may, without the consent of any Holder, increase such aggregate principal amount of Securities which may be outstanding at any time. The Securities may be subject to notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject or usage. (b) Except as provided in Section 2.14 hereof, each Security shall not be evidenced by a promissory note. The record of beneficial ownership of the Securities shall be maintained and updated by the Registrar through the establishment and maintenance of Accounts. Initially, each Security shall be in such denominations as may be designated from time to time by the Company. Each Security shall have a term of not less than thirteen (13) years and not greater than twenty (20) years as shall be designated by the Holder at the time of purchase, subject to the Company's acceptance thereof. (c) Each Security shall bear interest from and commencing on its Issue Date at such rate of interest as the Company shall determine from time to time, as set forth in the Prospectus. The interest rate of each Security will be fixed for the term of such Security upon issuance, subject to change upon the renewal of the Security at maturity. Interest on the Securities will not compound. The Company shall pay the Holders interest on the Securities quarterly on the last day of each quarter during which each such Security is outstanding. To the extent any applicable interest payment date is not a Business Day, then interest shall be paid instead on the next succeeding Business Day. (d) The Company will give each Holder of a Security a written notice approximately thirty (30) but not less than ten (10) days prior to the Maturity Date of the Security held by such Holder reminding such Holder of the Maturity Date of the Security. If the Company is offering renewal of Securities, the Company will provide such Holder with a schedule of interest rates then in effect and a form for the Holder to use to notify the Company whether the Holder wishes to renew the Security. To be effective, a notice of renewal must be returned to the Company (or 5 its agent) not later than the Maturity Date of the maturing Security. Unless a Security is properly renewed, no interest will accrue after the Maturity Date for such Security. If a Security is not renewed, the Company shall pay the Holder the principal amount on the maturing Security, together with accrued but unpaid interest thereon, within ten (10) days after the Maturity Date. (e) If the Company is offering renewal of Securities and a Holder renews a Security, then interest shall continue to accrue from the first day of such renewal term at the applicable rate then in effect. Such Security, as renewed, will continue in all its provisions, including provisions relating to payment. (f) The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, and the Holders by accepting the Securities, expressly agree to such terms and provisions and to be bound thereby. In case of a conflict, the provisions of this Indenture shall control. Section 2.2 Transaction Statement; Rescission. (a) A Security shall not be validly issued until a written confirmation of the acceptance of a Subscription in the form of a transaction statement executed by a duly authorized officer or agent of the Company is sent to the purchaser thereof and an Account is established by the Registrar in the name of such purchaser or transferee. (b) For a period of five (5) days following delivery of a Prospectus to a Holder in regard to issuance of a Security at the time of original purchase, but not upon transfer, the Holder shall have the right to rescind the Security and receive payment of the principal by presenting a written request to the Company. Payment of the principal shall be made within ten (10) days of the Company's receipt of such request from the Holder. No interest shall be paid on any such rescinded Security. Section 2.3 Registrar and Paying Agent. The Trustee shall maintain (i) an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Securities may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Securities and of their transfer and exchange, which shall include the name, address for notices and payment of principal and interest to the Holder, principal amount and interest rate for each Security, and such other information as the Company shall request that the Registrar maintain with regard to Holders or the Securities (the "Securities Register"). The Registrar shall not be required to maintain any records beyond those (i) specifically required by the terms of this Indenture, (ii) reasonably requested in writing by the Company and (iii) and as are or become required to be maintained by applicable law. Section 2.4 Deposit of Principal and Interest With Paying Agent. Prior to each Payment Date, the Company shall deposit with the Paying Agent sufficient funds to pay principal and interest then becoming due and payable in cash. 6 Section 2.5 List of Holders. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders and shall otherwise comply with TIA ss.312(a). If the Trustee is not the Registrar, the Registrar shall furnish to the Trustee each quarter during the term of this Indenture and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names, addresses and Account balances of Holders, and the aggregate principal amount outstanding and the Company shall otherwise comply with TIA ss.312(a). Section 2.6 Transfer and Exchange. (a) The Securities are not negotiable instruments and cannot be transferred without the prior written consent of the Company. Requests to the Registrar for the transfer of any Account maintained for the benefit of a Holder shall be: (1) made to the Company in writing on a form supplied by the Company; (2) duly executed by the current holder of the Account, as reflected on the Registrar's records as of the date of receipt of such transfer request, or his attorney duly authorized in writing; (3) accompanied by the written consent of the Company to the transfer; and (4) if requested by the Company, an opinion of Holder's counsel (which counsel shall be reasonably acceptable to the Company) that the transfer does not violate any applicable securities laws and/or a signature guarantee. (b) Upon transfer of a Security, the Company will provide the new registered owner of the Security with a transaction statement which will evidence the transfer of the Account in the Securities Register. (c) The Company or the Trustee may assess service charges to a Holder for any registration or transfer or exchange, and the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange pursuant to Section 9.5 hereof). (d) The Company shall treat the individual or entity listed on each Account maintained by the Registrar as the absolute owner of the Security represented thereby for purposes of receiving payments thereon and for all other purposes whatsoever. Section 2.7 Payment of Principal and Interest; Principal and Interest Rights Preserved. (a) Each Security shall accrue interest at the rate specified for such Security in the Securities Register and such interest shall be payable on each Payment Date following the Issue Date for such Security, until the principal thereof has been paid. Any installment of interest payable on a Security that is caused to be punctually paid or duly provided for by the Company 7 on the applicable Payment Date shall be paid by the Paying Agent to the Holder in whose name such Security is registered in the Securities Register on the applicable Regular Record Date with respect to the Securities outstanding, by the Paying Agent mailing a check for the amount of such interest payment to the Holder's address as it appears in the Securities Register on such Regular Record Date. The Paying Agent shall not be required to make any payment or partial payment of principal if the Paying Agent does not have funds on deposit and received from the Company in an amount sufficient to pay Holders amounts due to them on a Payment Date, but shall make full payments of interest to the extent that sufficient funds are on deposit to make such payments. Any installment of interest not punctually paid or duly provided for shall be payable in the manner and to the Holders as specified in Section 2.13 hereof. (b) Each of the Securities shall have stated maturities of principal as shall be indicated on such Securities and as set forth in the Securities Register. The principal of each Security and any accrued but unpaid interest thereon shall be paid in full no later than five (5) days following the Maturity Date thereof unless the term of such Security is extended pursuant to Section 2.1 hereof or such Security becomes due and payable at an earlier date by acceleration, redemption or otherwise. Notwithstanding any of the foregoing provisions with respect to payments of principal of and interest on the Securities, if the Securities have become or been declared due and payable following an Event of Default, then payments of principal of and interest on the Securities shall be made in accordance with Article 6 hereof. (c) All computations of interest due with respect to any Security shall be made, unless otherwise specified in the Security, based upon a 365 day year. (d) In the event that any check mailed to a Holder for the purpose of payment of principal or interest is returned to the Paying Agent for want of an accurate address or is not presented for payment, the funds represented thereby shall be held and disbursed as provided in Section 8.3 hereof. (e) The Company or the Trustee may withhold from any payment of interest amounts required by the Internal Revenue Service or other taxing authority to be so withheld, including, without limitation, upon the failure of any Holder to provide the Company or the Trustee with his or her tax identification number. Section 2.8 Reserved. Section 2.9 Outstanding Securities. (a) The Securities outstanding at any time are the outstanding balances of all Accounts representing the Securities maintained by the Company or such other entity as the Company designated as Registrar. (b) If the principal amount of any Security is considered paid under Section 4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue. (c) Subject to Section 2.10 hereof, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. 8 Section 2.10 Treasury Securities. In determining whether the holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or any Affiliate of the Company shall be considered as though not outstanding, except that for purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Section 2.11 Reserved. Section 2.12 Reserved. Section 2.13 Defaulted Interest. If the Company defaults in a payment of interest or principal on any Security, it shall pay the defaulted interest or principal plus, to the extent lawful, any interest payable thereon at the rate provided in the Security, to the Holder of such Security as of a subsequent special record date, which date shall be at the earliest practicable date, but in all events within fifteen (15) days following the scheduled Payment Date of the defaulted interest. The Company shall, with written notification to the Trustee, fix or cause to be fixed each such special record date and payment date. Prior to any such special record date, the Company (or the Trustee, in the name of and at the expense of the Company) shall mail to Holder(s) a notice that states the special record date, the related payment date and the amount of principal, interest and additional accrued interest to be paid. Section 2.14 Book-Entry Registration. (a) The Registrar shall maintain a book-entry registration and transfer system through the establishment of Accounts for the benefit of Holders of Securities as the sole method of recording the ownership and transfer of ownership interests in such Securities. The registered owners of the Accounts established by the Registrar in connection with the purchase or transfer of the Securities shall be deemed to be the Holders of the Securities outstanding for all purposes under this Indenture. The Company shall promptly notify (or cause an agent to notify) the Registrar of the acceptance of a subscriber's order to purchase a Security and the Registrar shall credit its book-entry registration and transfer system to the Account of each Security purchaser, the principal amount of such Security owned of record by the purchaser. (b) Book-entry accounts representing interests in the Securities shall not be exchangeable for Securities fully registered in the names of the Holders thereof unless (a) the Company at its option advises the Trustee in writing of its election to terminate the book-entry system, or (b) after the occurrence of any Event of Default, Holders of a majority of the Securities then outstanding (as determined based upon the latest statement provided to the Trustee pursuant to Section 4.3(d) hereof) advise the Trustee in writing that the continuation of the book-entry system is no longer in the best interests of such Holders and the Trustee notifies all Holders of the Securities, as the case may be, of such event and the availability of definitive notes to the Holders of Securities, as the case may be, requesting such notes in definitive form. 9 (c) The Registrar shall issue fully registered Securities if required by the administrator of an Individual Retirement Account or similar tax deferred account in which the Holder has acquired Securities. The Registrar may charge a Holder a $10 fee per Securities issuance. Section 2.15 Initial and Periodic Statements. (a) The Trustee shall provide an initial book entry acknowledgement to initial purchasers and registered owners, within thirty (30) business days of the purchase, transfer or pledge of a Security. (b) The Trustee shall send each Holder of a Security (and each registered pledgee) via U.S. mail not later than ninety (90) Business Days after each year end in which such Holder had an outstanding balance in such holder's Account, a statement which indicates as of the year end preceding the mailing: (i) the balance of such Account; (ii) interest credited; (iii) withdrawals made, if any; (iv) the interest rate payable on such Security; and (v) any other information required on IRS Form 1099. The Trustee or the Company shall provide additional statements as the Holders of the Securities may reasonably request from time to time. The Company or the Trustee may charge such Holders requesting such statements a fee to cover the charges incurred by the Company or the Trustee in providing such additional statements. ARTICLE III. REDEMPTION Section 3.1 Redemption of Securities at the Company's Election. (a) At any time and from time to time, the Company, in its sole discretion, may redeem any number or all of the Securities by providing thirty (30) days' written notice to the Holders thereof. The Company may redeem any or all of the Securities pursuant to this paragraph and need not redeem the Securities on a pro rata or other basis. The Company shall provide the Holders of any Securities to be redeemed pursuant to this paragraph with notice thereof, which notice shall set forth the date for such redemption (the "Redemption Date") and set forth the Redemption Price for the Securities to be redeemed. Each such notice shall also include the amount of interest and principal to be paid to the Holder on the Redemption Date. No interest shall accrue on a Security to be redeemed under this Section 3.1 for any period of time after the Redemption Date for such Security, provided that the Company has timely tendered the Redemption Price to the Holder. (b) The Company shall have no mandatory redemption or sinking fund obligations with respect to any of the Securities. (c) In its sole discretion, the Company may offer certain Holders the ability to extend the maturity of an existing Security through the redemption of the current Security and the issuance of a new Security. This redemption option shall not be subject to the thirty (30) day notice of redemption described in this section. 10 Section 3.2 Redemption of Securities at the Holder's Election. (a) Subject to paragraph (b) below, within forty-five (45) days of the death of a Holder who is a natural person, the personal representative of the estate of such Holder may require the Company to redeem, in whole and not in part, without penalty, the Security held by such Holder, by delivering to the Company a certified copy of the Holder's death certificate and an irrevocable written election (a "Redemption Election") requiring the Company to make such redemption. In the event a Security is held jointly by two or more natural persons (including, without limitation, joint owners that are not legally married), the Company shall redeem such Security upon proper notice if either of joint Holders of such Security has died. If the Security is held by a Holder 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, except in the case of the death of a natural person who is the beneficial owner of Securities held of record in an individual retirement account. (b) The Company will not be required to redeem Securities pursuant to Redemption Elections received pursuant to paragraph (a) above to the extent that such redemptions exceed $25,000 in the aggregate for all holders in any calendar quarter. For the purposes of such limit on aggregate Redemption Elections, Redemption Elections will be honored in the order received, and any Redemption Election not paid in the quarter received due to this limitation will be honored in the subsequent quarter, to the extent possible, as such limit on aggregate Redemption Elections will also apply to the subsequent quarter. (c) Subject to Section 3.2(b), upon receipt of a Redemption Election pursuant to Section 3.2(a), the Company shall designate the Redemption Date for the Security to be redeemed, which Redemption Date shall be no more than ten (10) days after the Company's receipt of the Redemption Election, and shall pay the Redemption Price to the estate of the Holder in accordance with the provisions set forth in Section 2.7 hereof. No interest shall accrue on a Security to be redeemed under this Section 3.2 for any period of time after the Redemption Date for such Security, provided that the Company has timely tendered the Redemption Price to the estate of the Holder. Securities for which redemption is delayed pursuant to Section 3.2(b) will continue to accrue interest until the Company establishes a Redemption Date therefor and the Security is redeemed. (d) The Company may at its option and in its sole discretion and from time to time accept for redemption Securities tendered to it by Holders and may impose such conditions thereon as it deems appropriate, including an early redemption penalty with regard thereto. Section 3.3 Offer to Redeem Securities Upon Change of the Company's Advisor. (a) If the Company terminates the Advisory Agreement for any reason, the Company shall provide all Holders with a notice thereof within ten (10) days of such termination, pursuant to which the Company shall offer to redeem all of the Securities outstanding as of the date of the termination of the Advisory Agreement. Each Holder shall have thirty (30) days from the date of such notice to provide the Company with a Redemption Election with regard to the Securities owned by such Holder, upon timely receipt of which the Company shall become bound to 11 redeem the electing Holder's Securities. This Section 3.3 shall not apply in the case that the Advisor terminates or elects not to renew the Advisory Agreement. (b) Upon receipt of a Redemption Election pursuant to Section 3.3(a), the Company shall designate the Redemption Date for each Security to be redeemed, which Redemption Date shall be no more than ten (10) days after the Company's receipt of the Redemption Election, and shall pay the Redemption Price to the Holder in accordance with the provisions set forth in Section 2.7 hereof. No interest shall accrue on a Security to be redeemed under this Section 3.3 for any period of time after the Redemption Date for such Security, provided that the Company has timely tendered the Redemption Price to the Holder. ARTICLE IV. COVENANTS Section 4.1 Payment of Securities. (a) Principal and interest (to the extent such interest is paid in cash) shall be considered paid on the date due if the Paying Agent, if other than the Company, holds at least one Business Day before that date money deposited by the Company in immediately available funds and designated for and sufficient to pay all principal and interest then due. Such Paying Agent shall return to the Company, no later than five (5) days following the date of payment, any money (including accrued interest) that exceeds such amount of principal and interest paid on the Securities in accordance with this Section 4.1. (b) To the extent lawful, the Company shall pay interest (including Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate borne by the Securities; it shall pay interest (including Post-Petition Interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace period) at the same rate. Section 4.2 Maintenance of Office or Agency. (a) The Company will maintain an office or agency (which may be an office of the Trustee) where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. (b) The Company may also from time to time designate one or more other offices or agencies where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 12 (c) The Company hereby designates its office as one such office of the Company. Section 4.3 SEC Reports and Other Reports. (a) The Company shall file with the Trustee, within fifteen (15) days after filing with the SEC, copies of the annual reports and of the information, documents, and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) that the Company is required to file with the SEC pursuant to Sections 13 or 15(d) of the Exchange Act. If the Company is not subject to the requirements of such Sections 13 or 15(d) of the Exchange Act, the Company shall continue to file with the SEC and the Trustee on the same timely basis such reports, information and other documents as it would file if it were subject to the requirements of Sections 13 or 15(d) of the Exchange Act. The Company shall also comply with the provisions of TIAss.314(a). Notwithstanding anything contrary herein, the Trustee shall have no duty to review such documents for purposes of determining compliance with any provisions of the Indenture. (b) Upon the request of any Holder, the Company shall provide such Holder with a copy of the Company's annual report on Form 10-K or quarterly reports on Form 10-Q without charge. The Company will not be required to provide Holders with any other reports or financial information or to provide reports to Holders absent a specific request therefor. Section 4.4 Compliance Certificate. (a) The Company shall deliver to the Trustee, within one hundred twenty (120) days after the end of each Fiscal Year, an Officer's Certificate stating that a review of the activities of the Company during the preceding fiscal year has been made under the supervision of the signing Officer(s) with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture, and further stating that to the best of his or her knowledge the Company has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action each is taking or proposes to take with respect thereto) and that to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities are prohibited or if such event has occurred, a description of the event and what action each is taking or proposes to take with respect thereto. The foregoing Officer's Certificate shall state whether the promissory notes constituting part of the Collateral are valid and binding obligations of the obligor thereof and whether any such promissory note has experienced an event of default thereon during the period covered by the Officer's Certificate. (b) The Company will, so long as any of the Securities are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officer's Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. 13 Section 4.5 Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture. The Company (to the extent that it may lawfully do so) hereby expressly waives all beneficial advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 4.6 Liquidation. Neither the Board of Directors nor the shareholders of the Company shall adopt a plan of liquidation that provides for, contemplates or the effectuation of which is preceded by (a) the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company otherwise than substantially as an entirety (Section 5.1 of this Indenture being the Section hereof which governs any such sale, lease, conveyance or other disposition substantially as an entirety) and (b) the distribution of all or substantially all of the proceeds of such sale, lease, conveyance or other disposition and of the remaining assets of the Company to the holders of capital stock of the Company, unless the Company, prior to making any liquidating distribution pursuant to such plan, makes provision for the satisfaction of the Company's Obligations hereunder and under the Securities as to the payment of principal and interest. Section 4.7 Financial Covenants The Company covenants that, so long as any of the Securities are outstanding: (i) the Company will maintain a positive net worth, which includes all equity held by the Company's common and preferred shareholders and the Company's subordinated debt, and (ii) the Company's long term liabilities will not exceed three hundred percent of the Company's shareholders' equity at the end of any fiscal year, or such higher amount as authorized by the Bylaws from time to time. Section 4.8 Restrictions on Dividends and Certain Transactions with Affiliates (a) The Company covenants that, so long as any of the Securities are outstanding, it shall not declare or pay any dividends or other payments of cash or other property to its common or preferred shareholders unless no Default or Event of Default with respect to the Securities then exists or would exist immediately following the declaration or payment of such dividend or other payment. (b) The Company covenants that, so long as any of the Securities are outstanding, it shall not guarantee, endorse or otherwise become liable for any obligations of any of the Company's Affiliates. 14 Section 4.9 Collateral (a) The Company shall from time to time assign, deliver and pledge to the Trustee, as security for the payment of principal and interest on the Securities, mortgage-secured promissory notes or debt securities (including, but not limited to church bonds) issued by churches and other nonprofit religious organizations evidencing loans or investments made by the Company, or cash or cash equivalents, which at all times shall have an aggregate unpaid principal balance of at least 100% of the outstanding principal amount of the Securities (the "Collateral"). Except as described in Section 4.9(g), the Company will not be obligated to assign the mortgages securing the Collateral to the Trustee. If any of the promissory notes or debt securities constituting part of the Collateral shall be in default for in excess of ninety (90) days, the Company shall provide replacement Collateral for such promissory note or debt security sufficient to maintain such 100% coverage without regard to such defaulted promissory note or debt security. The Company shall deliver to the Trustee such documents as the Trustee deems necessary to create a perfected first lien security interest in the Collateral under the applicable provisions of the Uniform Commercial Code. If an Event of Default has occurred, the Company shall deliver to the Trustee such documents as the Trustee deems necessary to enable the Trustee to exercise its remedies with regard to the Collateral, including those necessary for the Trustee to obtain direct payments under the pledged promissory notes and church bonds or to sell or transfer such promissory notes and church bonds to third parties. (b) At any time and from time to time, upon the written request of the Trustee, and at the sole expense of the Company, the Company will promptly and duly execute and deliver, or will promptly cause to be executed or delivered, such further instruments and documents and take such further action as the Trustee may reasonably request for the purpose of obtaining or preserving the full benefits of Collateral, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction. The Company also hereby authorizes the Trustee to file any such financing or continuation statement without the signature of the Company to the extent permitted by applicable law. (c) The Company shall furnish the following to the Trustee in connection with its pledge of the Collateral to the Trustee: (1) Upon delivery of Collateral, 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 pledged promissory notes, debt securities, cash or cash equivalents. (2) A UCC-1 financing statement or equivalent recordable form. (3) At least annually, an Opinion 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 pledged promissory notes or stating that no such action is necessary. (d) In connection with any release or substitution of Collateral assigned to the Trustee under Section 4.9(a), the Company will, subject to Section 4.9(e), deliver to the Trustee the certificate or opinion, if any, required by Section 314(d) of the Trust Indenture Act as to the fair 15 value of any Collateral to be released, dated as of a date not more than sixty (60) calendar days prior to the date of release. (e) Notwithstanding anything contained in this Indenture to the contrary, the provisions of 4.9(d) will not be applicable to any release or substitution of Collateral provided that the release and substitution was performed in or a result of changes in the Company's properties arising in the ordinary course of the Company's business and the aggregate unpaid principal balance of the Collateral after the release or substitution and giving effect to additional Collateral assigned to the Trustee contemporaneously therewith was at least 100% of the outstanding principal amount of the Securities. The Company will deliver to the Trustee semi-annually an Officer's Certificate certifying that all releases and substitutions of Collateral pursuant to this provision during the immediately proceeding six months were in compliance with this subsection. (f) The Company shall not change its name or corporate structure or change the jurisdiction under which it is incorporated or organized without first giving the Trustee at least thirty (30) days prior written notice thereof and shall have delivered to the Trustee all Uniform Commercial Code financing statements and amendments thereto as the Trustee shall request and taken all other actions deemed necessary by the Trustee to continue its perfected status in the Collateral with same or better priority. (g) Upon the request of the Trustee where there is a continuing Event of Default, the Company shall assign to the Trustee such mortgages securing the promissory notes constituting part of Collateral as are identified by the Trustee, in its discretion. (h) The Company covenants that, so long as any of the Securities are outstanding, the Company will not Transfer any part of the Collateral. For purposes of this subsection, the term "Transfer" means a sale, assignment, transfer or other disposition (whether voluntary or by operation of law) of, or the granting or creating of a lien, encumbrance or security interest in, any of the Collateral; provided, that the term "Transfer" does not include (i) a sale or disposition of any of the Collateral which is contemporaneously replaced by other promissory notes, or debt securities, or cash or cash equivalents that are otherwise eligible to constitute part of the Collateral and where the 100% Collateral coverage requirement is at all times met; or (ii) the creation of an involuntary lien against the Collateral that is released or discharged of record or otherwise remedied within sixty (60) days of creation. Section 4.10 Appointment as Attorney-in-Fact. (a) The Company hereby irrevocably constitutes and appoints the Trustee and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in its own name, from time to time in the Trustee's discretion, for the purpose of carrying out the terms of this Indenture relating to the Collateral, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Indenture as they relate to the Collateral and the Trustee's rights and powers with regard thereto; provided that Trustee hereby agrees that it shall not exercise its rights as attorney-in-fact unless an Event of Default shall have 16 occurred. Without limiting the generality of the foregoing, the Company hereby gives the Trustee the power and right, on behalf of the Company, without assent by, but with notice to, the Company, if an Event of Default shall have occurred and be continuing, to do the following: (1) in the name of the Company or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or church bond or with respect to any other Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Trustee for the purpose of collecting any and all such moneys due under any such mortgage insurance or church bond or with respect to any other Collateral whenever payable; (2) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral; (3) (A) to direct any party liable for any payment under any Collateral to make payment of any and all moneys due or to become due thereunder directly to the Trustee or as the Trustee shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any thereof and to enforce any other right in respect of any Collateral; (E) to defend any suit, action or proceeding brought against the Company with respect to any Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Trustee may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Trustee were the absolute owner thereof for all purposes, and to do, at the Trustee's option and the Company's expense, at any time, and from time to time, all acts and things which the Trustee deems necessary to protect, preserve or realize upon the Collateral and the Trustee's liens thereon and to effect the intent of this Loan Agreement, all as fully and effectively as the Company might do; and (4) to execute in the name and file on behalf of the Company assignments of mortgages securing the promissory notes constituting part of Collateral where there is a continuing Event of Default. The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The Company also authorizes the Trustee, at any time and from time to time, to execute any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. 17 (c) The powers conferred on the Trustee are solely to protect the Trustee's interests in the Collateral and shall not impose any duty upon the Trustee to exercise any such powers. The Trustee shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Trustee nor any of its officers, directors, or employees shall be responsible to the Company for any act or failure to act hereunder, except for its own gross negligence or willful misconduct. ARTICLE V. SUCCESSORS Section 5.1 When the Company May Merge, etc. (a) The Company may not consolidate or merge with or into (whether or not the Company is the surviving corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions to another corporation, Person or entity unless (i) the Company is the surviving corporation or the entity or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made is a corporation organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the entity or Person formed by or surviving any such consolidation or merger (if other than the Company) or the entity or Person to which such sale, assignment, transfer, lease, conveyance or other disposition will have been made assumes all the obligations of the Company by execution and delivery of a supplemental indenture in a form reasonably satisfactory to the Trustee; and (iii) immediately after such transaction no Default or Event of Default exists. (b) The Company shall deliver to the Trustee prior to the consummation of the proposed transaction an Officer's Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture. The Trustee shall be entitled to conclusively rely upon such Officer's Certificate and Opinion of Counsel. Section 5.2 Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.1, the successor corporation formed by such consolidation or into or with which the Company, is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person has been named as the Company herein; provided, however, that the Company shall not be released or discharged from the obligation to pay the principal of or interest on the Securities. 18 ARTICLE VI. DEFAULTS AND REMEDIES Section 6.1 Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on a Security when the same becomes due and payable and the Default continues for a period of thirty (30) days; (b) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon a required redemption or otherwise, and the Default continues for a period of thirty (30) days; (c) the Company fails to observe or perform any covenant, condition or agreement on the part of the Company to be observed or performed pursuant to Section 4.6 or 5.1 hereof; (d) the Company defaults in its obligations described in clause (b) or (c) of Section 4.9 and such default continues for a period of sixty (60) days; (e) the Company fails to comply with any of its other agreements or covenants in, or provisions of, the Securities or this Indenture and the Default continues for the period and after the notice specified below; (f) the Company pursuant to or within the meaning of any Bankruptcy Law (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case; (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) admits in writing its inability to pay debts as the same become due; or (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (i) is for relief against the Company in an involuntary case; (ii) appoints a Custodian of the Company or for all or substantially all of its property; (iii) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for one hundred twenty (120) consecutive days. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. A Default under clause (e) of this Section 6.1 is not an Event of Default until the Trustee or the Holders of at least a majority in principal amount of the then outstanding Securities notify the Company of the Default and the Company does not cure the Default or such Default is not waived within thirty (30) days after receipt of the notice. The notice must specify the Default, demand that it be remedied and state that the notice is a "Notice of Default." 19 Section 6.2 Acceleration. If an Event of Default (other than an Event of Default specified in clauses (f) or (g) of Section 6.1) occurs and is continuing, the Trustee by notice to the Company or the Holders of at least a majority in principal amount of the then outstanding Securities by written notice to the Company and the Trustee may declare the unpaid principal of and any accrued interest on all the Securities to be due and payable. Upon such declaration the principal and interest shall be due and payable immediately. If an Event of Default specified in clause (f) or (g) of Section 6.1 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Trustee, or the Holders of a majority in principal amount of the then outstanding Securities by written notice to the Trustee, may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default (except nonpayment of principal or interest that has become due solely because of the acceleration) have been cured or waived. Section 6.3 Other Remedies. (a) If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities or this Indenture, including, without limitations, all rights and remedies available to a secured party under the Uniform Commercial Code. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. Without limiting the generality of the foregoing, the Trustee without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker's board or office of the Trustee or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Trustee shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived or released. The Company further agrees, at the Trustee's request, to assemble the Collateral and make it available to the Trustee at places which the Trustee shall reasonably select, whether at the Company's premises or elsewhere. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition. (b) A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. 20 Section 6.4 Waiver of Past Defaults. The Trustee may waive any past Default or Event of Default without the consent of the Holders, provided that such Default is wholly cured. Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences, and a continuing Default or Event of Default in the payment of the principal of or interest on any Security held by a non-consenting Holder may also be waived upon the consent of the Holders of at least a majority of the principal amount of the then outstanding Securities. Upon actual receipt of any such notice of waiver by a Responsible Officer of the Trustee, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 6.5 Control by Majority. The Holders of a majority in principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it, provided, that indemnification for the Trustee's fees and expenses, in a form reasonably satisfactory to the Trustee, shall have been provided. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders, or that may involve the Trustee in personal liability. Section 6.6 Limitation on Suits. A Holder may pursue a remedy with respect to this Indenture or the Securities only if: (a) the Holder gives to the Trustee written notice of a continuing Event of Default; (b) the Holders of at least a majority in principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within sixty (60) days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such sixty (60) day period the Holders of a majority in principal amount of the then outstanding Securities do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Section 6.7 Rights of Holders to Receive Payment. Except as provided in this Indenture, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates expressed 21 in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Section 6.8 Collection Suit by Trustee. If an Event of Default specified in Section 6.1(a) or (b) occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Securities and interest on overdue principal and, to the extent lawful, interest and such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9 Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders allowed in any judicial proceedings relative to the Company (or any other obligor upon the Securities), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other property payable or deliverable on any such claims and any custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.7 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties which the Holders of the Securities may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10 Priorities. If the Trustee collects any money pursuant to this Article, it shall, subject to the provisions of Article 10 hereof, pay out the money in the following order: (a) First: to the Trustee, its agents and attorneys for amounts due under Section 7.7, including payment of all compensation, expenses and liabilities incurred, and all advances made, if any, by the Trustee and the costs and expenses of collection; 22 (b) Second: to Holders for amounts due and unpaid on the Securities for principal, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal; (c) Third: to Holders for amounts due and unpaid on the Securities interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest; and (d) Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders. Section 6.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE VII. TRUSTEE Section 7.1 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a reasonably prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) Except during the continuance of an Event of Default: (1) The duties of the Trustee shall be determined solely by the express provisions of this Indenture and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon resolutions, statements, reports, documents, orders, certificates, opinions or other instruments furnished to the Trustee and conforming to the requirements of this Indenture. However, in the case of any of the above that are specifically required to be furnished to the Trustee pursuant to 23 this Indenture, the Trustee shall examine them to determine whether they substantially conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph 7.1(b)(2) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.2 Rights of Trustee. (a) The Trustee may conclusively rely upon any document believed by it to be genuine and to have been signed or presented to it by the proper Person. The Trustee need not investigate any fact or matter stated in the document. The Trustee shall have no duty to inquire as to the performance of the Issuers' covenants in Article 4. In addition, the Trustee shall not be deemed to have knowledge of any Default or any Event of Default except any Default or Event of Default of which the Trustee shall have received written notification or obtained actual knowledge. (b) Before the Trustee acts or refrains from acting, it may require an Officer's Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officer's Certificate or Opinion of Counsel. The Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through agents, attorneys, custodians or nominees and shall not be responsible for the misconduct or negligence or the supervision of any agents, attorneys, custodians or nominees appointed by it with due care. 24 (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company shall be sufficient if signed by an Officer of the Company. (f) The Trustee shall not be deemed to have notice of an Event of Default for any purpose under this Indenture unless notified of such Event of Default by the Company or a Holder of the Securities. Section 7.3 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal with the Company or an Affiliate of the Company with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11. Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture or the Securities. It shall not be accountable for the Company's use of the proceeds from the Securities or any money paid to the Company or upon the Company's direction under any provision hereof. It shall not be responsible for any statement or recital herein or any statement in the Securities or any other document in connection with the sale of the Securities or pursuant to this Indenture other than its certificate of authentication. Section 7.5 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders at their addresses as they appear in the Securities Register a notice of the Default or Event of Default within ninety (90) days after it occurs or first becomes known to the Trustee. At least five (5) Business Days prior to the mailing of any notice to Holders under this Section 7.5, the Trustee shall provide the Company with notice of its intent to mail such notice. Except in the case of a Default or Event of Default in payment on any Security, the Trustee may withhold the notice if and so long as the Responsible Officer of the Trustee in good faith determines that withholding the notice would have no material adverse effect on the Holders. Section 7.6 Reports by Trustee to Holders. (a) Within sixty (60) days after December 31 of each calendar year, commencing December 31, 2008, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the 12 months preceding the reporting date, no report need be prepared or transmitted). The Trustee also shall comply with TIA ss. 313(b). The Trustee shall also transmit by mail all reports as required by TIA ss. 313(c). 25 (b) Commencing at the time this Indenture is qualified under the TIA, a copy of each report mailed to Holders under this Section 7.6 (at the time of its mailing to Holders) shall be filed with the SEC and each stock exchange, if any, on which the Securities are listed. The Company shall promptly notify the Trustee if and when the Securities are listed on any stock exchange. Section 7.7 Compensation and Indemnity. (a) The Company shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and its performance of the duties and services required hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. (b) The Company shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration of its duties under this Indenture, except as set forth in paragraph 7.7(d) hereof. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company shall not relieve the Company of its obligations hereunder, except to the extent the Company is prejudiced thereby. The Company shall defend the claim and the Trustee shall reasonably cooperate in such defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. (c) The obligations of the Company under this Section 7.7 shall survive the satisfaction and discharge of this Indenture. (d) The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through its own negligence or bad faith. (e) To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on a Payment Date scheduled to occur within ten (10) days of the Trustee's intended exercise of such lien. Such lien shall survive the satisfaction and discharge of this Indenture. The Trustee shall provide the Company with notice of its exercise of the lien provided for herein concurrently with its exercise of such lien. (f) When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.1(e) or (f) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. 26 Section 7.8 Replacement of Trustee. (a) A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.8. (b) Upon appointment of a successor Trustee, the Trustee may resign and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; (4) the Trustee becomes incapable of acting as Trustee under this Indenture; or (5) the Company so elects, provided such replacement Trustee is qualified and reasonably acceptable. (c) If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. (d) If a successor Trustee does not take office within thirty (30) days after notice that the Trustee has been removed, the Company may appoint a successor Trustee. (e) If the Trustee after written request by any Holder fails to comply with Section 7.10, such Holder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (f) A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to all Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided all sums owing to the Trustee hereunder have been paid and subject to the lien provided for in Section 7.7. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring Trustee. Section 7.9 Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further 27 act shall be the successor Trustee. The Trustee shall provide notice of any event described in this Section to the Company prior to or as soon as practical after the occurrence thereof. Section 7.10 Eligibility; Disqualification. (a) There shall at all times be a Trustee hereunder which shall be a corporation or association organized and doing business under the laws of the United States of America or of any state or territory thereof or of the District of Columbia authorized under such laws to exercise corporate trustee power, shall be subject to supervision or examination by Federal, state, territorial or District of Columbia authority and shall have a combined capital and surplus of at least $5,000,000 as set forth in its most recent published annual report of condition. (b) This Indenture shall always have a Trustee who satisfies the requirements of TIAss. 310(a)(1) and (2). The Trustee is subject to TIAss. 310(b). Section 7.11 Preferential Collection of Claims Against Company. The Trustee is subject to TIA ss. 311(a), excluding any creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or been removed shall be subject to TIA ss. 311(a) to the extent indicated therein. ARTICLE VIII. DISCHARGE OF INDENTURE Section 8.1 Termination of Company's Obligations. (a) This Indenture shall cease to be of further effect (except that the Company's obligations under Sections 7.7 and 8.4, and the Company's, Trustee's and Paying Agent's obligations under Section 8.3 shall survive) when all outstanding Securities have been paid in full and the Company has paid all sums payable by the Company hereunder. In addition, the Company may terminate all of its obligations under this Indenture if: (1) the Company irrevocably deposits in trust with the Trustee or at the option of the Trustee, with a trustee reasonably satisfactory to the Trustee and the Company under the terms of an irrevocable trust agreement in form and substance satisfactory to the Trustee, money or U.S. Government Obligations sufficient to pay principal and interest on the Securities to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder, provided that (i) the trustee of the irrevocable trust shall have been irrevocably instructed to pay such money or the proceeds of such U.S. Government Obligations to the Trustee and (ii) the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to the payment of said principal and interest with respect to the Securities; (2) the Company delivers to the Trustee an Officer's Certificate stating that all conditions precedent to satisfaction and discharge of this Indenture have been complied with; and 28 (3) no Event of Default or event (including such deposit) which, with notice or lapse of time, or both, would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit. Then, this Indenture shall cease to be of further effect (except as provided in this paragraph), and the Trustee, on demand of the Company, shall execute proper instruments acknowledging confirmation of and discharge under this Indenture. The Company may make the deposit only if Article X hereof does not prohibit such payment. However, the party's obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 4.1, 4.2, 4.3, 7.7, 7.8, 8.3 and 8.4 shall survive until the Securities are no longer outstanding. Thereafter, only the Company's obligations in Sections 7.7 and 8.4 and the Company's, Trustee's and Paying Agent's obligations in Section 8.3 shall survive. (b) After such irrevocable deposit made pursuant to this Section 8.1 and satisfaction of the other conditions set forth herein, the Trustee upon written request shall acknowledge in writing the discharge of the Company's obligations under this Indenture except for those surviving obligations specified above. (c) In order to have money available on a payment date to pay principal or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest at least one Business Day before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. Section 8.2 Application of Trust Money. The Trustee or a trustee satisfactory to the Trustee and the Company shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.1. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. Section 8.3 Repayment to Company. (a) The Trustee and the Paying Agent shall promptly pay to the Company upon written request any excess money or securities held by them at any time. All money deposited with the Trustee pursuant to Section 8.1 (and held by it or the Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon request. (b) The Trustee and the Paying Agent shall pay to the Company upon written request any money held by them for the payment of principal or interest that remains unclaimed for two years after the right to such money has matured; provided, however, that the Company shall cause notice of such payment to be mailed to each Holder entitled thereto no less than thirty (30) days prior to such repayment. After payment to the Company, Holders entitled to the money must look to the Company for payment as unsecured general creditors unless an abandoned property law designates another Person. If money is delivered to the Company pursuant to this Section 8.3(b), all liability of the Trustee and the Paying Agent with respect to such money shall cease. 29 Section 8.4 Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 8.2 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money or U.S. Government Obligations in accordance with Section 8.2; provided, however, that if the Company has made any payment of interest on or principal of any Securities because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment, as long as no money is owed to the Trustee by the Company, from the money or U.S. Government Obligations held by the Trustee or Paying Agent. ARTICLE IX. AMENDMENTS Section 9.1 Without Consent of Holders. The Company and the Trustee may amend this Indenture or the Securities without the consent of any Holder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Section 5.1; (c) to make any change that would provide any additional rights or benefits to Holders of Securities or that does not adversely affect the legal rights hereunder of any Holder; (d) to increase the aggregate dollar amount of Securities which may be outstanding under this Indenture; (e) make any change in Section 3.2; provided, however, that no such change shall adversely affect the rights of any outstanding Security; (f) to comply with any requirements of the SEC in connection with the qualification of this Indenture under the TIA or any requirements of state securities regulators imposed in connection with the qualification of the Indenture or the Securities under state law; or (g) to make any change necessary to maintain the Company's status as a real estate investment trust. Section 9.2 With Consent of Holders. (a) The Company and the Trustee may amend this Indenture or the Securities with the written consent of the Holders of at least a majority in principal amount of the then 30 outstanding Securities. The Holders of a majority in principal of the then outstanding Securities may also waive any existing default or compliance with any provision of this Indenture or the Securities. (b) It shall not be necessary for the consent of the Holders under this Section to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. Section 9.3 Compliance with Trust Indenture Act. If at the time this Indenture shall be qualified under the TIA, every amendment to this Indenture or the Securities shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 9.4 Revocation and Effect of Consents. (a) Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if notation of the consent is not made on any Security. An amendment or waiver becomes effective in accordance with its terms and thereafter binds every Holder. (b) The Company may fix a record date for determining which Holders must consent to such amendment or waivers. If the Company fixes a record date, the record date shall be fixed at (i) the later of thirty (30) days prior to the first solicitation of such consent or the date of the most recent list of Holders furnished to the Trustee prior to such solicitation pursuant to Section 2.5, or (ii) such other date as the Company shall designate. Section 9.5 Notation on or Exchange of Securities. The Trustee may place an appropriate notation about an amendment or waiver on any Security, if certificated, or any Account statement. Failure to make any notation or issue a new Security shall not affect the validity and effect of such amendment or waiver. Section 9.6 Trustee to Sign Amendments, etc. The Trustee shall sign any amendment or supplemental indenture authorized pursuant to this Article 9 if, in the Trustee's reasonable discretion, the amendment does not adversely affect the rights, duties, liabilities or immunities of the Trustee. If it does, the Trustee may, but need not, sign it. In signing or refusing to sign such amendment or supplemental indenture, the Trustee shall be entitled to receive, if requested, an indemnity reasonably satisfactory to it and to receive and, subject to Section 7.1, shall be fully protected in relying upon, an Officer's Certificate and an Opinion of Counsel (or written advice of counsel) as conclusive evidence that such amendment or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company in accordance with its terms. 31 ARTICLE X. MISCELLANEOUS Section 10.1 Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA ss. 318(c), the imposed duties shall control. Section 10.2 Notices. (a) Any notice, instruction, direction, request or other communication by the Company, the Trustee or any Holder to the others is duly given if in writing and delivered in person or mailed by first-class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company: AMERICAN CHURCH MORTGAGE COMPANY 10237 Yellow Circle Drive Minnetonka, MN 55343 Attention: President Fax: (952) 945-9433 If to the Trustee: HERRING BANK Corporate Trust Department 1608 S. Polk St. Amarillo, TX 79102 Fax: (806) 378-6655 (b) The Company or the Trustee by notice to the Company and the Trustee may designate additional or different addresses for subsequent notices or communications. (c) All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. (d) Any notice or communication to a Holder shall be mailed by first-class mail, certified or registered, return receipt requested, to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. (e) If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. 32 (f) If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. Section 10.3 Communication by Holders with Other Holders. Holders may communicate pursuant to TIA ss. 312(b) with other Holders with respect to their rights under this Indenture or the Securities. The Trustee shall provide information regarding other Holders to any Holder only as required by TIA ss. 312(b). The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA ss. 312(c). Section 10.4 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officer's Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.5) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 10.5) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been complied with. Section 10.5 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA ss. 314(a)(4)) shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion whether such covenant or condition has been complied with; and (d) a statement whether, in the opinion of such Person, such condition or covenant has been complied with. Section 10.6 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 33 Section 10.7 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in the State of Minnesota or at a place of payment are authorized or obligated by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 10.8 No Recourse Against Others. No director, officer, employee, agent, manager or stockholder of the Company as such, shall have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Security waives and releases all such liability. Section 10.9 Duplicate Originals. The parties may sign any number of copies of this Indenture. One signed copy is enough to prove this Indenture. Section 10.10 Governing Law. THE INTERNAL LAW OF THE STATE OF MINNESOTA SHALL GOVERN THIS INDENTURE AND THE SECURITIES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. Section 10.11 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 10.12 Successors. All agreements of the Company in this Indenture and the Securities shall bind its successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 10.13 Severability. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.14 Counterpart Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 34 Section 10.15 Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions thereof. [Remainder of page intentionally left blank.] 35 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, as of the day and year first written above. AMERICAN CHURCH MORTGAGE COMPANY By: ---------------------------------- Philip J. Myers, President STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing was acknowledged before me this ____ day of ________, 2008, by Philip J. Myers, in his capacity as President of American Church Mortgage Company, a Minnesota corporation. - --------------------- Notary Public HERRING BANK, as Trustee By: -------------------------------- Name: Catana Gray Title: Vice-President STATE OF TEXAS ) ) ss. COUNTY OF POTTER ) The foregoing was acknowledged before me this ____ day of ________, 2008, by Catana Gray, in her capacity as Vice-President of Herring Bank. - -------------------------- Notary Public {SIGNATURE PAGE TO INDENTURE} 36 EX-5 5 acmc091072_ex5.txt FORM OF OPINION LETTER AS TO THE LEGALITY OF THE SECURITIES EXHIBIT 5 [WINTHROP WEINSTINE LOGO] _____________ __, 2009 Philip T. Colton (612) 604-6729 pcolton@winthrop.com American Church Mortgage Company 10237 Yellow Circle Drive Minnetonka, MN 55343 RE: American Church Mortgage Company Ladies and Gentlemen: We have acted as counsel to you in connection with the preparation and filing by you of a Registration Statement on Form S-11 (the "Registration Statement"), containing a Prospectus (the "Prospectus"), under the Securities Act of 1933, as amended (the "Act"), with respect to the registration of $20,000,000 Series C Secured Investor Certificates (the "Certificates") of American Church Mortgage Company, a Minnesota corporation (the "Company"). We have reviewed the Registration Statement, including the Prospectus, which provides that it will be supplemented in the future by one or more supplements to the Prospectus (each a "Prospectus Supplement"). The Prospectus as supplemented by various Prospectus Supplements will provide for the issuance and sale of the Certificates. The Certificates will be issued pursuant to one or more indentures in the form filed as an exhibit to the Registration Statement, as amended or supplemented from time to time (each, an "Indenture"), between the Company, as obligor, and a trustee chosen by the Company and qualified to act as such under the Trust Indenture Act of 1939, as amended (each, a "Trustee"). In addition, we have examined such other documents and have reviewed such questions of law as we have considered necessary and appropriate for the purposes of our opinion set forth below. In rendering our opinion, we have assumed the authenticity of all documents submitted to us as originals, the genuineness of all signatures and the conformity to authentic originals of all documents submitted to us as copies. We have also assumed the legal capacity for all purposes relevant hereto of all natural persons and, with respect to all parties to agreements or instruments relevant hereto other than the Company, that such parties had the requisite power and authority (corporate or otherwise) to execute, deliver and perform such agreements or instruments, that such agreements or instruments have been duly authorized by all requisite action (corporate or otherwise), executed and delivered by such parties and that such agreements or instruments are the valid, binding and enforceable obligations of such parties. As to questions of fact material to our opinion, we have relied upon certificates of officers of the Company and of public officials. Based on the foregoing, we are of the opinion that the Certificates are duly and validly authorized for issuance and, when issued and paid for, as contemplated by the Registration Statement, the Prospectus and the related Prospectus Supplement(s), will be validly issued, fully paid and non-assessable. We are also of the opinion that when the Certificates are then issued and sold as contemplated by the Registration Statement, the Prospectus and the related Prospectus Supplement(s) and the Indenture, which is governed by the laws of the state of Minnesota, the Certificates will constitute valid and binding obligations of the Company. American Church Mortgage Company ______ __, 2009 Page 2 The foregoing opinions are subject to: (i) the effect of bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors; (ii) general principles of equity (whether considered in a proceeding in equity or at law); and (iii) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of, or contribution to, a party with respect to a liability where such indemnification or contribution is contrary to public policy. We express no opinion concerning the enforceability of any waiver of rights or defenses with respect to stay, extension or usury laws, and we express no opinion with respect to whether acceleration of the Certificates may affect the collectibility of any portion of the stated principal amount thereof which might be determined to constitute unearned interest thereon. We assume for purposes of this opinion that the Company will remain duly organized, validly existing and in good standing under Minnesota law. To the extent that the obligations of the Company under an Indenture may be dependent thereon, we assume for purposes of this opinion that such Indenture has been duly executed and delivered by the Company, that the Trustee for each Indenture is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; that the Trustee is duly qualified to engage in the activities contemplated by the applicable Indenture; that the applicable Indenture has been duly authorized, executed and delivered by the Trustee and constitutes a legally valid, binding and enforceable obligation of the Trustee, enforceable against the Trustee in accordance with its terms; that the Trustee is in compliance, generally and with respect to acting as Trustee under the applicable Indenture, with all applicable laws and regulations; and that the Trustee has the requisite organizational and legal power and authority to perform its obligations under the applicable Indenture. We consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our name under the heading "LEGAL MATTERS" in the Prospectus. In giving such consent, we do not hereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations of the Securities and Exchange Commission promulgated under the Act. Very truly yours, WINTHROP & WEINSTINE, P.A. EX-8 6 acmc091072_ex8.txt OPINION LETTER OF WINTHROP & WEINSTINE, P.A. Exhibit 8 [WINTHROP WEINSTINE LOGO] _____________ __, 2009 American Church Mortgage Company 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 Re: American Church Mortgage Company Ladies and Gentlemen: We have acted as special United Stated federal income tax counsel to American Church Mortgage Company, a Minnesota corporation (the "Company"), with respect to the preparation and filing by the Company of a Registration Statement on Form S-11 (the "Registration Statement"), containing a prospectus (the "Prospectus"), under the Securities Act of 1933, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder (collectively the "1933 Act"), with respect to the registration of $20,000,000 of Series C Secured Investor Certificates (the "Certificates") of the Company. In connection with rendering the opinions expressed below, we have examined originals (or copies identified to our satisfaction as true copies of the originals) of the following documents (collectively, the "Reviewed Documents"): (1) the Company's Articles of Incorporation (the "Company Charter"); (2) the Company's Bylaws (the "Company Bylaws"); (3) the Registration Statement; and (4) such other documents that the Company may have presented to us from time to time. In addition, we have relied upon the factual representations contained in the Company's certificate, dated as of the date hereof (the "Officer's Certificate"), executed by a duly appointed officer of the Company, setting forth certain representations relating to the organization and operation of the Company. For purposes of our opinions, we have not made an independent investigation of the information set forth in the documents that we have reviewed or on which we have relied. We consequently have assumed that the information, including all representations and statements of a factual nature, presented in such documents or otherwise furnished to us by the Company accurately and completely describes all material information relevant to our opinions and that all of the obligations imposed by any such documents on the parties thereto have been, and will be, American Church Mortgage Company _____________ __, 2009 Page 2 performed or satisfied in accordance with their terms. Any representation or statement in any such document or otherwise furnished to us that has been made "to the best of our knowledge" or otherwise similarly qualified is assumed to be correct and complete. In the course of our representation of the Company, no information has come to our attention that would cause us to question, in a material way, the accuracy or completeness of the documents that we have reviewed or on which we have relied or the information, including representations and statements, that is contained in such documents or otherwise furnished to us. Any alteration of the information that is set forth in the documents that we have reviewed or on which we have relied or the information that otherwise was furnished to us may adversely affect our opinions. In our review, we have assumed the genuineness of all signatures, the proper execution of all documents, the legal capacity of natural persons executing such documents, the authenticity of all documents that we have reviewed or on which we have relied as originals, the conformity to originals of documents that we have reviewed or on which we have relied as copies, and the authenticity of the originals from which any copies were made. We also have assumed that the Company or any entities in which it holds, or will hold, direct or indirect ownership interests will not take any action after the date of this opinion letter that would alter the information upon which the opinions set forth in this opinion letter are based. In rendering these opinions, we have assumed that the transactions contemplated by the Reviewed Documents will be consummated in accordance with the terms and provisions of such documents, and that such documents accurately reflect the material facts of such transactions. In addition, the opinions are based on the correctness of the following specific assumptions: (i) The Company will be operated in the proposed manner described in the Company Charter, the Company Bylaws, and the Registration Statement, and all terms and provisions of such agreements and documents will be complied with by all parties thereto; and (ii) The Company is a duly formed corporation under the laws of the State of Minnesota. The opinions set forth in this opinion letter are based on relevant provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the regulations promulgated thereunder by the United States Department of the Treasury (the "Regulations") (including temporary Regulations), and interpretations of the foregoing as expressed in court decisions, the legislative history, and existing administrative rulings and practices of the Internal Revenue Service (the "IRS") (including the IRS's practices and policies in issuing private letter rulings, which are not binding on it except with respect to the taxpayer that receives a private letter ruling), all as of the date hereof. It should be noted that the Code, the Regulations, and judicial decisions and administrative interpretations of both the Code and the Regulations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date of this opinion letter in any of the foregoing bases for our opinions could affect them. American Church Mortgage Company _____________ __, 2009 Page 3 It also must be noted that the qualification and taxation of the Company as a REIT will depend upon its ability to meet annually, based on its actual annual operating results, distribution levels, and diversity of share ownership, the various REIT qualification requirements imposed under Sections 856 through 860 of the Code and the Regulations. No assurances can be given that the actual, annual results of the Company for any one taxable year will satisfy all of REIT qualification requirements under Sections 856 though 860 of the Code for such taxable year. Based upon and subject to the foregoing, it is our opinion that: 1. 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. The Company's proposed method of operation, as described in the Prospectus, will permit the Company to satisfy the requirements for qualification and taxation as a REIT under Sections 856 through 860 of the Code with respect to 2009 and subsequent taxable years. The Company's status as REIT under the Code with respect to 2009 and each subsequent taxable year, however, will depend upon the Company's actually satisfying the REIT requirements of Sections 856 through 860 of the Code with respect to 2009 and each subsequent taxable year. Thus, because the Company's satisfaction of the requirements of Sections 856 through 860 of the Code will depend upon future events in 2009 and each subsequent taxable year, including the final determination of the Company's financial and operating results for 2009 and each subsequent taxable year, we cannot opine that the Company actually will satisfy the requirements under Code Sections 856 though 860 to qualify as a REIT with respect to 2009 or any subsequent taxable year. We will not review the annual results of the Company to determine whether the Company actually met the REIT qualification requirements with respect to a taxable year. 2. The discussion in the Registration Statement under the heading "Federal Income Tax Consequences Associated with the Certificates" to the extent that it constitutes matters of federal income tax law or legal conclusions relating thereto, is our opinion as to the material United States federal income tax consequences of the acquisition, ownership, and disposition of the Certificates. The foregoing opinions are limited to the matters specifically discussed herein, which are the only matters to which the Company has requested our opinions. Other than as expressly stated above, we express no opinion on any issue relating to the Company or to any investment therein, including, except as set forth above, the tax consequences, whether federal, state, local, or foreign, of the acquisition, ownership, and disposition of the Certificates. We are furnishing this opinion letter to the Company solely in connection with the Registration Statement relating to the Certificates. Neither the Company for any other purpose, any debt investor with respect to the Company (other than holders of the Certificates with respect to the Certificates only), nor any equity investor with respect to the Company may rely on this opinion letter. American Church Mortgage Company _____________ __, 2009 Page 4 We assume no obligation to advise the Company of any changes in the foregoing subsequent to the date of this opinion letter, and we are not undertaking to update this opinion letter from time to time. The Company should be aware that an opinion of counsel represents only counsel's best legal judgment, that the opinion has no binding effect or official status of any kind, and that no assurance can be given either that the IRS may not take contrary positions or that a court considering the issues would not hold otherwise. We consent to the use of our name wherever it appears in the Registration Statement with respect to the discussion of the material United States federal income tax consequences of the acquisition, ownership, and disposition of the Certificates and to the filing of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act, and we do not admit that we are "experts" within the meaning of such term as used in the 1933 Act with respect to any part of the Registration Statement, including this opinion letter as an exhibit or otherwise. Very truly yours, WINTHROP & WEINSTINE, P.A. A Shareholder EX-10.5 7 acmc091072_ex10-5.txt FORM OF SECURITY AGREEMENT EXHIBIT 10.5 SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Security Agreement") is made as of ____________ __, 2008, by American Church Mortgage Company, a Minnesota corporation (the "Company"), in favor of Herring Bank, a state banking institution, as trustee under the Indenture described below (the "Trustee"). WHEREAS, the Company has entered into an Indenture dated as of the approximate date hereof with the Trustee (the "Indenture"), whereby the Trustee has agreed to act as the indenture trustee under the Trust Indenture Act of 1939 for the benefit of the holders of those certain Series C Secured Investor Certificates issued by the Company (the "Securities"); and WHEREAS, under the terms of the Indenture the Company has agreed to pledge certain collateral as security for the payment of principal and interest on the Securities. NOW, THEREFORE, the Company agrees with Trustee as follows: 1. Security Interest. The Company hereby pledges to, and grants to the Trustee a security interest (herein called the "Security Interest") in, the Collateral (as described in Section 2 below) to secure the payment and performance of the following debts, liabilities and obligations of the Company (such debts, liabilities and obligations being herein collectively referred to as the "Obligations"): (a) the payment of principal and interest on the Securities, as required under the terms and conditions of the Securities; (b) the Company's obligations under the Indenture, and this Security Agreement; and (c) all amounts owed under any modifications, renewals or extensions of any of the foregoing Obligations. 2. Collateral. As used herein, the term "Collateral" means the following property: (a) the promissory notes, church bonds, and investment property described in Schedule A; (b) such Additional Notes that are designated by the Company as Collateral pursuant to Section 3 below; (c) any Substituted Notes that are substituted by Company for existing Collateral pursuant to Section 4 below; (d) supporting obligations of the Notes described in (a), (b), and (c) above; and (e) proceeds of any and all of the foregoing. Each of the items described in (a), (b), and (c) above is referred to herein as a "Note" and the all of such items are collectively referred to herein as the "Notes." The Company shall within five (5) business days of the date hereof, and in any event prior to the sale of any Securities, deliver to the Trustee the Notes described in Schedule A, together with endorsements by the Company in blank for such Notes. 3. Additional Collateral. Subject to the terms of Section 4.9 of the Indenture, the Company may at any time designate additional promissory notes or similar instruments or investment property ("Additional Notes") as Collateral for the Obligations. The Company may make such designation by delivering (a) the original Additional Notes and (b) an endorsement in blank for the Additional Notes to the Trustee and upon the Trustee's receipt, the Additional Notes shall be deemed to be Collateral. 4. Substitution of Collateral. (a) Provided that no Event of Default has occurred and is continuing, the Company shall have the right (and, under the terms of the Indenture, in certain circumstances the obligation) to substitute promissory notes or other similar instruments or investment property that meet the terms and conditions of Section 4.9 of the Indenture ("Substituted Notes") for Notes previously pledged as Collateral ("Released Notes"). (b) The Company may make such a substitution by delivering to the Trustee: (i) a written notice to the Trustee executed by an officer of the Company which contains (A) a description of the Substituted Note(s), (B) a statement that such Substituted Note has been pledged by the Company as Collateral under this Security Agreement, (C) a certification by the Company that the representations and warranties regarding Collateral contained in Section 6 below are true with respect to the Substituted Note, (D) a description of the Notes to be released from the Security Interest (i.e., a description of the Released Note(s)), and (E) a certification by the Company that upon the release of the Released Notes from the Security Interest, the value of the Collateral shall be at least 100% of the aggregate principal amount of the Securities then outstanding (the "Minimum Value"); (ii) the original Substituted Note(s); and (iii) an endorsement in blank for the Substituted Notes. (c) So long as the aggregate value of the Collateral after the release of the Released Notes is at least the Minimum Value, the value of the Substituted Note(s) being substituted for the Released Note(s) may be less than the value of the Released Note(s). (d) Upon the Trustee's receipt of the documents described in Section 4(b), the Substituted Note(s) shall be deemed to be Collateral and the Released Note(s) shall be deemed to be released from the Security Interest and shall no longer be subject to the terms of this Security Agreement. The Trustee shall promptly thereafter return the -2- Released Note(s) to the Company, together with any endorsement of such Released Note(s) made by the Company. (e) In the event that the Trustee has filed (or has caused to be filed) a financing statement in order to perfect the Security Interest in a Note that has become a Released Note, the Trustee shall prepare and file a financing statement amendment which releases the Released Note from the Security Interest and the Security Agreement (the "Release"). The Trustee hereby authorizes the Company to file a copy of the Release in the appropriate filing office if the Trustee has not filed the Release within ten (10) business days of the Trustee's receipt of the documents described in Section 4(b). This authorization is intended to comply with the terms of Minn. Stat. Section 336.9-509 and no further writing is required as evidence of the Trustee's grant of authority to the Company to file the Release. 5. Representations, Warranties and Agreements. The Company represents, warrants and agrees that: (a) The Company is a corporation organized under the laws of the state of Minnesota; (b) The Company's exact legal name is as set forth in the first paragraph of this Security Agreement; (c) This Agreement has been duly and validly authorized by all necessary corporate action and the person executing this Agreement on behalf of the Company has the requisite authority to act for the Company. (d) Until the Obligations are paid in full, the Company will: (i) preserve its corporate existence and not, in one transaction or a series of related transactions, merge into or consolidate with any other entity, or sell all or substantially all of its assets; (ii) not change its name, its type of organization, the state of its incorporation or organization, or its organizational identification number; and (iii) not change its corporate name without providing the Trustee with thirty (30) days' prior written notice. 6. Representations, Warranties and Agreements With Respect to Collateral. The Company represents, warrants and agrees that: (a) The Company has (or will have at the time the Company acquires rights in Collateral hereafter arising) absolute title to each item of Collateral free and clear of all claims, security interests, liens, encumbrances, and restrictions on transfer or pledge except the Security Interest and will defend the Collateral against all claims or demands of all persons other than the Trustee. Except as provided in the Indenture, the Trustee -3- does not authorize, and the Company agrees not to (i) make any sales of any of the Collateral; or (ii) grant any other security interest in the Collateral. (b) Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral is (or will be when arising or issued) the valid genuine and legally enforceable obligation, subject to no defense, set-off or counterclaim (other than those arising in the ordinary course of business) of the account debtor or other obligor named therein or in the Company's records pertaining thereto as being obligated to pay such obligation. The Company will neither agree to any material modification or amendment nor agree to any cancellation of any such obligation without the Trustee's prior written consent, and will not subordinate any such right to payment to claims of other creditors of such account debtor or other obligor. (c) The Company covenants that it will: (i) promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest; (ii) keep all Collateral free and clear of all security interests, liens and encumbrances except the Security Interest; (iii) at all reasonable times, permit the Trustee or its representatives to examine or inspect any Collateral, wherever located, and to examine, inspect and copy the Company's books and records pertaining to the Collateral and its business and financial condition and to send and discuss with account debtors and other obligors requests for verifications of amounts owed to the Company; (iv) upon the request of the Trustee, provide photocopies of any of the Collateral (or, to the extent that such Collateral is not of a tangible nature, photocopies of documentation evidencing the Collateral); (v) promptly notify the Trustee of any loss of or material damage to any Collateral or of any adverse change, known to the Company, in the prospect of payment of any sums due on or under any instrument, chattel paper, or account constituting Collateral; (vi) not use or keep any Collateral, or permit it to be used or kept, for any unlawful purpose or in violation of any federal, state or local law, statute or ordinance; and If the Company at any time fails to perform or observe any agreement contained in this Section 6(c), and if such failure shall continue for a period of ten (10) calendar days after the Trustee gives the Company written notice thereof, the Trustee may (but need not) perform or observe such agreement on behalf and in the name, place and stead of the Company (or, at the Trustee's option, in the Trustee's own name) and may (but need not) take any and all other actions which the Trustee may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens, or -4- encumbrances, the performance of obligations under contracts or agreements with account debtors or other obligors, the procurement and maintenance of insurance, and the procurement of repairs, transportation or insurance); and, except to the extent that the effect of such payment would be to render any loan or forbearance of money usurious or otherwise illegal under any applicable law, the Company shall thereupon pay the Trustee within fifteen (15) business days of the Company's receipt of the Trustee's demand, the amount of all moneys expended and all costs and expenses (including reasonable attorneys' fees for any purpose relating to the enforcement of the Trustee's rights hereunder including consultation, drafting documents, sending notices and/or instituting, prosecuting or defending litigation or arbitration) incurred by the Trustee in connection with or as a result of the Trustee's performing or observing such agreements or taking such actions, together with interest thereon from the date expended or incurred by the Trustee at the highest rate then applicable to any of the Obligations. 7. Perfection of Security Interests. The Trustee shall have the right to file, from time to time, such financing statements as the Trustee may reasonably require in order to perfect the Security Interest. To the extent permitted by law, the Company hereby authorizes and empowers the Trustee to file one or more financing statements and any other documents or instruments as are necessary to perfect the Security Interest, all without the signature or prior consent of the Company. 8. Events of Default. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (a) an "Event of Default" (as defined in the Indenture) shall have occurred and is continuing beyond any applicable grace or cure period; (b) any representation or warranty by the Company set forth in this Agreement shall prove materially false or misleading; or (c) the Trustee shall receive at any time after the date hereof an official report from the Secretary of State of the State of Minnesota or any other state where the Collateral is located indicating that the Security Interest is not prior to all other security interests or other interests reflected in the report. 9. Remedies upon Event of Default. Upon the occurrence of an Event of Default under Section 8 and at any time thereafter, the Trustee may exercise any one or more of the following rights and remedies: (a) require the prompt delivery to the Trustee of an assignment of any mortgage or other supporting obligation in a form sufficient for recording of such assignment; (b) notify any account debtor that the Company's right to payment has been assigned or transferred to the Trustee and that all amounts shall be paid directly to the Trustee; (c) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including but not limited to the -5- right to take possession of any Collateral, proceeding without judicial process (without a prior hearing or notice thereof, which the Company hereby expressly waives), and the right to sell, lease or otherwise dispose of any or all of the Collateral, and in connection therewith, the Trustee may require the Company to make the Collateral available to the Trustee at a place to be designated by the Trustee which is reasonably convenient to both parties, and if notice to the Company of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least ten (10) calendar days prior to the date of intended disposition or other action; or (d) exercise or enforce any or all other rights or remedies available to the Trustee by law or agreement against the Collateral, against the Company or against any other person or property. Whether or not an Event of Default has occurred, the Company shall pay when due or reimburse the Trustee on demand for all costs of collection of any of the Obligations and all other out-of-pocket expenses incurred by the Trustee in connection with the creation, perfection, satisfaction, protection, defense or enforcement of the Security Interest or the creation, continuance, protection, defense or enforcement of this Security Agreement or any or all of the Obligations, including but not limited to: (i) filing fees; (ii) costs of foreclosure; (iii) costs of obtaining money damages; and (iv) reasonable attorney's fees for any purpose relating to the enforcement of this Security Agreement including consultation, drafting documents, sending notices and/or instituting, prosecuting or defending litigation or arbitration. If during a sale of Collateral following an Event of Default, the Trustee sells any of the Collateral upon credit, the Company will be credited only with payments actually made by the purchaser, received by the Trustee and applied to the indebtedness of such purchaser. In the event the purchaser fails to pay for the Collateral, the Trustee may resell the Collateral and the Company shall be credited with the proceeds of the Sale. To the extent permitted under applicable law, the Trustee may disclaim any warranty of title or any other warranty with respect to any Collateral sold by the Trustee following an Event of Default. 10. Notice. (a) Any notice, document or other communication from one party to the other is duly given if in writing and delivered in person or mailed by first-class mail (registered or certified, return receipt requested), telex, telecopier or overnight air courier guaranteeing next day delivery, to the other's address: If to the Company: AMERICAN CHURCH MORTGAGE COMPANY 10237 Yellow Circle Drive Minnetonka, MN 55343 Attention: President Fax: (952) 945-9433 -6- If to the Trustee: HERRING BANK 1608 S. Polk St. Amarillo, TX 79102 Attention: Corporate Trust Department Fax:(806) 378-6655 (b) All notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five (5) business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and the next business day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery. (c) Each party, by notice to the other, may designate additional or different addresses for subsequent notices or communications. 11. Miscellaneous. (a) This Agreement can be waived, modified, amended, terminated or discharged and the Security Interest can be released, only explicitly in a writing signed by the Trustee. A waiver signed by the Trustee shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of the Trustee's rights or remedies. (b) All rights and remedies of the Trustee shall be cumulative and may be exercised singularly or concurrently, at the Trustee's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. (c) This Agreement shall be binding upon and inure to the benefit of the Company and the Trustee and their respective heirs, representatives, successors and assigns and shall take effect when signed by the Company and delivered to the Trustee, and the Company waives notice of the Trustee's acceptance hereof. The Trustee may execute this Agreement if appropriate for the purpose of filing, but the failure of the Trustee to execute this Agreement shall not affect or impair the validity or effectiveness of this Agreement. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. (d) To facilitate execution, this Agreement may be executed in as many separate counterparts as may be convenient or required. It shall not be necessary that the signature of each party, or that the signature of all persons required to bind any party, appear on each counterpart. Each counterpart when so executed and delivered shall be deemed to be an original, and all counterparts taken together shall constitute but one and the same instrument. It shall not be necessary in making proof of this Agreement to produce or account for more than a single counterpart containing the respective signatures of, or on behalf of, each of the parties, hereto. Signature pages from any -7- counterpart may be detached from the counterpart and attached with other signature pages to a single copy of the Agreement to physically form one document. (e) This Agreement shall be governed by the internal laws of the State of Minnesota. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. Any term not defined herein shall have, to the extent applicable, the definition set forth in Chapter 336.9 of Minnesota Statutes. [Remainder of page intentionally left blank.] -8- IN WITNESS WHEREOF, the Company and the Trustee hereby execute this Security Agreement as of the date first written above. COMPANY: AMERICAN CHURCH MORTGAGE COMPANY By: ----------------------------------- Philip J. Myers, President TRUSTEE: HERRING BANK By: ----------------------------------- Catana Gray Vice President -9- SCHEDULE A (Initial Collateral) Date of Original Principal Outstanding Principal Note Loan Recipient Value Balance as of , 2008 - --------- -------------- ------------------ ---------------------- ------------------ ---------------------- $ $ EX-21 8 acmc091072_ex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of American Church Mortgage Company None. EX-23.2 9 acmc091072_ex23-2.txt CONSENT OF AUDITOR [BHZ LOGO] CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the inclusion of our report dated March 28, 2008, except for as to Note 9 which is as of March 4, 2009, on the 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 in Form S-11 Registration Statement of American Church Mortgage Company dated on or about March 9, 2009 and to the reference to our Firm under the caption "Experts" in the Prospectus included therein. /s/Boulay, Heutmaker, Zibell & Co. P.L.L.P. Certified Public Accountants Minneapolis, Minnesota March 9, 2009 EX-25 10 acmc091072_ex25.txt STATEMENT OF ELIGIBILITY OF TRUSTEE EXHIBIT 25 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) ---------------------------------------------------------- HERRING BANK (Exact name of Trustee as specified in its charter) 75-0330569 (I.R.S. Employer Identification Number) - -------------------------------------------------------------------------------- 1608 S. Polk St. Amarillo, Texas 79102 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) - -------------------------------------------------------------------------------- Catana Gray Herring Bank 1608 S. Polk St. Amarillo, Texas 79102 (806) 378-6655 (Name, address and telephone number of agent for service) AMERICAN CHURCH MORTGAGE COMPANY (Issuer with respect to the Securities) - -------------------------------------------------------------------------------- Minnesota 41-1793975 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) - -------------------------------------------------------------------------------- $20,000,000 - Series C Secured Investor Certificates (Title of the Indenture Securities) ================================================================================ FORM T-1 Item 1. GENERAL INFORMATION. Furnish the following information as to the Trustee. a) Name and address of each examining or supervising authority to which it is subject. Federal Deposit Insurance Corporation Washington, D.C. Texas State Banking Department, Austin, TX b) Whether it is authorized to exercise corporate trust powers. Yes Item 2. AFFILIATIONS WITH OBLIGOR. If the obligor is an affiliate of the Trustee, describe each such affiliation. None Items 3-15. Items 3-15 are not applicable because to the best of the Trustee's knowledge, the obligor is not in default under any Indenture for which the Trustee acts as Trustee. Item 16. LIST OF EXHIBITS: List below all exhibits filed as a part of this statement of eligibility and qualification. 1. A copy of the Articles of Association of the Trustee. 2. A copy of the certificate of authority of the Trustee to commence business. 3. A copy of the certificate of authority of the Trustee to exercise corporate trust powers. (See Exhibit 2) 4. A copy of the existing bylaws of the Trustee. 5. A copy of each Indenture referred to in Item 4. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939, attached as Exhibit 6. 7. Report of Condition of the Trustee as of June 30, 2008, published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. NOTE The answers to this statement insofar as such answers relate to what persons have been underwriters for any securities of the obligors within three years prior to the date of filing this statement, or what persons are owners of 10% or more of the voting securities of the obligors, or affiliates, are based upon information furnished to the Trustee by the obligors. While the Trustee has no reason to doubt the accuracy of any such information, it cannot accept any responsibility therefor. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the Trustee, HERRING BANK, a state banking institution organized and existing under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Amarillo, State of Texas on the ___ day of _____________, 2008. HERRING BANK By: /s/ Catana Gray --------------------- Catana Gray Vice President [Signature Page to Form T-1] Exhibit 1 ARTICLES OF ASSOCIATION OF HERRING BANK ARTICLE I Name The name of the Bank shall be Herring Bank. * * * * * ARTICLE II Home Office The street address of the Bank's home office shall be: 2201 Civic Circle, Amarillo, Potter County, Texas 79109. * * * * * ARTICLE III Powers The powers of the Bank are all powers granted by law to a state bank. * * * * * ARTICLE IV Capital Stock and Preemptive Rights The aggregate number of shares which the Bank is authorized to issue is Forty Thousand (40,000) shares of common stock, par value $20.00 per share. No shareholder of this Bank shall, by reason of his holding shares of any class of stock of this Bank, have any preemptive or preferential right to purchase or subscribe for any shares of any class of stock of this Bank, now or hereafter to be authorized, or any notes, debentures, bonds or other securities convertible into or carrying options, warrants or rights to purchase shares of any class, now or hereafter to be authorized, whether or not the issuance of any such shares or such notes, debentures, bonds or other securities would adversely affect the dividend or voting rights of any such shareholder, other than such rights, if any, as the Board of Directors, at its discretion, from time to time may grant, and at such price as the Board of Directors at its discretion may fix; and the Board of Directors may issue shares of any class of stock of this Bank or any notes, debentures, bonds or other securities convertible into or carrying options, warrants or rights to purchase shares of any class without offering any such shares of any class of such notes, debentures, bonds or other securities, either in whole or in part, to the existing shareholders of any class 1 * * * * * ARTICLE V Cumulative Voting The right to cumulate votes in the election of directors and/or cumulative voting by any shareholder is hereby expressly denied. * * * * * ARTICLE VI Duration The Bank shall exist and be in force perpetually. * * * * * ARTICLE VII Board of Directors (a) The Board of Directors shall consist of not less than five (5) nor more than twenty-five (25) persons, the exact number to be fixed and determined from time to time by a resolution of a majority of the shareholders at any annual or special meeting thereof or by a majority of the full Board of Directors, when authorized by resolution adopted at any regular meeting of shareholders or at any special meeting of shareholders called for that purpose, provided that the total number of directors shall not exceed the number prescribed herein or by law. A majority of such persons shall be bona fide resident citizens of the State of Texas. (b) Any vacancy in the Board of Directors may be filled by action of the majority of the remaining directors between meetings of shareholders, and any director so appointed shall hold his office until the next election. (c) The names and addresses of the seven (7) directors and one (1) advisory director constituting the current Board of Directors are as follows: 2 - -------------------------------------------------------------------------------- NAMES ADDRESSES - -------------------------------------------------------------------------------- C. C. Burgess P.O. Box 9900 Amarillo, Texas 79105 - -------------------------------------------------------------------------------- Campbell Burgess 2201 Civic Circle, Suite 210 Amarillo, Texas 79109 - -------------------------------------------------------------------------------- Mrs. Jane Slemp Burgess P.O. Box 9900 Amarillo, Texas 79105 - -------------------------------------------------------------------------------- Dr. Susan Couch 3917 Texas St. Vernon, Texas 76384 - -------------------------------------------------------------------------------- Curtis D. Johnson 2230 Hilltop Vernon, Texas 76384 - -------------------------------------------------------------------------------- Jim Pennington 2020 Stephens Vernon, Texas 76384 - -------------------------------------------------------------------------------- Terry Spears 2530 Tolar Vernon, Texas 76384 - -------------------------------------------------------------------------------- Dr. Charles E. Deyhle, Sr., Box 946 Advisory Director Clarendon, Texas 79226 - -------------------------------------------------------------------------------- * * * * * ARTICLE VIII Limitation of Liability To the fullest extent not prohibited by law, no director of the Bank shall be personally liable to the Bank or its shareholders for monetary damages for an act or omission in the director's capacity as a director, except that this Article does not eliminate or limit the liability of a director for: (1) a breach of a director's duty of loyalty to the Bank or its shareholders, (2) an act or omission not in good faith that constitutes a breach of duty of a director to the Bank or an act or omission that involves gross negligence or willful or intentional misconduct or a knowing violation of the law, (3) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office, or (4) an act or omission for which the liability of a director is expressly provided by an applicable statute, or (5) an act related to an unlawful stock repurchase or payment of a dividend. 3 If applicable law or regulations are amended after approval by the Bank's shareholders of this ARTICLE VIII to authorize corporate action further eliminating or limiting the personal liability of directors or eliminating or limiting the personal liability of officers, the liability of a director or officer of the Bank shall be eliminated or limited to the fullest extent permitted by law. No repeal or modification of this ARTICLE VIII by the shareholders shall adversely affect any right or protection of a director or officer of the Bank existing by virtue of this ARTICLE VIII at the time of such repeal or modification. * * * * * ARTICLE IX Indemnification (a) Notwithstanding anything contained in this ARTICLE IX to the contrary, the Bank shall indemnify a director or officer against reasonable expenses incurred by him in connection with a Proceeding in which he is named a defendant or respondent because he is or was a director or officer if he has been wholly successful, on the merits or otherwise, in the defense of the Proceeding. The indemnification of directors and officers by the Bank herein provided shall be to the fullest extent authorized or permitted by applicable law, as such law exists or may hereafter be amended (but only to the extent that such amendment permits the Bank to provide broader indemnification rights than permitted prior to the amendment). (b) For purposes of this ARTICLE IX, the term "Proceeding" shall mean any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, or any inquiry or investigation that could lead to such an action, suit, or proceeding. (c) The expenses of a director or officer incurred as a party to any Proceeding shall be paid by the Bank as they are incurred and in advance of the final disposition of the Proceeding; provided, however, that the advance payment of expenses shall be made only upon receipt by the Bank of both a written affirmation from the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification under applicable laws and regulations and an unlimited, general undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it is ultimately determined by a final decision, order, or decree of a court of competent jurisdiction that the director or officer has not met those standards or if it is ultimately determined that indemnification of the director or officer in connection with such Proceeding is prohibited by this ARTICLE IX or under applicable law or regulation. (d) Any director or officer may enforce his rights to indemnification or advance payments for expenses in a suit brought against the Bank if his request for indemnification or advance payments for expenses is wholly or partially refused by the Bank or if there is no determination with respect to such request within 60 days from receipt by the Bank of a written notice from the director or officer for such a determination. If a director or officer is successful in establishing in a suit his entitlement to receive or recover an advancement of expenses or a right to indemnification, in whole or in part, he shall also be indemnified by the Bank for costs and expenses incurred in such suit. It shall be a defense to any such suit (other than a suit 4 brought to enforce a claim for the advancement of expenses under Section (b) of this ARTICLE IX when the required affirmation and undertaking have been received by the Bank) that the claimant has not met the standard of conduct under applicable laws and regulations. Neither the failure of the Bank nor independent legal counsel to have made a determination prior to the commencement of such suit that indemnification of the director or officer is proper in the circumstances because the director or officer has met the applicable standard of conduct nor a determination by the Bank or by independent legal counsel that the director or officer has not met such applicable standard of conduct shall be a defense to the suit or create a presumption that the director or officer has not met the applicable standard of conduct. In a suit brought by a director or officer to enforce a right under this Section (d) or by the Bank to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that a director or officer is not entitled to be indemnified or is not entitled to an advancement of expenses under this Section (d) or otherwise, shall be on the Bank. (e) The right to indemnification and the payment or advancement of expenses as they are incurred and in advance of the final disposition of a Proceeding shall not be exclusive of any other right to which a person may be entitled under these Articles of Association, the bylaws, a resolution of shareholders or directors, an agreement, or otherwise; provided, however, that all rights to indemnification and to the payment or advancement of expenses are valid only to the extent that they are consistent with applicable laws and regulations, as they may be limited by these Articles of Association. The right to indemnification under Section (a) hereof shall continue for a person who has ceased to be a director or officer and shall inure to the benefit of his heirs, next of kin, executors, administrators and legal representatives. (f) The Bank may purchase and maintain insurance or other arrangement at its expense to protect itself, or any person who is or was a director, officer, employee, or agent of the Bank or any person who is or was serving at the request of the Bank as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, employee benefit plan, other enterprise, or other entity, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the Bank would have the power to indemnify him against that liability under this ARTICLE IX. Without limiting the power of the Bank to procure or maintain any kind of insurance or other arrangement, the Bank may, for the benefit of persons indemnified by the Bank, (i) create a trust fund, (ii) establish any form of self-insurance, or (iii) establish a letter of credit, guaranty, or surety arrangement. The insurance or other arrangement may be procured, maintained or established within the Bank or with any insurer or other person deemed appropriate by the Board of Directors of the Bank regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or in part by the Bank. (g) The Bank shall not be obligated to reimburse the amount of any settlement unless it has agreed in writing to such settlement. If any person shall unreasonably fail to enter into a settlement of any Proceeding within the scope of Section (a) hereof, offered or assented to by the opposing party or parties and which is acceptable to the Bank, then notwithstanding any other provision of this ARTICLE IX, the indemnification obligation of the Bank in connection with such Proceeding shall be limited to the total of the amount at which settlement could have been made and the expenses incurred by such person prior to the time the settlement could reasonably have been effected. 5 (h) The Bank may, but need not, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Bank or to any director, officer, employee or agent of any of the Bank's subsidiaries to the fullest extent of the provisions of the Texas Business Corporation Act, the Texas Finance Code and of this ARTICLE IX subject to the imposition of such conditions or limitations as the Board of Directors may deem necessary or appropriate. (i) The provisions of this ARTICLE IX are valid only to the extent that they are consistent with, and are limited by, applicable laws and regulations, including, but not limited to 12 U.S.C. 1828(k) and regulations promulgated thereunder from time to time by applicable federal banking agencies. The invalidity of any provision of this ARTICLE IX will not affect the validity of the remaining provisions of ARTICLE IX. * * * * * ARTICLE X Consent in Lieu of Meeting of Shareholders Any action required by the Texas Business Corporation Act, the Texas Miscellaneous Corporation Laws Act or the Texas Finance Code to be taken at any annual or special meeting of shareholders of the Bank, and/or any action which may be taken at any annual or special meeting of shareholders of the Bank, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holder or holders of shares representing not less than the minimum number of votes that would have been necessary to take such action at a meeting at which the holders of all shares entitled to vote on the action were present and voted. Such action shall be taken in accordance with the provisions of Article 9.10A of the Texas Business Corporation Act, as amended. * * * * * ARTICLE XI Conversion The Bank is being organized pursuant to a plan of conversion of The Herring National Bank, 1900 Pease, Vernon, Texas, which was established on January 1, 1899 as a national banking association under the laws of the United States of America. [signature page follows] 6 IN WITNESS WHEREOF, the initial Directors of the Bank have executed these Articles of Association this 20th day of April, 2005. /s/ C. C. Burgess /s/ Campbell Burgess - ------------------------------------- ------------------------------------- C. C. Burgess Campbell Burgess /s/ Jane Slemp Burgess /s/ Susan Couch - ------------------------------------- ------------------------------------- Mrs. Jane Slemp Burgess Dr. Susan Couch /s/ Curtis D. Johnson /s/ Jim Pennington - ------------------------------------- ------------------------------------- Curtis D. Johnson Jim Pennington /s/ Terry Spears /s/ Charles E. Deyhle, Sr. - ------------------------------------- ------------------------------------- Terry Spears Dr. Charles E. Deyhle, Sr., Advisory Director 7 Exhibit 2 Certificate of Authority STATE OF TEXAS [FLAGS] DEPARTMENT OF BANKING CERTIFICATE OF AUTHORITY 3157-02 -------------- Charter number This is to certify that Herring Bank ------------ Effective May 2, 2005 is duly authorized under the laws of the State of Texas to conduct the business of banking at 2201 Civic Circle ----------------- Amarillo, Potter County, Texas ------------------------------ In witness whereof I have xxxx at the City of Austin, Travis xxxx in the State of Texas [THE STATE OF TEXAS STAMP] /s/ Randali S. James ----------------------------------------------- Randali S. James, Banking Commissioner of Texas Centennial 1905-2005 Exhibit 4 - -------------------------------------------------------------------------------- BYLAWS OF HERRING BANK AMARILLO, TEXAS - -------------------------------------------------------------------------------- ARTICLE I OTHER PROVISIONS 1.01 Principal Office. The principal office of the bank shall be located in Amarillo, Potter County, Texas. 1.02 Other Offices. The bank may, subject to compliance with all applicable banking laws and regulations, have offices at such other places as the board of directors may from time to time determine or as the affairs of the bank may require. ARTICLE II SHAREHOLDERS 2.01 Place of Meeting. All meetings of the sole shareholder for any purpose shall be held at the banking house of the bank or at such place, either within or without the State of Texas, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2.02 Annual Meetings. Unless a different date is selected by the board of directors, the annual meeting of the sole shareholder shall be held on the fourth Tuesday of February and at the time selected by the board of directors and specified in the notice of the meeting. At each such annual meeting, the sole shareholder shall elect a board of directors and transact such other business as may be properly brought before the meeting. 2.03 Special Meetings. Special meetings of the sole shareholder may be called for any purpose at any time by the president, the board of directors, or the holders of not less than a majority of all the shares entitled to vote at the meeting. 2.04 Notice of Meetings. Written notice stating the place, day and time of the meeting and, in the case of a special meeting, the purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date thereof, either personally or by mail, by or at the direction of the president, the secretary or officer of person calling the meeting, to the sole shareholder of record entitled to vote at such meeting. Only business within the purpose or purposes described in the notice required herein may be conducted at a special meeting of the sole shareholder. If mailed, notice shall be deemed to be delivered when deposited in the United States mail, postage prepaid, addressed to the sole shareholder at the shareholder's address as it appears on the stock transfer books of the bank. 2.05 Quorum. The presence in person or by proxy of the sole shareholder shall be requisite and shall constitute a quorum for the transaction of business at all meetings of the sole shareholder, except as otherwise provided by statute, the articles of association, or these bylaws. 2.06 Shareholder Action. When a quorum is present at any meeting, the vote of the sole shareholder shall decide any question brought before such meeting. 1 2.07 Voting and Proxies. Cumulative voting in the election of directors shall not be permitted. Each outstanding share having voting power shall be entitled to one vote on each matter submitted to a vote at a meeting of the sole shareholder. The sole shareholder may vote either in person or by proxy executed in writing by the sole shareholder or by his duly authorized attorney-in-fact, but no proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise expressly provided in the proxy. Each proxy shall be revocable unless the proxy form conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest (which includes the appointment as proxy of a pledgee; a person who purchased or agreed to purchase, or owns or holds an option to purchase, the shares; a creditor of the bank who extended it credit under terms requiring the appointment; an employee of the bank whose employment contract requires the appointment; and a party to a voting agreement validly created under the laws of the State of Texas). Each proxy shall be filed with the secretary of the bank prior to or at the time of the meeting. 2.08 Action by Written Consent. Any action required or permitted by statute to be taken at a meeting of the sole shareholder may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by the sole shareholder and such consent shall have the same force and effect as a unanimous vote. Any such signed consent, or a copy thereof, shall be placed in the minute book of the bank. ARTICLE III DIRECTORS 3.01 Powers of Directors. The business and affairs of the bank shall be managed by its board of directors, which may exercise all powers of the bank and do all lawful acts and things as are not by statute, the articles of association, or these bylaws, directed or required to be exercised or done by the sole shareholder. 3.02 Number and Qualifications. The number of directors which shall constitute the board of directors is seven (7), the majority of whom shall be residents of the State of Texas. Directors need not be shareholders of the bank. The number of directors may be increased (to not more than 25) or decreased (but not below 5) from time to time by resolution adopted at any regular meeting of the sole shareholder or at any special meeting called for the purpose of electing directors, (or by the board of directors if authorized to do so by resolution of the sole shareholder at a regular or special meeting), which resolution shall be spread on the minutes of the meeting. Prior to taking office, each director shall take oath that he/she accepts the position as director; that he will not violate, nor knowingly permit any officer, director, or employee of the bank to violate the laws of the State of Texas in the conduct of the business of the bank; and that he/she will diligently perform his duties as director. Such affidavit shall be sworn and subscribed to before a notary public and spread upon the minutes of the directors' meeting. Without the prior written consent of the Texas Banking Commissioner, no person shall be nominated to serve as a director or shall serve as a director if (i) the bank holds a judgment against such person; (ii) the bank holds a charged-off note on which such person is liable; or (iii) such person has been convicted of a felony. Each director elected shall serve until his successor shall have been elected and qualified. 3.03 Filling of Vacancies. A vacancy occurring in the board of directors by reason of death, resignation, or removal may be filled by election at an annual or special meeting of the sole shareholder called for that purpose or by an affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by election at an annual or special meeting of the sole shareholder called for that purpose; provided that, if authorized by a resolution of the sole shareholder, the board of directors, without action by the sole shareholder, may fill up to two such directorships during any one year. 2 3.04 Resignation of Directors. Any director may resign from his office at any time by delivering his written resignation to the secretary of the bank, and such resignation shall be effective immediately upon delivery to the secretary. 3.05 Removal of Directors. Any director may be removed with or without cause at any special meeting of the sole shareholder, by the affirmative vote of a majority of the number of shares represented in person or by proxy at such meeting and entitled to vote for the election of such director, if notice of intention to act upon such matter shall have been given in the notice calling such meeting. 3.06 Place of Meetings. Regular or special meetings of the board of directors may be held either within or outside of the State of Texas. 3.07 First Meetings. The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the sole shareholder at the annual meeting and no notice of such meeting to the newly elected directors shall be necessary in order to legally constitute the meeting, provided a quorum of duly qualified directors shall be present. If the sole shareholder fails to fix the time and place of such first meeting, it shall be held without notice immediately following, and at the same place as the annual meeting of the sole shareholder; provided, however, that if at least a majority (but not less than 5) of the newly elected directors are not present and qualified, such initial meeting shall be adjourned by those directors who are present and have qualified until the necessary majority of directors have been qualified and can be convened at a meeting to be called by the president. Until such initial meeting of the newly elected directors is held, the prior board of directors shall continue in office. 3.08 Regular Meetings. Regular meetings of the board of directors may be held without notice the fourth Tuesday of each month or at such time and place as shall from time to time be determined by resolutions of the board of directors. 3.09 Special Meetings. Special meetings of the board of directors may be called by the chairman of the board of directors or the president and shall be called by the secretary on the written request of three (3) directors. Notice of any special meeting of the board of directors shall be given to each director at least two (2) days before the date of the meeting. 3.10 Quorum of Directors. At all meetings of the board of directors, a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors. If a quorum shall not be present at any meeting of the directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 3.11 Other Committees. The board of directors, by resolution passed by a majority of the entire board of directors, may from time to time designate members of the board of directors to constitute committees of the board of directors, including an executive loan committee, an executive committee and an audit committee, which shall in each case consist of such number of directors, not less than two (2), and shall have and may exercise such powers as the board of directors may determine and specify in the respective resolutions appointing them. A majority of all the members of any such committee may determine its action and fix the time and place of any meeting, unless the board of directors shall otherwise direct. The board of directors shall have power at any time to change the number and the members (with or without cause) of any such committee, to fill vacancies and to discharge any such committee. 3.12 Action by Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the board of directors or any committee may be taken without a meeting if a consent in 3 writing, setting forth the actions so taken, is signed by all of the members of the board of directors or such committee, as the case may be. 3.13 Compensation of Directors. By resolution of the board of directors, the directors may be paid their expenses, if any, of attending each meeting of the board of directors and may be paid a fixed sum for attending each meeting of the board of directors or a stated salary for serving as a director. No such payment shall preclude any director from serving the bank in any other capacity and receiving compensation therefor. Members of the executive committee or of special or standing committees may, by resolution of the board of directors, be allowed like compensation for attending committee meetings. 3.14 Minutes of Meetings. The board of directors shall keep regular minutes of its proceedings and such minutes shall be placed in the minute book of the bank. Committees of the board of directors shall maintain a separate record of the minutes of their proceedings, which shall also be placed in the corporate minute book. ARTICLE IV NOTICES AND TELEPHONE MEETINGS 4.01 Method of Giving Notice. To the extent permitted by applicable law, notice to be given by the bank to any director, officer or other person (other than the sole shareholder) entitled to it shall be sufficiently given if delivered personally, or sent by first class mail, courier, telecopy, facsimile, or is otherwise communicated by electronic means capable of producing a copy that is accessible to the addressee at the latest address of the addressee as recorded in the records of the bank. Notice by first class mail shall be deemed to be given at the time when the same shall be deposited in the United States mail, postage prepaid. Notice given in any other manner shall be effective upon receipt by the addressee. 4.02 Waiver of Notice. Any notice required to be given under these bylaws or by law may be subject to a waiver thereof in writing signed by the person or persons entitled to receive such notice, whether before or after the time stated therein, and such waiver shall be deemed equivalent to the giving of such notice in a timely manner. Any such signed waiver of notice, or a signed copy thereof, shall be placed in the minute book of the bank. Attendance of such persons at any meeting shall constitute a waiver of notice of such meetings, except where the persons attend for the express purpose of objecting that the meeting is not lawfully convened. 4.03 Telephone Meetings. Subject to the requirements of the Texas Business Corporation Act, as amended, or these bylaws for notice of meetings, the sole shareholder, members of the board or directors, or members of any committee designated by such board of directors may participate in and hold a meeting of the sole shareholder, board of directors, or committee by means of a conference telephone, electronic or other communications facility (including by video conference) by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 4.03 shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE V OFFICERS 5.01 Qualifications. The officers of the bank need not be shareholders of the bank or residents of the State of Texas. The board of directors shall, on an annual basis, elect a chairman of the board, president (who shall also be a member of the board of directors), vice president (one or more), secretary, and cashier; and designate the chairman of the board or the president to serve as the chief executive officer of the bank. Such other officers and assistant officers as the board of directors may deem 4 desirable shall be appointed and removed in such other manner as may be prescribed by the board. Any two (2) or more offices may be held by the same person. 5.02 Compensation of Officers. The salaries of all officers of the bank shall be fixed by the board of directors. The board of directors shall have the power to enter into contracts for the employment and compensation of officers on such terms as the board of directors deems advisable. No officer shall be disqualified from receiving a salary or other compensation by reason of the fact that he is also a director of the bank. 5.03 Term and Vacancies. The officers of the bank shall hold office until their successors are elected or appointed and qualified, or until their death, resignation, or removal from office. Any vacancy occurring in any office of the bank by death, resignation, removal, or otherwise, may be filled by the board of directors. 5.04 Removal of Officers. Any officer elected or appointed by the board of directors may be removed at any time by the board of directors, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or employee shall not of itself create contract rights. Any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting, or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. 5.05 Resignation of Officers. Any officer may resign at any time by giving written notice to the board of directors, or to the president, or the secretary of the bank. Any such resignation shall take effect at the date of the receipt of such notice or at any later specified time; and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective. 5.06 General Authority of Officers. The board of directors, except as otherwise provided in these bylaws, may authorize any officer to enter into any contract or execute and deliver any instrument in the name of and on behalf of the bank, and such authority may be general or confined to specific instances. Unless so authorized, no officer, agent or employee shall have any power or authority to bind the bank by any contract or engagement or to pledge its credit or to render it liable pecuniarily for any purpose or in any amount. 5.07 Duties of the Chairman of the Board. The chairman of the board shall be elected by the board of directors and shall be deemed an executive officer of the bank. The chairman of the board shall call and preside at meetings of the board of directors and its committees and meetings of the sole shareholder. The chairman of the board shall have general oversight authority over the bank and shall possess and exercise such other authority and powers and shall perform such other duties as may be determined by these bylaws or the board of directors. Except as otherwise provided by resolution of the board of directors, the chairman of the board shall be the ex-officio chairman of all committees of the board. The chairman of the board may not be appointed for a period exceeding the period for which he has been elected as a director. 5.08 Duties of the Vice Chairman of the Board. The vice chairman of the board shall be elected by the board of directors and shall be deemed an executive officer of the bank. The vice chairman of the board has concurrent authority to call meetings of the board of directors and its committees and meetings of the sole shareholder, and presides at such meetings in the absence of or as delegated by the chairman. The vice chairman of the board shall have general oversight authority over the bank and shall possess and exercise such other authority and powers and shall perform such other duties as may be determined by these bylaws or the board of directors. Except as otherwise provided by resolution of the board of directors, the vice chairman of the board shall be the ex-officio vice chairman of all committees 5 of the board. The vice chairman of the board may not be appointed for a period exceeding the period for which he has been elected as a director. 5.09 Duties of Chief Executive Officer. The chief executive officer shall have, under the control of the board of directors and the chairman, general supervision and direction of the business and affairs of the bank. The chief executive officer shall possess and exercise such authority and powers and perform such other duties as may be determined by these bylaws, the board of directors or the chairman of the board. The board of directors shall designate either the chairman or the president of the bank to also be the chief executive officer of the bank. Unless the chairman shall also serve as the chief executive officer, the chief executive officer shall report to the chairman of the bank. 5.10 Duties of President. The president shall have the day to day active management and control of the business and affairs of the bank, and shall see that all orders and resolutions of the board of directors are carried into effect. The president shall be the principal executive officer primarily responsible for the execution of board policies and operation of the bank as required by Section 33.106 of the Texas Finance Code and shall be an ex-officio member of all committees. In the absence or disability of the chairman of the board, the president shall call and preside at all meetings of the sole shareholder and at all meetings of the board of directors and its committees. The president shall appoint, discharge and fix the compensation of agents and employees other than those appointed by the board of directors. The president shall perform such other duties as may be prescribed from time to time by the board of directors. In the absence of the chief executive officer of the bank, the president shall have the authority and power to take any and all action that may be taken by the chief executive officer under these bylaws or applicable laws or regulations. 5.11 Duties of Vice Presidents. The vice presidents, in the order of their seniority unless otherwise determined by the board of directors, shall, in the absence or disability of the president, perform the duties and have the authority and exercise the powers of the president. They shall perform such other duties and have such other authority and powers as the board of directors may from time to time prescribe, or as the president may from time to time delegate. 5.12 Duties of Secretary. The secretary shall attend all meetings of the board of directors and of the sole shareholder and record all business transacted at such meetings in a minute book to be kept for that purpose and shall perform like duties for the standing committees when required. The secretary shall give, or cause to be given, notice of all meetings of the sole shareholder and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or the president. The secretary shall take and keep custody of the seal of the bank and, when authorized by the board of directors, shall affix the same to any instrument requiring it. 5.13 Duties of Assistant Secretaries. The assistant secretaries, in the order of their seniority unless otherwise determined by the board of directors shall, in the absence or disability of the secretary, perform the duties and have the authority and exercise the powers of the secretary. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe or as the president or secretary may from time to time delegate. 5.14 Duties of Cashier. The cashier shall have custody of the bank's funds and securities, shall keep full and accurate accounts and records of receipts, disbursements and other transactions in books belonging to the bank, and shall deposit all funds and other valuable effects in the name and to the credit of the bank in such depositories as may be designated by the board of directors. The cashier shall disburse funds of the bank as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors at the regular meetings thereof or whenever the board of directors may require, an account of all of the cashier's transactions as cashier and of the financial condition of the bank. The cashier shall perform such other duties as usually 6 performed by cashiers of banks and shall have such other duties and authority as the board of directors may from time to time prescribe or as the president may from time to time delegate. The cashier shall be the officer responsible for the maintenance and storage of all corporate books and records of the bank and for required attestation of signatures as required by Section 33.106 of the Texas Finance Code. 5.15 Duties of Assistant Cashiers. The assistant cashiers, in the order of their seniority unless otherwise determined by the board of directors shall, in the absence or disability of the cashier, perform the duties and have the authority and exercise the powers of the cashier. They shall perform such other duties and have such other powers as the board of directors may from time to time prescribe or as the president or cashier may from time to time delegate. 5.16 Execution of Instruments. All documents, instruments or writings of any nature shall be signed, executed, verified, acknowledged or delivered by such officer and officers or such agent or agents of the bank and in such manner as the board of directors may from time to time determine. 5.17 Bonds of Officers and Employees. All officers and employees of the bank, who are active in the discharge of their duties, or who draw salaries, and whose duties permit or require the handling of any of the funds of the bank, shall, before entering upon the discharge of their duties, give good and sufficient bonds in such sum or sums as may be determined by the board of directors, or as may be required by the Texas Banking Commissioner. Such bonds shall be made by some surety company authorized to do business in the State of Texas and shall be kept in the custody of some person other than the officer or employee bonded. ARTICLE VI CERTIFICATES AND SHARE OWNERSHIP 6.01 Form of Certificates. Certificates shall be delivered representing all shares of stock in the bank to which the sole shareholder is entitled. Certificates for shares of stock of the bank shall be in such form as shall be required by law and as shall be approved by the board of directors. Every certificate for shares issued by the bank must be signed (such signatures may be facsimiles) by the chairman, the president or a vice president and the secretary or an assistant secretary. Such certificates shall bear a legend or legends in the form and containing the restrictions required to be stated thereon by the Texas Business Corporation Act, other provisions of law, the articles of association or these bylaws. Certificates shall be consecutively numbered and shall be recorded in the books of the bank as they are issued. Each certificate shall state on the face thereof the holder's name, the number and class of shares, the par value of such shares, and such other matters as may be required by law, the articles of association or these bylaws. 6.02 Lost Certificates. The board of directors may direct a new certificate or certificates to be issued in place of any certificate previously issued by the bank alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the loss or destruction. In so doing, the board of directors may in its discretion and as a condition precedent to the issuance of a new certificate (a) require the owner of the lost or destroyed certificate or such owner's legal representative, to advertise the same in such manner as it shall require and/or (b) to give the bank a bond (with a surety or sureties satisfactory to the bank) in such sum as it may direct, as indemnity against any claim, or expense resulting from any claim that may be made against the bank with respect to the certificate alleged to have been lost or destroyed. 6.03 Transfer of Shares. Shares of stock shall be transferable only on the books of the bank by the holder thereof in person or by such holder's duly authorized attorney. Upon surrender to the bank or its transfer agent of a certificate representing shares properly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the bank or its transfer agent shall issue a new 7 certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. 6.04 Record Ownership Conclusive. The bank shall be entitled to treat the holder of record of any share or shares of stock in the bank as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law or by any stock purchase and redemption agreement to which the stock may be subject, if such agreement has been formally executed or accepted by the bank. 6.05 Closing Transfer Books. The board of directors shall have the power to close the stock transfer books of the bank for a period not exceeding sixty (60) days preceding the date of any meeting of the sole shareholder or the date for payment of any distribution by the bank (other than a distribution involving a purchase or redemption by the bank of any of its own shares) or a share dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect. In lieu of closing the stock transfer books, the board of directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any meeting of the sole shareholder, or the date for the payment of any distribution by the bank (other than a distribution involving a purchase or redemption by the bank of any of its own shares) or a share dividend, or the date for allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the sole shareholder entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such distribution or share dividend, or any such allotment of rights, or to exercise the rights in respect to any such change, conversion, or exchange of capital stock, and in such case only the sole shareholder of record on the date so fixed shall be entitled to such notice of and to vote at such meeting, or to receive payment of such distribution or share dividend, or allotment of rights, or exercise such rights, as the case may be, and notwithstanding any transfer of any stock on the books of the bank after any such record date fixed as herein provided. ARTICLE VII OTHER PROVISIONS 7.01 Distributions. The board of directors may authorize the bank, at any regular or special meeting of the directors, to make distributions and to declare share dividends subject to the provisions of the articles of association and the laws of the State of Texas. Such distribution may be in the form of cash or, in the case of share dividends, in shares of the bank. The authorization for distributions and share dividends shall be at the discretion of the board of directors. 7.02 Reserves. Before payment of any distribution, the board of directors shall create and set aside funds and reserves as required by applicable law or as the directors from time to time and in their absolute discretion think proper to provide for contingencies or to equalize distributions or to repair or maintain any property of the bank, or for any other purpose they think beneficial to the bank. Subject to the requirements of applicable law, the directors may modify or abolish any such reserve or fund in the manner in which it was created. 7.03 Records. The bank shall keep correct and complete books and records of account and shall keep minutes of the proceedings of the sole shareholder and board of directors, and shall keep at its registered office or principal place of business or at the office of its transfer agent or registrar a shareholder roll, which shall give the name and address of and number of shares held by each shareholder. 7.04 Fiscal Year. The fiscal year of the bank shall, unless otherwise fixed by resolution of the board of directors, be the calendar year. 8 7.05 Seal. The bank's seal shall be in such form as may be prescribed by the board of directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. The seal need not be affixed to any document signed on behalf of the bank unless specifically required by resolution of the board of directors. 7.06 Insurance. A. The bank may purchase and maintain insurance or other arrangement on behalf of any person who is or was a director, officer, employee or agent of the bank or who is or was serving at the request of the bank as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic bank, partnership, joint venture, sole proprietorship, trust, other enterprise, or employee benefit plan, against any liability asserted against him and incurred by him in such a capacity or arising out of his status as such a person, whether or not the bank would have the power to indemnify him against that liability under the articles of association or these bylaws. If the insurance or other arrangement is with a person or entity that is not regularly engaged in the business of providing insurance coverage, the insurance or arrangement may provide for payment of a liability with respect to which the bank would not have the power to indemnify the person only if including coverage for the additional liability has been approved by the shareholders of the bank. Without limiting the power of the bank to procure or maintain any kind of insurance or other arrangement, the bank may, for the benefit of persons indemnified by the bank: (1) create a trust fund; (2) establish any form of self-insurance; or (3) establish a letter of credit, guaranty, or surety arrangement. The insurance or other arrangement may be procured, maintained, or established within the bank or with any other insurer or other person deemed appropriate by the board of directors regardless of whether all or part of the stock or other securities of the insurer or other person are owned in whole or part by the bank. In the absence of fraud, the judgment of the board of directors as to the terms and conditions of the insurance or other arrangement and the identify of the insurer or other person participating in an arrangement shall be conclusive and the insurance or arrangement shall not be voidable and shall not subject the directors approving the insurance or arrangement to liability, on any ground, regardless of whether directors participating in the approval are beneficiaries of the insurance or arrangement. 7.07 Transactions Between the Bank and an Officer, Director, or Shareholder. No contract or other transaction between the bank and any of its directors, officers or any bank or other organization in which any of them are directly or indirectly interested, shall be void or voidable solely by reason of the interest or relationship of such director or officer if: (1) the material facts of the relationship or interest of each such director, officer or security holder are known or disclosed: (a) to the board of directors and it nevertheless authorizes or ratifies the contract or transaction by a majority of the directors present, each such interested director to be counted in determining whether a quorum is present but not in calculating the majority necessary to carry the vote; or 9 (b) to the sole shareholder and it nevertheless authorizes or ratifies the contract or transaction by a majority of the shares present, each such interested person to be counted for quorum and voting purposes; or (2) the contract or transaction is fair to the bank as of the time it is authorized or ratified by the board of directors, or the sole shareholder. ARTICLE VIII AMENDMENT AND CONSTRUCTION 8.01 Amendment. The board of directors shall have the power to alter, amend, or repeal these bylaws or adopt new bylaws, subject to the right of the sole shareholder to rescind any board action with regard to the bylaws at a regular meeting of the sole shareholder or at a special meeting of the sole shareholder called for such purpose. 8.02 Severability. If any portion of these bylaws shall be invalid or inoperative, then, so far as is reasonable, the remainder of these bylaws shall be considered valid. 10 Exhibit 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, HERRING BANK hereby consents that reports of examination of the undersigned by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon its request therefor. Dated: __________ __, 2008 HERRING BANK By: --------------------------- Catana Gray Vice-President [Consent Signature Page] Exhibit 7 Herring Bank Statement of Financial Condition --- Schedule RI 4 --- Consolidated Report of Income for the period January 1, 2008 - June 30, 2008 All Report of Income schedules are to be reported on a calendar year-to-date basis in thousands of dollars. Schedule RI - Income Statement
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- 1. Interest income: a. Interest and fee income on loans: (1) Loans secured by real estate: ----------------------- (a) Loans secured by 1-4 family residential properties ........................ RIAD4435 943 1.a.(1)(a) ----------------------- (b) All other loans secured by real estate .................................... RIAD4436 3,809 1.a.(1)(b) ----------------------- (2) Commercial and industrial loans ............................................... RIAD4012 2,287 1.a.(2) ----------------------- (3) Loans to individuals for household, family, and other personal expenditures: ----------------------- (a) Credit cards .............................................................. RIADB485 41 1.a.(3)(a) ----------------------- (b) Other (includes single payment, installment, all student loans, and ----------------------- revolving credit plans other than credit cards) ........................... RIADB486 926 1.a.(3)(b) ----------------------- (4) Loans to foreign governments and official institutions ........................ RIAD4056 0 1.a.(4) ----------------------- (5) All other loans (1) ........................................................... RIAD4058 896 1.a.(5) ----------------------- (6) Total interest and fee income on loans (sum of items 1.a.(1)(a) through 1.a.(5)) ...................................................................... RIAD4010 8,902 1.a.(6) ----------------------- b. Income from lease financing receivables ........................................... RIAD4065 383 1.b. ----------------------- c. Interest income on balances due from depository institutions(2) ................... RIAD4115 0 1.c. ----------------------- d. Interest and dividend income on securities: (1) U.S. Treasury securities and U.S. Government agency obligations (excluding ----------------------- mortgage-backed securities) ................................................... RIADB488 320 1.d.(1) ----------------------- (2) Mortgage-backed securities .................................................... RIADB489 518 1.d.(2) ----------------------- (3) All other securities (includes securities issued by states and political subdivisions in the U.S.) ..................................................... RIAD4060 230 1.d.(3) ----------------------- e. Interest income from trading assets ............................................... RIAD4069 0 1.e. ----------------------- f. Interest income on federal funds sold and securities purchased under agreements to resell ......................................................................... RIAD4020 242 1.f. ----------------------- g. Other interest income ............................................................. RIAD4518 97 1.g. ----------------------- h. Total interest income (sum of items 1.a.(6) through 1.g) .......................... RIAD4107 10,692 1.h. 2. Interest expense: ----------------------- a. Interest on deposits: (1) Transaction accounts (NOW accounts, ATS accounts, and telephone and ----------------------- preauthorized transfer accounts) .............................................. RIAD4508 145 2.a.(1) ----------------------- (2) Nontransaction accounts: ----------------------- (a) Savings deposits (includes MMDAs) ......................................... RIAD0093 625 2.a.(2)(a) ----------------------- (b) Time deposits of $100,000 or more ......................................... RIADA517 1,219 2.a.(2)(b) ----------------------- (c) Time deposits of less than $100,000 ....................................... RIADA518 2,135 2.a.(2)(c) ----------------------- b. Expense of federal funds purchased and securities sold under agreements to repurchase ........................................................................ RIAD4180 0 2.b. ----------------------- c. Interest on trading liabilities and other borrowed money .......................... RIAD4185 37 2.c. -----------------------
- ---------- (1) Includes interest and fee income on "Loans to depository institutions and acceptances of other banks," "Loans to finance agricultural production and other loans to farmers," "Obligations (other than securities and leases) of states and political subdivisions in the U.S.," and "Other loans." (2) Includes interest income on time certificates of deposit not held for trading. --- Schedule RI 5 --- Schedule RI - Continued
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- d. Interest on subordinated notes and debentures ..................................... RIAD4200 0 2.d. ----------------------- e. Total interest expense (sum of items 2.a through 2.d) ............................. RIAD4073 4,161 2.e. ----------------------- 3. Net interest income (item 1.h minus 2.e) ............................................. RIAD4074 6,531 3. ----------------------- 4. Provision for loan and lease losses .................................................. RIAD4230 191 4. ----------------------- 5. Noninterest income: ----------------------- a. Income from fiduciary activities (1) .............................................. RIAD4070 883 5.a. ----------------------- b. Service charges on deposit accounts ............................................... RIAD4080 1,042 5.b. ----------------------- c. Trading revenue (2) ............................................................... RIADA220 0 5.c. ----------------------- d. ----------------------- (1) Fees and commissions from securities brokerage ................................ RIADC886 0 5.d.(1) ----------------------- (2) Investment banking, advisory, and underwriting fees and commissions ........... RIADC888 0 5.d.(2) ----------------------- (3) Fees and commissions from annuity sales ....................................... RIADC887 0 5.d.(3) ----------------------- (4) Underwriting income from insurance and reinsurance activities ................. RIADC386 0 5.d.(4) ----------------------- (5) Income from other insurance activities ........................................ RIADC387 17 5.d.(5) ----------------------- e. Venture capital revenue ........................................................... RIADB491 0 5.e. ----------------------- f. Net servicing fees ................................................................ RIADB492 0 5.f. ----------------------- g. Net securitization income ......................................................... RIADB493 0 5.g. ----------------------- h. Not applicable ----------------------- i. Net gains (losses) on sales of loans and leases ................................... RIAD5416 230 5.i. ----------------------- j. Net gains (losses) on sales of other real estate owned ............................ RIAD5415 0 5.j. ----------------------- k. Net gains (losses) on sales of other assets (excluding securities) ................ RIADB496 68 5.k. ----------------------- l. Other noninterest income (*) ...................................................... RIADB497 618 5.l. ----------------------- m. Total noninterest income (sum of items 5.a. through 5.l) .......................... RIAD4079 2,858 5.m. ----------------------- 6. ----------------------- a. Realized gains (losses) on held-to-maturity securities ............................ RIAD3521 0 6.a. ----------------------- b. Realized gains (losses) on available-for-sale securities .......................... RIAD3196 0 6.b. ----------------------- 7. Noninterest expense: ----------------------- a. Salaries and employee benefits .................................................... RIAD4135 3,140 7.a. ----------------------- b. Expenses of premises and fixed assets (net of rental income) (excluding ----------------------- salaries and employee benefits and mortgage interest) ............................. RIAD4217 933 7.b. ----------------------- c. ----------------------- (1) Goodwill impairment losses .................................................... RIADC216 0 7.c.(1) ----------------------- (2) Amortization expense and impairment losses for other intangible assets ........ RIADC232 12 7.c.(2) ----------------------- d. Other noninterest expense (*) ..................................................... RIAD4092 2,788 7.d. ----------------------- e. Total noninterest expense (sum of items 7.a. through 7.d) ......................... RIAD4093 6,873 7.e. ----------------------- 8. Income (loss) before income taxes and extraordinary items and other adjustments ----------------------- (item 3 plus or minus items 4, 5.m, 6.a, 6.b, and 7.e.) .............................. RIAD4301 2,325 8. ----------------------- 9. Applicable income taxes (on item 8) .................................................. RIAD4302 0 9. ----------------------- 10. Income (loss) before extraordinary items and other adjustments (item 8 minus item 9) ............................................................................. RIAD4300 2,325 10. ----------------------- 11. Extraordinary items and other adjustments, net of income taxes (*) .................. RIAD4320 0 11. ----------------------- 12. Net income (loss) (sum of items 10 and 11) .......................................... RIAD4340 2,325 12. -----------------------
- ---------- (1) For banks required to complete Schedule RC-T, items 12 through 19, income from fiduciary activities reported in Schedule RI, item 5.a. must equal the amount reported in Schedule RC-T, item 19. (2) For banks required to complete Schedule RI, Memorandum item 8, trading revenue reported in Schedule RI, item 5.c. must equal the sum of Memorandum items 8.a through 8.e. (*) Describe on Schedule RI-E - Explanations --- Schedule RI 6 --- Schedule RI - Continued Memoranda
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- 1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired after August 7, 1986, that is not deductible for federal income tax ----------------------- purposes ............................................................................. RIAD4513 26 M.1. ----------------------- 2. Income from the sale and servicing of mutual funds and annuities (included in ----------------------- Schedule RI, item 8) ................................................................. RIAD8431 0 M.2. ----------------------- 3. Income on tax-exempt loans and leases to states and political subdivisions in the ----------------------- U.S. (included in Schedule RI, items 1.a and 1.b) .................................... RIAD4313 64 M.3. ----------------------- 4. Income on tax-exempt securities issued by states and political subdivisions in the ----------------------- U.S. (included in Schedule RI, item 1.d.(3)) ......................................... RIAD4507 198 M.4. ----------------------- 5. Number of full-time equivalent employees at end of current period (round to ----------------------- nearest whole number) ................................................................ RIAD4150 137 M.5. ----------------------- 6. Memorandum item 6 is to be completed by: o banks with $300 million or more in total assets, and o banks with less than $300 million in total assets that have loans to finance agricultural production and other loans to farmers (Schedule RC-C, part I, item 3) exceeding five percent of total loans. Interest and fee income on loans to finance agricultural production and other loans to farmers (included in ----------------------- Schedule RI, item 1.a.(5)) (1) ..................................................... RIAD4024 816 M.6. ----------------------- 7. If the reporting bank has restated its balance sheet as a result of applying push ----------------------- down accounting this calendar year, report the date of the bank's acquisition (2) .... RIAD9106 M.7. ----------------------- 8. Trading revenue (from cash instruments and derivative instruments) (sum of Memorandum items 8.a through 8.e must equal Schedule RI, item 5.c) (To be completed by banks that reported average trading assets (Schedule RC-K, item 7) of $2 million or more for any quarter of the preceding calendar year.): ----------------------- a. Interest rate exposures ........................................................... RIAD8757 N/A M.8.a. ----------------------- b. Foreign exchange exposures ........................................................ RIAD8758 N/A M.8.b. ----------------------- c. Equity security and index exposures ............................................... RIAD8759 N/A M.8.c. ----------------------- d. Commodity and other exposures ..................................................... RIAD8760 N/A M.8.d. ----------------------- e. Credit exposures .................................................................. RIADF186 N/A M.8.e. ----------------------- 9. Net gains (losses) recognized in earnings on credit derivatives that economically hedge credit exposures held outside the trading account: ----------------------- a. Net gains (losses) on credit derivatives held for trading ......................... RIADC889 0 M.9.a. ----------------------- b. Net gains (losses) on credit derivatives held for purposes other than trading ..... RIADC890 0 M.9.b. ----------------------- 10. To be completed by banks with $300 million or more in total assets: (1) ----------------------- Credit losses on derivatives (see instructions) ..................................... RIADA251 0 M.10. ----------------------- ----------------------- Yes/No - ------------------------------------------------------------------------------------------------------------------- 11. Does the reporting bank have a Subchapter S election in effect for federal income tax purposes for the current tax year? ....................................... RIADA530 YES M.11. ----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- Memorandum item 12 is to be completed by banks that are required to complete Schedule RC-C, part I, Memorandum items 8.b and 8.c 12. Noncash income from negative amortization on closed-end loans secured by 1-4 ----------------------- family residential properties (included in Schedule RI, item 1.a.(1)(a)) ............ RIADF228 N/A M.12. -----------------------
- ---------- (1) The asset size tests and the five percent of total loans test are generally based on the total assets and total loans reported on the June 30, 2007, Report of Condition. (2) For example, a bank acquired on March 1, 2008, would report 20080301. --- Schedule RI 7 --- Schedule RI - Continued Memoranda (continued)
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- Memorandum item 13 is to be completed by banks that have elected to account for assets and liabilities under a fair value option. 13. Net gains (losses) recognized in earnings on assets and liabilities that are reported at fair value under a fair value option: ----------------------- a. Net gains (losses) on assets ..................................................... RIADF551 N/A M.13.a. ----------------------- (1) Estimated net gains (losses) on loans attributable to changes in ----------------------- instrument-specific credit risk .............................................. RIADF552 N/A M.13.a.(1) ----------------------- b. Net gains (losses) on liabilities ................................................ RIADF553 N/A M.13.b. ----------------------- (1) Estimated net gains (losses) on liabilities attributable to changes in ----------------------- instrument-specific credit risk .............................................. RIADF554 N/A M.13.b.(1) -----------------------
--- Schedule RC 14 --- Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for June 30, 2008 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC - Balance Sheet
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions (from Schedule RC-A): ----------------------- a. Noninterest-bearing balances and currency and coin (1) ............................ RCON0081 14,290 1.a. ----------------------- b. Interest-bearing balances (2) ..................................................... RCON0071 0 1.b. ----------------------- 2. Securities: ----------------------- a. Held-to-maturity securities (from Schedule RC-B, column A) ........................ RCON1754 0 2.a. ----------------------- b. Available-for-sale securities (from Schedule RC-B, column D) ...................... RCON1773 41,702 2.b. ----------------------- 3. Federal funds sold and securities purchased under agreements to resell: ----------------------- a. Federal funds sold ................................................................ RCONB987 14,500 3.a. ----------------------- b. Securities purchased under agreements to resell (3) ............................... RCONB989 0 3.b. ----------------------- 4. Loans and lease financing receivables (from Schedule RC-C): ----------------------- a. Loans and leases held for sale .................................................... RCON5369 0 4.a. ----------------------- b. Loans and leases, net of unearned income .......................................... RCONB528 251,483 4.b. ----------------------- c. LESS: Allowance for loan and lease losses ......................................... RCON3123 3,152 4.c. ----------------------- d. Loans and leases, net of unearned income and allowance (item 4.b minus 4.c) ....... RCONB529 248,331 4.d. ----------------------- 5. Trading assets (from Schedule RC-D) .................................................. RCON3545 0 5. ----------------------- 6. Premises and fixed assets (including capitalized leases) ............................. RCON2145 4,071 6. ----------------------- 7. Other real estate owned (from Schedule RC-M) ......................................... RCON2150 1,872 7. ----------------------- 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ....................................................................... RCON2130 0 8. ----------------------- 9. Not applicable 10. Intangible assets: ----------------------- a. Goodwill .......................................................................... RCON3163 128 10.a. ----------------------- b. Other intangible assets (from Schedule RC-M) ...................................... RCON0426 60 10.b. ----------------------- 11. Other assets (from Schedule RC-F) ................................................... RCON2160 8,291 11. ----------------------- 12. Total assets (sum of items 1 through 11) ............................................ RCON2170 333,245 12. -----------------------
- ---------- (1) Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. (3) Includes all securities resale agreements, regardless of maturity. --- Schedule RC 15 --- Schedule RC - Continued
----------------------- Dollar Amounts in Thousands Bil Mil Thou - ------------------------------------------------------------------------------------------------------------------- LIABILITIES 13. Deposits: ----------------------- a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) ......... RCON2200 298,707 13.a. ----------------------- (1) Noninterest-bearing (1) ....................................................... RCON6631 63,720 13.a.(1) ----------------------- (2) Interest-bearing .............................................................. RCON6636 234,987 13.a.(2) ----------------------- b. Not applicable 14. Federal funds purchased and securities sold under agreements to repurchase: ----------------------- a. Federal funds purchased (2) ....................................................... RCONB993 0 14.a. ----------------------- b. Securities sold under agreements to repurchase (3) ................................ RCONB995 0 14.b. ----------------------- 15. Trading liabilities (from Schedule RC-D) ............................................ RCON3548 0 15. ----------------------- 16. Other borrowed money (includes mortgage indebtedness and obligations ----------------------- under capitalized leases) (from Schedule RC-M) ...................................... RCON3190 1,031 16. ----------------------- 17. Not applicable 18. Not applicable ----------------------- 19. Subordinated notes and debentures (4) ............................................... RCON3200 0 19. ----------------------- 20. Other liabilities (from Schedule RC-G) .............................................. RCON2930 3,438 20. ----------------------- 21. Total liabilities (sum of items 13 through 20) ...................................... RCON2948 303,176 21. ----------------------- 22. Minority interest in consolidated subsidiaries ...................................... RCON3000 0 22. ----------------------- EQUITY CAPITAL ----------------------- 23. Perpetual preferred stock and related surplus ....................................... RCON3838 0 23. ----------------------- 24. Common stock ........................................................................ RCON3230 1,000 24. ----------------------- 25. Surplus (exclude all surplus related to preferred stock) ............................ RCON3839 28,200 25. ----------------------- 26. ----------------------- a. Retained earnings ................................................................. RCON3632 2,553 26.a. ----------------------- b. Accumulated other comprehensive income (5) ........................................ RCONB530 (1,684) 26.b. ----------------------- 27. Other equity capital components (6) ................................................. RCONA130 0 27. ----------------------- 28. Total equity capital (sum of items 23 through 27) ................................... RCON3210 30,069 28. ----------------------- 29. Total liabilities, minority interest, and equity capital (sum of items 21, 22, and 28) ............................................................................. RCON3300 333,245 29. -----------------------
Memorandum To be reported with the March Report of Condition.
----------------------- Number - ------------------------------------------------------------------------------------------------------------------- 1. Indicate in the box at the right the number of the statement below that best describes the most comprehensive level of auditing work performed for the bank by independent external auditors as of any date during 2007 ............................. RCON6724 N/A M.1.
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = Attestation on bank management's assertion on the effectiveness of the bank's internal control over financial reporting by a certified public accounting firm 4 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 5 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 6 = Review of the bank's financial statements by external auditors 7 = Compilation of the bank's financial statements by external auditors 8 = Other audit procedures (excluding tax preparation work) 9 = No external audit work - ---------- (1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Report overnight Federal Home Loan Bank advances in Schedule RC, item 16, "Other borrowed money." (3) Includes all securities repurchase agreements, regardless of maturity. (4) Includes limited-life preferred stock and related surplus. (5) Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, and minimum pension liability adjustments. (6) Includes treasury stock and unearned Employee Stock Ownership Plan shares. -----END PRIVACY-ENHANCED MESSAGE-----