-----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, BeOUtWkhUwrha5z8R477qx+itfqyynDwBTwVGvvMCRFBgchXvUyiSb4UaUR5EJbJ Nw4cqQff7OCcjzzvVNBqhA== 0000934543-04-000016.txt : 20040929 0000934543-04-000016.hdr.sgml : 20040929 20040929114442 ACCESSION NUMBER: 0000934543-04-000016 CONFORMED SUBMISSION TYPE: S-11/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 20040929 DATE AS OF CHANGE: 20040929 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: 333-116919 FILM NUMBER: 041051684 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 forms11amend.txt As filed with the Securities and Exchange Commission on September 28, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 AMENDMENT NO. 1 TO FORM S-11 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 American Church Mortgage Company (Exact Name of Registrant as Specified in Governing Instruments) 10237 Yellow Circle Drive Minnetonka, MN 55343 (952) 945-9455 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Philip J. Myers, President 10237 Yellow Circle Drive Minnetonka, MN 55343 (952) 945-9455 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service) copies to: 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. If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
CALCULATION OF REGISTRATION FEE ====================================================================================================================== ======================================= ==================== =================== ==================== ================ Amount Proposed Maximum Proposed Maximum Amount Of Title Of Each Class Of Securities to be Offering Price Aggregate Offering Registration To Be Registered Registered Per Unit Price Fee --------------------------------------- -------------------- ------------------- -------------------- ---------------- --------------------------------------- -------------------- ------------------- -------------------- ---------------- Series B Secured Investor Certificates $23,000,000 $1,000(1) $23,000,000 $2,914 ======================================= ==================== =================== ==================== ================
(1) Certificates may be purchased in any multiple of $1,000. 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 AMERICAN CHURCH MORTGAGE COMPANY $23,000,000 of Series B Secured Investor Certificates American Church Mortgage Company is a real estate investment trust, or "REIT." We make mortgage loans to churches and other non-profit religious organizations. We also purchase mortgage-secured bonds issued by such organizations. We are offering our Series B Secured Investors Certificates. We may offer new certificates with maturities ranging from eight (8) to fifteen (15) years. Renewal certificates, which aggregate no more than $3,000,000 principal amount, with maturities ranging from two to three years will be offered to investors desiring to renew certificates from prior offering. Depending on our capital needs, certificates with certain terms may not always be available. We will periodically establish and may change interest rates on the unsold certificates offered in this prospectus. Current interest rates will be published in supplements to this prospectus. Once a certificate is sold, its interest rate will not change during its term. The certificates are non-negotiable and may be transferred only in limited circumstances with the consent of our advisor. There is no public market for the certificates. 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. 6 and "Conflicts of Interest" beginning on p. 15. Those risks include the following: >> If we lose 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 controlled by the same person. >> 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 churches, which are typically limited purpose properties. The use of forecasts in this offering is prohibited. Any representations to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from an investment in this program is not permitted.
================================================= ======================== ============================== ================== Series B Secured Investor Certificates Price to Public Selling Commission (2) Proceeds to Us ------------------------------------------------- ------------------------ ------------------------------ ------------------ ------------------------------------------------- ------------------------ ------------------------------ ------------------ Minimum Purchase $1,000 (1) $40.00 $960.00 ------------------------------------------------- ------------------------ ------------------------------ ------------------ ------------------------------------------------- ------------------------ ------------------------------ ------------------ Total $23,000,000 $845,000 (3) $22,155,000 ================================================= ======================== ============================== ==================
(1) Certificates may be purchased in any multiple of $1,000. (2) Estimated for purposes of this table based on the average commission we will pay the underwriter. Actual commissions we pay the underwriter will vary based on the term to maturity of the certificates sold on our behalf. Includes 1.00% underwriter's management fee that we will pay to the underwriter upon original issuance of each certificate. Of the $23,000,000 Series B Secured Investor Certificates, $3,000,000 of the certificates are reserved for the renewal of the Series A Secured Investor Certificates. These certficates will have maturities ranging from two to three years. (3) The average commission we will pay the underwriter on the renewal of the Series A Secured Investor Certificates is 1.5%. An underwriter's management fee will not be paid on any certificates that are renewed. AMERICAN INVESTORS GROUP, INC. Minnetonka, Minnesota September __, 2004 Table of Contents PROSPECTUS SUMMARY............................................................1 - ------------------ RISK FACTORS..................................................................6 - ------------ WHO MAY INVEST................................................................11 - -------------- USE OF PROCEEDS...............................................................12 - --------------- COMPENSATION TO ADVISOR AND AFFILIATES........................................13 - -------------------------------------- CONFLICTS OF INTEREST.........................................................15 - --------------------- DISTRIBUTIONS.................................................................16 - ------------- CAPITALIZATION................................................................18 - -------------- SELECTED FINANCIAL DATA.......................................................19 - ----------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................................20 - ---------------------- OUR BUSINESS..................................................................24 - ------------ MANAGEMENT....................................................................36 - ---------- SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS...................................38 - ------------------------------------------- CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT........................39 - ------------------------------------------------------ THE ADVISOR AND THE ADVISORY AGREEMENT........................................40 - -------------------------------------- FEDERAL INCOME TAX CONSEQUENCE ASSOCIATED WITH THE CERTIFICATES...............41 - --------------------------------------------------------------- FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS.........................43 - ----------------------------------------------------- ERISA CONSEQUENCES............................................................44 - ------------------ DESCRIPTION OF CAPITAL STOCK..................................................44 - ---------------------------- DESCRIPTION OF THE CERTIFICATES...............................................45 - ------------------------------- SUMMARY OF THE ORGANIZATIONAL DOCUMENTS.......................................53 - --------------------------------------- PLAN OF DISTRIBUTION..........................................................56 - -------------------- COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.........57 - --------------------------------------------------------------------- LEGAL MATTERS.................................................................57 - ------------- EXPERTS 58 REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION.............................58 - ------------------------------------------------- ADDITIONAL INFORMATION........................................................58 - ---------------------- INDEX TO FINANCIAL STATEMENTS................................................F-1 i PROSPECTUS SUMMARY This summary highlights some information from the prospectus. It may not be all the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and the financial statements. In this prospectus, American Church Mortgage Company refers to itself as "we," "us, " and "our." Our prospective investors are sometimes referred to as "you" or "your." AMERICAN CHURCH MORTGAGE COMPANY American Church Mortgage Company is a real estate investment trust, or REIT. We make mortgage-backed loans from $100,000 to $1,000,000 to churches and other non-profit religious organizations for the purchase, construction or refinancing of real estate and improvements. As of June 30, 2004 we have 64 mortgage loans outstanding in the aggregate principal amount of $29,395,983, and own church bonds having a face value of $7,723,860. The principal balance of our loan and bond portfolios at June 30, 2004, were $27,681,993 and $7,677,044, respectively. We intend to continue to lend funds pursuant to our business plan as funds from the sale of certificates and otherwise become available. American Church Mortgage Company was incorporated in the State of Minnesota on May 27, 1994. Our executive offices and those of our advisor are located at 10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343. Our telephone number is (952) 945-9455. OUR ADVISOR We are managed by Church Loan Advisors, Inc. Church Loan Advisors, Inc. is referred to in this prospectus as our advisor. Our advisor manages our business activities, provides our office space, personnel, equipment and support services. Our advisor assumes most of the normal operating expenses we would otherwise incur if we had our own employees and directly managed our business activities. Pursuant to the advisory agreement between us and our advisor, we pay our advisor advisory fees based on our average invested assets and certain expenses. We also pay our advisor one-half of any origination fees we collect. Our advisor is affiliated by common ownership with American Investors Group, Inc., which is the underwriter of this offering (the "Underwriter"). 1
THE CERTIFICATES OFFERED Issuer........................................ American Church Mortgage Company Trustee....................................... The Herring National Bank, Amarillo, Texas Securities Offered............................ Series B Secured Investor Certificates Offering Price................................ 100% of the principal amount per certificate; multiples of $1,000 per certificate. Maturity.......................................8, 9, 10, 11, 12, 13, 14 and 15 year maturities. Certificates will mature on the last day of the calendar quarter in which they were purchased. We may cease offering specified maturities, and begin reoffering any unavailable maturity, at any time. Interest Rates.................................The interest rate we will pay for each maturity of certificates will be set forth in a supplement to this prospectus. Interest Payments..............................Interest will be paid quarterly. Principal Payment..............................Unless you renew your certificate, we will pay the entire principal amount of the certificate at maturity. Redemption.....................................We generally will not be required to redeem outstanding certificates. We will redeem outstanding certificates only in the following cases: o If you die, your representative may require us to redeem your certificate, subject to an aggregate limit of $25,000 in any calendar quarter for all redemptions. o If there is a change of control of our business, we may redeem each outstanding certificate at our option. o If our outstanding indebtedness exceeds the amount of indebtedness allowed by our bylaws, we may redeem certificates in an amount sufficient to bring our outstanding indebtedness into compliance with our bylaws. o If we terminate our advisory agreement with Church Loan Advisors, Inc., our current advisor, for any reason, we will be required to offer to redeem all outstanding certificates. If we redeem any certificate, we will pay the holder an amount equal to the outstanding principal amount of the redeemed certificate plus accrued but unpaid interest. Collateral....................................To secure payment of the certificates, we will assign to the trustee as collateral non-defaulted mortgage-secured promissory notes and church bonds with an aggregate outstanding principal balance equal to at least 120% of the aggregate outstanding principal amount of the certificates. We will not assign underlying mortgages securing the assigned promissory notes. Renewal.......................................Certificates are renewable at your option at the interest rates we are offering at the time the certificate matures. We may cease offering to renew certificates at any time. Transferability...............................The certificates are non-negotiable and may be transferred only in limited circumstances with the consent of our advisor. Absence of Public Market..................... There is no market for the certificates. We do not believe that a public market will develop. You may not be able to sell your certificates. Sales Commission............................ We will pay the underwriter a commission for assisting us in selling the certificates. The Underwriter will receive a sales commission of 3.0% and an underwriting management fee equal to 1.0% of the principal amount of certificates sold. We will pay the underwriter a commission up to 1.5% when a certificate is renewed. Outstanding Indebtedness......................Our bylaws prohibit us from borrowing in excess of 300% of Shareholders' Equity.
2 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 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 capital 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. A market likely will not develop after this offering. >> Fluctuations in interest rates or default in repayment of loans by borrowers could adversely affect our ability to make interest payments on and repay certificates as they mature. CONFLICTS OF INTEREST A number of potential conflicts exist between us and our advisor and its principals. These conflicts include: >> Our President owns both our advisor and the underwriter. >> Agreements between us and our advisor and the underwriter were not negotiated at arm's-length. >> We and the underwriter have common business interests. >> Negotiations between us and our advisor during the organization and structuring of our operations were not at arm's length. >> The advisory agreement was not negotiated at arm's-length. >> We share operations facilities with our advisor and the underwriter. Our advisor and its affiliates may engage in businesses similar to ours. We compensate our advisor and its affiliates for services rendered and pay an annual advisory fee equal to 1.25% of average invested assets. 3 OUR INVESTMENT OBJECTIVES Our investment objectives are to provide our certificate holders with: >> a higher level of distributable income or interest rate than is available in guaranteed or government-backed fixed-income investments; >> preservation of their investment capital through portfolio diversification (lending funds to many different borrowers and purchasing bonds issued by numerous issuers); >> greater security for our portfolio through investment only in mortgage-backed loans and securities (providing us with collateral in the event of a borrower's default); and >> greater security for our certificate holders by our pledging mortgage-secured promissory notes or debt securities that we hold to secure our obligations under the certificates (providing certificate holders with a stream of revenue and potential sale proceeds in the event of our default). BUSINESS OBJECTIVES AND POLICIES We seek to provide cash distributions of current income to our shareholders through the implementation of our investment and operating strategy. We make mortgage loans from $100,000 to $1,000,000 to churches and other non-profit religious organizations throughout the United States. We seek to enhance returns by: >> lending at rates of interest in excess of standard commercial and residential mortgage interest rates; >> seeking origination fees (i.e. "points") from the borrower at the outset of a loan and upon any renewal of a loan; >> making a limited amount of higher-interest rate and increased risk second mortgage loans and short-term construction loans to qualified borrowers; and >> purchasing a limited amount of mortgage-secured debt securities issued by churches and other non-profit religious organizations, typically at a discount from par value. Our policies limit the amount of second mortgage loans to 20% of our average invested assets on the date any second mortgage loan is closed and limit the amount of mortgage-secured debt securities to 30% of our average invested assets on the date of their purchase. All other mortgage loans we make are secured by a first mortgage (or deed of trust). We may make fixed-interest rate loans having maturities of three to twenty-five years. We may borrow up to 300% of our shareholders' equity. LENDING GUIDELINES We follow specified lending guidelines and criteria in evaluating the creditworthiness of potential borrowers. These guidelines and criteria include: >> Loans we make cannot exceed 75% of the appraised value of the real property and improvements securing the loan. >> We may not loan more than $1,000,000 to a single borrower. >> We require appraisals of the property securing our loans. >> The borrower must furnish us with a mortgagee title policy insuring our interest in the collateral. >> The borrower's long-term debt (including the proposed loan) as of the date of the mortgage loan may not exceed four times the borrower's gross income for its most recent twelve (12) months. >> The borrower must furnish us with its reviewed or audited financial statements for the last two (2) complete fiscal years and financial statements for the period within ninety (90) days of the loan closing date. 4
RATIO OF EARNINGS TO FIXED CHARGES For the Period Ended Decmeber 31, Six Month Period --------------------------------- Ended June 30, ------------------ 1999 2000 2001 2002 2003 2003 (1) 2004 2004 (1) (actual) (proforma) (actual) (pro forma) ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ Earnings (Interest $952,712 $ 1,208,452 $ 1,304,845 $ 1,451,182 $2,106,358 $3,427,211 $1,268,622 $1,301,550 Income) Fixed Expenses 833 68,199 26,835 161,241 805,604 2,126,457 522,969 555,897 Ratio of Earnings to 1143.71:1 17.72:1 48.62:1 9.00:1 2.61:1 1.61:1 2.43:1 2.34:1 Fixed Charges
(1) Adjusted to reflect the sale of all certificates offered and assumes a weighted average interest rate of 6.275% per year ($1,255,000 total). Actual interest rates we will pay on certificates will be set forth in a supplement to this prospectus. Further assumes that we derive no income from the application of certificate sale proceeds to new mortgage loans. 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 shares or certificates) of at least $30,000 and a net worth (exclusive of home, home furnishings and automobiles) of $30,000; or (ii) a net worth (determined with the foregoing exclusions) of at least $100,000. You may purchase more than $5,000 of certificates only if you have either: (i) a minimum annual gross income (without regard to your investment in shares or certificates) of at least $45,000 and a net worth (exclusive of home, home furnishings and automobiles) of at least $45,000; or (ii) a net worth (determined with the foregoing exclusions) of at least $150,000. Suitability standards may be higher in certain states. Potential investors who are residents of Arizona, Arkansas, Kansas, Minnesota, North Dakota, Texas or Washington should read Exhibit A for suitability requirements particular to their state. In addition to the above suitability standards, it is recommended that Kansas investors limit their investment to no more than 10% of their net worth (exclusive of home, home furnishings and automobiles). In addition to the above suitability standards, residents of 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 account application to be signed by all purchasers of the Series B 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 NASD. 5 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 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 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 most corporations and their shareholders are subject. Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions. To qualify and maintain our status as a REIT, we must meet certain share ownership, income, asset and distribution tests on a continuing basis. No assurance can be given that we will satisfy these tests at all times. Further, the requirements for a REIT may substantially affect day-to-day decision-making by our advisor. Our advisor may be forced to take action it would not otherwise take or refrain from action which might otherwise be desirable in order to maintain our REIT status. If we fail to qualify as a REIT in any taxable year, then we would be subject to federal income tax on our taxable income at regular corporate rates and not be allowed a deduction for distributions to shareholders. We would be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status. We intend to operate as a REIT. However, future economic, market, legal, tax or other consequences may cause our board of directors to revoke the REIT election. Loss of REIT status from either our disqualification as a REIT or our revocation of REIT status would not affect 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. 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. 6 Risks Related to the Certificates We May Incur More Indebtedness. We may incur additional indebtedness in the future. We may assign or pledge some of our mortgage-secured promissory notes or other collateral in connection with incurring this additional indebtedness. Our ability to incur additional indebtedness is limited to 300% of our Shareholders' Equity by our bylaws. Once this threshold is reached, we will not be able to incur additional indebtedness unless we raise additional equity capital. This limitation could restrict our growth or affect our ability to repay the certificates as they mature. There Are Potential Adverse Effects Associated With Lending Borrowed Funds. We intend to deploy the proceeds from this offering to make loans to churches and other non-profit religious organizations. We have also used our line of credit with Beacon Bank, Shorewood, Minnesota, to fund loans, and intend to use our line of credit in this way in the future. Lending borrowed funds is subject to greater risks than in unleveraged lending. The profit we realize from lending borrowed funds is largely determined by the difference, or "spread," between the interest rates we pay on the borrowed funds and the interest rates that our borrowers pay us. Our spread may be materially and adversely affected by changes in prevailing interest rates. Furthermore, the financing costs associated with lending borrowed funds could decrease the effective spread in lending borrowed funds, which could adversely affect our ability to pay interest on and repay the certificates as they mature. Fluctuations In Interest Rates May Affect Our Ability to Sell Certificates. If the interest rates we offer on certificates become less attractive due to changes in interest rates for similar investments, our ability to sell certificates could be adversely affected or certificate holders could choose not to renew their certificates upon maturity. Since we will rely on the proceeds from the sales of certificates and renewals of certificates, in part, to pay maturing certificates, a decline in sales of certificates could adversely affect our ability to pay your certificate upon maturity. We may change the interest rates at which we are currently offering certificates in response to fluctuations in interest rates. There Is No Public Market for the Certificates. There is no market for the certificates. It is unlikely that a market will develop. The certificates will not be listed on any exchange and will not be qualified for quotation on NASDAQ. In addition, the market for REIT securities historically has been less liquid than other types of publicly-traded 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 equal to at least 120% of the outstanding principal balance of the certificates. If we default in the repayment of the certificates, or another event of default occurs, the trustee will not be able to foreclose on the mortgages securing the promissory notes and bonds in order to obtain funds to repay certificate holders. Rather, the trustee will need to look to the revenue stream associated with our borrowers' payments on or repayment of the promissory notes and bonds or revenue derived from sale of the promissory notes or bonds to repay certificate holders. If the trustee chooses to rely on revenues received from our borrowers, certificate holders may face a delay in payment on certificates in the event of default, as borrowers will repay their obligations to us in accordance with amortization schedules associated with their promissory notes or bonds. If the trustee chooses to sell promissory notes or bonds in the event of our default, the proceeds from the sales may not be sufficient to repay our obligations on all outstanding or defaulted certificates. The Certificates Are Not Negotiable Instruments and Are Subject to Restrictions on Transfer. The certificates are not negotiable debt instruments. Rights of record ownership of the certificates may be transferred only with our advisor's prior written consent. You will not be able to freely transfer the certificates. We Are Obligated To Redeem Certificates Only In Limited Circumstances. You will have no right to require us to prepay or redeem any certificate prior to its maturity date, except in the case of your death or if we replace our current advisor. Further, even in the event of your death, we will not be required to redeem your certificates if we have redeemed at least $25,000 of principal amount of certificates during the calendar quarter in which your representative notifies us of your death and requests redemption. We do not intend to redeem certificates prior to maturity except in the case of death. 7 We May Not Have Sufficient Available Cash to Redeem Certificates If We Terminate Our Advisory Agreement With Our Current Advisor. We will be required to offer to redeem all outstanding certificates if we terminate our advisory agreement with Church Loan Advisors, Inc., our current advisor, for any reason. If the holders of a significant principal amount of certificates request that we redeem their certificates, we may be required to sell a portion of our mortgage loan and church bond portfolio to satisfy the redemption requests. Any such sale would likely be at a discount to the recorded value of the mortgage loans and bonds being sold. Further, if we are unable to sell loans or church bonds in our portfolio, we may be unable to satisfy the redemption obligations. The Indenture Contains Limited Protection For Holders of Certificates. The indenture governing the certificates contains only limited events of default other than our failure to pay principal and interest on the certificates on time. Further, the indenture provides for only limited protection for holders of certificates upon a consolidation or merger between us and another entity or the sale or transfer of all or substantially all of our assets. If we default in the repayment of the certificates or under the indenture, you will have to rely on the trustee to exercise your remedies on your behalf. You will not be able to seek remedies against us directly. Risks Related to Management We Are Dependent Upon Our Advisor. Our advisor, Church Loan Advisors, Inc., manages us and selects our investments subject to general supervision by our board of directors and compliance with our lending policies. We depend upon our advisor and its personnel for most aspects of our business operations. Our success depends on the success of our advisor in locating borrowers and negotiating loans upon terms favorable to us. Among others, our advisor performs the following services for us:
o mortgage loan marketing and procurement o managing relationships with our accountants and o bond portfolio selection and investment attorneys o mortgage loan underwriting o corporate management o mortgage loan servicing o bookkeeping o money management o reporting to state, federal, tax and other o developing and maintaining business relationships regulatory authorities o maintaining "goodwill" o reports to shareholders and shareholder relations
Our shareholders' right to participate in management is generally limited to the election of directors. Certificate holders will have no right to participate in our management. You should not purchase certificates unless you are willing to entrust our management to our advisor and our board of directors. We Have Conflicts of Interest with Our Advisor and the Underwriter. Affiliations and conflicts of interests exist among our officers and directors and the owner and officers and directors of our advisor and the underwriter. Our advisor and the underwriter are both owned by our President, Philip Myers. Our President and the officers and directors of our advisor are involved in the church financing business through their affiliations with the underwriter. The underwriter originates, offers and sells first mortgage bonds for churches. We may purchase first mortgage bonds issued by churches through the underwriter in its capacity as underwriter for the issuing church, or as broker or dealer on the secondary market. In such event, the underwriter would receive commissions (paid by the issuing church) on original issue bonds, or "mark-ups" in connection with any secondary transactions. If we sell church bonds in our portfolio, the bonds will be sold through the underwriter. We would pay the underwriter commissions in connection with such transactions. Our bylaws limit the amount of all commissions, mark-downs or mark-ups paid to the underwriter. Our business dealings with our advisor and its affiliates also must be approved by a majority of our board of directors, including a majority of our independent directors. Generally, mortgage loans we originate are smaller than the bond financings originated by the underwriter. However, there may be circumstances where our advisor and the underwriter could recommend either type of financing to a prospective borrower. The decisions of our advisor and the underwriter could affect the credit quality of our portfolio. Redemption Obligations Relating to the Certificates May Affect Our Ability to Replace our Advisor. We will be required to offer to redeem all outstanding certificates if we terminate our advisory agreement with Church Loan Advisors, Inc. Our independent directors are required to review and approve the agreement with our advisor on an annual basis. The redemption provision relating to the certificates may have the effect of reducing our ability to replace our current advisor. 8 Risks Related to Mortgage Lending We Are Subject to the Risks Generally Associated with Mortgage Lending. Mortgage lending involves various risks, many of which are unpredictable and beyond our control and foresight. It is not possible to identify all potential risks associated with mortgage lending. Some of the more common risks encountered may be summarized as follows:
o low demand for mortgage loans o availability of alternative financing and competitive conditions o interest rate fluctuations o factors affecting specific borrowers o changes in the level of consumer confidence o losses associated with default, foreclosure of a o availability of credit-worthy borrowers mortgage, and sale of the mortgaged property o national and local economic conditions o state and federal laws and regulations o demographic and population patterns o bankruptcy or insolvency of a borrower o zoning regulations o taxes and tax law changes
Second Mortgage Loans Pose Additional Risks. Our financing policies allow us to make second mortgage loans. The principal amount of such loans may not exceed 20% of our average invested assets. Second mortgage loans entail more risk than first mortgage loans, as foreclosure of senior indebtedness or liens could require us to pay the senior debt or risk losing our mortgage. Fixed-Rate Debt Can Result in Yield Fluctuations. Fixed-rate debt obligations carry certain risks. A general rise in interest rates could make the yield on a particular mortgage loan lower than prevailing rates. This could negatively affect our value and consequently the value of the certificates. Neither we nor our advisor can predict changes in interest rates. We will attempt to reduce this risk by maintaining medium and longer-term mortgage loans and through offering adjustable rate loans to borrowers. We do not intend to borrow funds or sell certificates if the cost of such borrowing exceeds the income we believe we can earn from lending the funds. The Mortgage Banking Industry Is Highly Competitive. We compete with a wide variety of lenders, including banks, savings and loan associations, insurance companies, pension funds and fraternal organizations for mortgage loans. Many competitors have greater financial resources, larger staffs and longer operating histories than we have, and thus may be a more attractive lender to potential borrowers. We intend to compete by limiting our business "niche" to lending to churches and other non-profit religious organizations, offering loans with competitive and flexible terms, and emphasizing our expertise in the specialized industry segment of lending to churches and other non-profit religious organizations. Fluctuations in Interest Rates May Affect Our Ability to Repay the Certificates. Prevailing market interest rates impact borrower decisions to obtain new loans or to refinance existing loans, possibly having a negative effect upon our ability to originate mortgage loans. If interest rates decrease and the economic advantages of refinancing mortgage loans increase, then prepayments of higher interest mortgage loans in our portfolio would likely reduce our portfolio's overall rate of return (yield). We Are Subject to the Risks Associated with Fluctuations in National and Local Economic Conditions. The mortgage lending industry is subject to increased credit risks and rates of foreclosures during economic downturns. In addition, because we provide mortgages to churches and other religious organizations who generally receive financing through charitable contributions, our financial results are subject to fluctuations based on a lack of consumer confidence or a severe or prolonged national or regional recession. As a result of these and other circumstances, our potential borrowers may decide to defer or terminate plans for financing their properties decreasing demand for mortgage loans. In addition, during such economic times we may be unable to locate as many credit-worthy borrowers. Our Business May Be Adversely Affected If Our Borrowers Become Insolvent or Bankrupt. If any of our borrowers become insolvent or bankrupt, the borrower's mortgage payments will be delayed and may cease entirely. We may be forced to foreclose on the mortgage and take legal title to the real estate and incur expenses related to the foreclosure and disposition of the property. 9 Risks Related to Mortgage Lending to Churches Churches Rely on Member Contributions to Repay Our Loans. Churches rely on member contributions for their primary source of income. Member contributions are used to repay our loans. The membership of a church or the per capita contributions of its members may not increase or remain constant after a loan is funded. A decrease in a church's income could result in its inability to pay its obligation to us, which may affect our ability to pay 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. Expenses of Foreclosure May Prevent Us From Recovering the Full Value of a Loan. If we foreclose on a mortgage and take legal title to a church's real estate, real estate taxes could be levied and assessed against the property since the property would no longer be owned by a non-profit entity. The property may also incur operating expenses pending its sale, such as property insurance, security, repairs and maintenance. These expenses would be our financial responsibility, and could be substantial in relation to our prior loan if we cannot readily dispose of the property. Such expenses could prevent us from recovering the full value of a loan in the event of foreclosure. Risks Related to Environmental Laws We May Face Liability Under Environmental Laws. Under federal, state and local laws and regulations, a secured lender (like us) may be liable, under certain limited circumstances, for the costs of removal or remediation of certain hazardous or toxic substances and other costs (including government fines and injuries to persons and adjacent property). Liability may be imposed whether or not the owner or lender knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of remediation or removal of hazardous or toxic substances, or of fines for personal or property damages, may be substantial and material to our business operations. The presence of hazardous or toxic substances, or the failure to promptly remediate such substances, may adversely affect our ability to resell real estate collateral after foreclosure or could cause us to forego foreclosure. This is a changing area of the law. The courts have found both in favor and against lender liability in this area under various factual scenarios. The Collateral For Our Loans and Our Lenders May Be Subject to Environmental Claims. If there are environmental problems associated with the real estate securing any of our loans, the associated remediation or removal requirements imposed by federal, state and local laws could affect our ability to realize value on our collateral or our borrower's ability to repay its loan. Future Changes in Tax Laws May Affect Our REIT Status In this prospectus, we discuss our tax treatment as a REIT 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. 10 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 $30,000 and a net worth (exclusive of home, home furnishings and automobiles) of $30,000; or (ii) a net worth (determined with the foregoing exclusions) of at least $100,000. You may purchase more than $5,000 of certificates only if you have either: (i) a minimum annual gross income of (without regard to your investment in shares or certificates) at least $45,000 and a net worth (exclusive of home, home furnishings and automobiles) of $45,000; or (ii) a net worth (determined with the foregoing exclusions) of at least $150,000. Suitability standards may be higher in some states. Potential investors who are residents of Arizona, Arkansas, Kansas, Minnesota, North Dakota, Texas or Washington should read Exhibit A for suitability requirements particular to their state. You must represent in your subscription agreement that you satisfy any applicable suitability standards. In addition to the above suitability standards, it is recommended that Kansas investors limit their investment to no more than 10% of their net worth (exclusive of home, home furnishings and automobiles). In addition to the above suitability standards, residents of 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. 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. 11 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) $23,000,000 100.00% Less Expenses Selling Commissions (2) 800,000 3.48% Commissions on Renewals (3) 45,000 .20% Underwriter's Expense Allowance (4) 120,000 .52% Offering Expenses (5) 100,000 .43% Total Public Offering-Related Expenses 1,065,000 4.63% Amount Available for Investment (6) $21,935,000 95.37%
- -------------------------------- (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 3.0% and an underwriting management fee equal to 1.0% of the principal amount of certificates sold. (3) We will pay the underwriter a sales commission of up to 1.50% on the renewal of any of the Series A certificates. An underwriter's management fee will not be paid on any certificates that are renewed. (4) We will pay the underwriter a non-accountable expense allowance of up to $120,000, if all of the shares and certificates are sold, payable as follows: (i) $20,000 is payable upon the sale of $1,000,000 of certificates; and (ii) $100,000 is payable ratably as the remaining $19,000,000 of certificates is sold. (5) 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. (6) Substantially all of the net proceeds from the sale of certificates will be used to make mortgage loans to churches and other non-profit religious organizations and purchase mortgage bonds issued by churches. Some of the proceeds may be used to pay down our line of credit, redeem our equity securities and repay maturing certificates. We will use no more that 15% of the gross proceed of this offering to pay interest on certificates and repay principal to certificate holders. Pending application of the proceeds as outlined above, the net proceeds of this offering will be invested in permitted temporary investments. 12 COMPENSATION TO ADVISOR AND AFFILIATES This table discloses all the compensation our advisor and its affiliates can receive either directly or indirectly. In accordance with applicable state law, the total of all acquisition fees and expenses we pay in connection with our business cannot exceed 6% of the amount loaned, unless a majority of the directors (including a majority of our independent directors) not otherwise interested in the transaction approve the transaction as being commercially competitive, fair and reasonable to us. Our total operating expenses cannot (in the absence of a satisfactory showing to the contrary) in any fiscal year exceed the greater of: (a) 2% of our average invested assets; or (b) 25% of our net income for the year. Our independent directors may, upon a finding of unusual and nonrecurring factors which they deem sufficient, determine that a higher level of expenses is justified in any given year.
ADVISOR COMPENSATION ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION - -------- --------- -------------------------------- COMPENSATION Advisory Fee Advisor 1.25% annually, paid monthly, of our average invested assets. 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 $116,293 for the year ended December 31, 1999, $154,389 for the year ended December 31, 2000, $162,131 for the year ended December 31, 2001, $172,151 for the year ended December 31, 2002, $269,043 for the year ended December 31, 2003 and $101,673for the six months ended June 30, 2004. Assuming all of the certificates are sold and our average invested assets were $45,000,000, the advisory fee would be $537,500 per year. Acquisition Advisor In connection with mortgage loans we make, borrowers may be required to pay our Fees/Expenses advisor's expenses for closing and other loan-related expenses, such as accounting fees and appraisal fees paid by our advisor to independent service providers. Our advisor may retain payments made by the borrower in excess of costs, but our bylaws limit the total of all acquisition fees and acquisition expenses to a reasonable amount and in no event in excess of six percent (6%) of the funds advanced to the borrower. Advisor Loan Advisor One-half of the origination fees collected from the borrower at closing in Origination Fee connection with each mortgage loan we make. Our advisor received origination fees in the amount of $114,685 for the year ended December 31, 1999, $21,250 for the year ended December 31, 2000, $37,297 for the year ended December 31, 2001, $98,270 for the year ended December 31, 2002, $275,860 for the year ended December 31, 2003 and $41,236 for the six months ended June 30, 2004. 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 $18,980,000 in mortgage loans with an average origination fee of 3%, the loan origination fees payable to our advisor in such year would be $284,700. As our loans mature or are otherwise repaid, we may make new loans to borrowers. Loan origination fees would be payable to our advisor in connection with these loans. 13 AFFILIATE COMPENSATION ITEM OF RECIPIENT AMOUNT OR METHOD OF COMPENSATION - -------- --------- -------------------------------- COMPENSATION Commissions on the Sale of Underwriter 3.0% of the principal amount of the certificates. The underwriter may re-allow Certificates in this Offering all or a portion of this amount to other participating broker-dealers who are members of the National Association of Securities Dealers, Inc. Non-Accountable Expense Underwriter Up to $120,000 to cover the underwriter's costs and expenses relating to Allowance Relating to the Sale of the offer and sale of the certificates in this offering, payable as Certificates in this Offering follows: (i) $20,000 paid upon the sale of the first $1,000,000 of certificates, and (ii) $100,000 payable ratably based on the principal amount of the certificates sold thereafter. Underwriter's Management Fee Underwriter 1.0% of the principal amount of the certificates, payable only upon original issuance. We will not pay the underwriter a management fee upon renewal of certificates. Commissions and Expenses on Underwriter Customary mark-ups and mark-downs on first mortgage church bonds we purchase and First Mortgage Bonds sell through the underwriter on the secondary market, and commissions earned Purchased through the underwriter on church bonds we purchase in the primary market. Renewal Commissions Underwriter We will pay the underwriter a commission not to exceed 1.5% on the renewal of each certificate.
14 CONFLICTS OF INTEREST We are subject to various conflicts of interest arising from our relationship with our advisor and the underwriter. Our President owns both our advisor and the underwriter. Our advisor, its affiliates, our directors and the directors of our advisor are not restricted from engaging for their own accounts in business activities similar to ours. Occasions may arise when our interests would be in conflict with those of one or more of the directors, our advisor or their affiliates. Our directors, a majority of whom are independent, will endeavor to exercise their fiduciary duties in a manner that will preserve and protect our rights and the interests of the shareholders in the event any conflicts of interest arise. Any transactions between us and any director, our advisor or any of their affiliates, other than the purchase or sale, in the ordinary course of our business, of church bonds from or through the underwriter, will require the approval of a majority of the directors who are not interested in the transaction. Transactions with Affiliates and Related Parties We compensate our advisor and its affiliates for services they provide to us. Our board of directors has the responsibility to ensure that such services are provided on terms no less favorable than we could obtain from unrelated persons or entities. The underwriter may receive commissions from our transactions in church bonds. Compensation to Our Advisor and Conflicts of Interest We pay our advisor an annual advisory fee equal to a 1.25% of our average invested assets. 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 fees when we make or renew a mortgage loan based upon a percentage of the amount paid by a mortgage borrower as "points," or origination fees. Accordingly, a conflict of interest could arise since the retention, acquisition or disposition of a particular loan could be advantageous to our advisor, but detrimental to us, or vice-versa. Because origination fees are payable upon the closing of the loan or its renewal, and the amount is dependent upon the size of the mortgage loan, our advisor may have a conflict of interest in negotiating the terms of the loan and in determining the appropriate amount of indebtedness to be incurred by the borrower. We and our advisor believe that it would not be possible, as a practical matter, to eliminate these potential conflicts of interest. However, the advisory agreement must be renewed annually by the affirmative vote of a majority of the independent directors. The independent directors may determine not to renew the advisory agreement if they determine that our advisor is not satisfactorily performing its duties. In connection with the performance of their fiduciary responsibilities, the existence of possible conflicts of interest will be one of the factors for the directors to consider in determining the action we will take. Compensation to the Underwriter and Conflicts of Interest We will pay the underwriter commissions based on the gross amount and maturities of the certificates it sells on our behalf in this offering. A conflict of interest could arise from this compensation arrangement, as the underwriter may be incentivized to sell certificates prior to our being able to deploy the resulting proceeds to fund mortgage loans or purchase church bonds. Our Affiliates May Compete with Us Any of our directors or officers may have personal business interests that conflict with our interests and may engage in the church lending business or any other business. A director or officer may have an interest in an entity we engage to render advice or services, and may receive compensation from such entity in addition to compensation received from us. The underwriter provides financing to churches and other not-for-profit religious organizations. Therefore, a conflict could arise if the underwriter were to pursue and secure a lending opportunity otherwise available to us. However, the average size of first mortgage bond financings undertaken by the underwriter is approximately $1.75 million, with $1,000,000 being its stated (but not required) minimum financing. We focus on financings ranging from $100,000 to $1,000,000 in size. Conflicts of interest between the underwriter and us likely will be reduced by virtue of the targeted size of loans pursued by each. We have agreed with the underwriter that financing prospects of less than $1,000,000 will be first directed to us for consideration. If we determine that the loan is not suitable or decline to make the loan for any reason, or if the prospective borrower independently declines to accept our lending, then the underwriter or its affiliates will have the opportunity to provide financing to that prospective borrower. 15 The underwriter conducted the first mortgage bond offerings for the churches owning the three properties on which we hold second mortgages. If a default were to occur on any of our second mortgage loans or the first mortgage bonds secured by the properties securing or second mortgages, our interests may be in conflict with those of the underwriter or its affiliates. Neither our advisor nor its affiliates are prohibited from providing the same services to others, including competitors. These relationships may produce conflicts in our advisor's and its affiliates' allocation of time and resources among various projects. Non Arm's-Length Agreements Many agreements and arrangements we have with our advisor and its affiliates, including those relating to compensation, were not negotiated at arm's-length. The conflicts or potential conflicts arising from these agreements and arrangements will be mitigated by the following factors: (i) our Bylaws limit our operating expenses to an amount that does not exceed the greater of 2% of our average invested assets or 25% of our net income unless the independent directors approve a higher amount and disclose the justification for the higher expenses to our investors; (ii) our advisor intends to structure its business relationships so as to be competitive with other programs in the marketplace; and (iii) the agreements and arrangements are subject to approval by a majority of our independent directors. Lack of Separate Legal Representation We are represented by the law firm of Winthrop & Weinstine, P.A., Minneapolis, Minnesota, which has also acted and will continue to act as counsel to the underwriter, our advisor, our affiliates, and various affiliates of our advisor with respect to other matters. Shared Operations Facilities We are located in the leased offices of the underwriter, American Investors Group, Inc., in Minnetonka (Minneapolis), Minnesota. We expect to continue to be housed in these or similar leased premises along with the underwriter and its affiliates. We are not separately charged for rent or related expenses. Our advisor incurs our occupancy expense and many of our operating expenses in exchange for the advisory fee. DISTRIBUTIONS In order to qualify for the beneficial tax treatment afforded real estate investment trusts by the Internal Revenue Code, we are required to pay dividends in annual amounts which are equal to at least 90% of our "real estate investment trust taxable income." We intend to make distributions that meet this requirement. Annual distributions will be estimated for the first three quarters of each fiscal year and adjusted annually based upon our audited year-end financial report. Investors who purchase certificates in this offering will not be entitled to receive dividends from us as they will not own any of our common stock. We began making regular quarterly distributions to our shareholders for the period of operations ended June 30, 1996. Distributions to date, and the annualized effective yield represented by such distributions (assuming shares you own were purchased for $10.00 per share) are as follows:
- --------------------------------- ------------------------------- ------------------------------- ------------------------------- Dollar Amount Annualized Yield Distribution Distributed Per Share For Quarter Ended: Date: Per Share(2): Represented (3): - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 1996 July 31, 1996 0.1927 (1) 9.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 1996 October 30, 1996 0.23125 9.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 1996 January 31, 1997 0.240625 9.625% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 1997 April 30, 1997 0.225 9.00% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 1997 July 31, 1997 0.22875 9.15% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 1997 October 30, 1997 0.2375 9.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 1997 January 31, 1998 0.25625 10.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 1998 April 30, 1998 0.23125 9.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 1998 July 31, 1998 0.23125 9.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- 16 - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 1998 October 30, 1998 0.2125 8.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 1998 January 31, 1999 0.215625 8.625% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 1999 April 30, 1999 0.1875 7.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 1999 July 31, 1999 0.21875 8.75% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 1999 October 30, 1999 0.228125 9.125% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 1999 January 31, 2000 0.215625 8.625% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 2000 April 30, 2000 0.20 8.00% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 2000 July 31, 2000 0.1875 7.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 2000 October 31, 2000 0.2125 8.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 2000 January 31, 2001 0.225 9.00% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 2001 April 30, 2001 0.2125 8.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 2001 July 31, 2001 0.225 9.00% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 2001 October 30, 2001 0.20 8.00% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 2001 January 31, 2002 0.19375 7.75% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 2002 April 30, 2002 0.20625 8.25% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 2002 July 31, 2002 0.209375 8.375% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 2002 October 31, 2002 0.1875 7.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 2002 January 31, 2003 0.165625 6.625% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 2003 April 30, 2003 0.165625 6.625% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 2003 July 31, 2003 0.1625 6.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- September 30, 2003 October 31, 2003 0.1531255 6.125% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- December 31, 2003 January 31, 2004 0.16875 6.75% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- March 31, 2004 April 30, 2004 0.1625 6.50% - --------------------------------- ------------------------------- ------------------------------- ------------------------------- - --------------------------------- ------------------------------- ------------------------------- ------------------------------- June 30, 2004 July 31, 2004 0.153125 6.125% - --------------------------------- ------------------------------- ------------------------------- -------------------------------
(1) Represents a 75 day operating period (April 15 to June 30, 1996). (2) Distributions for the first three quarters of a year may exceed accumulated earnings and profits at such date. However, the annual cumulative dividends for each year are not intended to exceed annual earnings and profits. (3) Annualized yield for shares purchased for $10.00 per share. We terminated our dividend reinvestment plan on July 1, 2004. 17 CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2003 and June 30, 2004 and as of December 31, 2003 and June 30, 2004 as adjusted to give effect to sale of all of the certificates offered hereby. December 31, 2003 December 31, 2003 June 30, 2004 June 30, 2004 Actual As Adjusted Actual As Adjusted Long Term Debt $ 13,573,000 $ 33,573,000 $ 13,920,000 $ 33,920,000 Current Liabilities 1,144,407 1,144,407 1,419,779 1,419,779 Deferred Income 556,673 556,673 512,410 512,410 Shareholder's Equity Common Stock, $.01 par value per share; 30,000,000 shares authorized; issued and outstanding 2,452,277 shares at December 31, 2003 and 2,546,094 shares at June 30, 2004 24,523 24,523 25,461 25,461 Additional Paid-In Capital 22,471,234 22,471,234 23,321,854 23,321,854 Accumulated Deficit (630,850) (630,850) (676,985) (676,985) Total Shareholder's Equity 21,864,907 21,864,907 22,670,330 22,670,330 Total Capitalization $ 37,138,987 $ 57,138,987 $ 38,522,519 $ 58,522,519
18 SELECTED FINANCIAL DATA The selected financial data presented below is derived from our audited financial statements at and for the years ended December 31, 1999, 2000, 2001, 2002 and 2003. The selected financial data is from our unaudited financial statement at and for the six months ended June 30, 2004. 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.
Six Months Year Ended December 31, Ended ----------------------------------------------------------------------------- June 30, 1999 2000 2001 2002 2003 2004 ------------- ------------ ----------- ------------ ------------ ------------ Statement of Operations Data Revenues Interest Income Loans $848,346 $1,160,113 $1,247,261 $1,338,459 $1,906,051 $1,140,388 Interest Income Other 200,165 219,857 243,504 389,416 447,733 283,287 Capital Gains Realized 14,828 1,293 5,839 7,208 34,207 3,061 Origination Income 45,690 25,223 27,071 49,543 71,204 86,491 Income Other Sources 407 928 1,887 817 59 - 0 - ---------- ---------- ------- -------- --------- --------- Total Revenues 1,109,436 1,407,414 1,525,562 1,785,443 2,459,254 1,513,227 Operating Expenses Professional Fees 11,351 21,241 20,606 29,187 37,273 26,828 Director Fees 3,200 3,200 3,200 3,800 3,800 2,800 Amortization 833 2,917 - 0 - 29,874 113,466 85,244 Advisory Fees 116,293 154,389 162,131 172,151 269,043 101,673 Other 25,880 20,132 34,780 141,840 42,780 113,304 -------- ------- ------- ------- ------ ------- Total Operating Expenses 157,557 201,879 220,717 376,852 466,362 329,849 Interest Expense - 0 - 65,282 26,835 118,650 692,138 437,725 Benefit From Income Taxes (20,000) - 0 - - 0 - - 0 - - 0 - - 0 - -------- ------- ------- -------- ------- ------ Net Income $971,879 $1,140,253 $1,278,010 $1,289,941 $1,300,754 $745,653 ======= ========= ========= ========= ========= ======= Income per Common Share $ .81 $ .81 $ .80 $ .66 $.55 $ .30 Weighted Average Common Shares Outstanding 1,203,954 1,414,275 1,593,568 1,964,428 2,345,604 2,503,080 Dividends Declared $1,024,501 $1,164,973 $1,324,091 $1,496,369 $1,524,061 $791,788 Dividends Declared per Share $ .85 $ .825 $ .83125 $ .76875 $ .64975 $ .315625 December 31, June 30, ---------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 ------------ ------------- ----------- ----------- ------------ ---------- Balance Sheet Data: Assets: Cash and Cash Equivalents $ 382,765 $213,084 $ 1,256,556 $ 7,852,220 $ 4,368,769 $ 2,325,357 Current maturities of loans receivable 218,398 276,565 298,921 290,759 919,859 2,496,705 Current maturities of bond - 0 - - 0 - - 0 - 47,000 54,000 49,000 portfolio Loans Receivable, net of current maturities 10,189,529 11,463,484 11,724,272 16,140,961 25,383,192 25,100,288 Bonds Receivable 2,056,199 2,289,962 3,162,511 4,309,637 5,431,286 7,628,044 Accounts Receivable 5,782 9,892 58,008 63,602 61,423 67,061 Interest Receivable - 0 - 15,651 66,236 94,385 135,648 134,075 Prepaid Expense 2,917 9,110 - 0 - - 0 - - 0 - 11,001 Real-Estate Held for Sale - 0 - - 0 - - 0 - - 0 - 156,352 120,000 Deferred Offering Costs - 0 - - 0 - 56,587 377,174 568,458 530,988 Deferred Tax Asset 60,000 60,000 60,000 60,000 60,000 60,000 ------ ------ ------ ------ ------ ------ Total Assets $12,915,590 $14,337,748 $16,683,091 $29,235,738 $37,138,987 $38,522,519 ========== ========== ========== ========== ========== ========== Liabilities and Shareholder's Equity Account Payable $ - 0 - $ 116,997 $ 4,350 $ 39,690 $ 17,296 $ 46,131 Investors Saver Certificates - 0 - - 0 - - 0 - 7,428,000 14,257,000 14,872,000 Note payable, line of credit 500,000 399,653 - 0 - - 0 - - 0 - - 0 - Mortgage Loan Commitment - 0 - - 0 - - 0 - 1,243,827 - 0 - - 0 - Deferred Income 187,991 213,059 260,942 364,969 588,303 545,803 Dividends Payable 274,280 293,629 344,504 361,941 411,481 388,255 Shareholder's Equity 11,953,319 13,314,410 16,073,295 19,797,311 21,864,907 22,670,330 ---------- ---------- ---------- ---------- ---------- ---------- $12,915,590 $14,337,748 $16,683,091 $29,235,738 $37,138,987 $38,522,519 ========== ========== ========== ========== ========== ==========
19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis The following discussion regarding our financial statements should be read in conjunction with the financial statements and notes thereto included in this prospectus beginning at page F-1. We commenced operations as a real estate investment trust in 1996, specializing in providing mortgage loans to churches and other religious non-profit organizations. Financial Condition During the six months ended June 30, 2004 and the year ended December 31, 2003 our total assets increased by $1,383,532 and $7,903,249, respectively due primarily to sale of our common stock and secured investor certificates in our fourth "best efforts" public offering. Our total liabilities increased by $4,843,504 and $5,835,653 at June 30, 2004 and December 31, 2003, respectively due primarily to the issuance of our secured investor certificates. Since our inception, we have experienced our highest quarterly dividend payment for the quarter ended December 31, 1997 and experienced our lowest quarterly dividend payment for the quarter ended September 30, 2003 and June 30, 2004. 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 payment for each share held of record on September 30, 2003 was $.153125 representing an annualized yield of 6.125% 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 payment made to September 30, 2003 and June 30, 2004 shareholders of record was significantly lower than the average dividend amount due directly to large cash balances we received from our fourth public offering of stock and secured investor certificates and held in money market instruments pending deployment into new loans to churches. Because interest earned in our money market account at current yields is substantially lower than interest earned on our mortgage loans, interest income earned was lower than is anticipated to be earned once the offering proceeds are fully deployed into new loans. Results of Operations - June 30, 2004 Net income for the Company's six month periods ended June 30, 2004 and 2003 was $745,653 and $593,047 on total revenues of $1,513,227 and $1,097,223. Interest income earned on our portfolio of loans was $1,140,388 and $836,686 for the six month periods ended June 30, 2004 and 2003. The increase was due to the funding of additional mortgage loans and purchase of first mortgage bonds. Interest and debt offering amortization expenses were $437,725 and $289,712 for the six month periods ended June 30, 2004 and 2003. The increase was due to the sale of additional secured investor certificates. We have elected to operate as a real estate investment trust, therefore we distribute to shareholders at least 90% of "Taxable Income," the dividends declared and paid to shareholders for the period ended June 30, 2004 may include origination income even though it is not recognized in its entirety for the period under GAAP. As of June 30, 2004 and 2003, we had origination income of $43,991 and $175,185 during the first six months of the fiscal year for tax purposes. Our Board of Directors declared dividends of $.153125 for each share held of record on June 30, 2004. During our public offering, dividends are computed and paid to each Shareholder based on the number of days during a quarter that the shareholder owned their shares. The dividend, which was paid July 31, 2004, represents a 6.125% annual rate of return on each share of common stock owned and purchased for $10 per share. Our liabilities at the end of the six month period ended June 30, 2004 are primarily comprised of dividends declared as of June 30, 2004 but not yet paid, our secured investor certificates and accounts payable. Results of Operations - 2003 Net income for our fiscal year ended December 31, 2003 was $1,300,754 on total revenues of $2,459,254 compared to $1,289,941 on total revenues of $1,785,443 for the year ended December 31, 2002. Interest income earned on the Company's portfolio of loans was $1,906,051 for the year ended December 31, 2003, compared to $1,338,459 for 2002. This increase was due to the fact that 26 new loans were originated in fiscal year ended December 31, 2003. Excluded from revenue for the year ended December 31, 2003 is $286,836 of origination income we received. 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 20 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, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 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, 2003 were $466,362 compared to $376,852 for our fiscal year ended December 31, 2002. Our Board of Directors declared dividends of $.165625 for each share of record on March 31, 2003, $.1625 for each shares held of record on June 30, 2003, $.153125 for each shares held of record September 30, 2003 and $.16875 for each share held of record on December 31, 2003. Based on the four quarters ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003, the dividends paid represented an 6.625%, 6.50%, 6.125% and 6.75% annualized yield to shareholders, respectively, for an effective overall annual yield of 6.50% in 2003. In 2003, and especially in the third quarter of 2003, our dividend yield was significantly lower than in prior periods. This decrease results primarily from the large cash balances we received from our public offering of common stock and Secured Investor Certificates, which were held in money market instruments pending deployment into new loans. Because interest earned in our money market account is substantially lower than interest earned on our mortgage loans, interest income earned on a per share basis was lower than in prior periods. Results of Operations - 2002 Net income for our fiscal year ended December 31, 2002 was $1,289,941 on total revenues of $1,785,443 compared to $1,278,010 on total revenues of $1,525,562 for the year ended December 31, 2001. Interest income earned on the Company's portfolio of loans was $1,785,443 for the year ended December 31, 2002, compared to $1,525,562 for 2001. This increase was due to the fact that 16 new loans were originated in fiscal year ended December 31, 2002. Excluded from revenue for the year ended December 31, 2002 is $151,485 of origination income we received. As previously noted, recognition of origination income under GAAP must be deferred over the expected life of each loan. Our Board of Directors declared dividends of $.20625 for each share of record on March 31, 2002, $.209375 for each shares held of record on June 30, 2002, $.1875 for each shares held of record September 30, 2002 and $.165625 for each share held of record on December 31, 2002. Based on the four quarters ended March 31, 2002, June 30, 2002, September 30, 2002 and December 31, 2002, the dividends paid represented an 8.25%, 8.375%, 7.50% and 6.625% annualized yield to shareholders, respectively, for an effective overall annual yield of 7.6875% in 2002. In 2002, an especially in the last quarter of 2002, our dividend yield was significantly lower than in prior periods. This decrease results primarily from the large cash balances we received from our public offering of common stock and Secured Investor Certificates, which were held in money market instruments pending deployment into new loans. Because interest earned in our money market account is substantially lower than interest earned on our mortgage loans, interest income earned on a per share basis was lower than in prior periods. Results of Operations - 2001 Net income for our fiscal year ended December 31, 2001 was $1,278,010 on total revenues of $1,525,562 compared to $1,140,253 on total revenues of $1,407,414 for the year ended December 31, 2000. Interest income earned on the Company's portfolio of loans was $1,195,464 for the year ended December 31, 2001, compared to $1,160,113 for 2000. This increase was due to the fact that five new loans were originated in fiscal year ended December 31, 2001. Excluded from revenue for the year ended December 31, 2001 is $74,112 of origination income we received. Distribution to Shareholders of at least 90% of "Taxable Income," the dividends declared and paid to our Shareholders for the quarters ended March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001 included origination income even though it was not recognized in its entirety as income for the period under GAAP. Our operating expenses for our fiscal year ended December 31, 2001 were $220,717 compared to $201,879 for our fiscal year ended December 31, 2000. Our Board of Directors declared quarterly dividends of $.2125 for each share held of record on March 31, 2001, $.225 per share held of record June 30, 2001, $.20 per share held of record September 30, 2001, and $.19375 per share held of record on December 31, 2001. Based on the four quarters of operations for the quarters ended March 31, 2001, June 30, 2001, September 30, 2001, and December 31, 2001, the dividends paid represented a 8.50%, 9.00%, 8.00% and 7.75% annualized yield to shareholders respectively for an effective overall annual dividend yield of 8.3125% in 2001. 21 Liquidity and Capital Resources Our revenue is derived principally from interest income, and secondarily, from origination fees and renewal fees generated by mortgage loans that we make. We also earn income through interest on funds that are invested pending their use in funding mortgage loans or distributions of dividends to our shareholders, and on income generated on church bonds we may purchase and own. We generate revenue through (i) permitted temporary investments of the net proceeds from the sale of the shares, and (ii) implementation of our business plan of making mortgage loans to churches and other non-profit religious organizations. Our principal expenses are advisory fees, legal and accounting fees, communications costs with our shareholders, and the expenses of our stock transfer agent, registrar and dividend reinvestment agent. In addition, we are able to borrow funds in an amount not to exceed 300% of Shareholders' Equity in order to increase our lending capacity. We currently have a $2,000,000 secured line of credit with Beacon Bank, Shorewood, Minnesota. As of June 30, 2004 we have no outstanding balance against our line of credit. This credit line is secured by the pledge of $2,000,000 in principal amount of our Church Bonds. Interest on our line of credit is payable to Beacon Bank on a monthly basis. We believe that the rate at which we lend funds will always be higher than the cost at which we borrow the funds (currently our rate at which we can borrow funds is the prime interest rate plus 1/2% totalling 5.25%). However, there can be no assurance that we can loan funds out at rates higher than the rate at which we borrow the funds. We anticipate to "pay-down" any future borrowings on our line of credit by (i) selling additional securities in our public offering; (ii) applying the proceeds from principal payments on our current loan portfolio payments and any loan re-payments. Increases or decreases in the prime lending rate as well as the increase or decrease in the rate of interest charged on our loans has and likely will continue to impact interest income we will earn and, accordingly, influence dividends declared by our Board of Directors. Our registration statement to sell to the public 1,500,000 shares of our common stock at $10 per share ($15,000,000) and to sell to the public $15,000,000 of debt securities, which we call "Secured Investor Certificates" terminated in May 2004. In this offering we raised $7,180,440 through the sale of shares and $15,000,000 through the sale of Secured Investor Certificates. Our future capital needs over the next three to five years are expected to be met by (i) this public offering; (ii) the repayment of existing loans; and (iii) borrowing under our line of credit. We may borrow funds up to an amount that equals 300% of Shareholders' Equity. The objective of our current offering of certificates is to raise intermediate term funds that we can deploy into new loans at rates that provide a positive spread. This additional loan development will further diversify our loan portfolio while generating origination income to the advantage to our shareholders. The cost of this capital is expected to be lower than if borrowed directly from banks at variable rates of interest. Critical Accounting Policies and Estimates Preparation of our financial statements requires estimates and judgments to be made that affect the amounts of assets, liabilities, revenues and expenses reported. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. We evaluate these estimates based on assumptions we believe to be reasonable under the circumstances. The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated. Of our significant accounting policies, described in the notes to our financial statements included herewith, we believe that the estimation of fair value of our mortgage loans receivable and bond portfolio involve a high degree of judgment. We estimate the fair value of our mortgage loans receivable to be the same as the carrying value because of the substantial activity/turnover in this portfolio. We estimate the fair value of the bond portfolio to be the same as the carrying value because, even though there is no ready public market for these bonds, the cost is current. We do not consider future cash flows, the interest rate or the yield rate of a loan or bond in estimating fair value. We do not consider the availability of a market for a loan or bond in estimating fair value. We follow a loan loss reserve policy on our portfolio of loans outstanding. This critical policy requires complex judgments and the need to make estimates of future events, which may or may not materialize as planned. This policy reserves for principal amounts outstanding on a particular loan if cumulative interruptions occur in the normal payment schedule of a loan. Our policy will reserve for the outstanding principal amount of a loan in our portfolio if the amount is in doubt of being collected. 22 Listed below is our current loan loss reserve policy:
--------------- ------------------------ ------------------------------------------------------------------------------ Incident Percentage of Loan Status of Loan Reserved --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 1. None Loan is current, no interruption in payments during history of the loan, ("interruption" means receipt by us more than 30 days after scheduled payment date). --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 2. None Loan current, previous interruptions experienced, but none in the last six month period. --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 3. None Loan current, previous interruptions experienced, but none in the last 90 day period. --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 4. 1.00% Loan serviced regularly, but 2 or 3 payments cumulative in arrears. Delinquency notice been sent. --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 5. 2.00% Loan serviced regularly, but 4 or 5 payments cumulative in arrears. --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 6. 5.00% Loan more than 5 payments cumulative in arrears, loan servicing intermittent during the last 90 days. Ability of obligor to continue to service the loan at scheduled levels in doubt. Restructuring contemplated or imminent. --------------- ------------------------ ------------------------------------------------------------------------------ --------------- ------------------------ ------------------------------------------------------------------------------ 7. The Greater Of: (i) Loan is declared to be in default. Foreclosure proceeding underway or Accumulate reserve imminent. Reserve amount dependent on value of collateral. All expenses during default period related to enforcing loan agreements are expensed. equal to principal loan balance in excess of 65% of original collateral value; or (ii) 1% of the remaining principal balance each quarter during which the default remains in effect --------------- ------------------------ ------------------------------------------------------------------------------
Loan loss reserves are recorded on a quarterly basis. Quantitative and Qualitative Disclosure About Market Risk We are exposed to changes in interest rate as a result of borrowing activities used to fund operations and to make mortgage loans and as a result of the interest income received on the mortgage loans that we make. We borrow using both floating interest rate lines of credit and fixed rate notes payable. We primarily use medium-term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our costs of capital. At June 30, 2004, we had no floating interest rate debt outstanding under our credit facilities and $15,000,000 of fixed rate notes payable. The floating interest rate on the line of credit is based upon the prevailing prime interest rate plus 1/2% totalling 5.0%. A hypothetical one-percent change in the prevailing prime rate would not have affected our net income as there was currently no outstanding balance on our variable rate line of credit. The weighted average interest rate as of June 30, 2004 on our fixed rate notes payable was 5.91%. 23 OUR BUSINESS General American Church Mortgage Company was established by American Investors Group, Inc. (the "underwriter" or "American") to service demand that American identified through the course of its business for mortgage lending to borrowers in the amount of $100,000 to $1,000,000. Because of the regulatory and administrative expenses associated with bond financing, the economic feasibility of bond financing diminishes for financings under $750,000. As a result, American believed that many churches were forced to either forego the project for which their financing request was made, fund their project from cash flow over a period of time and at greater expense, or seek bank financing on terms which were not always favorable or available to them. We were incorporated in Minnesota on May 27, 1994 to provide a lending source to this segment of the industry, capitalizing on a lack of significant competition in the specialized business of making smaller church loans, the experienced human resources available at American and our advisor, and the marketing, advertising and general goodwill of American. We began making loans in April 1996. We make loans throughout the United States in principal amounts limited in range from $100,000 to $1,000,000. We may invest up to 30% of our average invested assets in mortgage-secured debt securities (bonds) issued by churches and other non-profit religious organizations. We intend to lend funds and acquire mortgage secured investments pursuant to our business plan as additional funds become available from this offering, and thereafter as funds from loan repayments, bond maturities and other resources become available. We utilize American's unique specialization in procuring, qualifying and servicing church loans to enhance our operations. American has underwritten first mortgage bonds for churches throughout the United States since 1987. In underwriting church bonds, American reviews financing applications, analyzes prospective borrowers' financial capability, and structures, markets and sells, mortgage-backed bond securities to the investing public. Since its inception, American has underwritten approximately 204 church bond financings, in which approximately $387,982,000 in first mortgage bonds have been sold to public investors. The average size of church bond financings underwritten by American since its inception is approximately $1,901,873. Financing Business We make first mortgage loans in amounts ranging from $100,000 to $1,000,000, to churches and other non-profit religious organizations, and invest in mortgage-secured debt instruments issued by churches and other non-profit religious organizations, called church bonds. We apply essentially all of our working capital (after adequate reserves determined by our advisor) toward making mortgage loans and investing in church bonds. We seek to enhance returns on investments by: o offering competitively attractive mid-term (5-15 years) loans and long-term (20-25 year) loans (although there is no limit on the term of our loans); o seeking origination fees, or "points," from the borrower at the outset of a loan and upon any renewal of a loan; o making a limited amount of higher-interest rate second mortgage loans and construction loans to qualified borrowers; and o purchasing a limited amount of church bonds, typically at a discount from par value. Our policies limit the amount of second mortgage loans to 20% of our average invested assets on the date any second mortgage loan is closed, and limit the amount of mortgage-secured debt securities to 30% of average invested assets on the date of their purchase. All other mortgage loans we make (or church bonds purchased for investment) will be secured by a first mortgage or deed of trust on the borrower's real property. As of June 30, 2004, the percentage of average invested assets in second mortgage loans, and the percentage of average invested assets in mortgage-secured debt securities, was 8.53% and 21.7% 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. 24 Current First Mortgage Loan Terms We offer prospective borrowers a selection of loan types, which include a choice of fixed or variable rates of interest indexed to the prime rate, the U.S. Treasury 10-Year Notes, or another generally recognized reference index, and having various terms to maturity, origination fees and other terms and conditions. The terms of loans we offer may be changed by our advisor as a result of such factors as (i) the credit quality and experience of the borrowers; (ii) the terms of loans in our portfolio; (iii) competition from other lenders; (iv) anticipated need to increase the overall yield on our mortgage loan portfolio; (v) local and national economic factors; and (vi) actual experience in borrowers' demand for the loans. We currently make the loan types described in the table below. This table describes material terms of loans available from us. The table does not purport to identify all possible terms, rates, and fees we may offer. We may modify the terms identified below or offer loan terms different than those identified below. Many loans are individually negotiated and differ from the terms described below.
----------------------------------- -------------------------------------- ----------------------------- Loan Type Interest Rate (1) Origination Fee (2) ----------------------------------- -------------------------------------- ----------------------------- ----------------------------------- -------------------------------------- ----------------------------- 20/25 Year Term (3) Fixed @ 8.25%/8.50% respectively 3.5% ----------------------------------- -------------------------------------- ----------------------------- ----------------------------------- -------------------------------------- ----------------------------- 20 Year Term (3) Variable Annually @ Prime + 2.50% 3.5% ----------------------------------- -------------------------------------- ----------------------------- ----------------------------------- -------------------------------------- ----------------------------- Renewable Term (4) Fixed @: 3 Year 7.75% 3.5% 5 Year 7.95% 3.5% 7 Year 8.25% 3.5% 10 Year 8.35% 3.5% ----------------------------------- -------------------------------------- ----------------------------- ----------------------------------- -------------------------------------- ----------------------------- Construction 1 Year Term Fixed @ 9.00% 2.0% ----------------------------------- -------------------------------------- -----------------------------
(1) "Prime" means the prime rate of interest charged to preferred customers, as published by a federally chartered bank chosen by us. We may also tie our offered interest rates to other indexes. (2) Origination fees are generally based on the original principal amount of the loan and are collected from the borrower at the origination and renewal of loans, one-half of which is payable directly to our advisor. (3) Fully amortized repayment term. Amortization terms may vary, as may other loan terms, depending on individual loan negotiations and competitive forces. (4) Renewable term loans are repaid based on a 20-year amortization schedule, and are renewable at the conclusion of their initial term for additional like terms up to an aggregated maximum of 20 years. We charge a fee of 1% upon the date of each renewal. If renewed by the borrower, the interest rate is adjusted upon renewal to Prime plus a specified percentage "spread." 25 Property (Portfolio) of the Company As of June 30, 2004, we had sixty-one first mortgage loans aggregating $27,005,983 in original principal amount, three second mortgage loans aggregating $2,390,000 in original principal amount, and purchased $7,723,860 original principal amount first mortgage bonds issued by churches. The table below identifies the borrowing institutions and certain key terms of the loans currently comprising our loan portfolio.
===================================== ============== ============== ============= ======================== ==================== Borrowing Church Loan Loan Interest Collateral Appraised Funding Date Amount Term Rate Value - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Landmark Apostolic Church $290,000 5 years 10.00% $650,000 04/25/96 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Fountain of Life Church $375,000 15 years 11.25% $500,000 05/15/96 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- River of Life Church (1) $425,000 7 years 9.25% $600,000 05/06/96 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- St. Luke's Pentecostal (2) $207,000 5 years 6.75% $277,000 12/04/97 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bethlehem Temple, Rialto $290,000 5 years 7.00% $2,375,000 12/24/97 (Second Mortgage Loan) (3) - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Mt. Ararat Baptist Church (4) $170,000 5 years 10.75% $1,000,000 09/24/98 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Praise Chapel International (5) $115,000 5 years 10.00% $175,000 03/02/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bread of Life Church $435,000 20 years 9.85% $950,000 05/17/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Greater Hill Zion Baptist Church $500,000 20 years 9.75% $1,040,000 05/20/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Freewill Christian Center $596,000 20 years 10.00% $797,000 06/22/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bethel Temple of Longview $500,000 20 years 10.25% $1,550,000 07/04/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Greater Fort Lauderdale $605,000 20 years 9.75% $900,000 09/08/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- New Growth in Christ $460,000 20 years 9.85% $697,400 11/22/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Holy Deliverance Church $250,000 20 years 9.85% $360,000 12/14/99 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Old Morning Star Church (6) $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 A.M.E Church $200,000 20 years 10.25% $325,000 11/02/00 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- First Metro Church of Houston $100,000 5 years 12.00% $3,500,000 12/13/00 (Second Mtg Loan) - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Second Missionary Baptist Church $225,000 20 years 10.25% $370,000 06/19/01 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bethel Christian Mission $268,000 20 years 10.25% $384,000 06/25/01 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- True Vine Gospel Church $350,000 25 years 9.95% $500,000 11/15/01 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Nehemiah Christian Center $115,000 3 years 8.5% $140,000 05/30/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Unity of Faith Worship Center $426,000 20 years 8.5% $835,150 05/31/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Peniel Baptist Church $555,000 20 years 9.75% $1,358,496 06/26/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- New Light Fellowship $350,000 20 years 9.25% $1,650,000 07/15/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Eagle Vision Community Church $165,000 20 years 9.25% $215,000 07/19/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Aaron's Rod Kathedral (7) $347,000 20 years 9.25% $444,000 08/06/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Abundant Faith Apostolic Church of $400,000 20 years 9.25% $634,000 08/06/02 Deliverance - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Holly Grove Baptist Church $263,000 20 years 9.25% $425,000 08/12/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Holly Grove Missionary Baptist $205,000 20 years 9.25% $461,900 09/19/02 Church - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- 26 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Full Life Gospel Center $327,000 20 years 9.25% $560,000 11/27/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- New Hope Christian Center $450,000 25 years 9.25% $725,000 12/13/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- House of Praise Ministries $610,000 20 years 8.75% $1,785,000 12/30/02 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- House of Joy & Praise Outreach $435,000 20 years 9.25% $780,000 12/30/02 Center - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- New Creation Family Church $500,000 20 years 9.25% $680,000 02/07/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- United Apostolic Church $950,000 25 years 9.50% $1,990,000 02/14/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bread of Life Baptist Church $763,000 20 years 9.25% $1,160,000 02/21/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Life Changing Faith Christian Church $460,000 20 years 9.00% $690,000 03/12/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Good News Family Worship Center $567,000 25 years 9.25% $750,000 03/13/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- United for Chirst $267,000 25 years 8.75% $382,000 05/28/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Zion Hill Baptist Church $255,000 20 years 8.65% $365,000 05/30/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Bend Christian Center $445,000 25 years 8.65% $1,010,000 06/19/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Believers New Life Ministries $280,000 5 years 7.95% $395,000 06/26/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Pembroke Park Church of Christ $520,000 20 years 8.65% $880,000 06/26/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Glad Tidings Community Church $663,000 25 years 8.75% $900,000 06/30/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Roanoke Chapel M.B. Church $1,955,000 25 years 8.75% $2,625,000 06/30/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Assured Faith C.O.G.I.C. $355,000 20 years 8.65% $565,000 08/01/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- The Apostolic Church of New York $335,000 20 years 9.25% $537,000 08/18/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- All Faith's Christian Center $645,000 20 years 8.65% $922,000 09/11/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Landmark Apostolic Church $400,000 20 years 8.65% $750,000 09/19/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Ekklesia Fellowship Ministries $227,500 20 years 8.65% $335,000 09/25/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Grace Christian Center $640,000 20 years 9.25% $1,310,000 10/14/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- 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 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Crossroads Christian Center $385,000 20 years 8.65% $530,000 12/15/03 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- The Word of the Living God $650,000 20 years 8.65% $1,125,000 12/16/03 Ministries, Inc. - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Praise Tabernacle Deliverance $500,000 25 years 8.35% $1,058,000 12/19/03 Baptist Church - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Greater Joy C.O.G.I.C. $275,000 20 years 8.65% $600,000 02/14/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Chesapeake Christian Center $551,077 20 years 8.25% $1,100,000 02/29/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Faith Christian Center $475,000 20 years 8.65% $746,000 04/21/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Christian Discipleship Ministries $410,000 25 years 8.50% $600,000 04/22/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- 27 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Shiloh Temple House of God $500,000 20 years 8.25% $710,000 04/29/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Inter-Denominiational Fellowship $240,000 20 years 8.65% $375,000 05/21/04 Ministries - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Fun Family Christian Center $873,406 25 years 9.25% $1,290,850 05/22/04 - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- - ------------------------------------- -------------- -------------- ------------- ------------------------ -------------------- Chapel Hill Harvester Church $2,000,000 1 year 7.50% $31,000,000 06/25/04 (Second Mortgage Loan) ===================================== ============== ============== ============= ======================== ====================
(1) Renewed for an additional six year period in June 2002. (2) Renewed for an additional five year period in January 2003. (3) Renewed for an additional five year period in January 2003. Interest rate will be adjusted annually. (4) Church loan was due on September 24, 2003. Church is making payments at current rate. Church has not yet decided on loan renewal. (5) Church loan was due on March 2, 2004. Church is making payments at current rate. Church has not yet decided on loan renewal. (6) Includes an initial loan in the amount of $250,000 and an additional supplemental loan of $30,000 funded April 2001. (7) Includes an initial loan in the amount of $300,000 and an additional supplemental loan of $47,000 funded April 2003. The following mortgage-secured bonds have been purchased by the Company:
=================================================================================================================================== Issuer Principal Company Face Yield of Yield to Current Maturity Original Amount Purchase Bonds Maturity Yield Date Issue Price Date - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Palm Beach Cathedral $2,000 $ 871 7.75% 19.63% 17.80% 01/25/12 01/25/97 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle Church $3,000 $3,000 9.50% 9.50% 9.50% 02/01/10 02/01/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle $1,000 $1,000 9.25% 9.25% 9.25% 08/01/08 02/01/98 Church - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Greater Open Door Church $623,000 $623,000 From 7.90% to N/A 9.55% Serially to 12/17/98 9.80% 05/01/18 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Church of the Great Commission $4,000 $4,000 10.50% 10.50% 10.50% 09/15/13 04/01/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- From the Heart Ministries, Inc. $13,000 $13,000 From 8.00% to N/A 8.71% From 02/15/03 02/15/01 10.40% to 08/15/19 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Community Protestant Church $5,000 $4,600 10.05% 11.46% 10.92% 02/15/11 08/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Abundant Life Family Worship $3,000 $2,760 10.15% 11.65% 11.03% 02/15/10 10/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Church of the Great Commission $5,000 $4,600 10.25% 12.26% 11.14% 03/15/07 03/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Abundant Life Family Christian $3,000 $2,940 10.10% 10.56% 10.31% 08/15/07 08/15/96 Center - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- From the Heart $3,000 $3,000 10.40% 10.40% 10.40% 02/15/19 02/15/01 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- From the Heart $1,000 $1,000 10.00% 10.00% 10.00% 02/15/11 02/15/01 - ----------------------------------------------------------------------------------------------------------------------------------- 28 - ----------------------------------------------------------------------------------------------------------------------------------- From the Heart $1,000 $1,000 10.15% 10.15% 10.15% 02/15/11 02/15/01 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hills Harvester $4,000 $438 10.15% N/A N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hills Harvester $6,000 $657 10.15% N/A N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Greater Holy Trinity $883,000 $883,000 From 6.70% to N/A 8.50% Serially to 12/15/01 9.75% 12/15/21 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Community Protestant $5,000 $4,500 10.10% 11.53% 11.22% 05/15/16 11/15/97 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Church of the Great Commission $5,000 $4,500 10.00% 11.46% 11.11% 09/15/05 03/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Church of the Great Commission $5,000 $4,500 10.25% 12.60% 11.38% 03/15/08 03/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Full Gospel Pentecostal $5,000 $4,500 8.95% 11.07% 9.94% 10/15/08 10/15/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Community Protestant $3,000 $2,550 10.50% 12.62% 12.35% 04/01/20 04/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Church of the Great Commission $3,000 $2,550 10.50% 13.33% 2.35% 09/15/10 03/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Community Protestant $3,000 $2,550 10.05% 12.89% 11.82% 02/15/11 08/15/95 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle $3,000 $2,670 10.20% 13.33% 11.46% 03/01/19 03/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Full Gospel Pentecostal Church $17,000 $15,640 8.95% 10.82% 9.73% 10/15/08 10/15/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Swope Parkway Church of Christ $8,000 $7,440 9.95% 11.20% 10.70% 11/01/11 11/01/97 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Miracle Revival Center $30,000 $28,500 10.00% N/A 10.53% From 06/01/18 12/01/99 to 12/01/18 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle Church $15,000 $14,400 10.05% 10.64% 10.47% 02/01/15 02/01/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Christian Love Fellowship, Inc. $790.10 $505.66 8.00% 13.51% 12.50% 02/15/19 02/15/99 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle $23,000 $20,470 9.95% 11.96% 11.18% 02/01/12 02/01/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $1,267 $886.90 7.00% 15.32% 7.89% 07/01/08 01/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $637 $445.90 7.00% 15.32% 15.70% 07/01/08 01/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $1,267 $886.90 7.00% 15.32% 7.89% 07/01/08 01/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $1,899 $1,329.30 7.00% 15.32% 10.53% 07/01/08 01/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $3,000 $0 7.00% N/A N/A 07/01/08 01/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle Church $1,000 $940 10.10% 10.92% 10.74% 02/01/18 02/01/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle Church $1,000 $950 10.75% 11.50% 11.32% 03/01/16 03/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Harvest Baptist Church $10,000 $5,073.95 From 5.00% to N/A N/A 04/01/19 04/28/03 12.00% - ----------------------------------------------------------------------------------------------------------------------------------- 29 - ----------------------------------------------------------------------------------------------------------------------------------- Harvest Baptist Church $6,000 $3,031.14 From 5.00% to N/A N/A 04/01/19 04/28/03 12.00% - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Greater St. Matthew's Baptist $372,000 $372,000 9.00% 9.00% 9.00% From 01/15/23 07/15/03 Church to 07/15/23 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Christian Church $210,000 $210,000 9.50% 9.50% 9.50% From 08/15/07 08/15/03 to 08/15/11 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- St. Agnes Missionary Baptist $2,000,000 $2,000,000 From 5.35% to N/A 6.71% From 05/15/11 05/15/03 Church 7.50% to 05/15/22 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Peaceful Zion Missionary $10,000 $7,900 9.70% 17.25% 12.28% 10/15/07 10/15/93 Baptist Church - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Morningstar Missionary Baptist $10,000 $7,500 9.80% 14.40% 13.07% 09/15/14 09/15/94 Church - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- First Baptist Church of Corona $10,000 $7,900 11.20% 20.18% 14.18% 03/01/07 03/01/92 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Christian Pentecostal Church $10,000 $7,900 10.30% 17.51% 13.04% 02/01/08 02/01/93 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Central Holiness Church $10,000 $7,900 9.65% 17.12% 12.22% 11/15/07 11/15/93 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Macedonia Missionary Baptist $10,000 $7,900 11.20% 20.36% 14.18% 02/15/07 02/15/92 Church - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Antelope Valley Christian School $598,000 $598,000 From 4.00% to N/A 5.44% From 09/15/06 09/15/03 7.50% to 09/15/22 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $20,000 $20,000 7.35% 7.35% 7.35% 01/15/19 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $40,000 $40,000 7.75% 7.75% 7.75% 07/15/21 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $1,000 $1,000 7.50% 7.50% 7.50% 01/15/21 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester $2,000,000 $2,000,000 From 7.25% to N/A 7.70% From 03/01/18 03/01/04 8.00% to 03/01/29 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $48,000 $48,000 7.50% 7.50% 7.50% 01/15/21 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $68,000 $68,000 8.00% 8.00% 8.00% 01/15/27 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $3,000 $3,000 6.75% 6.75% 6.75% 01/15/15 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $3,000 $3,000 7.00% 7.00% 7.00% 01/15/16 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $8,000 $8,000 7.00% 7.00% 7.00% 07/15/16 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- New Life Tabernacle $10,000 $10,000 7.35% 7.35% 7.35% 01/15/19 01/15/04 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Gospel Tabernacle Church $5,000 $4,900 9.50% 9.96% 9.69% 02/01/10 02/01/98 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Community Protestant Church $6,000 $6,000 10.00% 10.00% 10.00% 10/01/18 04/01/00 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- 30 - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester Church $59,000 $59,000 8.00% 8.00% 8.00% From 03/01/24 03/01/04 to03/01/29 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Miracle Revival Center $10,000 $9,600 9.60% 10.86% 10.00% 06/01/08 12/01/99 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Chapel Hill Harvester Church $1,000 $1,000 8.00% 8.00% 8.00% 09/01/27 03/01/04 ===================================================================================================================================
We have four first mortgage loans that are three or more payments in arrears. The first loan has an outstanding balance of approximately $228,846. The church missed five mortgage payments in 2003 and missed one mortgage payment in 2004. We have engaged legal counsel to foreclose on the church's property. The church has made all required payments since being served foreclosure notice and is adhereing to a re-payment schedule. The second loan is a first mortgage loan with an outstanding balance of $390,000. The church has not made a mortgage payment since September 2003. We have engaged legal counsel and are currently foreclosing on the property. The third loan is a first mortgage loan with an outstanding balance of $410,674. The church missed five mortgage payments in 2003. We have reserved for this loan and are continuing to work with the church to bring their mortgage current. They have not missed a mortgage payment in the last five months. The fourth loan is a first mortgage loan with an outstanding balance of $339,095. The church has not made a payment since October 2003. There was a split in the congregation and the Church has agreed to sell their facility to another Church organization. We are in contact with the Church and are monitoring the progress of the sale. Mortgage Loan Processing and Underwriting Our advisor's personnel process and verify mortgage loan applications. Verification procedures are designed to assure a borrower's qualification under our financing policies. Verification procedures include obtaining: o applications containing key information concerning the prospective borrower o project description o financial statements of the prospective borrower o organizational documents and history of the borrower o preliminary title report or commitment for mortgagee title insurance o a real estate appraisal in accordance with our financing policies We require that appraisals and financial statements be prepared by independent third-party professionals who are pre-approved based on their experience, reputation and education. Completed loan applications, together with a written summary are then considered by our loan committee, comprised of our advisor's president, our advisor's vice-president and our advisor's administrator. Our advisor may arrange for the provision of mortgage title insurance and for the services of professional independent third-party accountants and appraisers on behalf of borrowers in order to achieve pricing efficiencies on their behalf and to assure the efficient delivery of title commitments, preliminary title reports and title policies, and financial statements and appraisals meeting our 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-half is payable to us and one-half is payable to our advisor. 31 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. We have a $2,000,000 secured line of credit facility with Beacon Bank, Shorewood, Minnesota. We intend to use this loan facility to enable us to close loans on schedule while we may not otherwise have adequate funds on hand. The Beacon Bank line of credit is secured by church bonds owned by us. This line of credit is used periodically to fund loans when we do not otherwise have sufficient capital to do so. Historically, the line has been paid as soon as additional capital becomes available to us. We pay Beacon Bank a rate of interest equal to the prime interest rate plus 1/2% totalling 5.0% on the outstanding balance on the line, in addition to a nominal annual renewal fee. Financing Policies Our business of mortgage lending to churches and other non-profit religious organizations is managed in accordance with and subject to our financing policies. Our financing policies identify our general business guidelines and the parameters of our lending business. >> Loans we make are limited to churches and other non-profit religious organizations and are secured by mortgages. The total principal amount of our second mortgage loans and bonds funded is limited to 20% of our average invested assets. All other loans and bonds will be secured by first mortgages. 32 >> 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 the last two complete fiscal years and a current financial statement as of and for the period within 90 days of the loan closing date. On loans of $500,000 or less, the last complete fiscal year must be reviewed by an independent accounting firm. On loans in excess of $500,000, our advisor may require that the last complete fiscal year financial statements be audited by an independent auditor. Borrowers in existence for less than three fiscal years must provide financial statements since inception. We do not extend loans to borrowers in operation less than two years absent express approval by our board of directors. >> Our advisor typically requires the borrower to arrange for automatic electronic or drafting of monthly payments. >> Our advisor may require (i) key-person life insurance on the life of the senior pastor of a church; (ii) personal guarantees of church members and/or affiliates; and (iii) other security enhancements for our benefit. >> The borrower must agree to provide us with annual financial statements within 120 days of each fiscal year end during the term of the loan. >> Our advisor may require the borrower to grant to us a security interest in all personal property located and to be located upon the mortgaged premises (excluding property leased by the borrower). >> We may make fixed-interest rate loans having maturities of three to twenty-five years. >> We may borrow up to 300% of Shareholders' Equity. We require borrowers to maintain a general perils and liability coverage insurance policy naming us as the loss-payee in connection with damage or destruction to the property of the borrower which typically includes weather-related damage, fire, vandalism and theft. In its discretion, our advisor may require the borrower to provide flood, earthquake and/or other special coverage. These financing policies are in addition to the prohibited investments and activities set forth in our bylaws, which are discussed in the next section. Prohibited Investments and Activities Our bylaws impose certain prohibitions and restrictions on our investment practices and activities, including prohibitions against: >> Investing more than 10% of our total assets in unimproved real property or mortgage loans on unimproved real property; >> Investing in commodities or commodity futures contracts other than "interest rate futures" contracts intended only for hedging purposes; 33 >> 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. 34 Policy Changes Our bylaw relating to policies, prohibitions and restrictions referred to under "Our Business - Prohibited Investments and Activities" may not be changed (except in certain immaterial respects by a majority approval of the board of directors) without the approval of a majority of the independent directors and the approval of the holders of a majority of our shares, at a duly held meeting for that purpose. Competition The business of making loans to churches and non-profit religious organizations is competitive. We compete with a wide variety of investors, including banks, savings and loan associations, insurance companies, pension funds and fraternal organizations which may have investment objectives similar to ours. Some competitors have greater financial resources, larger staffs and longer operating histories than we have. We compete by offering loans with competitive and flexible terms, and emphasizing our expertise in this specialized industry segment. Employees We have no employees. Subject to the supervision of our board of directors, our business is managed by our advisor, which provides investment advisory and administrative services to us. Our advisor is owned by Philip J. Myers, our president and one of our directors. Mr. Myers also controls the underwriter. At present, certain officers and directors of the underwriter and our advisor are providing services to us at no charge. These services include, among others, legal and analytic services relating to the implementation of our business plan, preparation of this prospectus (and registration statement of which this prospectus is a part) and development and drafting of documents utilized by our advisor in connection with our business operations. Our advisor employs three persons on a part-time or other basis and expects to hire additional persons depending on the success of this offering and the volume of new loans to be funded. We do not expect to directly employ any persons in the foreseeable future, since all administrative functions and operations are contracted for through our advisor. Legal and accounting services will be provided by outside professionals. We will pay for these services directly. Description of Property Foreclosure was completed on a church located in Battle Creek, Michigan. We have determined the fair value of the property to be $120,000. The church congregation has disbanded and the church's property is currently unoccupied. We have taken possession of the church and have listed the property for sale through a local realtor for $129,900. Facilities We are located in the 8,200 square foot offices of American Investors Group, Inc., 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343. These facilities are owned by Yellow Circle Partners, LLP, a partnership controlled by Philip J. Myers, our president and one of our directors. We are not charged any rent for our use of these facilities, or for our use of copying services, telephones, facsimile machines, postage service, office supplies or employee services, which are paid by our advisor. Payments to our advisor under the advisory agreement are intended, at least in part, to cover the general costs of personnel, operating facilities, equipment and services used. We will not reimburse our advisor for these expenses. We believe that the terms of this arrangement are at least as favorable as those obtainable from unaffiliated third parties. We believe that our current facilities will be adequate for the foreseeable future. 35 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 48 President, Treasurer, Secretary and Director 2001 Kirbyjon H. Caldwell 50 Independent Director 1994 Robert O. Naegele, Jr. 64 Independent Director 1994 Dennis J. Doyle 51 Independent Director 1994 Michael G. Holmquist 54 Independent Director 2003
Philip J. Myers has been our President since April 2001 and a director of ACMC since October 2001. He has also served as President, Treasurer, shareholder and a director of our advisor, Church Loan Advisors, Inc. since 1994, President, Secretary, and a director of the underwriter, American Investors Group, Inc. since 1996, and of its parent company, Apostle Holdings Corp. since 2000. Mr. Myers has been an officer of the underwriter and directly engaged in church mortgage lending since 1989. He earned his bachelor of arts degree in political science in 1977 from the State University of New York at Binghamton and his juris doctor degree from the State University of New York at Buffalo School of Law in 1980. From 1980 to 1982, Mr. Myers served as an attorney in the Division of Market Regulation of the U.S. Securities and Exchange Commission in Washington, D.C. and, from 1982 to 1984, as an attorney with the Division of Enforcement of the Securities and Exchange Commission in San Francisco. From August 1984 to January 1986, he was employed as an attorney with the San Francisco law firm of Wilson, Ryan and Compilongo where he specialized in corporate finance, securities and broker-dealer matters. From January 1986 to January 1989, Mr. Myers was engaged as Senior Vice-President and General Counsel of Financial Planners Equity Corporation, a 400 broker securities dealer formerly located in Marin County, California. He became affiliated with American Investors Group, Inc. in 1989. He is a member of the New York, California (inactive status) and Minnesota State Bar Associations. Mr. Myers holds General Securities Representative and General Securities Principal licenses with the National Association of Securities Dealers, Inc. Kirbyjon H. Caldwell, has served as an independent director of ACMC since September 1994. He has been Senior Pastor of Windsor Village United Methodist Church in Houston, Texas since January 1982. The membership of Windsor Village is approximately 14,400. Mr. Caldwell received his B.A. degree in Economics from Carlton College (1975), an M.B.A. in Finance from the University of Pennsylvania's Wharton School (1977), and his Masters in Theology from Southern Methodist University School of Theology (1981). He is a member of the Boards of Directors of JP Morgan Chase--Texas, Continental Airlines, National Children's Defense Fund, Baylor College of Medicine, Greater Houston Partnership and the American Cancer Society. He is also the founder and member of several foundations and other community development organizations. Robert O. Naegele, Jr. has served as an independent director since September 1994. Mr. Naegele's professional background includes advertising, real estate development and consumer products, with a special interest in entrepreneurial ventures and small developing companies. Most recently, he led a group of investors to apply for, and receive an NHL expansion franchise, the Minnesota Wild, which began play in the Xcel Energy Center in St. Paul, Minnesota, in October 2000. Dennis J. Doyle has served as an independent director since September 1994. He is the majority shareholder and co-founder of Welsh Companies, Inc., Minneapolis, Minnesota, a full-service real estate company involved in property management, brokerage, investment sales, construction and commercial development. Welsh Companies was co-founded by Mr. Doyle in 1980, and has over 350 employees. Mr. Doyle is the recipient of numerous civic awards relating to his business skills. He also is a member of the post board of directors of Rottlund Homes and Hope For the City. Michael G.Holmquist has served as an independent director of the Company since July 17, 2003. Mr. Holmquist is a Certified Public Accountant practicing from his office in Deephaven, Minnesota. He entered the public accounting field in 1977. Prior to entering the accounting field 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 and has taken additional studies in accounting and income tax at the University 36 of Minnesota. Mr. Holmquist was an original incorporator of American Investors Group, Inc. and an employee of the firm from 1986-1989. He participated in establishing the firm's church bond underwriting department and has extensive additional experience in church auditing. Mr. Holmquist is a member of the American Institute of CPAs and the Minnesota Society of CPAs. 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 2003, our directors held four meetings. All of our directors attended more than 75% of our board meetings. Neither our articles of incorporation or bylaws nor any of our policies restrict officers or directors from conducting, for their own account, or on behalf of others, business activities of the type we conduct. Directors and officers have a duty to us and our shareholders. Our directors may be removed by a majority vote of all shares outstanding and entitled to vote at any annual meeting or special meeting called for such purpose. Executive Compensation Officers are not compensated other than through their interest in our advisor. We currently pay each of our independent directors a fee of $500 for each board meeting ($400 for telephonic meetings), limited to $2,500 per year. We reimburse directors for travel expenses incurred in connection with their duties as directors. In 2003, our independent directors (four in number) were paid a total of $3,800 in director's fees. Fiduciary Responsibility of Board of Directors and Indemnification The board of directors and our advisor are accountable to us and our shareholders as fiduciaries. Consequently, they must exercise good faith and integrity in handling our affairs. Similarly, our advisor has contractual obligations to us which it must discharge with the utmost good faith and integrity. Our articles require us to indemnify and pay or reimburse reasonable expenses to any individual who is our present or former director, advisor or affiliate, provided that: (i) the director, advisor or affiliate seeking indemnification has determined, in good faith, that the course of conduct which caused the loss or liability was in our best interest; (ii) the director, advisor or affiliate seeking indemnification was acting on our behalf or performing services on our behalf; (iii) such liability or loss was not the result of negligence or misconduct on the part of the indemnified party, except that in the event the indemnified party is or was an independent director, such liability or loss shall not have been the result of gross negligence or willful misconduct; and (iv) such indemnification or agreement to be held harmless is recoverable only out of our assets and not from our shareholders directly. We may advance amounts to persons entitled to indemnification for legal and other expenses and costs incurred as a result of legal action instituted against or involving such person if: (i) the legal action relates to the performance of duties or services by the indemnified party for or on our behalf; (ii) the legal action is initiated by a third party who is not a shareholder, or the legal action is initiated by 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. 37 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. SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS The following table sets forth as of June 30, 2004, certain information regarding beneficial ownership of our shares, by (i) each person known by us to be the beneficial owner of 5% or more of the outstanding shares; (ii) each of our directors and executive officers; and (iii) all of our directors and officers as a group. The percentage of shares outstanding before and after the Offering is calculated separately for each person. Unless otherwise noted, each of the following persons has sole voting and investment power with respect to the shares set forth opposite their respective names.
Number of Shares Percentage of Outstanding Name of Beneficial Owner (1) Beneficially Owned Shares Philip J. Myers 20,000 0.8% Robert O. Naegele, Jr. 8,033 0.3% Kirbyjon H. Caldwell 0 0% Dennis J. Doyle 0 0% Michael G. Holmquist 0 0% All Executive Officers and Directors as a Group 28,333 (2) 1.2% (5 individuals)
(1) The address for our directors is 10237 Yellow Circle Drive, Minnetonka, Minnesota 55343. (2) Includes 300 shares owned by Scott J. Marquis. Mr. Marquis is an officer of our advisor. 38 CERTAIN RELATIONSHIPS AND TRANSACTIONS WITH MANAGEMENT Our advisor, Church Loan Advisors, Inc., manages our business subject to the supervision of our board of directors. Our advisor provides us with investment advisory and administrative services. Our advisor is owned by Philip J. Myers. Mr. Myers is also the sole shareholder, officer and director of Apostle Holdings Corp., which owns American Investors Group, Inc. (the underwriter of this offering). Our advisor employs, among others, two key persons on a part-time basis, including Philip J. Myers, President and Scott J. Marquis, Vice President. Our advisor, on our behalf, regularly uses the services of personnel employed by American Investors Group, Inc. We incur no direct cost for such services, except for the advisory fee we pay to our advisor. Transactions With Our Advisor. We pay our advisor advisory fees and expenses and one-half of any origination fee collected from a borrower. For the six month period ended June 30, 2004, we paid our advisor advisory fees in the amount of $101,673 and our advisor received loan origination fee income of $41,236. For the year ended December 31, 2003, we paid our advisor advisory fees in the amount of $269,043 and our advisor received loan origination fee income of $275,860. In 2002, we paid our advisor advisory fees in the amount of $172,151 and our advisor received loan origination fee income of $98,270. In 2001, we paid our advisor total advisory fees in the amount of $161,131 and our advisor received loan origination fees income of $37,297. In 2000, we paid our advisor total advisory fees in the amount of $154,389 and our advisor received loan origination fee income of $21,250. In 1999, we paid our advisor total advisory fees in the amount of $116,293, and our advisor received loan origination fee income of $114,685. Our advisor voluntarily waived $12,250 in advisory fees in 2000. The waiver of fees by our advisor in 2000 was voluntary and cannot be expected to occur in the future. We believe that the terms of the advisory agreement are no less favorable to us had we entered into the agreement with an independent third party as advisor. Transactions with the Underwriter. Pursuant to a distribution agreement we have entered into with the underwriter, we will pay the underwriter a commission based on the gross principal amount and maturity 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 commission when certificates are renewed. 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. 39 THE ADVISOR AND THE ADVISORY AGREEMENT Church Loan Advisors, Inc. Church Loan Advisors, Inc. renders lending and advisory services to us and administers our business affairs and operations. Our advisor's offices are located at 10237 Yellow Circle Drive, Minnetonka (Minneapolis), Minnesota 55343. The following table sets forth the names and positions of the officers and directors of our advisor: Name Position Philip J. Myers President, Treasurer and Director Scott J. Marquis Vice President, Secretary Scott J. Marquis, age 46, is Vice-President and Secretary of our advisor, having served in such capacities since December 13, 1994. He is also currently employed full-time as Chief Financial and Operating Officer of the underwriter, American Investors Group, Inc., where he has been employed since February 1987. Prior to his employment with American Investors Group, Inc., Mr. Marquis was employed for approximately seven years with the Minneapolis-based broker dealer, Piper Jaffray Companies in various capacities within its operations department. Mr. Marquis attended the University of Minnesota, Minneapolis, Minnesota and served in the United States Coast Guard Reserve. Mr. Marquis is a licensed financial principal and registered representative of American Investors Group, Inc., holds his Series 7, 63 and 27 licenses from the National Association of Securities Dealers, Inc. and holds a Minnesota life/accident/health insurance license. See "Management" for a description of the positions and business experience of Philip J. Myers. The Advisory Agreement We have entered into an advisory agreement with our advisor under which our advisor provides advice and recommendations concerning our business affairs, provides us with administrative services and manages our day-to-day affairs. Our advisor provides us with the following services: o serves as our mortgage loan underwriter and advisor in connection with our primary business of making loans to churches o advises and selects church bonds for us to purchase and hold for investment o services all mortgage loans that we make o provides marketing and advertising and generates loan leads directly and through its affiliates o deals with borrowers, lenders, banks, consultants, accountants, brokers, attorneys, appraisers, insurers and others o supervises the preparation, filing and distribution of tax returns and reports to governmental agencies, prepares reports to shareholders and acts on our behalf in connection with shareholder relations o provides office space, personnel, supplies, equipment and communications o reports to us on its performance of the foregoing services o furnishes advice and recommendations with respect to other aspects of our business. The advisory agreement expires annually. We expect to renew the agreement annually, subject to our determination, including a majority of the independent directors, that our advisor's performance has been satisfactory and that the compensation we have paid to our advisor has been reasonable. We may terminate the advisory agreement on 60 days written notice with or without cause or penalty upon a vote of the majority of our independent directors. Upon termination of the advisory agreement by either party, our advisor may require us to change our name to a name that does not contain the word "American," "America" or the name of our advisor or any approximation or abbreviation thereof, and that is sufficiently dissimilar to the word "America" or "American" or the name of our advisor as to be unlikely to cause confusion or identification with either our advisor or any person or entity using the word "American" or "America" in its name. We may continue to use the word "church" in our name. Our 40 directors will determine that any successor advisor possesses sufficient qualifications to perform the advisory function for us and justify the compensation provided for in its contract with us. Our advisor's compensation under the advisory agreement is set forth under "Compensation to Advisor and Affiliates." Our advisor is required to pay all of the expenses it incurs in providing services to us, including, personnel expenses, rental and other office expenses, expenses of officers and employees of our advisor, and all of its overhead and miscellaneous administrative expenses relating to performance of its functions under the advisory agreement. We pay other expenses, including expenses of reporting to governmental agencies and shareholders, fees and expenses of appraisers, directors, auditors, outside legal counsel and transfer agents, and costs directly incurred relating to closing of loan transactions and to enforcing loan agreements. In the event that our total operating expenses (before interest expense) exceed in any calendar year the greater of (a) 2% of our average invested assets or (b) 25% of our net income, our advisor must reimburse us, to the extent of its fees for such calendar year, for the amount by which the aggregate annual operating expenses paid or incurred exceeds the limitation. The independent directors may, upon a finding of unusual and non-recurring factors which they deem sufficient, determine that a higher level of expenses is justified. Our bylaws require the independent directors to determine at least annually the reasonableness of the compensation we pay to our advisor. Our independent directors originally approved the Amended and Restated Advisory Agreement and the Amended and Restated Bylaws on May 19, 1995 and most recently approved on January 22, 2004 the renewal of the Restated Advisory Agreement for another year. Factors considered in reviewing the advisory fee include the size of the fees of our advisor in relation to the size, composition and profitability of our loan portfolio, the rates charged by other investment advisors performing comparable services, the success of our advisor in generating opportunities that meet our investment objectives, the amount of additional revenues realized by our advisor for other services performed for us, the quality and extent of service and advice furnished by our advisor, the quality of our investments in relation to investments generated by our advisor for its own account, if any, and the performance of our investments. In addition, on January 22, 2004, the board approved, as recommended by our advisor, to revise the management fee payout structure to the advisor. It is the opinion of our advisor that certain economies of scale are reached as our assets continue to grow. Loan servicing, accounting, legal and banking are costs which remain relatively constant with continual deployment of funds into loans and investments. We pay our advisor an annual advisory fee equal to a 1.25% of our average invested assets. This fee is reduced to 1.0% on average invested assets from $35 million to $50 million and to .75% on average invested assets over $50 million. 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. MATERIAL FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH THE CERTIFICATES The following discussion summarizes the material United States federal income tax consequences relating to the acquisition, ownership and disposition of the certificates, 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. The information in this summary is based on the Internal Revenue Code (the "Code"), current, temporary, and 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 41 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 you will hold the certificates 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, OWNER, AND DISPERSITION OF THE CERTIFICATES. THIS INCLUDES THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE CERTIFICATES AND THE 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. 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 or 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. 42 Under certain circumstances, as a holder of a certificate, you may be subject to "backup withholding." Backup withholding may apply to you if you are a United States person and, among other circumstances, you fail to furnish your Social Security Number or other taxpayer identification number to us. Backup withholding may apply, under certain circumstances, if you are a foreign person and fail to provide us with the statement necessary to establish an exemption from federal income and withholding tax on interest on the certificates. Backup withholding is not an additional tax and may be refunded against your United States federal income tax liability provided that you furnish the Internal Revenue Service with certain required information. FEDERAL INCOME TAX CONSEQUENCES ASSOCIATED WITH REITS The discussion of federal income tax treatment of real estate investment trusts ("REITs") set forth below is a summary. It does not address all potential consequences of whether we qualify as a REIT. Qualification as a Real Estate Investment Trust General. We operate as a REIT under the Code. Our ability to qualify as a REIT depends, in part, on the timing and nature of our investments. There can be no assurance that we will 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 anticipated income tax treatment described in this prospectus may be changed, perhaps retroactively, by legislative, administrative or judicial action at any time. The following is a general summary of the provisions that govern the federal income tax treatment of a REIT. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. Benefits of Qualification as a REIT. The Code provides special tax treatment for organizations that qualify as REITs. An entity that qualifies as a REIT generally is not subject to federal corporate income taxes on its net income that is currently distributed to shareholders. This treatment substantially eliminates the "double taxation" that generally results from investment in a corporation. "Double taxation" means being subject to tax once at the corporate level when income is earned, and once again at the shareholder level when the income is distributed to shareholders. Even if we qualify as a REIT, we will be subject to federal income tax as follows: o We will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. o Under certain circumstances, we may be subject to the "alternative minimum tax" on our items of tax preference. o If we have (i) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (ii) other nonqualifying income from foreclosure property, it will be subject to tax at the highest regular corporate rate on such income. o If we have net income from "prohibited transactions" (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of our business (i.e., when we are acting as a dealer)), such income will be subject to a 100% tax. o If we fail to distribute by the end of each year at least the sum of (i) 90% of our REIT ordinary income for such year, (ii) 90% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Requirements for Qualification. The Code defines a REIT as a corporation, trust or association (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) which would be taxable, but for Sections 856 through 859 of the Code, as a domestic corporation; (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) during the last half of each taxable year not more than 50% of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (which term includes certain entities); 43 and (vii) which meets certain other tests, described below. Conditions (i) to (iv) must be met during the entire taxable year. Condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. To qualify as a REIT for a taxable year, we must elect or previously have elected to be so treated and must meet other requirements, including percentage tests relating to the sources of its gross income, the nature and diversification of our assets and the distribution of our income to our shareholders. 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 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 shares 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. 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. 44 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. Transfer Agent and Registrar The transfer agent and registrar for our capital stock is Computershare Trust Company, Inc., 350 Indiana Street Suite 800, Golden, CO 80401, telephone: (303) 262-0600. DESCRIPTION OF THE CERTIFICATES General. The certificates we are offering by this prospectus are secured debt obligations of American Church Mortgage Company. We will issue the certificates under an indenture between us and The Herring National Bank, as trustee. The terms and conditions of the certificates include those stated in the indenture and those made part of the indenture by reference to the Trust Indenture Act of 1939. The following is a summary of some, but not all, provisions of the certificates, the indenture and the Trust 45 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 (8, 9, 10, 11, 12, 13, 14 or 15 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. We have reserved $3,000,000 of the certificates in this offering for exchange of the two and three year series "A" certificates which will begin to mature June 30, 2004. Our plan is to allow investors who purchased the series "A" certificates to exchange their certificates for series "B" certificates for the same period of time at the new published rates. However, we are under no obligation to renew any certificates. We will set interest rates based on current market conditions and our need for capital. Investors may choose not to exchange their series "A" certificates for series "B" certificates. Any investor who chooses not to exchange their series "A" certificates will have their principal investment returned to them and their certificate will be retired. There are $684,000 certificates maturing in 2004, $1,321,000 certificates maturing in 2005 and $1,982,000 maturing in 2006. The interest rate will be fixed for the term of your certificate. Available rates will be set forth in a supplement to this prospectus. The interest rate will vary based on the term to maturity of the certificate you purchase. Upon acceptance of your subscription to purchase certificates, the trustee, who is also acting as our servicing agent, will create an account in our book-entry registration system for you and credit the principal amount of your subscription to your account. Our trustee will send you a book-entry receipt that will indicate our acceptance of your subscription. If we reject your subscription, all funds deposited will be promptly returned to you without any interest. Investors whose subscriptions for certificates have been accepted and anyone who subsequently acquires certificates in a qualified transfer are referred to as "holders" or "registered holders" in this document and in the indenture. We may modify or supplement the terms of the certificates described in this prospectus from time to time in a supplement to this prospectus. Except as set forth under "Amendment, Supplement and Waiver" below, any modification or amendment will not affect then-outstanding certificates. Denomination. You may purchase certificates in principal amount of multiples of $1,000. You will determine the original principal amount of each certificate you purchase when you subscribe. Term and Maturity. We are offering certificates with terms ranging from eight years to fifteen years as follows: o eight (8) years o twelve (12) years o nine (9) years o thirteen (13) years o ten (10) years o fourteen (14) years o eleven (11) years o fifteen (15) 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. 46 The maturity date will be the anniversary of the last day of the calendar quarter in which you purchase your certificate. For example, if you purchase a ten (10) year certificate on July 10, 2004, the certificate will mature on September 30, 2014. We may cease offering specified maturities, and re-continue their offering, at any time during the offering period. Collateral. We will assign to the trustee to secure the certificates mortgage-secured promissory notes and bonds issued by churches and other nonprofit religious organizations evidencing loans made by us which have an aggregate unpaid principal balance of at least 100% of the aggregate outstanding principal amount of the certificates. We will not assign the mortgages securing the assigned promissory notes and bonds to the trustee. We will be obligated to replace a promissory note or bond that we have assigned to the trustee if the church obligor prepays the promissory note or bond or if it defaults in the payment of principal or interest on the promissory note or bond and the default continues for at least 90 days. We will assign additional promissory notes and bonds to the trustee as necessary to maintain the aggregate outstanding principal balance of the assigned notes at a level of at least 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. 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 60 days. To the extent not collateralized, the certificates will constitute a subordinated claim again the issuer. Interest Rate. The interest rate on a particular certificate will be the interest rate for the particular term of the certificate at the time of subscription or renewal. We publish currently effective interest rates in a supplement to this prospectus. The interest rate will remain fixed for the original or renewal term of the certificate. We will set interest rates based on current market conditions and our need for capital. Interest rates will not be derived from any reference or published interest rate. We will establish and may change the interest rates payable for unsold certificates of various terms in a supplement to this prospectus. Computation of Interest. We will compute interest on certificates on the basis of an actual calendar year. Interest will accrue from the date of purchase, but will not be compounded. The date of purchase will be the first business day immediately following the date we receive funds. Our business days are Monday through Friday, except for legal holidays recognized by the National Association of Securities Dealers, Inc. 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. 47 Servicing Agent. We have engaged The Herring National Bank, who is also acting as the trustee in this offering, to act as our servicing agent for the certificates. The trustee's responsibilities as servicing agent will include serving as our registrar and transfer agent and fulfilling certain of our responsibilities to the holders. You may contact the trustee as follows with any questions about the certificates: The Herring National Bank 1001 South Harrison Street Amarillo, TX 79101 (800) 753-1439 Book-Entry Registration and Transfer. You will not receive or be entitled to receive physical delivery of a certificate. The issuance and transfer of certificates will be accomplished exclusively through the crediting and debiting of the appropriate accounts in our book-entry registration and transfer system. However, you will receive a book-entry acknowledgement from the trustee that will show all pertinent information regarding your certificate, including the principal amount of your certificate, its interest rate and maturity, and verification of its registration. The trustee will maintain our book-entry system. The holders of the accounts established upon the purchase or transfer of certificates will be deemed to be the owners of the certificates under the indenture. The holders of certificates must rely upon the procedures established by the trustee to exercise any rights of a holder of certificates under the indenture. The servicing agent will determine the interest payments to be made to the book-entry accounts and maintain, supervise and review any records relating to book-entry beneficial interests in the certificates. Book-entry notations in the accounts evidencing ownership of the certificates are exchangeable for actual certificates only if: (i) we, at our option, advise the trustee in writing of our election to terminate the book-entry system, or (ii) after the occurrence of an event of default under the indenture, holders of the certificates aggregating more than 50% of the aggregate outstanding amount of the certificates advise the trustee in writing that the continuation of a book-entry system is no longer in the best interests of the holders of certificates and the trustee notifies all registered holders of the occurrence of any such event and the availability of definitive certificates. Subject to the exceptions described above, the book-entry interests in these securities will not be exchangeable for fully registered certificates. The trustee will also issue fully registered certificates if required by the administrator of an Individual Retirement Account or similar tax deferred account in which a holder has acquired a certificate. The trustee may charge a $10 fee per certificate issuance. Right To Reject 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. 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. 48 Redemption Prior To Stated Maturity. The certificates may be redeemed prior to stated maturity only as set forth below. You will have no right to require us to prepay any certificate prior to its maturity date except as indicated below. Redemption By Us On Change of Control. We have the option to redeem all outstanding certificates in the event that we are subject to a change of control. If we exercise this option, we will give all certificate holders 30 days notice that we intend to redeem all outstanding certificates. A change of control will be deemed to have occurred if any person is or becomes the beneficial owner (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of shares of our capital stock entitling such person to exercise 50% or more of the total voting power of all shares of our capital stock entitled to vote in elections of directors (or the capital stock of any successor of ours in the case of a merger or transfer of all or substantially all of our assets). Redemption By Us If Required By Our Bylaws. Our bylaws place certain limitations on the amount of debt that we may have outstanding at any time. If the aggregate amount of the certificates outstanding causes us to be in violation of these limitations, we may redeem a sufficient amount of certificates so that we will be brought back into compliance with these limitations. We may redeem any of the certificates pursuant to this option, and need not redeem the certificates on a pro rata basis. We will provide you with a notice that your certificate has been selected for redemption because of these limitations. Offer to Redeem By Us Upon a Change of Our Advisor. Our advisor is currently Church Loan Advisors, Inc. If we terminate our advisory agreement with our current advisor for any reason, we will offer to redeem all certificates outstanding as of the date of such termination. In such case, certificates will be redeemable at the option of the holders. If we terminate our advisory agreement with our current advisor, we will provide our certificate holders with notices offering to redeem all outstanding certificates within 10 days of the termination. Holders of outstanding certificates will have 30 days after the date of the notice to inform us in writing whether they will require us to redeem their certificates. The redemption price will be the principal amount of the certificate, plus interest accrued and not previously paid up to the date of redemption. Redemption By The Holder Upon Death. Certificates may be redeemed upon the death of a holder who is a natural person (including certificates held in an individual retirement account), by his or her estate giving us written notice within 45 days following his or her death. The redemption price will be the principal amount of the certificate, plus interest accrued and not previously paid up to the date of redemption. Subject to the limitations described below, we will pay the redemption price within 10 days of receiving notice of the holder's death. If spouses are joint registered holders of a certificate, the election to redeem will apply when either registered holder dies. If the certificate is held by a person who is not a natural person such as a trust, partnership, corporation or other similar entity, the right of redemption upon death does not apply. In addition, we will not be required to redeem any certificates at the request of the holder in excess of $25,000 aggregate principal amount for all holders per calendar quarter. For purposes of the $25,000 limit, redemption requests will be honored in the order in which they are received and any redemption request not honored in a calendar quarter will be honored, to the extent possible, in the next calendar quarter. Redemptions in the next calendar quarter are also subject to the $25,000 limitation. We will not redeem certificates in connection with a holder's death if an uncured event of default exists with respect to the outstanding certificates. Discretionary Redemption. If you request us to redeem your certificate prior to maturity, we may do so and charge you early redemption penalties, both at our complete discretion. Transfers. The certificates are not negotiable debt instruments and, subject to certain exceptions, will be issued only in book-entry form. The book-entry receipt issued upon our acceptance of a subscription is not a negotiable instrument, and no rights of record ownership can be transferred without our advisor's prior written consent. Transfers of certificates will generally be 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. 49 Upon transfer of a certificate, the trustee will provide the new holder of the certificate with a book-entry receipt which will evidence the transfer of the account on our records. The record date of any transfer will be the last day of the quarter in which the transfer is made. The transferee will be entitled to all interest accruing in the quarter in which the transfer is made. No Sinking Fund. We will not contribute funds to a separate account, commonly known as a sinking fund, to repay principal or interest on the certificates upon maturity or default. Restrictive Covenants. The indenture contains certain covenants that require us to maintain certain financial standards and restrict us from certain actions as set forth below. Maintenance of Certain Financial Standards. The indenture provides that, so long as the certificates are outstanding: o we will maintain a positive net worth, which includes shareholders' equity and subordinated debt; and o our long-term liabilities, will not exceed our shareholders' equity at the end of any fiscal year. Prohibition on Certain Actions. The indenture provides that, so long as the certificates are outstanding: o we will not pay any dividends on our common or preferred stock unless there is no uncured event of default with respect to the certificates; o we will not allow any other lien to be created or maintained on the collateral securing the certificates; and o we will not guarantee, endorse or otherwise become liable for any obligations of any of our control persons, or other parties controlled by or under common control with any of our control persons. Consolidation, Merger Or Sale. The indenture generally permits a consolidation or merger between us and another entity. It also permits the sale or transfer by us of all or substantially all of our property and assets. These transactions are permitted if: o the resulting or acquiring entity, if other than us, is organized and existing under the laws of a domestic jurisdiction and assumes all of our responsibilities and liabilities under the indenture, including the payment of all amounts due on the certificates and performance of the covenants in the applicable indenture; and o immediately after the transaction, and giving effect to the transaction, no event of default under the indenture exists. If we consolidate or merge with or into any other entity or sell or lease all or substantially all of our assets, according to the terms and conditions of the indenture, the resulting or acquiring entity will be substituted for us in the indenture with the same effect as if it had been an original party to the indenture. As a result, such successor entity may exercise our rights and powers under the indenture, in our name and, except in the case of a lease, we will be released from all our liabilities and obligations under the indenture and under the certificates. 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 60 days; o our failure to observe or perform any material covenant or our breach of any material representation or warranty, but only after we have been given notice of such failure or breach and such failure or breach is not cured within 30 days after our receipt of notice; 50 o defaults in certain of our other financial obligations; and o certain events of bankruptcy or insolvency with respect to us. If any event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then-outstanding certificates may declare the unpaid principal of and any accrued interest on the certificates to be due and payable immediately. In the case of an event of default arising from certain events of bankruptcy or insolvency, with respect to us, all outstanding certificates will become due and payable without further action or notice. Holders of the certificates may not enforce the indenture or the certificates except as provided in the indenture. Subject to certain limitations, holders of a majority in principal amount of the then-outstanding certificates may direct the trustee in its exercise of any trust or power. The trustee may withhold from holders of the certificates notice of any continuing default or event of default (except a default or event of default relating to the payment of principal or interest) if the trustee determines that withholding notice is in the interest of the holders. The holders of a majority in aggregate principal amount of the certificates then outstanding by notice to the trustee may, on behalf of the holders of all of the certificates, waive any existing default or event of default and its consequences under the indenture, except a continuing default or event of default in the payment of interest on, or the principal 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, an amendment or waiver will not be effective with respect to certificates held by a holder who has not consented if it has any of the following consequences, unless holders of at least 80% of the outstanding principal amount of the certificates consent to the amendment or waiver: o reduces the principal of or changes the fixed maturity of any certificate or alters the redemption provisions or the price at which we shall offer to redeem the certificate; o reduces the interest rate of or changes the time for payment of interest on any certificate; o waives a default or event of default in the payment of principal or premium, if any, or interest on or redemption payment with respect to the certificates except a rescission of acceleration of the certificates by the holders of at least a majority in aggregate principal amount of the then outstanding certificates and a waiver of the payment default that resulted from such acceleration; o makes any certificate payable in money other than United States currency; o makes any change in the provisions of the indenture relating to waivers of past defaults or the rights of holders of certificates to receive payments of principal of or interest on the certificates; o modifies or eliminates holders' redemption rights; or o makes any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any holder of the certificates, we or the trustee may amend or supplement the indenture or the certificates: o to cure any ambiguity, defect or inconsistency; o to provide for assumption of our obligations to holders of the certificates in the case of a merger or consolidation; 51 o to make any change that would provide any additional rights or benefits to the holders of the certificates or that does not materially adversely affect the legal rights under the indenture of any such holder, including an increase in the aggregate dollar amount of certificates which may be outstanding under the indenture; o to modify our policy regarding redemptions elected by a holder of certificates and our policy regarding redemptions of the certificates upon the death of any holder of the certificates, but such modifications shall not materially adversely affect any then outstanding certificates; o to comply with requirements of the SEC in order to effect or maintain the qualification of the indenture under the Trust Indenture Act; or o to maintain our status as a REIT. The Trustee. The Herring National Bank has agreed to be the trustee under the indenture. The indenture contains certain limitations on the rights of the trustee, should it become one of our creditors, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any claim as security or otherwise. The trustee will be permitted to engage in other transactions with us. The indenture provides that in case an event of default specified in the indenture shall occur and not be cured, the trustee will be required, in the exercise of its power, to use the degree of care of a reasonable person in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request of any holder of certificates, unless the holder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense. Resignation Or Removal Of The Trustee. The trustee may resign at any time, or may be removed by the holders of a majority of the principal amount of then-outstanding certificates. In addition, upon the occurrence of contingencies relating generally to the insolvency of the trustee or the trustee's ineligibility to serve as trustee under the Trust Indenture Act of 1939, as amended, we may remove the trustee or a court of competent jurisdiction may remove the trustee upon petition of a holder of certificates. However, no resignation or removal of the trustee may become effective until a successor trustee has been appointed. No Personal Liability Of Directors, Officers, Employees, Stockholders and Servicing Agent. No director, officer, employee, incorporator or 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 will not be able to sell your certificates. You should be prepared to hold any certificates you purchase until maturity. Reports. We publish and file with the Securities and Exchange Commission annual reports on form 10-KSB containing financial statements and quarterly reports on 10-QSB containing financial information for the first three quarters of each fiscal year. We will send copies of our reports at no charge to any certificate holder who requests them in writing. 52 SUMMARY OF THE ORGANIZATIONAL DOCUMENTS Our organizational documents, consisting of Amended and Restated Articles of Incorporation and Amended and Restated Bylaws, were reviewed and ratified by our directors (including our independent directors) on May 19, 1995. The following is a summary of certain provisions of these documents. This summary is qualified in its entirety by specific reference to the organizational documents filed as exhibits to the registration statement of which this prospectus is a part. On May 28, 2004 at a regular annual meeting of shareholders, a majority of our shareholders voted for amendments to our bylaws in certain technical aspects. Certain Articles of Incorporation and Bylaws Provisions Shareholders' rights and related matters are governed by the Minnesota Business Corporation Act, our Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws. Certain provisions of our articles of incorporation and bylaws, which are summarized below, may make it more difficult to change the composition of our board and may discourage an attempt by a person or group to obtain control of us through acquisitions of shares. Shareholder Meetings Our bylaws provide for annual meetings of shareholders. Special meetings of shareholders may be called by (i) our Chief Executive Officer, (ii) a majority of the members of our board of directors or a majority of our independent directors, or (iii) shareholders holding at least 10% of the outstanding shares of common stock entitled to vote at the meeting. Board of Directors Our bylaws provide that our board establishes the number of our directors, which may not be fewer than three (3) nor more than nine (9), and a majority of which must be independent directors. Any vacancy will be filled by a majority of the remaining directors, except that a vacancy of an independent director position must follow a nomination by the remaining independent directors. The directors may leave a vacancy unfilled until the next regular meeting of the shareholders. Limitations on Director Actions Without concurrence of a majority of the outstanding shares, the directors may not: (i) amend our articles or bylaws, except for amendments which do not adversely affect the rights, preferences and privileges of shareholders including amendments to provisions relating to, director qualifications, fiduciary duty, liability and indemnification, conflicts of interest, investment policies or investment restrictions; (ii) sell all or substantially all of our assets other than in the ordinary course of our business or in connection with liquidation and dissolution; (iii) cause us to merge with another entity or otherwise reorganize; or (iv) cause us to dissolve or liquidate. A majority of the then outstanding shares may, without the necessity for concurrence by our directors, vote to: (i) amend the bylaws; (ii) terminate the corporation; or (iii) remove the directors. Minnesota Anti-Takeover Law We are governed by the provisions of Sections 302A.671 and 302A.673 of the Minnesota Business Corporation Act. In general, Section 302A.671 provides that the shares of a corporation acquired in a "control share acquisition" have no voting rights unless voting rights are approved in a prescribed manner. A "control share acquisition" is an acquisition, directly or indirectly, of beneficial ownership of shares that would, when added to all other shares beneficially owned by the acquiring person, entitle the acquiring person to have voting power of 20% or more in the election of directors. In general, Section 302A.673 prohibits a public Minnesota corporation from engaging in a "business combination" with an "interested shareholder" for a period of four years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. "Business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested shareholder. An "interested shareholder" is a person who is the beneficial owner, directly or indirectly, of 10% or more of the corporation's voting stock or who is an affiliate or associate of the corporation and at any time within four years prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the corporation's stock. 53 Restrictions on Roll-Ups "Roll-up" means a transaction involving our acquisition, merger, conversion, or consolidation (either directly or indirectly) and the issuance of securities of a roll-up entity. Such term does not include: (i) a transaction involving our securities that have been for at least 12 months listed on a national securities exchange or traded through the NASDAQ National Market System; or (ii) a transaction involving the conversion to corporate, trust, or association form if, as consequence of the transaction, there will be no significant adverse change in any of the following: (a) shareholders' voting rights; (b) our term of existence; (c) sponsor or advisor compensation; (d) our investment objectives. "Roll-up entity" means a partnership, real estate investment trust, corporation, trust, or other entity created or surviving after the completion of a roll-up transaction. In connection with a roll-up, an appraisal of all of our assets would be required to be obtained from a competent independent expert. The appraiser would evaluate all relevant information, indicate the value of the assets as of a date immediately prior to the announcement of the roll-up and assume an orderly liquidation of the assets over a 12-month period. Notwithstanding the foregoing, we may not participate in any proposed roll-up which would: >> result in our shareholders having rights to meeting less frequently or which are more restrictive to shareholders than those provided in our bylaws; >> result in our shareholders having voting rights that are less than those provided in our bylaws; >> result in our shareholders having greater liability than as provided in our bylaws; >> result in our shareholders having rights to receive reports that are less than those provided in our bylaws; >> result in our shareholders having access to records that are more limited than those provided in our bylaws; >> include provisions which would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the roll-up entity (except to the minimum extent necessary to preserve the tax status of the roll-up entity); >> limit the ability of an investor to exercise the voting rights of its securities in the roll-up entity on the basis of the number of the shares held by that investor; >> result in investors in the roll-up entity having rights of access to the records of the roll-up entity that are less than those provided in our bylaws; or >> place upon us any of the costs of the transaction if the roll-up is not approved by the shareholders. Nothing prevents our participation in any proposed roll-up resulting in shareholders having rights and restrictions comparable to those contained in our bylaws, with the prior approval of a majority of our shareholders. Shareholders voting against a proposed roll-up have the choice of (i) accepting the securities of the roll-up entity offered in the proposed roll-up; or (ii) one of either: (a) remaining as our shareholders and preserving their interests therein on the same terms and conditions as previously existed, or (b) receiving cash in an amount equal to the shareholders' pro rata share of the appraised value of our net assets. We do not intend to participate in a roll-up transaction. Limitation on Total Operating Expenses Our bylaws provide that, subject to the conditions described in this paragraph, our annual total operating expenses cannot exceed the greater of 2% of our average invested assets or 25% our net income, computed before interest expense. The independent directors have a fiduciary responsibility to limit our annual total operating expenses to amounts that do not exceed the foregoing limitations. The independent directors may determine that a higher level of operating expenses is justified for such period because of unusual and non-recurring expenses. Any such finding by the independent directors and the reasons in support thereof must be recorded in the minutes of the meeting of the board of directors. We will send a written disclosure to our shareholders within 60 days after the end of any fiscal quarter for which operating expenses (for the 12 months then ended) exceed 2% of the average invested assets or 25% of net income. In the event the operating expenses exceed the limitations described above and if our directors are unable to conclude that such excess was justified then within 60 days after the end of our fiscal year, 54 our advisor must reimburse us for the amount by which the aggregate annual total operating expenses paid or incurred by us exceed the limitation. Transactions with Affiliates Our bylaws restrict our dealings with our advisor, sponsor and any director or affiliates thereof. In approving any transaction or series of transactions with such persons or entities, a majority of our directors not otherwise interested in such transaction, including a majority of the independent directors must determine that: (a) the transaction as contemplated is fair and reasonable to us and our shareholders and its terms and conditions are not less favorable to us than those available from unaffiliated third parties; (b) if the transaction involves compensation to any advisor or its affiliates for services rendered in a capacity other than contemplated by the advisory arrangements, such compensation is not greater than the customary charges for comparable services generally available from other competent unaffiliated persons and is not in excess of compensation paid to any advisor and its affiliates for any comparable services; (c) if the transaction involves the making of loans (other than in the ordinary course of our business) or the borrowing of money, the transaction is fair, competitive, and commercially reasonable and no less favorable to us than loans between unaffiliated lenders and borrowers under the same circumstances; and (d) if the transaction involves the investment in a joint venture, the transaction is fair and reasonable and no less favorable to us than to other joint venturers. If the proposed transaction involves a loan to any advisor, director or any affiliate thereof, or to a wholly-owned subsidiary of ours, a written appraisal of the underlying property must be obtained from an independent expert. The appraisal must be maintained in our records for at least five years and be available for inspection and duplication by any shareholder. Such loan is subject to all requirements of our Financing Policy. We cannot borrow money from any advisor, director or any affiliate thereof, unless a majority of our directors (including a majority of the independent directors) not otherwise interested in the transaction approve the transaction as being fair, competitive, and commercially reasonable and no less favorable to us than loans between unaffiliated parties under the same circumstances. We cannot make or invest in any mortgage loans subordinate to any mortgage or equity interest of our advisor, directors, sponsors or any of our affiliates. Restrictions on Investments The investment policies and restrictions set forth in our bylaws have been approved by a majority of our independent directors. In addition to other investment restrictions imposed by the directors consistent with our objective to qualify as a REIT, we will observe the guidelines and prohibitions on our investments set forth in our bylaws. These guidelines and prohibitions are discussed at the section headed "Our Business-Prohibited Investments and Activities." 55 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 $23,000,000 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 3.0% for sales of new certificates sold and 1.5% for sales of certificates sold on renewal of matured certificates. We will also pay the underwriter 1.0% management fee upon the original issuance of each certificate. We will not pay an underwriter's management fee on renewals of maturing certificates. 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, $20,000 of which is payable upon the sale of $1,000,000 of certificates, and the balance ($100,000) is payable ratably based on the principal amount of certificates sold thereafter. 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 one-half of one percent (.5%) due diligence fee. 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 shares or certificates. This provision does not prohibit the normal sales commission payable to a registered broker-dealer or other properly licensed person for selling certificates. Subscription Process Our certificates will be offered to the public through the underwriter and soliciting dealers. The certificates are being sold when, as 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 NASD ("soliciting dealers"). The underwriter may re-allow to soliciting dealers a portion of its commissions, fees and reimbursable expenses payable to it under the distribution agreement. In no event will the compensation re-allowed by the underwriter to soliciting dealers exceed the total of compensation payable to the underwriter under the distribution agreement. Clients of soliciting dealers who wish to purchase certificates will receive a confirmation of their purchase directly from the underwriter and must remit payment for the purchase of certificates directly to the underwriter payable to "American Investors Group, Inc." A sale will be deemed to have been made on the date reflected in the written confirmation. The confirmation will be sent to each purchaser by the underwriter on the first business day following the date upon which we advise the underwriter in writing that a application has been accepted. Generally, payment for certificates should accompany the account application. However, the underwriter must receive payment of the purchase price by the settlement date set forth in the confirmation. You may rescind your purchase of certificates for up to five (5) business days after you receive a final prospectus. The distribution agreement provides for reciprocal indemnification between us and the underwriter against certain liabilities in connection with this offering, including liabilities under the Securities Act of 1933. 56 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 $30,000 and a minimum gross income (without regard to investment in the certificates) of at least $30,000; or (ii) a net worth (excluding home, home furnishings and automobiles) of at least $100,000. To purchase in excess of $5,000 of certificates, you must meet one of the following standards: (i) a net worth (excluding home, home furnishings and automobiles) of at least $45,000 and 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. 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. You must meet all of the applicable requirements set forth in the account application. The account application to be signed by all purchasers of the Series B 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 NASD. COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to our bylaws, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore, unenforceable. 57 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, 2003 and 2002 and related statements of operations, stockholder's equity and cash flows for the years ended December 31, 2003, 2002, and 2001 included in this prospectus have been audited by Boulay, Heutmaker, Zibell and Company, P.L.L.P., independent certified public accountants, as set forth in the report thereon appearing elsewhere herein, and are included herein in reliance upon such report given on the authority of said firm as experts in accounting and auditing. REPORTS TO SHAREHOLDERS AND RIGHTS OF EXAMINATION Our advisor will keep, or cause to be kept, full and true books of account on an accrual basis of accounting, in accordance with generally accepted accounting principles ("GAAP"). All books of account, together with a copy of our Articles and any amendments thereto, will be maintained at our principal office, and will be open to inspection, examination and duplication at reasonable times by our shareholders or their agents. We will provide to shareholders, upon request, a list of the names and addresses of all of our shareholders by mail. The shareholders will also have the right to inspect our records in the same manner as shareholders of any other Minnesota corporation. Our shareholders have rights under our bylaws to inspect our records that are in addition to those available under applicable federal and state law. We will send an annual report to shareholders in connection with our annual meeting. We prepare our annual report on Securities and Exchange Commission Form 10-KSB. Our regular accountants will prepare our federal and state tax returns. We will submit tax information to shareholders within 90 days following the end of each fiscal year. A specific reconciliation between GAAP and income tax information will not be provided to the shareholders. Reconciling information will be available in our office for inspection and review by any shareholder. Dividend check statements will reflect the number of shares owned by each of our shareholders, including shares purchased under our dividend reinvestment plan. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission in Washington, D.C., a registration statement (as amended) on Form S-11 (of which this prospectus is a part) under the Securities Act of 1933, as amended, with respect to the certificates offered hereby. This prospectus does not contain all the information set forth in the registration statement. Statements contained in the prospectus as to the contents of any contract or other document are not necessarily complete. In each instance reference is made to the copy of such contract or document filed as an exhibit to the registration statement. The registration statement and to the exhibits and schedules thereto contain further information regarding us. We are subject to the information requirements of the Exchange Act, and in accordance therewith file reports and other information with the Commission. Reports and other information we have filed with the Commission can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth St. N.W., Washington, DC 20549. The Commission maintains a Web site that contains reports, proxy and information statements and other materials that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval system (EDGAR). This Web site can be accessed at http://www.sec.gov. 58 AMERICAN CHURCH MORTGAGE COMPANY INDEX TO FINANCIAL STATEMENTS
Financial Statements Report of Independent Auditors F-1 Balance Sheet at June 30, 2004 and 2003 F-2 Balance Sheet at December 31,2003 and 2002 F-4 Statements of Operations for years ended December 31, 2003, 2002, 2001 and the six month period ended June 30, 2004 and 2003 F-6 Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001 and the six month period ended June 30, 2004 F-7 Statements of Cash Flows for the years ended December 31, 2003, 2002, 2001 and the six month period ended June 30, 2004 and 2003 F-9 Notes to Financial Statements F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM Board of Directors American Church Mortgage Company Minnetonka, Minnesota We have audited the accompanying balance sheet of American Church Mortgage Company as of December 31, 2003 and 2002 and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 2003, 2002 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Church Mortgage Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years ended December 31, 2003, 2002 and 2001, in conformity with U.S. generally accepted accounting principles. /s/ Boulay, Heutmaker, Zibell & Co., P.L.L.P. Certified Public Accountants Minneapolis, Minnesota February 24, 2004 F-1 AMERICAN CHURCH MORTGAGE COMPANY Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------- June 30 ASSETS 2004 2003 (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and equivalents $ 2,325,357 $ 9,945,877 Accounts receivable 67,061 44,830 Interest receivable 134,075 107,273 Current maturities of mortgage loans receivable, net of allowance of $85,000 and $112,111 at June 30, 2004 and 2003 2,496,705 763,005 Prepaid expense 11,001 Deferred Offering Costs 126,461 Current maturities of bond portfolio 49,000 78,000 ----------- ----------- Total current assets 5,083,199 11,065,446 Mortgage Loans Receivable, net of current maturities 25,100,288 21,640,616 Real-Estate Held for Sale 120,000 Deferred Investors Saver Certificates Offering Costs, net of accumulated amortization of $228,584 and $79,012 at June 30, 2004 and 2003 530,988 413,113 Bond Portfolio, net of current maturities 7,628,044 3,222,103 Other 60,000 60,000 ------------- ----------- Total assets $38,522,519 $36,401,278 ========== ==========
Notes to Financial Statements are an integral part of this Statement. F-2 AMERICAN CHURCH MORTGAGE COMPANY Balance Sheet
- ------------------------------------------------------------------------------------------------------------------------------------ June 30 LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Current Liabilities Current maturities of investor saver certificates $ 952,000 $ 260,000 Accounts payable 46,131 98,862 Mortgage loan commitment 1,243,827 Deferred income 33,393 29,155 Dividends payable 388,255 378,124 ------------ ---------- Total current liabilities 1,419,779 2,009,968 Deferred Income, net of current maturities 512,410 477,963 Investors Saver Certificates 13,920,000 11,794,000 Stockholders' Equity Common stock, par value $.01 per share Authorized, 30,000,000 shares Issued and outstanding, 2,546,094 and 2,356,573 at June 30, 2004 and 2003 25,461 23,566 Additional paid-in capital 23,321,854 21,586,392 Accumulated deficit (676,985) (561,661) ------------ ------------ Total stockholders' equity 22,670,330 21,048,297 ---------- ---------- Total liabilities and equity $38,522,519 $36,401,278 ========== ==========
Notes to Financial Statements are an integral part of this Statement. F-3 AMERICAN CHURCH MORTGAGE COMPANY Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------- December 31 ASSETS 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Current Assets Cash and equivalents $ 4,368,769 $ 7,852,220 Accounts receivable 61,423 63,602 Interest receivable 135,648 94,385 Current maturities of mortgage loans receivable, net of allowance of $52,111 and $112,111 at December 31, 2003 and 2002 919,859 290,759 Current maturities of bond portfolio 54,000 47,000 ----------- ----------- Total current assets 5,539,699 8,347,966 Mortgage Loans Receivable, net of current maturities 25,383,192 16,140,961 Real-Estate Held for Sale 156,352 Deferred Investors Saver Certificates Offering Costs, net of accumulated amortization of $143,339 and $29,875 at December 31, 2003 and 2002 568,458 377,174 Bond Portfolio, net of current maturities 5,431,286 4,309,637 Other 60,000 60,000 ------------- ------------- Total assets $37,138,987 $29,235,738 ========== ==========
Notes to Financial Statements are an integral part of this Statement. F-4 AMERICAN CHURCH MORTGAGE COMPANY Balance Sheet
- ----------------------------------------------------------------------------------------------------------------------------------- December 31 LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Current Liabilities Current maturities of investor saver certificates $ 684,000 Accounts payable 17,296 $ 39,690 Mortgage loan commitment 1,243,827 Deferred income 31,630 18,247 Dividends payable 411,481 361,941 ------------ ------------ Total current liabilities 1,144,407 1,663,705 Deferred Income, net of current maturities 556,673 346,722 Investors Saver Certificates 13,573,000 7,428,000 Stockholders' Equity Common stock, par value $.01 per share Authorized, 30,000,000 shares Issued and outstanding, 2,452,277 at December 31, 2003 and 2,205,568 shares at December 31, 2002 24,523 22,056 Additional paid-in capital 22,471,234 20,182,798 Accumulated deficit (630,850) (407,543) ------------ ------------ Total stockholders' equity 21,864,907 19,797,311 ---------- ---------- Total liabilities and equity $37,138,987 $29,235,738 ========== ==========
Notes to Financial Statements are an integral part of this Statement. F-5 AMERICAN CHURCH MORTGAGE COMPANY Statement of Operations
- ------------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30 2004 2003 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income $ 1,513,227 $1,097,223 Operating Expenses 329,849 214,464 --------- -------- Operating Income 1,183,378 882,759 Other Expense Interest expense 437,725 289,712 Income Taxes - - --------- ------- Net Income $745,653 $593,047 ======= ======= Basic and Diluted Income Per Common Share $ .30 $ .26 ========== ======= Weighted Average Common Shares Outstanding 2,503,080 2,278,624 ========= =========
Notes to Financial Statements are an integral part of this Statement. F-6 AMERICAN CHURCH MORTGAGE COMPANY Statement of Operations
- ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income $ 2,459,254 $ 1,785,443 $1,525,562 Operating Expenses Other operating expenses 406,362 376,852 220,717 Real-estate impairment expenses 60,000 - - --------- ---------- --------- Total operating expenses 466,362 376,852 220,717 --------- ---------- --------- Operating Income 1,992,892 1,408,591 1,304,845 Other Expense Interest expense 692,138 118,650 26,835 Income Taxes - - - --------- --------- --------- Net Income $1,300,754 $1,289,941 $1,278,010 ========= ========= ========= Basic and Diluted Income Per Common Share $ .55 $ .66 $ .80 ========== ========= ========= Weighted Average Common Shares Outstanding 2,345,604 1,964,428 1,593,568 ========= ========= =========
Notes to Financial Statements are an integral part of this Statement. F-7 AMERICAN CHURCH MORTGAGE COMPANY Statement of Stockholders' Equity
- ----------------------------------------------------------------------------------------------------------------------------------- Additional Common Stock Paid-In Accumulated ------------------- Shares Amount Capital Deficit - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 1,469,817 $ 14,698 $ 13,454,746 ($ 155,034) Issuance of 325,651 shares of common stock, net of offering costs 325,651 3,256 3,058,649 Redemption of 25,694 shares of common stock (25,694) (256) (256,683) Net income 1,278,010 Dividends declared (1,324,091) --------- ------ --------- --------- Balance, December 31, 2001 1,769,774 17,698 16,256,712 (201,115) Issuance of 464,544 shares of common stock, net of offering costs 464,544 4,645 4,194,541 Redemption of 28,750 shares of common stock (28,750) (287) (268,455) Net income 1,289,941 Dividends declared (1,496,369) ----------- Balance, December 31, 2002 2,205,568 22,056 20,182,798 ( 407,543) Issuance of 263,292 shares of common stock, net of offering costs 263,292 2,633 2,439,755 Redemption of 16,583 shares of common stock (16,583) (166) (151,319) Net income 1,300,754 Dividends declared ________ ________ __________ (1,524,061) ----------- Balance, December 31, 2003 2,452,277 $24,523 $22,471,234 ( $630,850) F-8 AMERICAN CHURCH MORTGAGE COMPANY Statement of Stockholders' Equity (continued) Issuance of 102,826 shares of common stock, net of offering costs 102,826 1,028 931,633 Redemption of 9,009 shares of common stock (9,009) (90) (81,013) Net income 745,653 Dividends declared (791,788) --------- ------- ----------- --------- Balance, June 30, 2004 2,546,094 $25,461 $23,321,854 ( $676,985) ========= ====== ========== =======
Notes to Financial Statements are an integral part of this Statement. F-9 AMERICAN CHURCH MORTGAGE COMPANY Statement of Cash Flows
- ------------------------------------------------------------------------------------------------------------------------------------ Six Months Ended June 30 2004 2003 (Unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $745,653 $593,047 Adjustments to reconcile net income to net cash from operating activities: Amortization 85,244 Deferred income (42,500) 142,149 Impairment loss on real estate 36,352 Provision for losses on mortgage loans receivable 32,889 Change in assets and liabilities Accounts receivable (5,638) 18,772 Interest receivable 1,573 (12,888) Prepaid expenses (11,001) Accounts payable 28,835 59,172 -------- -------- Net cash from operating activities 871,407 800,252 Cash Flows from Investing Activities Investment in mortgage loans receivable (3,900,000) (7,020,950) Collections of mortgage loans receivable 2,573,169 2,120,099 Investment in bond portfolio (3,193,000) (161,860) Proceeds from bond portfolio called/sold 1,001,242 1,218,394 --------- --------- Net cash used for investing activities (3,518,589) (3,844,317) Cash Flows from Financing Activities Proceeds from secured investors certificates 615,000 4,626,000 Proceeds from stock offering, net of offering costs 932,661 1,528,817 Payments for deferred saver certificate offering costs (47,774) (35,939) Deferred equity offering costs (126,461) Stock redemptions (81,103) (123,713) Dividends paid (815,014) (730,982) ------- ------- Net cash from financing activities 603,770 5,137,722 ------- --------- Net (decrease) increase in Cash and Equivalents (2,043,412) 2,093,657 Cash and Equivalents - Beginning of Year 4,368,769 7,852,220 --------- --------- Cash and Equivalents - End of Year $2,325,357 $9,945,877 ========= =========
Notes to Financial Statements are an integral part of this Statement. F-10 AMERICAN CHURCH MORTGAGE COMPANY Statement of Cash Flows - Continued
- ----------------------------------------------------------------------------------------------------------------------------------- Six Months Ended June 30 2004 2003 (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Schedule of Noncash Financing and Investing Activities Dividends payable $388,255 $378,124 ======= ======= Mortgage loan commitments $1,071,050 ========= Supplemental Cash Flow Information Cash paid during the year for Interest $437,725 $289,712 ======= =======
Notes to Financial Statements are an integral part of this Statement. F-11 AMERICAN CHURCH MORTGAGE COMPANY Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 2003 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Flows from Operating Activities Net income $1,300,754 $1,289,941 $1,278,010 Adjustments to reconcile net income to net cash from operating activities: Impariment loss on real-estate 60,000 Provision for losses on mortgage loans receivable (60,000) 101,000 11,111 Amortization of deferred bond offering costs 113,464 29,875 Deferred income 223,334 104,027 47,883 Change in assets and liabilities Accounts receivable 2,179 (5,594) (48,116) Interest receivable (41,263) (28,149) (50,585) Prepaid expenses 9,110 Accounts payable (22,394) 35,340 (76,425) Management fees payable (36,222) --------- --------- --------- Net cash from operating activities 1,576,074 1,526,440 1,134,766 Cash Flows from Investing Activities Investment in mortgage loans receivable (14,596,927) (5,261,000) (1,248,000) Collections of mortgage loans receivable 3,325,417 1,995,300 953,745 Investment in bond portfolio (2,763,890) (2,048,000) (1,905,605) Proceeds from bond portfolio called/sold 1,635,241 853,874 1,033,056 ---------- --------- --------- Net cash used for investing activities (12,400,159) (4,459,826) (1,166,804) Cash Flows from Financing Activities Proceeds from investors savers certificates 6,829,000 7,428,000 Net payments on note payable, line of credit (399,653) Proceeds from stock offering, net of offering costs 2,442,392 4,199,186 3,061,905 Payments for deferred saver certificate offering costs (304,752) (378,755) (28,294) Deferred equity offering costs (28,293) (28,293) Stock redemptions (151,485) (268,742) (256,940) Dividends paid (1,474,521) (1,478,932) (1,273,215) --------- --------- --------- Net cash from financing activities 7,340,634 9,529,050 1,075,510 --------- --------- --------- Net Increase in Cash and Equivalents (3,483,451) 6,595,664 1,043,472 Cash and Equivalents - Beginning of Year 7,852,220 1,256,556 213,084 --------- --------- --------- Cash and Equivalents - End of Year $4,368,769 $7,852,220 $1,256,556 ========= ========= =========
Notes to Financial Statements are an integral part of this Statement. F-12 AMERICAN CHURCH MORTGAGE COMPANY Statement of Cash Flows - Continued
- ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Supplemental Schedule of Noncash Financing and Investing Activities Offering costs reclassified and charged to additional paid-in capital $49,478 $182,628 $ 42,443 ====== ======= ======== Dividends payable $411,481 $361,941 $344,504 ======= ======= ======= Mortgage loan commitment $1,243,827 ========= Reclassification of mortgage receivable to real-estate held for sale $216,352 ======= Supplemental Cash Flow Information Cash paid during the year for Interest $692,138 $131,367 $ 26,835 ======= ======= ========
Notes to Financial Statements are an integral part of this Statement. F-13 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited financial statements have been prepared in accordance with the instructions for interim statements and, therefore, do not include all information and disclosures necessary for a fair presentation of results of operations, financial position, and changes in cash flow in conformity with generally accepted accounting principles. However, in the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of financial position, results of operations, and cash flows for the period presented. Nature of Business American Church Mortgage Company, a Minnesota corporation, was incorporated on May 27, 1994. The Company was organized to engage primarily in the business of making mortgage loans to churches and other nonprofit religious organizations throughout the United States, on terms that it establishes for individual organizations. Accounting Estimates Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. The most sensitive estimates relate to the allowance for mortgage loans, and the valuation of the bond portfolio. It is at least reasonably possible that these estimates could change in the near term and that the effect of the change, in any, would be material to the financial statements. Cash The Company considers all highly liquid debt instruments purchased with maturities of three months or less to be cash equivalents. The Company maintains its accounts primarily at two financial institutions. At times throughout the year, the Company's cash and equivalents balances may exceed amounts insured by the Federal Deposit Insurance Corporation. Cash in money market funds is not Federally insured. The Company has not experienced any losses in such accounts. F-14 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 Bond Portfolio The Company accounts for its bond portfolio under Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company classifies its bond portfolio as "available-for sale." Available-for-sale bonds are carried at fair value. Although no ready public market for these bonds exists, management believes that their cost approximates their fair value. During the six month period ended June 30, 2004 the Company bought 3,193,000 bonds at or below par. During the six month period ended June 30, 2003, the Company bought $161,860 of bonds at or below par. During 2003, the Company sold $56,000 of its bonds below par (which was the Company's cost) to an affiliate of the Advisor. During 2002, the Company sold $497,000 of its bonds at par, to an affiliate of the Advisor. During 2001, the Company sold $716,000 of its bonds at par or above cost, to an affiliate of the Advisor (see Note 5). There were no losses on the sale of the bonds in 2003, 2002 or 2001. Allowance for Mortgage Loans Receivable The Company records its loans at their estimated net realizable value. The Company's loan policy provides an allowance for estimated uncollectible loans based on its evaluation of the current status of its loan portfolio. This policy reserves for principal amounts outstanding on a particular loan if cumulative interruptions occur in the normal payment schedule of a loan. The Company policy will reserve for the outstanding principal amount of a loan in the Company's portfolio if the amount is in doubt of being collected. Additionally, no interest income is recognized on impaired loans. At June 30, 2004 the Company reserved $85,000 for five mortgage loans totaling approximately $1,800,000 which are three or more payments in arrears, two of which are in the process of being foreclosed. At June 30, 2003, the Company reserved $112,111 for two mortgage loans which are three or more payments in arrears, one of which was in the process of being foreclosed. At December 31, 2003, the Company reserved $52,111 for four mortgage loans that are three or more mortgage payments in arrears. At December 31, 2002, the Company reserved $112,111 for two mortgage loans which are three or more mortgage payments in arrears, one of which was in the process of being foreclosed. The total impaired loans were $0 and $228,441 at December 31, 2003 and 2002, respectively. Real-Estate Held for Sale Foreclosure was completed on a church located in Battle Creek, Michigan valued at $120,000 and $156,352 at June 30, 2004 and December 31, 2003 respectively. The value of the real estate held for sale was written down by $36,352 to $120,000 in the quarter ended March 31, 2004. 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-15 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 Deferred Offering Costs Deferred equity offering costs are charged to stockholders' equity when equity subscriptions are received. Deferred investors saver certificates offering costs are amortized over the term of the certificates using the straight line method which approximates the effective interest method. Revenue Recognition Interest income on mortgage loans is recognized as earned. Interest income on the bond portfolio is recognized on the interest payable date. Deferred income represents loan origination fees which are recognized over the life of the loan as an adjustment to the yield on the loan. Dividend Re-investment Plan Dividends re-invested to purchase common stock were $156,393 and $110,149 for the six-month periods ended June 30, 2004 and 2003, respectively, and $266,850, $217,419 and $202,095 for the years ended December 31, 2003, 2002 and 2001, respectively. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences in recognition of income from loan origination fees for financial and income tax reporting. The Company has elected to be taxed as a Real Estate Investment Trust (REIT). Accordingly, the Company will not be subject to Federal income tax to the extent of distributions to its shareholders if the Company meets all the requirements under the REIT provisions of the Internal Revenue Code. Income Per Common Share No adjustments were made to income for the purpose of calculating earnings per share. Stock options had no effect on the weighted average number of shares outstanding. 2. MORTGAGE LOANS AND BOND PORTFOLIO At June 30, 2004, the Company had mortgage loans receivable totaling $27,681,993. The loans bear interest ranging from 6.75% to 12.00%. The Company also had a portfolio of secured church bonds at June 30, 2004 which are carried at cost plus amortized interest income. The bonds pay either semi-annual or quarterly interest ranging from 3.50% to 11.20%. The combined principal of $7,723,860 at June 30, 2004 is due at various maturity dated between November 1, 2004 and March 1, 2029. F-16 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 At December 31, 2003, the Company had first mortgage loans receivable totaling $26,355,162. The loans bear interest ranging from 6.00% to 12.00%. At December 31, 2002, the Company had first mortgage loans receivable totaling $16,543,831 that bore interest ranging from 8.50% to 12.00%. Included in mortgage loans receivable for 2002 is $1,243,827, representing loans that were closed in 2002 and the proceeds disbursed in 2003. The Company also had a portfolio of secured church bonds at December 31, 2003 and 2002, which are carried at cost plus amortized interest income. The bonds pay either semi-annual or quarterly interest ranging from 5.00% to 12.00%. The combined principal of $5,533,860 at December 31, 2003 is due at various maturity dates between February 1, 2004 and July 15, 2023. Six bond issues comprised 84% and 86% of the Company's bond portfolio at December 31, 2003 and 2002, respectively. At June 30, 2003, the Company had mortgage loans receivable totaling $22,717,732. The loans bear interest ranging from 6.00% to 12.00%. The Company also had a portfolio of secured church bonds at June 30, 2003 which are carried at cost plus amortized interest income. The bonds pay either semi-annual or quarterly interest ranging from 5.00% to 12.00%. The combined principal of $3,346,860 at June 30, 2003 is due at various maturity dates between July 15, 2003 and June 15, 2021. The maturity schedule for mortgage loans and bonds receivable as of June 30, 2004 and December 31, 2003 is as follows:
June 30, 2004 June 30, 2004 December 31, 2003 December 31, 2003 Mortgage Loans Bond Portfolio Mortgage Loans Bond Portfolio -------------- -------------- -------------- -------------- (Unaudited) (Unaudited) 2004 $ 2,496,705 $ 49,000 $ 919,859 $ 54,000 2005 593,913 55,000 619,142 55,000 2006 651,521 89,000 680,076 57,000 2007 715,108 199,000 747,063 198,000 2008 784,310 107,070 820,049 175,070 Thereafter 22,440,436 7,224,790 22,568,97 4,994,790 ---------- --------- ---------- --------- 27,681,993 7,723,860 26,355,162 5,533,860 Less loan loss reserves (85,000) (52,111) Less Discount from par (46,816) (48,574) ---------- --------- ---------- -------- Totals $27,596,993 $7,677,044 $26,303,051 $5,485,286 ========== ========= ========== =========
F-17 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 3. INVESTORS SAVER CERTIFICATES Investors saver certificates (see Note 7) are collateralized by certain mortgage loans receivable of approximately the same value as the certificates. Additionally, the Company incurred deferred offering costs related to the debt offering. The maturity schedule for the investors saver certificates at June 30, 2004 and December 31, 2003, is as follows:
June 30, 2004 December 31, 2003 Investor Saver Investor Saver Certificates Certificates (Unaudited) 2004 $ 952,000 $ 684,000 2005 1,321,000 1,321,000 2006 2,118,000 1,982,000 2007 2,900,000 2,900,000 2008 2,374,000 2,374,000 Thereafter 5,207,000 4,996,000 --------- --------- $14,872,000 $14,257,000 ========== ==========
Interest expense related to these certificates for the six month periods ended June 30, 2004 and 2003 and for the year ended December 31, 2003, 2002 and 2001 was $437,725, $289,712, $692,138, 118,650 and $0, respectively. 4. STOCK OPTION PLAN The Company adopted a Stock Option Plan granting each member of the Board of Directors and the president of the Advisor an option to purchase 3,000 shares of common stock annually upon their re-election. The purchase price of the stock is the fair market value at the grant date. No options were outstanding at December 31, 2003 due to the termination of the plan. Options outstanding were 99,000 shares at a price of $10 per share at December 31, 2002. The options are exercisable November 15, 1996 and incrementally at one year intervals after the date of grant and expire November 15, 2002 through November 15, 2006. No options were exercised as of December 31, 2002. The Stock Option Plan was terminated by the Company's Board of Directors in January 2003 and all outstanding stock options were cancelled. No options were exercised during the Plan's existence. The Company has chosen to account for stock based compensation in accordance with APB Opinion 25. Management believes that the disclosure requirements of Statement of Financial Accounting Standards No. 123, as amended, are not material to its financial statements. F-18 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 5. TRANSACTIONS WITH AFFILIATES The Company has an Advisory Agreement with Church Loan Advisors, Inc., Minnetonka, Minnesota ("Advisor"). The Advisor is responsible for the day-to-day operations of the Company and provides office space, administrative services and personnel. Under the terms of the Advisory Agreement, the Company pays the Advisor an annual base management fee of 1.25 percent of average invested assets (generally defined as the average of the aggregate book value of the assets invested in securities and equity interests in and loans secured by real estate), which is payable on a monthly basis. The fee is reduced to 1.00% on assets from $35 million to $50 million and to .75% on assets over $50 million. The Advisor will also receive one-half of the origination fees paid by a mortgage loan borrower in connection with a mortgage loan made or renewed by the Company. The Company has expensed Advisor management and origination fees of approximately $142,909 and $312,724 for the six month periods ended June 30, 2004 and 2003, respectively, and $545,000, $291,000 and $199,000 during 2003, 2002, and 2001, respectively. The Advisor and the Company are related through common ownership and common management. See Notes 1 and 7 for additional transactions. 6. INCOME TAXES As discussed in Note 1, a REIT is subject to taxation to the extent that taxable income exceeds dividend distributions to its shareholders. In order to maintain its status as a REIT, the Company is required to distribute at least 90% of its taxable income. In 2003, the Company had pretax income of $1,300,754 and distributions to shareholders in the form of dividends during the tax year of $1,524,061. The expected tax expense to the Company, pre-dividends would have been $442,256. In 2002, the Company had pretax income of $1,289,941 and distributions to shareholders in the form of dividends during the tax year of $1,496,369. The expected tax expense to the Company, pre-dividends would have been $438,580. In 2001, the Company had pretax income subject to tax of $1,278,010 and distributions to shareholders in the form of dividends during the tax year of $1,324,091. The expected tax expense to the Company, pre-dividends, would have been $434,523 in 2001. F-19 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 The following reconciles the income tax benefit with the expected provision obtained by applying statutory rates to pretax income at December 31:
2003 2002 2001 ---- ---- ---- Expected tax expense $442,256 $438,580 $434,623 Benefit of REIT distributions (490,990) (508,289) (450,190) Valuation allowance 48,734 69,709 15,667 ------- ------- ------- Totals $ - $ - $ - ======= ====== ====== The components of deferred income taxes are as follows at December 31: 2003 2002 ---- ---- Loan origination fees $172,823 $124,089 Loan loss allowance 17,718 38,118 Valuation allowance (130,541) (102,207) -------- -------- $60,000 $60,000 ====== ====== The total deferred tax assets are as follows at December 31: 2003 2002 ---- ---- Deferred tax assets $190,541 $162,207 Deferred tax asset valuation allowance (130,541) (102,207) ------- ------- Net deferred tax asset $60,000 $60,000 ====== ======
The change in the valuation allowance was $28,334, $69,709 and $15,667 for 2003, 2002 and 2001, respectively. 7. PUBLIC OFFERINGS OF THE COMPANY'S COMMON STOCK The Company filed a Registration Statement with the Securities and Exchange Commission for a third public offering of its common stock in August 1999. The Company offered 1,500,000 shares of its common stock at a price of $10 per share. The offering was underwritten by an underwriter (an affiliate of the Advisor) on a "best efforts" basis, and no minimum sale of stock was required. The stock sale commenced on September 23, 1999 and concluded September 23, 2001. A total of 569,207 shares were sold during the Company's third public offering. F-20 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001 In December 2001, the Company filed a Registration Statement with the Securities and Exchange Commission for a fourth public offering of its common stock and its first public offering of debt securities, which the Securities and Exchange Commission declared effective April 30, 2002. In May 2003, the Company extended the offering period to May 2004. The Company concluded its fourth public offering on April 30, 2004. The Company offered 1,500,000 shares of its common stock at a price of $10 per share and $15,000,000 principal amount of Series "A" secured investor certificates. The certificates pay quarterly interest with two, three, four, five and seven year maturities with interest rates ranging from 5.00% to 7.00%. Certificates may be purchased in any multiple of $1,000. The offering was underwritten by American Investors Group, Inc. (an affiliate of the Advisor) on a "best efforts" basis, and no minimum sale of stock or certificates will be required. The Company has sold 763,471 shares and $15,000,000 of its Series "A" secured investor certificates during its fourth public offering. As of December 31, 2003 and 2002, respectively, the Company has sold 671,450 and 452,424 shares of common stock and $14,257,000 and $7,428,000 of its Series "A" secured investor certificates. Pursuant to the terms of the Underwriting Agreement, the Company incurred expense to the managing underwriter and participating broker-dealers commissions and non-reimbursable expenses of approximately $449,154, $669,579 and $217,000 during 2003, 2002 and 2001, respectively, in connection with these last two public offerings. The Company has filed a Registration Statement with the Securities and Exchange Commission for a second public offering of debt securities. The Company is offering $23,000,000 principal amount of Series "B" secured investor certificates. The Company expects this offering will become effective in 2004. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of the Company's financial instruments, none of which are held for trading purposes, are as follows at June 30, 2004 and 2003 and December 31, 2003 and 2002:
June 30, June 30, 2004 2003 ----------------------------------------- --------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $ 2,325,357 $ 2,325,357 $ 9,945,877 $ 9,945,877 Accounts receivable 67,061 67,061 44,830 44,830 Interest receivable 134,075 134,075 101,273 101,273 Mortgage loans receivable 27,596,993 27,596,993 22,403,621 22,403,621 Bond portfolio 7,677,044 7,677,044 3,300,103 3,300,103 Investors saver certificates 14,872,000 14,872,000 12,054,000 12,054,000
F-21 AMERICAN CHURCH MORTGAGE COMPANY Notes to Financial Statements June 30, 2004 and 2003 (Unaudited) December 31, 2003, 2002 and 2001
December 31, December 31, 2003 2002 ----------------------------------- ----------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $ 4,368,769 $ 4,368,769 $ 7,852,220 $ 7,852,220 Accounts receivable 61,423 61,423 63,602 63,602 Interest receivable 135,648 135,648 135,648 135,648 Mortgage loans receivable 26,303,051 26,303,051 16,431,720 16,431,720 Bond portfolio 5,485,286 5,485,286 4,356,637 4,356,637 Investors saver certificates 14,257,000 14,257,000 7,428,000 7,428,000
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 fair value because of minimal changes in interest rates and quality of the underlying collateral since initial purchase. The carrying value of the investor saver certificates approximates fair value because the interest rates that the certificates have been sold at have not changed significantly in the past year. 9. LINE OF CREDIT The Company obtained a $1,000,000 line of credit with its bank, Beacon Bank of Shorewood, MN, on July 22, 1999 which was increased to $2,000,000 on March 18, 2002, subject to certain borrowing base limitations, through August 1, 2004. Interest is charged at 1/2% over the prime rate totaling 5.00% at June 30, 2004 and 4.50% at December 31, 2003 and 4.75% at June 30, 2003 and December 31, 2002. The line of credit is collateralized by the mortgage secured bonds held by the Company. There was no balance outstanding at June 30, 2004 or December 31, 2003 and 2002. Interest expense related to the line of credit was $0 for June 30, 2004 and 2003 and December 31, 2003 and $12,717 for December 31, 2002. F-22
Account Application Account Number: __ New Account (check one) _____________________ __ Update Years Known: _________ 1. Account Registration: (Check One): __ Individual __ Joint Tenants with Rights of Survivorship __ Corporate* __ Non-Profit* __ Custodial __ Community Property __ Partnership* __ Trust* __ Investment Club* __ Pension/Profit Sharing Plan* __ Sole Proprietorship* __ Estate* __ IRA* __ Joint Tenants in Common (50%/50% unless otherwise noted _____% __ __ TOD/POD *Additional Paperwork May Be Required 2. Account Registration: - ------------------------------------------------------------------------------------------------------------------------------- Full Legal Name: Individual/Corporation/Trust/IRA Trustee Social Security Number - ------------------------------------------------------------------------------------------------------------------------------- Full Legal Name: Co-Applicant/Minor/Trustees Social Security Number - ------------------------------------------------------------------------------------------------------------------------------- Home Address: (P.O. Box Unacceptable) City State Zip Length at Residence - ------------------------------------------------------------------------------------------------------------------------------- Alternate Mailing Address (P.O. Box Acceptable) City State Zip - ----------------- ----------------------- ------------------------------- ------------------------------- Date of Birth Date of Birth (Co-Applicant) Daytime Phone Evening Phone - ------------------------- ----------------------------------------------------- ------------------------------- Fax Number E-mail Address Name of your Bank 3. Customer Identification Program (CIP) To help the United States fight the funding of terrorism and money laundering activities, Federal law requires us to obtain, verify and record information that identifies each person who opens an account with us. Individuals: __ Driver's License __ Govt. or State Issued I.D. __ 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 Page 1 of 2 Account Application ________________ Account Number: (Continued) 4. Investor Information (Continued): Investment Objectives (Check all that apply): __ Capital Preservation: Preserving the value of your existing assets by investing in securities with a smaller degree of risk of loss of principal. __ Income: Generating current income rather than generating capital appreciation. __ Growth: Generating capital appreciation by investing in securities with a higher degree of volatility and risk of loss of principal, which will generate little if any current income. __ Speculation: Trading volatile securities with a higher than average possibility of loss of principal with the hope of achieving significant capital appreciation. Financial Information Primary Applicant __ Check Here If You Are Combining Financial Information Estimated Liquid Net Worth Investment Experience (# of Estimated Annual Estimated Net Worth (Cash, Bank C.D.'s, Liquid Securities) Tax Bracket Years) Income __ 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 ___ $100,001 - $175,00 ___ $250,001 - $500,000 ___ $250,001 - $500,000 __ 33% Partnerships ________ ___ $175,001 - $250,00 ___ $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 (# of Estimated Annual Estimated Net Worth (Cash, Bank C.D.'s, Liquid Securities) Tax Bracket Years) Income __ 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 ___ $100,001 - $175,00 ___ $250,001 - $500,000 ___ $250,001 - $500,000 __ 33% Partnerships ________ ___ $175,001 - $250,00 ___ $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 ___________________________________________ Applicants Signature (Date) Co-Applicants Signature (Date) FOR BROKER USE ONLY Rep Last Name: ________________________ Rep #: ______________ X __________________________________________ X ___________________________________________ Registered Representative Signature (Date) Principals Signature (Date)
Page 2 of 2 EXHIBIT A 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 B Secured Investor Certificates of 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. When you sign the account application you are required to represent that you meet the suitability standards contained under the caption "Who May Invest" (at page 11 of this prospectus), and if applicable, the higher standards set forth in the table below. 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.
- --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- STATE ALTERNATIVE 1 ALTERNATIVE 2 MINIMUM INVESTMENT MAXIMUM INVESTMENT NET WORTH NET INCOME + NET WORTH - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Arizona $150,000 $45,000 net income N/A N/A PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Arkansas $150,000 $45,000 net income N/A N/A PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Kansas N/A N/A N/A It is recommended that Kansas investors limit their investment to no more than 10% of their net worth. - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Minnesota $150,000 $45,000 net income N/A N/A PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- North Dakota $150,000 $45,000 net income N/A N/A PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Texas $150,000 $45,000 net income N/A 10% of net worth PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- - --------------------- ---------------------- ---------------------- -------------------- ------------------------------------- Washington $150,000 $45,000 net income N/A N/A PLUS $45,000 net worth - --------------------- ---------------------- ---------------------- -------------------- -------------------------------------
================================================================== ============================================================== Prospective investors may rely only on the information contained in this prospectus. Neither American Church Mortgage Company American Church nor the Underwriter has authorized anyone to provide any other Mortgage Company information. This prospectus isn't an offer to sell to - nor is it seeking an offer to buy 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 1 Risk Factors 6 Who May Invest 11 $23,000,000 of Series B Investor Certificates Use of Proceeds 12 Compensation to Advisor and Affiliates 13 Conflicts of Interest 15 Distributions 17 Capitalization 19 Selected Financial Data 20 PROSPECTUS Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Our Business 25 Management 36 Security Ownership of Management and Other 38 Certain Relationships and Transactions With Management 39 The Advisor and the Advisory Agreement 40 Federal Income Tax Consequences Associated With the Certificates 41 Federal Income Tax Consequences Associated With REITS 43 ERISA Consequences 44 Description of the Capital Stock 44 Description of the Certificates 45 Summary of the Organizational Documents 53 Plan of Distribution 56 Commission Position on Indemnification for Securities Act Liabilities 57 Legal Matters 57 Experts 58 Reports to Shareholders and Rights of Examination 58 Additional Information 58 Index to Financial Statements F-1 Dealers effecting transactions in the securities offered by this prospectus, whether or not participating in the offering, may be required to deliver a prospectus until 45 days after completion of this offering. Dealers may also be American Investors Group, Inc. required to deliver a prospectus when acting as underwriters and for their unsold allotments or subscriptions. September __, 2004 ================================================================== ==============================================================
PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 31. Other Expenses of Issuance and Distribution. Item Estimated Cost ---- -------------- SEC Registration Fee............................... $ 2,914 NASD Filing Fee.................................... $ 2,800 Blue Sky Qualification Fees and Expenses*.......... $ 20,000 Underwriter's Expense Allowance** $ 120,000 Printing and Engraving*............................ $ 5,000 Legal Fees and Expenses*........................... $ 45,000 Accounting Fees and Expenses*...................... $ 12,000 Miscellaneous*..................................... $ 12,286 ---------- Total.......................................... $ 220,000 ------- * Estimated ** Assumes sale of all securities offered Item 32. Sales to Special Parties. None. Item 33. Recent Sales of Unregistered Securities. None. Item 34. Indemnification of Directors and Officers. Our articles require us to indemnify and pay or reimburse reasonable expenses to any individual who is our present or former director, advisor or affiliate, provided that: (i) the director, advisor or affiliate seeking indemnification has determined, in good faith, that the course of conduct which caused the loss or liability was in our best interest; (ii) the director, advisor or affiliate seeking indemnification was acting on our behalf or performing services on our behalf; (iii) such liability or loss was not the result of negligence or misconduct on the part of the indemnified party, except that in the event the indemnified party is or was an independent director, such liability or loss shall not have been the result of gross negligence or willful misconduct; and (iv) such indemnification or agreement to be held harmless is recoverable only out of our assets and not from our shareholders directly. We may advance amounts to persons entitled to indemnification for legal and other expenses and costs incurred as a result of legal action instituted against or involving such person if: (i) the legal action relates to the performance of duties or services by the indemnified party for or on our behalf; (ii) the legal action is initiated by a third party who is not a shareholder, or the legal action is initiated by shareholder acting in his or her capacity as such and a court specifically approves such advancement; and (iii) the indemnified party receiving such advances undertakes, in writing, to repay the advanced funds, with interest at the rate we determined, in cases in which such party would not be entitled to indemnification. Notwithstanding the foregoing, we may not indemnify our directors, advisor, or affiliates and any persons acting as a broker-dealer for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities by such party unless one or more of the following conditions are met: (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as the particular indemnitee; (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee; or (iii) a court of competent jurisdiction approves a settlement of the claims against a II-1 particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission and of the published position of any state securities regulatory authority in which our securities were offered or sold as to indemnification for violations of securities laws. Subject to the limitations described above, we have the power to purchase and maintain insurance on behalf of an indemnified party. We may procure insurance covering our liability for indemnification. The indemnification permitted by our Articles is more restrictive than permitted under the Minnesota Business Corporation Act. Item 35. Treatment of Proceeds From Stock Being Registered. None. Item 36. Financial Statements and Exhibits. (a) Financial Statements:
Financial Statements Report of Independent Auditor Balance Sheet at December 31, 2003, 2002 and June 30, 2004, 2003 Statements of Operations for years ended December 31, 2003, 2002, 2001 and the six month period ended June 30, 2004, 2003 Statements of Stockholders' Equity for the years ended December 31, 2003, 2002, 2001 and the six month period ended June 30, 2004 Statements of Cash Flows for the years ended December 31, 2003, 2002, 2001 and the six month period ended June 30, 2004, 2003 Notes to Financial Statements
(b) Exhibits: See attached exhibit index. Item 37. Undertakings. The undersigned registrant hereby undertakes: 1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933. b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (ss. 230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-2 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. 4) To deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. 5) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. 6) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 7) The undersigned registrant hereby undertakes to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Act. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Minnetonka, state of Minnesota, on September 28, 2004. AMERICAN CHURCH MORTGAGE COMPANY By /s/ Philip J. Myers --------------------------- Philip J. Myers, President POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Philip J. Myers and Scott J. Marquis, or either of them, such person's true and lawful attorney-in-fact and agent with full power of substitution and resubstitution for such person and in such person's name, place and stead, in any and all capacities, to sign the Registration Statement on Form S-11 of American Church Mortgage Company and any and all amendments (including post-effective amendments) to the Registration Statement, and to file same, with all exhibits hereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
/s/ Kirbyjon H. Caldwell Director September 28, 2004 - --------------------------------------------------- Kirbyjon H. Caldwell /s/ Dennis J. Doyle Director September 28, 2004 - --------------------------------------------------- Dennis J. Doyle /s/ Michael G. Holmquist Director September 28, 2004 - --------------------------------------------------- Michael G. Holmquist Director, President, /s/ Philip J. Myers Secretary and Treasurer September 28, 2004 - --------------------------------------------------- Philip J. Myers /s/ Robert O. Naegele, Jr. Director September 28, 2004 - --------------------------------------------------- Robert O. Naegele, Jr.
II-4
INDEX TO EXHIBITS Exhibit No. Title 1 Distribution Agreement 1 3.1 Amended and Restated Articles of Incorporation 4 3.2 Third Amended and Restated Bylaws 1 4.1 Specimen Common Stock Certificate 4 4.2 Trust Indenture 1 5 Opinion Letter of Winthrop & Weinstine, P.A. as to the legality of the securities 1 8 Opinion Letter of Winthrop & Weinstine, P.A. as to certain tax matters relating to the 1 securities 10.1 Amended and Restated REIT Advisory Agreement Between the Company and Church Loan Advisory, Inc. 5 dated May 19, 1995 10.2 Amendment No. 1 to Advisory Agreement Between the Company and Church Loan Advisors, Inc. dated 2 January 1, 1999 10.3 Line of Credit Agreement with Beacon Bank dated March 18, 2002 6 10.4 $2,000,000 Promissory Note and Combined Security Agreement between the Company and Beacon Bank 6 dated March 18, 2002 10.5 Security Agreement between the Company and The Herring National Bank, as Trustee 1 12 Statements Regarding Computation of Ratios 1 21 Subsidiaries of the Registrant 3 23.1 Consent of Counsel (included in Exhibit 5 and 8) 1 23.2 Consent of Auditor 1 24 Power of Attorney (included on signature page) 1 25 Statement of Eligibility of Trustee 1 - ----------------- (1) Filed herewith. (2) Incorporated herein by reference to the Company's Registration Statement on Form S-11 filed June 29, 1999 (Commission File No. 333-81819). (3) None. (4) Incorporated herein by reference to the Company's Registration Statement on Form 8-A filed April 30, 1999. (5) Incorporated herein by reference to the Company's Registration Statement on Form S-11 filed December 21, 2001 (6) Incorporated herein by reference to the Company's Registration Statement on Form S-11/A filed April 26, 2002.
II-5 EX-12 2 ratiosamend.txt Exhibit 12 STATEMENTS REGARDING COMPUTATION OF RATIOS
-------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- December 31, June 30, June 30, 2003 2004 2004 1999 2000 2001 2002 2003 (pro forma) (actual) (pro forma) -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Pretax Income $951,879 $1,140,253 $1,278,010 $1,289,941 $1,300,754 $1,300,754 $745,653 $745,653 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Add Back Fixed Charges Certificates Interest Expense (1) 0 0 0 0 0 1,255,000 0 627,500 Amortization related to line of credit 833 2,917 0 0 0 0 0 0 Amortization related to debt offering (2) 0 0 0 29,874 113,466 179,319 85,244 118,172 Interest Expense 0 65,282 26,835 131,367 692,138 692,138 437,725 437,725 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Total Fixed Charges 833 68,199 26,835 161,241 805,604 2,126,457 522,969 555,897 -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------- Earnings $952,712 $1,208,452 $1,304,845 $1,451,182 $2,106,358 $3,427,211 $1,268,622 $1,301,550 ========================================================================================================
(1) Interest expense is adjusted to reflect the sale of all certificates offered and assumes a weighted average interest rate of 6.275% per year (1,255,000 total). Actual interest rates we will pay on certificates will be set forth in a supplement to this prospectus. Further assumes that we derive no income from the application of certificate sale proceeds to new mortgage loans. (2) Assumes all certificates are sold and underwriting fees are amortized over the life of the certificates which amounts to $65,853 per year. EX-3 3 bylaws.txt THIRD AMENDED AND RESTATED BYLAWS OF AMERICAN CHURCH MORTGAGE COMPANY As Adopted by the Shareholders May 28, 2004 TABLE OF CONTENTS GLOSSARY ARTICLE 1 - OFFICES 1.1 Registered Office 1.2 Offices ARTICLE 2 - SHAREHOLDERS 2.1 Regular Meeting 2.2 Special Meetings 2.3 Quorum 2.4 Voting 2.5 Voting of Shares by Certain Holders 2.6 Notice of Meeting 2.7 Proxies 2.8 Record Date 2.9 Presiding Officer 2.10 Conduct of Meetings of Shareholders 2.11 Order of Business 2.12 Inspectors of Election 2.13 Informal Action by Shareholders 2.14 Access to Records 2.15 Liability of Shareholders ARTICLE 3 - DIRECTORS 3.1 General Powers 3.2 Number 3.3 Qualifications; Independent Directors and Term of Office 3.4 Quorum 3.5 Regular Meetings 3.6 Special Meetings 3.7 Electronic Communications 3.8 Absent Director 3.9 Notice 3.10 Manner of Acting 3.11 Transaction Involving Advisor, Sponsor, Director or Affiliate 3.12 Compensation and Expenses 3.13 Salaries 3.14 Executive Committee 3.15 Resignation; Vacancies 3.16 Order of Business 3.17 Informal Action by Directors 3.18 Fiduciary Duty of the Directors 3.19 Investment Policies and Restrictions 3.20 Church Lending Guidelines 3.21 Advisory Agreements 3.22 Total Expenses, Acquisition Fees and Expenses 3.23 Removal of Directors ARTICLE 4 - OFFICERS 4.1 Number 4.2 Election, Term of Office and Qualifications 4.3 The Chief Executive Officer 4.4 Assistant Executive Officers i 4.5 Secretary 4.6 Chief Financial Officer 4.7 Assistant Officers 4.8 Officers Shall Not Lend Corporate Credit 4.9 Other Officers and Agents 4.10 Compensation 4.11 Removal; Resignation ARTICLE 5 - INDEMNIFICATION 5.1 Authority of the Board of Directors 5.2 Standard for Indemnification 5.3 Determination 5.4 Advance Payment 5.5 Continuance of Indemnification 5.6 Insurance 5.7 Roll-Up Restrictions ARTICLE 6 - SHARES AND THEIR TRANSFER 6.1 Certificates of Stock 6.2 Facsimile Signature 6.3 Establishment and Issuance of Shares 6.4 Transfer of Shares 6.5 Lost Certificates 6.6 Treasury Stock 6.7 Inspection of Records by Shareholders 6.8 Transfer Agent and Registrar 6.9 Transfer of Stock; Excess Shares 6.10 Registered Shareholders 6.11 Stock Ledger ARTICLE 7 - DIVIDENDS, DISTRIBUTIONS, ETC. 7.1 Dividends 7.2 Other Distributions, Reserves 7.3 Dividend Reinvestment Plan ARTICLE 8 - FINANCIAL AND PROPERTY MANAGEMENT 8.1 Fiscal Year 8.2 Audit of Books and Accounts 8.3 Contracts 8.4 Checks 8.5 Deposits 8.6 Voting Securities Held by Corporation 8.7 Accrual Method of Accounting 8.8 Annual Report 8.9 Quarterly Report ARTICLE 9 - WAIVER OF NOTICE 9.1 Requirement of Waiver in Writing ARTICLE 10 - AMENDMENT OF BYLAWS 10.1 Action by Board of Shareholders ARTICLE 11 - NAME CHANGE 11.1 Requirement to Change Name ii ARTICLE 12 - DISSOLUTION 12.1 Action by Shareholders ARTICLE 13 - MINIMUM CAPITAL 13.1 Minimum Capital ARTICLE 14 - CHOICE OF LAW THIRD AMENDED AND RESTATED BYLAWS OF AMERICAN CHURCH MORTGAGE COMPANY GLOSSARY For purposes of these Bylaws and for purposes of filing these Bylaws with respective states, the following terms shall mean: "Acquisition Expenses" means expenses including but not limited to legal fees and expenses, travel and communications expenses, costs of appraisals, nonrefundable option payments on property not acquired, accounting fees and expenses, title insurance, and miscellaneous expenses related to selection and acquisition of properties, whether or not acquired. "Acquisition Fee" means the total of all fees and commissions paid by any party to any party in connection with making or investing in mortgage loans by the corporation. Included in the computation of such fees or commissions shall be any commission, selection fee, nonrecurring management fee, reinvestment fees, loan fee or points or origination fee or any fee of a similar nature, however designated. Excluded shall be fees paid to Persons not affiliated with the Sponsor in connection with the acquisition and funding of the corporation's properties. "Advisor" means, initially, Church Loan Advisors, Inc., or its successors, and generally, the Person(s) or entity responsible for directing or performing the day-to-day business affairs of the corporation, including a Person or entity to which an Advisor subcontracts substantially all such functions. "Affiliate" means an Affiliate of another Person including any of the following: (i) any Person directly or indirectly owning, controlling, or holding, with power to vote ten percent or more of the outstanding voting securities of such other Person; (ii) any Person ten percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held, with power to vote, by such other Person; (iii) any Person directly or indirectly controlling, controlled by, or under common control with such other Person; (iv) any executive Officer, Director, trustee or general partner of such other Person; or (v) any legal entity for which such Person acts as an executive Officer, Director, trustee or general partner. "Average Invested Assets" for any period shall mean the average of the aggregated book value of the assets of the corporation invested, directly or indirectly, in loans (or interests in loans) secured by real estate, and first mortgage bonds, before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such values at the end of each calendar month during such period. "Independent Director(s)" means the Directors of the corporation who are not associated and have not been associated within the last two years, directly or indirectly, with the Sponsor or Advisor of the corporation. A Director shall be deemed to be associated with the Sponsor or Advisor if he or she: (i) owns an interest in the Sponsor, Advisor, or any of their Affiliates; or (ii) is employed by the Sponsor, Advisor or any of their Affiliates; or (iii) is an Officer or Director of the Sponsor, Advisor, or any of their Affiliates; or (iv) performs services, other than as a Director, for the corporation; or (v) is a Director for more than three real estate investment trusts organized by the Sponsor or advised the Advisor; or (vi) has any material business or professional relationship with the Sponsor, Advisor, or any of their Affiliates. For purposes of determining whether or not the business or professional relationship is material, the gross revenue derived by the prospective Independent Director from the Sponsor and Advisor and Affiliates shall be deemed material per se if it exceeds 5% of the prospective Independent Director's: (i) annual gross revenue, derived from all sources, during either of the last two years; or (ii) net worth, on a fair market value basis. An indirect relationship shall include circumstances in which a Director's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or has been associated with the Sponsor, Advisor, any of their Affiliates, or the corporation. 1 "Independent Expert" means a Person with no material current or prior business or personal relationship with the Advisor or Directors who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the corporation. "Initial Investment" means that portion of the initial capitalization of the corporation contributed by the Sponsor or its Affiliates pursuant to Section II A of NASAA REIT Policy. "Leverage" means the aggregate amount of indebtedness of the corporation for money borrowed (including purchase money mortgage loans) outstanding at any time, both secured and unsecured. "NASAA REIT Policy" means the Statement of Policy Regarding Real Estate Investment Trusts, as adopted September 29, 1993, by the North American Securities Administrators Association, Washington, D. C. "Net Assets" means the total assets (other than intangibles) at cost before deducting depreciation or other non-cash reserves less total liabilities, calculated at least quarterly on a basis consistently applied. "Net Income" for any period shall mean total revenues applicable to such period, less the expenses applicable to such period, other than additions to reserves for depreciation or bad debts or other similar non-cash reserves determined in accordance with generally accepted accounting principles. "Organization and Offering Expenses" means all expenses incurred by and to be paid from the assets of the corporation in connection with and in preparing the corporation's Shares for registration and subsequently offering and distributing them to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositaries, experts, expenses of qualification of the sale of the securities under Federal and State laws, including taxes and fees, accountants' and attorneys' fees. "Person" means any natural Persons, partnership, corporation, association, trust, limited liability company or other legal entity. "Real Estate Investment Trust" or "REIT" means a corporation, trust, association or other legal entity (other than a real estate syndication) that is engaged primarily in investing in equity interests in real estate (including fee ownership and leasehold interests) or in loans secured by real estate or both. "Roll-up" means a transaction involving the acquisition, merger, conversion, or consolidation either directly or indirectly of the corporation and the issuance of securities of a Roll-up Entity. Such term does not include: (i) a transaction involving securities of the corporation that have been for at least 12 months listed on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (ii) a transaction involving the conversion to corporate, trust, or association form of only the corporation if, as consequence of the transaction there will be no significant adverse change in any of the following: (a) Shareholders' voting rights; (b) the term of existence of the corporation; (c) Sponsor or Advisor compensation; (d) the corporation's investment objectives. "Roll-up Entity" means a partnership, real estate investment trust, corporation, trust, or other entity that would be created or would survive after the successful completion of a proposed Roll-up transaction. "Shares" means Shares of beneficial interest or of common stock of the corporation of the class that has the right to elect the corporation's Directors. "Shareholders" means the registered holders of a corporation's Shares. "Sponsor" means any Person directly or indirectly instrumental in organizing, wholly or in part, a real estate investment trust or any Person who will control, manage or participate in the management of a real estate investment trust, and any Affiliate of such Person. Not included is any Person whose only relationship with the real estate investment trust is as that of an independent property manager of real estate investment trust assets, and whose 2 only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services. A Person may also be deemed a Sponsor of the corporation by: (i) taking the initiative, directly or indirectly, in founding or organizing the business or enterprise of the corporation, either alone or in conjunction with one or more other Persons, (ii) receiving a material participation in the corporation in connection with the founding or organizing of the business of the corporation, in consideration of services or property, or both services and property, (iii) having a substantial number of relationships and contacts with the corporation, (iv) possessing significant rights to control corporation properties, (v) receiving fees for providing services to the corporation which are paid on a basis that is not customary in the industry; or (vi) providing goods or services to the corporation on a basis which was not negotiated at arms length with the corporation. "Total Operating Expenses" means aggregate expenses of every character paid or incurred by the corporation as determined under Generally Accepted Accounting Principles, including Advisors' fees, but excluding: (i) the expenses of raising the capital such as Organization and Offering Expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses, and tax incurred in connection with the issuance, distribution, transfer, registration, and shock exchange listing of the corporation's Shares; (ii) interest payments; (iii) taxes; (iv) non-cash expenditures such as depreciation, amortization and bad debt reserves; (v) incentive fees; (vi) Acquisition Fees, Acquisition Expenses, real estate commissions on resale of property and other expenses connected with the acquisition, disposition, and ownership of real estate interests, mortgage loans, or other property (such as the costs of foreclosure, insurance premiums, legal services, maintenance, repair, and improvement of property). ARTICLE 1. OFFICES 1.1 Registered Office - The registered office of the corporation shall be 10237 Yellow Circle Drive, Minneapolis, Minnesota 55343. The Board of Directors shall have authority to change the registered office of the corporation from time to time, and any such change shall be registered by the Secretary with the Secretary of State of Minnesota. 1.2 Offices - The corporation may have such other offices, including its principal business office, either within or without the State of Minnesota, as the Board of Directors may designate or as the business of the corporation may require from time to time. ARTICLE 2. SHAREHOLDERS 2.1 Regular Meeting - Shareholders shall have one annual meeting upon reasonable notice and within a reasonable period (not less than 30 days) following delivery of the annual report. Such regular meetings of the Shareholders of the corporation shall be held at the principal business office of the corporation, or at such place as is designated by the Board of Directors or the Chief Executive Officer, at which time the Shareholders, voting as provided in the Articles of Incorporation, shall elect appropriate members to the Board of Directors, and shall transact such other business as shall properly come before them. The Board of Directors shall take reasonable steps to insure that the corporation shall have a regular meeting each year. 2.2 Special Meetings - Special meetings of the Shareholders may be called by the Secretary at any time upon request of the Chief Executive Officer, or a majority of the members of the Board of Directors, or a majority of the Independent Directors and shall be called by any Officer of the corporation upon written request of Shareholders holding in the aggregate not less than ten percent (10%) of the voting Shares of the corporation. The written request shall be given to the Chief Executive Officer and shall contain the purpose of the meeting. Notice shall be given in accordance with the provisions of Section 2.6 hereof. 2.3 Quorum - The holders of a majority of the Shares outstanding and entitled to vote, represented either in person or by proxy, shall constitute a quorum for the transaction of business. The Shareholders present at a duly called or held meeting, at which a quorum of the Shareholders is present, may continue to transact business until adjournment notwithstanding the withdrawal of enough Shareholders to leave less than a quorum. In case a quorum is not present at any meeting, those present shall have the power to adjourn the meeting from time to time, without notice or other announcement at the meeting, until the requisite number of voting Shares shall be 3 represented; any business may be transacted at such reconvened meeting which might have been transacted at the meeting which was adjourned. 2.4 Voting - At each meeting of the Shareholders, every Shareholder having the right to vote shall be entitled to vote in person or by proxy duly appointed by an instrument in writing subscribed by such Shareholder. Each Shareholder shall have one (1) vote for each Share having voting power standing in his name on the books of the corporation. Upon the demand of any Shareholder, the vote for Director, or the vote upon any question before the meeting shall be by ballot. All elections shall be had and all questions decided by a majority vote of the number of Shares entitled to vote and represented at any meeting at which there is a quorum present, except in such cases as shall otherwise be required or permitted by statute, the Articles of Incorporation, these Bylaws or by agreement approved by a majority of all Shareholders. A majority of the then outstanding Shares may, without the necessity for concurrence by the Directors, vote to: (i) amend the Bylaws; (ii) terminate the corporation; or (iii) remove the Directors. 2.5 Voting of Shares by Certain Holders - Shares standing in the name of another corporation may be voted by such Officer, agent or proxy as the articles or Bylaws of such corporation may prescribe, or in the absence of such provision, as that corporation's board of Directors may prescribe. Shares under control of a personal representative, administrator, guardian, conservator, attorney-in-fact, or other similar person may be voted by that Person, either in person or by proxy, without registration of those Shares in the name of that Person. Shares under the control of a trustee in bankruptcy or a receiver may be voted by the trustee or receiver if authority to do so is contained in an appropriate order of the court by which the trustee or receiver was appointed. A Shareholder whose Shares are pledged may vote those Shares until the Shares are registered in the name of the pledgee. Shares held by a trust shall be registered in the name of a trustee, as trustee for the trust, and may be voted by that named trustee in person or by proxy. With respect to Shares owned by the Advisor, a Sponsor, the Directors, or any Affiliate, neither the Advisor, nor a Sponsor, nor the Directors, nor any Affiliate may vote or consent on matters submitted to the Shareholders regarding the removal of the Advisor, Directors or any Affiliate or any transaction between the corporation and any of them. In determining the requisite percentage in interest of Shares necessary to approve a matter on which the Advisor, a Sponsor, Directors and any Affiliate may not vote or consent, any Shares owned by any of them shall not be included. 2.6 Notice of Meeting - There shall be mailed to each Shareholder shown by the books of the corporation to be a holder of record of voting Shares, at the Shareholder's address as shown by the books of the corporation, a notice setting out the time and place of the regular or any special meeting, which notice shall be mailed at least ten (10) days prior thereto. In the event the meeting is a special meeting called by an Officer following receipt of a written request of the Shareholders in accordance with Article 2.2 hereof, the notice shall be mailed within ten (10) days of the receipt of the request for the meeting, shall state the purpose of the special meeting, shall state that no other business shall be considered at such meeting, and shall name the date of the meeting which shall be held on a date not less than twenty (20) nor more than sixty (60) days after receipt of said request, at a time and place convenient to the Shareholders. Every notice of any special meeting shall state the purpose or purposes of the proposed meeting, and the business transacted at all special meetings shall be confined to purposes stated in the call. Notice thereof may be waived in writing either before, at, or after such meeting. 2.7 Proxies - At all meetings of Shareholders, a Shareholder may vote by proxy executed in writing by the Shareholder or by his duly authorized attorney-in-fact. Such proxies shall be filed with the Secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 2.8 Record Date - The Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the date of any of the aforesaid events, as a record date for the determination of Shareholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or allotment of rights, or to exercise the rights in respect to any change, conversion or exchange of capital stock or to give such consent, and in such case only such Shareholders on the record date so fixed shall be entitled to notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any Shares on the books of the corporation after any such record date so fixed. If the stock transfer books are not closed and no record date is fixed for such determination of the Shareholders of record, the date on which notice of the meeting is mailed, or the date 4 of adoption of a resolution of the Board of Directors declaring a dividend, allotment of rights, change, conversion or exchange of capital stock or to give such consent, whichever is earlier, shall be the record date for such determination of Shareholders. The determination of Shareholders entitled to vote at the meeting as called shall apply to any adjournment of such meeting except when the date of determination or the closing of the stock transfer took is more than ninety (90) days prior to such adjourned meeting, in which event a new meeting must be called. 2.9 Presiding Officer - The appropriate Officers of the corporation shall preside over all meetings of the Shareholders; provided, however, that in the absence of an appropriate corporate Officer at any meeting of the Shareholders, the meeting shall choose any Person present to act as presiding Officer of the meeting. 2.10 Conduct of Meetings of Shareholders - Subject to the following, meetings of Shareholders generally shall follow accepted rules of parliamentary procedure: 1. If disorder should arise which prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is immediately adjourned. 2. The chairman may ask or require that anyone not a bona fide Shareholder or proxy leave the meeting. 2.11 Order of Business - The suggested order of business at the annual meeting of Shareholders, and so far as possible at other meetings of the Shareholders shall be: 1. Calling of roll. 2. Proof of due notice of meeting, or unanimous waiver. 3. Reading and disposal of any unapproved minutes. 4. Annual reports of all Officers and committees. 5. Election of Directors. 6. Unfinished business. 7. New business. 8. Adjournment. 2.12 Inspectors of Election - The Board of Directors in advance of any meeting of Shareholders may appoint inspectors to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the Officer or Person acting as chairman of any such meeting may, and on the request of any Shareholder or his proxy, shall make such appointment. In case any Person appointed as inspector shall fail to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting, or at the meeting by the Officer or Person acting as chairman. The inspectors of election shall determine the number of Shares outstanding, the voting power of each, the Shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes, ballots, assents or consents, hear and determine all challenges and questions in any way arising and announce the result, and do such acts as may be proper to conduct the election or vote with fairness to all Shareholders. No inspector whether appointed by the Board of Directors or by the Officer or Person acting as chairman need be a Shareholder. 2.13 Informal Action by Shareholders - Any action required to be taken at a meeting of Shareholders, or any other action which may be taken at a meeting of Shareholders, may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by all of the Shareholders entitled to vote with respect to the subject matter set forth. 2.14 Access to Records - Any Shareholder and any designated representative thereof shall be permitted access to all records of the corporation at all reasonable times, and may inspect and copy any of them. Inspection of the corporation's books and records by an official or agency administering the securities laws of any jurisdiction in which the corporation's Shares are registered, shall be provided upon reasonable notice and during normal business hours. The corporation or its transfer agent shall maintain as part of its books and records and shall make available 5 for inspection by any Shareholder or the Shareholder's designated agent at the home office of the corporation upon the request of the Shareholder an alphabetical list of the names, addresses, and telephone numbers of the Shareholders of the corporation along with the number of Shares held by each of them (the "Shareholder List"). The Shareholder List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of the Shareholder List shall be mailed to any Shareholder requesting the Shareholder List within ten days of the request. The copy of the Shareholder List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). A reasonable charge for copy work may be charged by the corporation. The purposes for which a Shareholder may request a copy of the Shareholder List include, without limitation, matters relating to Shareholders' voting rights and the exercise of Shareholders' rights under federal proxy laws. If the Advisor or Directors of the corporation neglects or refuses to exhibit, produce, or mail a copy of the Shareholder List as requested, the Advisor, and the Directors shall be liable to any Shareholder requesting the list for the costs, including attorneys' fees, incurred by that Shareholder for compelling the production of the Shareholder List, and for actual damages suffered by any Shareholder by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Shareholder List is to secure such list of Shareholders or other information for the purpose of selling such list or copies thereof, or of using the same as a commercial purpose other than in the interest of the applicant as a Shareholder relative to the affairs of the corporation. The corporation may require the Shareholder requesting the Shareholder List to represent that the list is not requested for a commercial purpose unrelated to the Shareholder's interest in the corporation. The remedies provided hereunder to Shareholders requesting copies of the Shareholder List are in addition to, and shall not in any way limit, other remedies available to Shareholders under federal law, or the laws of any state. 2.15 Liability of Shareholders - The Shares of the corporation, to the extent they are validly issued and fully paid, shall be non-assessable. ARTICLE 3. DIRECTORS 3.1 General Powers - The property, affairs, and business of the corporation shall be managed under the direction of the Board of Directors. It is the intent of the corporation that it engage primarily in the business of real estate mortgage lending (including participation in mortgage bond financing through the purchase of first mortgage bonds) to churches and other non-profit organizations. Any other investment, other than Permitted Temporary Investments as allowed by the corporation's established investment guidelines from time to time, shall be only with the approval of a majority of the Independent Directors as defined in Section 3.3 hereof. It shall be the duty of the Board of Directors to ensure that the purchase, sale, retention, and disposal of the corporation's assets and the investment policies of the corporation are in compliance with restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended from time to time. Without concurrence of a majority of the outstanding Shares, the Directors may not: (i) amend the corporation's Articles of Incorporation 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 the corporation's assets other than in the ordinary course of the corporation business or in connection with liquidation and dissolution; (iii) cause the merger or other reorganization of the corporation; or (iv) dissolve or liquidate the corporation, other than before the initial investment in property. 3.2 Number - The initial number of Directors shall be six (6) which number may be increased or decreased by the affirmative vote of a majority of the Directors, but shall not be less than three (3) nor more than nine (9). In the event a majority of the Directors increases the number of Directors, the Shareholders, at any regular or special meeting in which notice of such meeting contains a statement of the proposed increase in Directors, shall have the power to elect such additional Directors to hold office until the next annual meeting of the Shareholders, and until their successors are elected and qualified. A Director shall be elected upon having received the affirmative vote of a simple majority of the Shareholders entitled to vote at such meeting. In addition, a majority of Shareholders present in person or by proxy at a Regular Meeting at which a quorum is present, may, without the necessity for concurrence by the Directors, vote to elect the Directors. 3.3 Qualifications; Independent Directors and Term of Office - At all times, the corporation intends to be qualified as a real estate investment trust under the Internal Revenue Code. Directors need not (but may) be 6 Shareholders of this corporation, nor are Directors required to be residents of the State of Minnesota. A non-Independent Director shall have had at least three years of relevant experience demonstrating the knowledge and experience required to successfully acquire and manage the type of assets being acquired by the corporation. A majority of the Board of Directors shall be "Independent Directors," with at least one Independent Director having had at least three years of relevant real estate experience. The initial Board of Directors set forth in the organizational minutes of this corporation shall serve for a one-year term or until the next annual meeting of Shareholders when a successor shall have been elected and qualified. At the first annual meeting of Shareholders and at each annual meeting thereafter, the Shareholders shall elect Directors to hold office for a one year term or until their successors are elected and qualify. Shareholders desiring to nominate a Person for election as a Director shall deliver written notice of such nomination at least 90 days prior to an annual meeting of Shareholders and within seven (7) days following the date on which notice of a special meeting of Shareholders to elect Directors is first given to each of the corporation Shareholders. Each of the Directors of the corporation shall hold office until the annual meeting next following or closely coinciding with the expiration of his/her term of office and until his/her successor shall have been elected and shall qualify, or until he or she shall resign, or shall have been removed as provided by statute. 3.4 Quorum - A majority of the Board of Directors shall constitute a quorum for the transaction of business; provided, however, that if any vacancies exist by reason of death, resignation or otherwise, a majority of the remaining Directors shall constitute a quorum for the conduct of business. If less than a quorum is present at any meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. 3.5 Regular Meetings - As soon as practical after each regular meeting of Shareholders, the Board of Directors shall meet for the purposes of organization, choosing the Officers of the corporation and for the transaction of other business at the place where the Shareholders' meeting is held or at the place where regular meetings of the Board of Directors are held. No notice of such meeting need be given. Such first meeting may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings or in a consent and waiver of notice signed by all the Directors. Other regular meetings of the Board of Directors shall be held from time to time at such time and place as may from time to time be fixed by resolution adopted by a majority of the whole Board of Directors. Unless notice shall be waived by all Directors entitled to notice, notice shall be given in the same manner as prescribed for notice of special meetings. 3.6 Special Meetings - Special meetings of the Board of Directors may be held at such time and place as may from time to time be designated in the notice or waiver of notice of the meeting. Special meetings of the Board of Directors may be called by the Chief Executive Officer, or by any two Directors. Unless notice shall be waived by all Directors entitled to notice, notice of the special meeting shall be given by the Secretary, who shall give at least twenty-four (24) hours notice thereof to each Director by mail, telegraph, telephone, or in person. 3.7 Electronic Communications - A Board of Directors meeting may be had entirely or partially by any means of communication through which the Directors may simultaneously hear each other, provided notice is given of the meeting pursuant to Section 3.9 and there are a sufficient number of participants to constitute a quorum. In addition, a Board of Directors meeting may be had entirely or partially by any means of electronic communication even if the Directors may not simultaneously hear each other provided such meeting or substance thereof is followed by a written statement by the appropriate Director or Officer and assented to by a quorum of the Board in writing within ten (10) days of such meeting. Participation in a meeting by these means shall constitute presence in person by such Person at a meeting. 3.8 Absent Director - A Director may give advance written consent or opposition, to a proposal to be acted on at a Directors' meeting. Such written consent or opposition does not constitute presence for purposes of determining the lie existence of a quorum. Written consent or opposition shall be counted as a vote on the proposal if the proposal acted on is substantially the same or has substantially the same effect as the proposal to which the Director has consented or objected. 3.9 Notice - Unless notice is waived by all Directors entitled to notice, a regular meeting of the Board of Directors may be called by giving ten (10) days notice to all Directors. A special meeting of the Board of Directors may be called by giving at least twenty-four (24) hours notice to all Directors. Notice may be given by mail, telegraph, telephone, or in person. If given by mail such notice shall be deemed given when deposited in the 7 United States Mails. Notice by mail may not be used if the meeting is called less than four (4) days from the date of notice. The notice must specify the date, time and place of the meeting, and if a special meeting, the purpose of the meeting. 3.10 Manner of Acting - The act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Notwithstanding the foregoing, any action pertaining to a transaction involving the corporation in which any Advisor, any Director or Officer of the corporation or any Affiliate of any of the foregoing Persons has an interest shall specifically be approved as being fair and reasonable to the corporation and on terms not less favorable to the corporation than those available from unaffiliated third parties. The approval may be made with respect to any isolated transactions or generally be approved with respect to any series or similar transactions, by a majority of the members of the Board of Directors who are not Affiliates of such interested party, even if such Directors constitute less than a quorum, or unless an act requires the approval of a majority of the Independent Directors as defined in Bylaw 3.3, or as required in other provisions of these Bylaws. 3.11 Transaction Involving Advisor, Sponsor, Director or Affiliates - In approving any transaction or series of transactions between the corporation and the Advisor, Sponsor, Director or any Affiliate thereof, a majority of the 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 the corporation and its Shareholders and its terms and conditions are not less favorable to the corporation than those available from unaffiliated third parties; (b) if the transaction involves compensation to any Advisor or its Affiliates for services rendered in a capacity other than contemplated by the advisory arrangements, such compensation, is not greater than the customary charges for comparable services generally available from other competent unaffiliated Persons and is not in excess of compensation paid to any Advisor and its Affiliates for any comparable services; (c) if the transaction involves the making of loans (other than in the ordinary course of the corporation's business) or the borrowing of money, the transaction is fair, competitive, and commercially reasonable and no less favorable to the corporation 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 the corporation than to other joint venturers. (e) Notwithstanding anything to the contrary above, if the proposed transaction involves a loan by the corporation to any Advisor, Sponsor, Director or any Affiliate thereof, or to a wholly-owned subsidiary of the corporation, and the proposed loan will not be insured or guaranteed, in whole or in part, by a government or government agency, a written appraisal must be obtained from an Independent Expert concerning the underlying property and such appraisal shall be maintained in the corporation's records for at least five years and be available for inspection and duplication by any Shareholder. In addition to the appraisal, such loan shall be subject to all requirements of the corporation's financing policies, as adopted by the corporation's Board of Directors. The corporation shall not borrow money from any Advisor, Sponsor, Director or any Affiliate thereof, unless a majority of the corporation's Directors (including a majority of the independent Directors) not otherwise interested in such transaction approve the transaction as being fair, competitive, and commercially reasonable and no less favorable to the corporation than loans between unaffiliated parties under the same circumstances. Notwithstanding anything to the contrary, the corporation shall not make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of the Advisor, Directors, Sponsors or any Affiliate of the corporation. 3.12 Compensation and Expenses - Directors and any members of any committee of the corporation contemplated by these Bylaws or otherwise provided for by resolution of the Board of Directors, shall receive such compensation therefor as may be determined from time to time by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any Director that is not an Independent Director from serving the corporation in any other capacity and receiving proper compensation therefor. Each Independent Director shall 8 receive initial compensation of $500 per meeting, limited to Two-Thousand-Five-Hundred and 00/100 Dollars ($2,500.00) per year. In addition, the corporation shall reimburse the Directors for travel expenses incurred in connection with the duties as Directors of the corporation. 3.13 Salaries - Salaries and other compensation of all Officers of the corporation shall be fixed by the Board of Directors, which action may be taken informally without the benefit of written resolutions. Nothing herein contained shall be construed to preclude any Officer from serving the corporation as a Director, consultant or in any other capacity and receiving proper compensation therefor. 3.14 Executive Committee - A majority vote of the Board of Directors present at a meeting may pass a resolution establishing committees having the authority of the Board to the extent provided in the resolution. A committee shall consist of one or more Persons all of whom are members of the Board and a majority of whom are Independent Directors. A majority of the committee present at a meeting shall constitute a quorum for the purpose of transacting business. In all other respects committees shall conduct meetings in the same manner prescribed for the Board of Directors. Committees shall be subject at all times to the control and direction of the Board. 3.15 Resignation; Vacancies - A Director may resign at any time by giving written notice of same to the Board of Directors, or to the Chief Executive Officer. Such resignation shall be effective upon receipt unless a later date is specified in the notice. The acceptance of a resignation shall not be necessary to make it effective. If at any time and for any reason, including the creation of a new Directorship, a vacancy occurs in the Board of Directors, the remaining Directors of the Board, though less than a quorum, may elect a successor to fill such vacancy, or the Board may leave the vacancy unfilled until the next regular meeting of the Shareholders, or until an intervening special meeting of the Shareholders is called and held for the purpose of electing a successor. The nomination for filing a vacancy of an Independent Director position must be made by the remaining Independent Directors at such time; provided that the corporation seeks to qualify as a real estate investment trust where, in accordance with Section 3.3, a majority of the Board of Directors are required to be Independent Directors. A Director elected to fill any vacancy shall hold office for the unexpired term of his predecessor, or until a successor is duly elected and qualified. 3.16 Order of Business - The meetings shall be conducted in accordance with Roberts Rules of Order, Revised, and the suggested order of business at any meeting of the Directors shall be: 1. Roll call. 2. Proof of due notice of meeting, or unanimous consent, or unanimous presence and declaration by president. 3. Reading and disposal of any unapproved minutes. 4. Reports of Officers and committees. 5. Election of Officers. 6. Unfinished business. 7. New Business. 8. Adjournment. 3.17 Informal Action by Directors - Any action required to be taken at a meeting of the Directors, or any other action which may be taken at a meeting of the Directors, may be taken without a meeting and notice thereof if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter set forth. 3.18 Fiduciary Duty of the Directors - The Directors shall be charged with a fiduciary duty to the corporation and the Shareholders to supervise the relationship of the corporation with the Advisor. 3.19 Investment Policies and Restrictions - It shall be the duty of Directors to ensure that the sale, retention and disposal of the corporation's assets, and the investment policies of the corporation and the limitations thereon or amendment thereof are at all times (i) consistent with such policies, limitations and restrictions as are contained in this Section 3.19, or recited in the Registration Statement on Form S-11 (the "Registration Statement") filed with the Securities and Exchange Commission in connection with this corporation's initial offering of common 9 stock (the "Initial Offering"), and (ii) in compliance with the restrictions applicable to real estate investment trusts pursuant to the Internal Revenue Code of 1986, as amended. In this regard, the corporation shall not: (a) Invest more than ten percent (10%) of its total assets in unimproved real property, or in mortgage loans secured by mortgages on unimproved real property; (b) Invest in commodities or commodity futures contracts, provided that such limitation shall not apply to interest rate futures when used solely for hedging purposes; (c) Invest in or make mortgage loans (including construction loans) on any one property if the aggregate amount of all mortgage loans outstanding on the property including the loans of the corporation, would exceed 75% of the appraised value of the property as determined by appraisal, unless substantial justification, such as the net worth of the borrower and the credit rating of the borrower based on historical, financial performance, exists because of the presence of other underwriting criteria with the exception of the initial property where the construction loan will be for one hundred percent (100%) of cost. (Appraisals obtained in connection with a mortgage loan shall be retained for at least three years from the date of the loan.); (d) Make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of the Advisor, a Sponsor, a Director or an Affiliate thereof; (e) Invest in equity securities; (f) Engage in any short sales of securities or in trading as distinguished from investment activities; (g) Issue redeemable equity securities; (h) Engage in underwriting or the agency distribution of securities issued by others; (i) Issue options or warrants or similar evidence of a right to buy its security to purchase its Shares to the Advisor, Sponsor, Director or an Affiliate thereof, except on the same terms as such options or warrants (or underlying Shares), if any, are sold to the general public. The corporation may issue options or warrants to Persons not so connected with the corporation but only as a part of a financing arrangement, but not at exercise prices less than the fair market value of such Shares on the date of grant and for consideration that in the judgment of a majority of the Independent Directors, has a market value less than the value of such option on the date of grant. Options or warrants issuable to the Sponsor, Advisor, their Affiliates or any Director or Affiliates of the corporation shall not exceed an amount equal to ten percent (10%) or the outstanding Shares of the corporation on the date of grant of any options or warrants; (j) Issue debt securities unless the historical debt service coverage the most recently completed fiscal year as adjusted for known changes, is sufficient to properly service the higher level of debt; (k) Invest in real estate contracts of sale unless such contracts are in recordable form and are appropriately recorded in the chain of title; (l) An Advisor, Sponsor, Director or any Affiliate thereof shall not acquire or lease assets from the corporation unless approved by a majority of Directors (including a majority of Independent Directors), not otherwise interested in such transaction, as being fair and reasonable to the corporation; (m) Purchase property from any Advisor, Sponsor or Director, or any Affiliate thereof, unless a majority of Directors (including a majority of Independent Directors) not otherwise interested in such transaction approve the transaction as being fair and reasonable to the corporation and at a price to the corporation no greater than the cost of the asset to such Advisor, Sponsor, Director or any Affiliate thereof, or if the price to the corporation 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 to the corporation exceed its current appraised value; (n) Issue its Shares on a deferred payment basis or other similar arrangement; 10 (o) Invest in or make mortgage loans unless mortgagee's or owner's title insurance policy or commitment as to the priority of the mortgage or condition of title is obtained; or (p) Invest in first mortgage church bonds sold through American Investors Group, Inc., or any other Affiliate, except on terms and conditions equal to or better than terms offered to public investors (including commission rates and expenses) or as otherwise approved by a majority of the corporation's Independent Directors. The foregoing provisions shall not be changed without the approval of a majority of the Independent Directors. The corporation does not intend to invest in the securities of other issuers for the purposes of exercising control, to engage in the trading of or to underwrite securities for other issuers to engage in the purchase and sale (or turnover) of investments other than as described in the Registration Statement, to offer securities in exchange for property unless deemed prudent by a majority of the Directors, to repurchase or otherwise reacquire Shares of the corporation except as may be necessary to maintain qualification as a real estate investment trust, to issue senior securities or to make loans to other Persons. The Independent Directors shall review the investment policies of the corporation at least annually to determine that the policies then being followed by the corporation are in the best interests of its Shareholders. Each such determination and the basis therefore shall be set forth in the minutes of the Board of Directors. The aggregate borrowings of the corporation, secured and unsecured, shall be reasonable in relation to the Shareholders' Equity of the corporation and shall be reviewed by the Independent Directors at least quarterly. The maximum amount of such borrowings shall not exceed 300% of Shareholders' Equity in the absence of a satisfactory showing that a higher level of borrowing is appropriate. Any excess in borrowing over such 300% level shall be approved by a majority of the Independent Directors and disclosed to Shareholders in the next quarterly report of the corporation, along with justification for such excess. 3.20 Church Lending Guidelines - The corporation has adopted lending and investment guidelines and policies specific to its business, which guidelines and policies are in addition to those set forth in Section 3.19 above. These guidelines and policies are identified and described in the Prospectus made part of the Registration Statement, and may not be modified or changed materially unless such modification or change is approved by a majority vote of the Board of Directors and confirmed by a majority vote of the Shareholders. Once modified or changed, a complete written summary of such guidelines and policies shall be made part of the minutes of the next meeting of the Board of Directors and furnished to all Shareholders along with the next annual report or other scheduled communication mailed to them. 3.21 Advisory Arrangements - The Board of Directors shall cause the corporation to engage an Advisor on a year-to-year basis to furnish advice and recommendations concerning the affairs of the corporation, provide administrative services to the corporation and manage the corporation's day-to-day affairs pursuant to a written contract or contracts, or any renewal thereof, which have obtained the requisite approvals of the Board of Directors, including a majority of the Independent Directors. The Board of Directors shall evaluate the performance of the Advisor and its key personnel before entering into or renewing any advisory arrangement. The minutes of meetings with respect to such evaluation shall reflect the criteria used by the Board of Directors in making such evaluation. Upon any termination of the initial advisory arrangements reflected in the Registration Statement, the Board of Directors shall determine that any successor Advisor possesses sufficient qualifications (a) to perform the advisory function for the corporation; and (b) to justify the compensation provided for in its contract with the corporation. Each contract for the services of an Advisor entered into by the Board of Directors shall have a term of no more than one year, but may be renewed annually at or prior to the expiration of the contract. Each contract shall be terminable by a majority of the Independent Directors on sixty (60) days prior written notice with or without cause and without penalty. Each contract shall provide that, in the event of termination of the contract, the Advisor shall take all reasonable steps to assist the corporation's Directors in making an orderly transition of the advisory function. 11 The Independent Directors shall determine at least annually that the compensation which the corporation contracts to pay the Advisor is reasonable in relation to the nature and quality of the services performed and also shall supervise performance of the Advisor and the compensation paid to it by the corporation to determine that the provisions of such contract are being carried out. Each such determination shall be based upon the following factors and all other factors the Independent Directors may deem relevant and the findings of the Independent Directors on each of such factors shall be recorded in the minutes of the Board of Directors: (a) the size of the advisory fee and expense reimbursement in relation to the size, composition and profitability of the investment portfolio of the corporation; (b) the success of the Advisor in generating opportunities that meet the investment objectives of the corporation; (c) the rates charged to other companies similar to the corporation and to other investors by Advisors performing comparable services; (d) additional revenues realized by the Advisor and its Affiliates through their relationship with the corporation, whether paid by the corporation or by others with whom the corporation does business; (e) the quality and extent of service and advice furnished to the corporation, including the frequency of problem investments and competence in dealing with distress situations; (f) the performance of the investment portfolio of the corporation, including income, conservation or appreciation of capital; (g) the quality of the investment portfolio of the corporation in relationship to the investments generated by the Advisor for its own account. (h) the experience and expertise of the Advisor in the specialized business segment in which the corporation is engaged. 3.22 Total Expenses, Acquisition Fees and Expenses - The Independent Directors shall determine from time to time and at least annually that the compensation which the corporation contracts to pay to the Advisor is reasonable in relation to the nature and quality of services performed and that such compensation is within the limits prescribed by this Statement of Policy. The Independent Directors shall also supervise the performance of the Advisor and the compensation paid to it by the corporation to determine that the provisions of such contract are being carried out. Each such determination shall be based on the factors set forth below and all other factors such Independent Trustees may deem relevant and the findings of such Trustees on each of such factors shall be recorded in the minutes of the Directors: (i) the size of the advisory fee in relation to the size, composition and profitability of the portfolio of the REIT; (ii) the success of the Advisor in generating opportunities that meet the investment objectives of the corporation; (iii) the rates charged to other corporations and to investors other than corporations by Advisors performing similar services; (iv) additional revenues realized by the Advisor and any Affiliate through their relationship with the corporation including loan administration, underwriting or broker commissions, servicing, engineering, inspection and other fees, whether paid by the corporation or by others with whom the corporation does business; (v) the quality and extent of service and advice furnished by the Advisor; (vi) the performance of the investment portfolio of the corporation, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; (vii) the quality of the portfolio of the corporation in relationship to the investments generated by the Advisor for its own account. The Independent Directors shall have a fiduciary responsibility to limit the "Total Operating Expenses" to amounts that do not exceed for the 12 months ending with the end of each fiscal quarter of the corporation) the greater of (a) two percent (2%) of the corporation's "Average Invested Assets" or (b) 25% of the corporation's Net Income (the "Limitations"), unless the Independent Directors shall have made a finding that, based on such unusual or non-recurring factors which they deem sufficient, a higher level of expenses is justified for such year. Such determination and the reasons therefor shall be reflected in the minutes of the meeting of the Directors and shall also be disclosed in writing to Shareholders, together with an explanation of all factors considered in the determination, within 60 days after the end of any fiscal quarter for which Total Operating Expenses (for the 12 months then ended) 12 exceeded the Limitation. In the event the Independent Directors do not determine that such excess expenses are justified, the Advisor shall reimburse the corporation at the end of the twelve (12) month period, the amount by which Total Operating Expenses exceeded the Limitation. The total of all Acquisition Fees and Acquisition Expenses shall be reasonable, and shall not exceed an amount equal to 6% of the funds advanced. Notwithstanding the above, a majority of the Directors (including a majority of the Independent Directors) not otherwise interested in the transaction may approve fees in excess of these limits if they determine the transaction to be commercially competitive, fair and reasonable to the corporation. Organization and Offering Expenses paid in connection with the Company's formation or the distribution of its Shares must be reasonable and may in no event exceed an amount equal to 15% of the proceeds raised in an offering. 3.23 Removal of Directors - A Director may be removed by the vote or written consent of the holders of a majority of the outstanding Shares. A special meeting of the Shareholders may be called for the purpose of removing a Director pursuant to the provision of Section 2 of these Bylaws. ARTICLE 4. OFFICERS 4.1 Number - The Officers of the corporation may include a Chief Executive Officer, a Chief Financial Officer, a Secretary and such other Officers as may from time to time be chosen by the Board of Directors. Any number of offices may be held by one Person. 4.2 Election, Term of Office and Qualifications - At any regular meeting of the Board of Directors, the Board may elect a Chief Executive Officer, a Chief Financial Officer, a Secretary and such other Officers and assistant Officers as may be deemed advisable. Such Officers shall hold office until their successors are elected and qualify; provided, however, that any Officer may be removed with or without cause by the affirmative vote of a majority of the whole Board of Directors. 4.3 The Chief Executive Officer - The Chief Executive Officer, who may also be referred to as the President, shall: (a) have general active management of the business of the corporation; (b) when present, preside at all meetings of the Board and of the Shareholders: (c) see that all orders and resolutions of the Board are carried into effect; (d) sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts or other instruments pertaining to the business of the corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another Person or as expressly delegated by the articles or Bylaws or by the Board to some other Officer or agent of the corporation; (e) maintain records of and, whenever necessary, certify all proceedings of the Board and the Shareholders; and (f) perform other duties prescribed by the Board. The Chief Executive Officer may also be referred to as the President. 4.4 Assistant Executive Officers - Each assistant executive Officer shall have such powers and shall, perform such duties as may be prescribed by the Board of Directors. In the event of absence or disability of the Chief Executive Officer. An assistant executive Officer shall succeed to his powers and duties in the order in which they are elected or as otherwise prescribed by the Board of Directors. The Assistant Executive Officers may also be referred to as Vice Presidents. 4.5 Secretary - The Secretary shall be secretary of and shall attend all meetings of the Shareholders and Board of Directors. The Secretary shall act as clerk thereof and shall record all the proceedings of such meetings in the minute book of the corporation. The Secretary shall give proper notice of meetings of Shareholders and Directors. The Secretary shall keep the seal of the corporation, if any, and shall affix the same to any instrument requiring it and shall attest the seal by his signature. The Secretary shall, with the Chief Executive Officer or Chief Financial Officer, acknowledge all certificates for Shares of the corporation and shall perform such other duties as may be prescribed from time to time by the Board of Directors. 13 4.6 Chief Financial Officer - The Chief Financial Officer, who may also be referred to as the Treasurer, shall: (a) keep accurate financial records for the corporation; (b) deposit all money, drafts, and checks in the name of and to the credit of the corporation in the banks and depositories designated by the Board; (c) endorse for deposit all notes, checks, and drafts received by the corporation as ordered by the Board, making proper vouchers therefor; (d) disburse corporate funds and issue checks and drafts in the name of the corporation as ordered by the Board; (e) render to the Chief Executive Officer and the Board, whenever requested, an account of all transactions by the Chief Financial Officer and of the financial condition of the corporation; and (f) perform other duties prescribed by the Board or by the Chief Executive Officer. The Chief Financial Officer may also be referred to as the Treasurer. 4.7 Assistant Officers - In the event of absence or disability of any assistant executive Officer, Secretary, or Chief Financial Officer, such assistants to such Officers shall succeed to the powers and duties of the absent Officer in the order in which they are elected or as otherwise prescribed by the Board of Directors until such principal Officer shall resume his duties or the Board of Directors elects his replacement. Such assistant Officers shall exercise such other powers and duties as may be delegated to them from time to time by the Board of Directors, but they shall be subordinate to the principal Officer they are designated to assist. 4.8 Officers Shall Not Lend Corporate Credit - Except for the proper use of the corporation, no Officer of this corporation shall sign or endorse in the name or on behalf of this corporation, or in his official capacity, any obligations for the accommodation of any other party or parties, nor shall any check, note, bond, stock certificate or other security or thing of value belonging to this company be signed by any Officer or Director as collateral for any obligation other than valid obligations of this corporation. 4.9 Other Officers and Agents - The Board of Directors may appoint such other Officers and agents as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 4.10 Compensation - The salaries of all Officers and agents of the corporation shall be fixed by the Board of Directors. 4.11 Removal; Resignation - The Officers of the corporation shall serve at the pleasure of the Board of Directors, and until their successors are chosen and qualified. Any Officer or agent may be removed by the Board of Directors whenever, in its judgment, the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the Person so removed. Any Officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified herein, and if a time is not specified, at the time of its receipt by the Chief Executive Officer or the Secretary. The acceptance of a resignation shall not be necessary to make it effective. If the office of any Officer becomes vacant for any reason, the vacancy shall be filled by the Board of Directors. ARTICLE 5. INDEMNIFICATION 5.1 Authority of the Board of Directors - The corporation acting through its Board of Directors, including a majority of its Independent Directors, or as otherwise provided by this bylaw, shall and hereby does exercise as fully as may be permitted from time to time by the statutes and decisional law of the State of Minnesota or by any other applicable rules or principles and law its power to indemnify any Director, Officer, Employee or Agent of the corporation and any Person who is or was serving at the request of the corporation as a Director, Officer, Employee, or Agent of another corporation, partnership, joint venture, trust or other enterprise, and who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, or proceeding, wherever brought, whether civil, criminal, administrative, or investigative, by reason of the fact that he is or was a Director, Officer, employee, or agent of the corporation, or is or was serving at the request of the corporation, as a Director, Officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. Notwithstanding anything to the contrary above, the corporation shall not provide for indemnification of the Directors, Sponsors, Advisors or Affiliates for any liability or loss suffered by the Directors, Sponsors, Advisors or Affiliates, nor shall it provide that the Directors, Advisors or Affiliates be held harmless for any loss or liability suffered by the 14 corporation, unless all of the following conditions are met: (i) the Directors, Sponsors, Advisors or Affiliates have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interests of the corporation; (ii) the Directors, Sponsors, Advisors or Affiliates were acting on behalf of or performing services for the corporation; (iii) such liability or loss was not the result of: (a) negligence or misconduct by the Directors, excluding the Independent Directors, Advisors or Affiliates; or (b) gross negligence or willful misconduct by the Independent Directors; (iv) such indemnification or agreement to hold harmless is recoverable only out of corporation's net assets and not from Shareholders. 5.2 Standard for Indemnification - Any Person described in Section 5.1 shall be indemnified by the corporation to the full extent permitted under the laws of the State of Minnesota and other applicable law; provided, however, that, notwithstanding anything to the contrary above, the Directors, Sponsors, Advisors or Affiliates and any Persons acting as a broker-dealer shall not be indemnified by the corporation for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws 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 securities of the corporation were offered or sold as to indemnification for violations of securities laws. 5.3 Determination - Any indemnification under Section 5.1, unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 5.2. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of Directors who are not parties to such action, suit, or proceeding. 5.4 Advance Payment - The advancement of corporation funds to the Directors (including Independent Directors) Officers, Sponsors, Employees, Agents or Advisors or Affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if all of the following conditions are satisfied: (i) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the corporation; (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 of competent jurisdiction specifically approves such advancement; (iii) the Directors, Officers, Sponsors, Employees, Agents, Advisors or Affiliates undertake to repay the advanced funds to the corporation, together with the applicable legal rate of interest thereon, in cases in which such Directors (including Independent Directors), Sponsors, Employees, Agents, Advisors or Affiliates are found not to be entitled to indemnification. 5.5 Continuance of Indemnification - The indemnification provided by this bylaw shall continue as to a Person who has ceased to be a Director, Officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a Person. 5.6 Insurance - The corporation may purchase and maintain insurance on behalf of any Person who is or was a Director, Officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a Director, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, provided, that no indemnification shall be made under any policy of insurance for any act which could not be indemnified by the corporation under this bylaw. 5.7 Roll-Up Transactions - In connection with a proposed Roll-Up, the Board of Directors shall obtain an appraisal of all assets of the corporation from a competent, Independent Expert. If the appraisal will be included in a prospectus used to offer the securities of a Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange Commission and the states as an exhibit to the registration statement. Accordingly, an issuer using the appraisal shall be subject to liability for violation of Section 11 of the Securities Act of 1933 and comparable provision under state laws for any material misrepresentations or material omissions in the appraisal. The 15 corporation's assets shall be appraised on a consistent basis. The appraisal shall be based on an evaluation of all relevant information, and shall indicate the value of the corporation's assets as of a date immediately prior to the announcement of the proposed Roll-Up transaction. The appraisal shall assume an orderly liquidation of the corporation's assets over a 12 month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the corporation and its Shareholders. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the appraiser in connection with a proposed Roll-Up. In connection with a proposed Roll-Up, the Person sponsoring the Roll-Up shall offer to Shareholders who vote "no" on the proposal the choice of: (i) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; or (ii) one of the following: (a) remaining as Shareholders of the corporation and preserving their interest therein on the same terms and conditions as existed previously; or (b) receiving cash in an amount equal to the Shareholders' pro-rata share of the appraised value of the net assets of the corporation. The corporation shall not participate in any proposed Roll-Up which would result in Shareholders having voting in the Roll-Up entity that are less than those presently provided to the corporation's Shareholders. The corporation shall not participate in any proposed Roll-Up which (i) would result in the Shareholders having rights to meeting less frequently or which are more restrictive to Shareholders than those provided herein; (ii) would result in the Shareholders having voting rights that are less than those provided herein; (iii) would result in the Shareholders having greater liability than as provided herein; (iv) would result in the Shareholders having rights to receive reports that are less than those provided herein; (v) would result in the Shareholders having access to records that are more limited than those provided herein; (vi) includes 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); (vii) would limit the ability of a Shareholder to exercise the voting rights of its securities of the Roll-Up entity on the basis of the number of Shares held by that Shareholder; (viii) would result in investor's rights of access to the records of the Roll-Up entity being less than those provided herein; (ix) would result in any of the costs of the transaction being borne by the Company if the Roll-Up is not approved by the Shareholders. ARTICLE 6. SHARES AND THEIR TRANSFER 6.1 Certificates of Stock - Shares of stock may be either certified or uncertified; however, every owner of stock of the corporation shall be entitled to a certificate, to be in such form as the Board of Directors prescribes, certifying the number of Shares of stock of the corporation owned by him. The certificates for such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the corporation by the Chief Executive Officer, and by the Secretary or any other proper Officer of the corporation authorized by the Board of Directors. A record shall be kept of the name of the Person, firm or corporation owning the stock represented by each such certificate, the number of Shares represented by each such certificate, and the respective issue date thereof, and in the case of cancellation, the respective dates of cancellation. Every certificate surrendered to the corporation for exchange or transfer shall be cancelled and no other certificate or certificates shall be issued in exchange for any existing certificates until such existing certificate shall have been so cancelled except in cases provided for in Section 6.5 of this Article 6. 6.2 Facsimile Signature - Where any certificate is manually signed by a transfer agent, a transfer clerk or by a registrar appointed by the Board of Directors to perform such duties, a facsimile or engraved signature of the President and Secretary or other proper Officer of the corporation authorized by the Board of Directors may be inscribed on the certificate in lieu of the actual signature of such Officer. The fact that a certificate bears the facsimile signature of an Officer who has ceased to hold office shall not affect the validity of such certificate if otherwise validly issued. 6.3 Establishment and Issuance of Shares - Subject to the provisions of the Articles of Incorporation and as provided by law, the Board of Directors is authorized to designate and cause to be issued, classes and series of Shares of the corporation, with designated voting rights, preferences, and other characteristics, at such times and for such consideration as the Board of Directors may determine. 16 6.4 Transfer of Shares - Transfer of Shares on the books of the corporation may be authorized only by the Shareholder named in the certificate, or by the Shareholder's legal representative, or duly authorized attorney-in-fact, and upon surrender for cancellation of the certificate or certificates for such Shares. The Shareholder in whose name Shares of stock stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation; provided, that when any transfer of Shares shall be made as collateral security, and not absolutely, such facts, if known to the Secretary of the corporation, or to the transfer agent, shall be so expressed in the entry of transfer. Transfer of Shares shall be subject further to the restrictions contained in the Articles of Incorporation of the corporation. 6.5 Lost Certificates - Any Shareholder claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact in such form as the Board of Directors may require, and shall, if the Directors so require, give the corporation a bond of indemnity in form, and with one or more sureties, satisfactory to the Board, in an amount determined by the Board of Directors not exceeding double the value of the stock represented by such certificate to indemnify the corporation, against any claim that may be made of such certificate; whereupon a new certificate may be issued in the same tenor and for the same number of Shares as the one alleged to have been stolen or lost. 6.6 Treasury Stock - Treasury stock shall be held by the corporation subject to disposal by the Board of Directors, in accordance with the Articles of Incorporation and these Bylaws, and shall not have voting rights nor participate in dividends. 6.7 Transfer Agent and Registrar - The Board of Directors may appoint one or more transfer agents or transfer clerks, and may require all certificates for Shares to bear the signature or signatures of any of them. 6.8 Transfer of Stock; Excess Shares - No transfer of Shares of stock of the corporation shall be made if (i) void ab initio pursuant to Article 9 of the corporation's Articles of Incorporation, or (ii) the Board of Directors, pursuant to such Article 9, shall have refused to transfer such Shares. The Board of Directors of the corporation may: (a) redeem the outstanding Shares of stock of the corporation or restrict the transfer of such Shares to the extent necessary to prevent the concentration of ownership of more than 50% of the outstanding Shares of the corporation in the hands of five or fewer individuals or entities and to ensure that the corporation always has at least 100 Shareholders; (b) refuse to effect a transfer of Shares of stock of the corporation to any Person who as a result would beneficially own Shares in excess of 9.8% of the outstanding Shares of the corporation ("Excess Shares"); and (c) redeem Excess Shares held by any Shareholder of the corporation. Permitted transfers of Shares of stock of the corporation shall be made on the stock records of the corporation only upon the instruction of the registered holder thereof, or by his attorney thereunder authorized by power of attorney duly executed and filed with the Secretary or with a transfer agent or transfer clerk, and upon surrender of the certificate or certificates, if issued for such Shares properly endorsed or accompanied by a duly executed stock transfer power and the payment of all taxes thereon. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for Shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer as to any transfers not prohibited by the corporation's Articles of Incorporation, these Bylaws, or by action of the Board of Directors thereunder, it shall be the duty of the corporation to issue a new certificate to the Person entitled thereto, cancel the old certificate and record the transaction upon its books. 6.9 Registered Shareholders - The corporation shall be entitled to recognize the exclusive right of a Person registered on its books as the owner of Shares to receive dividends and to vote as such owner, and 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 shall have express or other notice thereof, except as otherwise provided by law. 17 6.10 Stock Ledger - The corporation shall maintain at its office in the Minneapolis metropolitan area and State of Minnesota an original stock ledger containing the names and addresses of all Shareholders and the number of Shares of each class held by each Shareholder. Such stock ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. ARTICLE 7. DIVIDENDS, DISTRIBUTIONS, ETC. 7.1 Dividends - Subject to the Articles of Incorporation, these Bylaws, and the applicable laws, the Board of Directors may declare a distribution in the form of a dividend whenever, and in such amounts as, in its opinion, the condition and the affairs of the corporation shall render it advisable provided that the corporation shall comply with all requirements necessary for it to maintain its status as a qualified real estate investment trust pursuant to the Internal Revenue Code as amended from time to time. In addition, subject to the corporation's Articles of Incorporation and any requirements of applicable law, quarterly dividends of substantially all of the corporation's available cash flow from operation of its properties, may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, or in its own Shares (provided such Shares are readily marketable securities), subject to the provisions of law and the corporation's Articles of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sums as the Directors from time to time, in their absolute discretion, determine proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall deem conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created. 7.2 Other Distributions, Reserves, Repurchase of Shares - Subject to the provisions of the Articles of Incorporation and of these Bylaws, the Board of Directors in its discretion may purchase or acquire any of the Shares of the capital stock of this corporation in accordance with law, or any of its bonds, debentures, notes, scrip or other securities or evidences of indebtedness, or from time to time may set aside from its net assets or net profits such sum or sums as it, in its absolute discretion, may think proper as a reserve fund to meet contingencies, or for the purpose of maintaining or increasing the property or business of the corporation or for any other purpose it may think conducive to the best interests of the corporation subject to the requirements necessary for the corporation to maintain its status as a qualified real estate investment trust pursuant to the Internal Revenue Code as amended from time to time; provided, however, that repurchases of Shares must not impair the capital or operations of the corporation and the Sponsor, Advisor, Directors and Affiliates may not receive a fee on the repurchase of the Shares by the corporation. 7.3 Dividend Reinvestment Plan - The Board of Directors, including a majority of the Independent Directors, may adopt a dividend reinvestment plan designated to enable Shareholders to have cash distributions automatically invested in additional Shares of common stock of the Company. Any such plan shall require the distribution to each Shareholder, at least annually, information regarding the effect, including the tax consequences thereof, of reinvesting such distributions. The plan shall also provide a reasonable opportunity of withdrawal at least annually following receipt of the information required therewith. ARTICLE 8. FINANCIAL, PROPERTY MANAGEMENT AND ANNUAL REPORT 8.1 Fiscal Year - Since the corporation intends to qualify as a real estate investment trust within the meaning of the Internal Revenue Code, the fiscal year end of the corporation shall be December 31. 8.2 Audit of Books and Accounts - The books and accounts of the corporation shall be audited at such times as may be ordered by the Board of Directors. 8.3 Contracts - The Chief Executive Officer shall have full power and authority to do any and all things necessary on behalf of the corporation. In addition, the Board of Directors may authorize any Officer or Officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances. 8.4 Checks - All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the corporation shall be signed by the treasurer or such other Officer or Officers, 18 agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. 8.5 Deposits - All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select, including investments in stocks, bonds, money market accounts, government securities or other accounts or investments as the Board of Directors deems appropriate in light of the corporation's investment objectives and its intent to qualify as a real estate investment trust. 8.6 Voting Securities Held by Corporation - The Chief Executive Officer or other agent designated by the Board of Directors, shall have full power and authority on behalf of the corporation to attend, act and vote at any meeting of security holders of other corporations in which this corporation may hold securities. At such meeting the Chief Executive Officer, or such other agent, shall possess and exercise any and all rights and powers incident to the ownership of such securities which the corporation might possess and exercise. 8.7 Accrual Method of Accounting - The financial books and records of the corporation shall be based upon the accrual method of accounting. 8.8 Annual Report - The President or a Vice President or the Treasurer shall prepare or cause to be prepared annually a full and correct report of the affairs of the corporation, including a balance sheet and a financial statement of operations for the preceding fiscal year, which shall be certified by independent certified public accountants and distributed to Shareholders within one hundred twenty (120) days after the close of the corporation's fiscal year and a reasonable period of time (not less than 30 days) prior to the annual meeting and shall be filed within twenty (20) days thereafter at the principal office of the corporation in the State of Minnesota. The annual report shall also include full disclosure of all material terms, factors and circumstances surrounding any transactions between the corporation and the Advisor, any Sponsor, any Director, or any Affiliates of the Advisor or such Sponsor or Director. The Independent Directors shall comment on the fairness of such transactions in the annual report. The corporation shall also publish in the annual report (i) the ratio of the cost of raising capital during the year to the capital raised, (ii) the aggregate amount of advisory fees and other fees paid to the Advisor and all Affiliates of the Advisor by the corporation, including fees or charges paid to such Advisor and all Affiliates of the Advisor by third parties doing business with the corporation; and (iii) the total operating expenses of the corporation, stated as a percentage of Average Invested Assets and as a percentage of its Net Income. The annual report shall also include a report from the Independent Directors stating that the policies being followed by the corporation are in the best interests of its Shareholders and the reasons for such a determination. The Directors, including the Independent Directors, shall take reasonable steps to insure that the above requirements are met. 8.9 Quarterly Report - The President or a Vice President or the Treasurer shall also prepare or cause to be prepared quarterly for each of the first three quarters of each fiscal year, a full and correct report of the affairs of the corporation, including a balance sheet and financial statement of operations for the preceding fiscal quarter, which shall not be certified by independent public accountants and shall be distributed to Shareholders within forty-five (45) days after the close of the corporation's preceding fiscal quarter. ARTICLE 9. WAIVER OF NOTICE 9.1 Requirement of Waiver in Writing - Whenever any notice whatever is required to be given by these Bylaws or the Articles of Incorporation of the corporation or any of the corporate laws of the State of Minnesota, a waiver thereof in writing, signed by the Person or Persons is entitled to said notice, either before, at, or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 10. AMENDMENT OF BYLAWS 10.1 Action by Shareholders - The Shareholders of the corporation are expressly authorized to make Bylaws of the corporation and from time to time to alter or repeal Bylaws so made. In so acting, the Shareholders may do so only upon vote of a majority of the holders of outstanding capital stock at any annual meeting or at any special meeting called for that purpose. 19 ARTICLE 11. NAME CHANGE 11.1 Requirement to Change Name. - Upon termination of the Advisory Agreement between the corporation and Church Loan Advisors, Inc., a Minnesota corporation ("Advisor"), by either party, the Board of Directors of this corporation shall, upon the request of the Advisor, cause the name of this corporation to be changed to or to remain a name (i) that does not contain the word "American" or "America" or the name of the Advisor or any approximation or abbreviation thereof; and (ii) that is sufficiently dissimilar to the word "American" or "America" or the name of the Advisor as to be unlikely to cause confusion or identification with either the Advisor or any Person or entity using the word "American" or "America" in its name; provided, however, that the word "church" may be used by the corporation at its discretion and without restriction. ARTICLE 12. DISSOLUTION 12.1 Action by Shareholders. Dissolution of the corporation shall be commenced upon the approval of a majority of the holders of outstanding capital stock at a meeting of Shareholders held for the purpose of considering dissolution following notice of the meeting pursuant to the provisions of Section 2 of these Bylaws. ARTICLE 13. MINIMUM CAPITAL 13.1 Minimum Capital. There shall be an Initial Investment to capital of the corporation of $200,000.00 by the initial Shareholders. Shares issued following this contribution to capital shall not be subject to sale for a period of one (1) year following completion of the initial public offering of stock in the corporation (or such longer period as may be required by NASAA REIT POLICY or by written agreement with any state or federal regulatory authority) and may be sold only in the market on which the corporation's Shares are normally traded. Notwithstanding anything to the contrary above, the Initial Investment may be transferred at anytime to an Affiliate of the Sponsor. ARTICLE 14. CHOICE OF LAW 14.1 These Bylaws shall be construed in accordance with the laws of the State of Minnesota and the obligations, rights and remedies hereunder shall be determined in accordance with such laws; provided, however, that causes of action for violations of federal or state securities laws shall not be governed by this Article 14. EX-5 4 legal092804.txt September 28, 2004 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 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 $23,000,000 of Series B Secured Investor Certificates of American Church Mortgage Company, a Minnesota corporation. We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion and, based thereon, we are of the opinion that the Certificates are duly and validly authorized for issuance and, when issued and paid for, as described in the Prospectus, will be validly issued, fully paid and nonassessable. We are also of the opinion that the trust indenture dated September 28, 2004, by and between American Church Mortgage Company and The Herring National Bank, under which the Certificates will be issued is in compliance with the Trust Indenture Act of 1939, as amended. 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. /s/ Philip T. Colton Philip T. Colton EX-8 5 taxopinion.txt EXHIBIT 8 Winthrop & Weinstine, P.A. 225 South Sixth Street Suite 3500 Minneapolis, Minnesota 55402 June 21, 2004 American Church Mortgage Company 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 Re: American Church Mortgage Company Ladies and Gentlemen: We have acted as 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 $23,000,000 of Series B Secured Investor Certificates (the "Certificates") of the Company. In rendering our opinion, we have examined certain documents, including: (a) The Registration Statement, including exhibits to the Registration Statement; and (b) Such other certificates, opinions, and instruments as we have deemed necessary. As to various questions of fact that are material to the opinion set forth in this letter, we have relied upon certain representations, statements, and information set forth in the foregoing documents and certificates of officers of the Company. In addition, we have assumed that the business of the Company will be conducted as described in the Registration Statement. As to matters of law, we have based our opinion upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury regulations promulgated or proposed under the Code (the "Regulations"), the legislative history of the Code, and the interpretations of the Code and the Regulations by the Internal Revenue Service (the "IRS") and by the courts, all as of the date of this letter. The provisions of the Code or the Regulations may be amended, or the interpretations of the IRS or the courts may change, each in a manner that could affect our opinion, and any such change may have retroactive effect. We undertake no American Church Mortgage Company June 21, 2004 Page 2 responsibility to advise the Company of any changes in the application or the interpretation of the United States federal income tax laws that occur after the date of this opinion. Based upon and subject to the foregoing, and subject to the qualifications set forth herein, the discussion under the heading "Material Federal Income Tax Consequences Associated with the Certificates" that is contained in the Registration Statement, as it relates to statements of law and legal conclusions, is our opinion as to the material United States federal income tax consequences of the acquisition, ownership, and disposition of the Certificates. Our opinion represents our best judgment as to how a court would decide if presented with the issues addressed in the discussion under the heading "Material Federal Income Tax Consequences Associated with the Certificates" that is contained in the Registration Statement and are not binding upon either the IRS or any court. Thus, we cannot give any assurances that a position taken in reliance on our opinion will not be challenged by the IRS or rejected by a court. Except as set forth above, we express no opinion to any party as to the tax consequences, whether federal, state, local, or foreign, of the acquisition, ownership, and disposition of the Certificates. We are furnishing this opinion to the Company solely in connection with the Registration Statement. 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. We disclaim any obligation to update this opinion letter for events occurring, or coming to our attention, after the date hereof. Very truly yours, WINTHROP & WEINSTINE, P.A. By - /s/ Paul W. Markwardt A Shareholder PWM/JKK 2124980v1 EX-4 6 trustindenture.txt iv INDENTURE AMERICAN CHURCH MORTGAGE COMPANY, as obligor Series B Secured Investor Certificates $23,000,000 THE HERRING NATIONAL BANK, a national banking association, as trustee Dated as of September 28, 2004 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.........................................5 ----------- ------------------------------------------------- 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................................................................7 ----------- -------------------------- SECTION 2.4 DEPOSIT OF PRINCIPAL AND INTEREST WITH PAYING AGENT.......................................7 ----------- --------------------------------------------------- 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................8 ----------- -------------------------------------------------------------------------- SECTION 2.8 RESERVED..................................................................................9 ----------- -------- SECTION 2.9 OUTSTANDING SECURITIES....................................................................9 ----------- ---------------------- SECTION 2.10 TREASURY SECURITIES.......................................................................9 ------------ ------------------- SECTION 2.11 RESERVED..................................................................................9 ------------ -------- SECTION 2.12 RESERVED.................................................................................10 ------------ -------- SECTION 2.13 DEFAULTED INTEREST.......................................................................10 ------------ ------------------ SECTION 2.14 BOOK-ENTRY REGISTRATION..................................................................10 ------------ ----------------------- SECTION 2.15 INITIAL AND PERIODIC STATEMENTS..........................................................11 ------------ ------------------------------- ARTICLE III. REDEMPTION...............................................................................11 - ------------ ---------- SECTION 3.1 REDEMPTION OF SECURITIES AT THE COMPANY'S ELECTION.......................................11 ----------- -------------------------------------------------- SECTION 3.2 REDEMPTION OF SECURITIES AT THE HOLDER'S ELECTION........................................12 ----------- ------------------------------------------------- SECTION 3.3 OFFER TO REDEEM SECURITIES UPON CHANGE OF THE COMPANY'S ADVISOR..........................13 ----------- ---------------------------------------------------------------- ARTICLE IV. COVENANTS................................................................................13 - ----------- --------- SECTION 4.1 PAYMENT OF SECURITIES....................................................................13 ----------- --------------------- SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY..........................................................13 ----------- ------------------------------- SECTION 4.3 SEC REPORTS AND OTHER REPORTS............................................................14 ----------- ----------------------------- SECTION 4.4 COMPLIANCE CERTIFICATE...................................................................14 ----------- ---------------------- SECTION 4.5 STAY, EXTENSION AND USURY LAWS...........................................................15 ----------- ------------------------------ SECTION 4.6 LIQUIDATION..............................................................................15 ----------- ----------- SECTION 4.7 FINANCIAL COVENANTS......................................................................15 ----------- ------------------- SECTION 4.8 RESTRICTIONS ON DIVIDENDS AND CERTAIN TRANSACTIONS WITH AFFILIATES.......................16 ----------- ------------------------------------------------------------------ SECTION 4.9 COLLATERAL...............................................................................16 ----------- ---------- SECTION 4.10 APPOINTMENT AS ATTORNEY-IN-FACT..........................................................18 ------------ -------------------------------- i ARTICLE V. SUCCESSORS...............................................................................19 - ---------- ---------- SECTION 5.1 WHEN THE COMPANY MAY MERGE, ETC..........................................................19 ----------- -------------------------------- SECTION 5.2 SUCCESSOR CORPORATION SUBSTITUTED........................................................20 ----------- --------------------------------- ARTICLE VI. DEFAULTS AND REMEDIES....................................................................20 - ----------- --------------------- SECTION 6.1 EVENTS OF DEFAULT........................................................................20 ----------- ----------------- SECTION 6.2 ACCELERATION.............................................................................21 ----------- ------------ SECTION 6.3 OTHER REMEDIES...........................................................................22 ----------- -------------- SECTION 6.4 WAIVER OF PAST DEFAULTS..................................................................22 ----------- ----------------------- SECTION 6.5 CONTROL BY MAJORITY......................................................................23 ----------- ------------------- SECTION 6.6 LIMITATION ON SUITS......................................................................23 ----------- ------------------- SECTION 6.7 RIGHTS OF HOLDERS TO RECEIVE PAYMENT.....................................................23 ----------- ------------------------------------ SECTION 6.8 COLLECTION SUIT BY TRUSTEE...............................................................23 ----------- -------------------------- SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM.........................................................24 ----------- -------------------------------- SECTION 6.10 PRIORITIES...............................................................................24 ------------ ---------- SECTION 6.11 UNDERTAKING FOR COSTS....................................................................25 ------------ --------------------- ARTICLE VII. TRUSTEE..................................................................................25 - ------------ ------- SECTION 7.1 DUTIES OF TRUSTEE........................................................................25 ----------- ----------------- SECTION 7.2 RIGHTS OF TRUSTEE........................................................................26 ----------- ----------------- SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE.............................................................27 ----------- ---------------------------- SECTION 7.4 TRUSTEE'S DISCLAIMER.....................................................................27 ----------- -------------------- SECTION 7.5 NOTICE OF DEFAULTS.......................................................................27 ----------- ------------------ SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS............................................................27 ----------- ----------------------------- SECTION 7.7 COMPENSATION AND INDEMNITY...............................................................28 ----------- -------------------------- SECTION 7.8 REPLACEMENT OF TRUSTEE...................................................................29 ----------- ---------------------- SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.........................................................30 ----------- --------------------------------- SECTION 7.10 ELIGIBILITY; DISQUALIFICATION............................................................30 ------------ ----------------------------- SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY........................................30 ------------ ------------------------------------------------- ARTICLE VIII. DISCHARGE OF INDENTURE...................................................................30 - ------------- ---------------------- SECTION 8.1 TERMINATION OF COMPANY'S OBLIGATIONS.....................................................30 ----------- ------------------------------------ SECTION 8.2 APPLICATION OF TRUST MONEY...............................................................31 ----------- -------------------------- SECTION 8.3 REPAYMENT TO COMPANY.....................................................................31 ----------- -------------------- SECTION 8.4 REINSTATEMENT............................................................................32 ----------- ------------- ARTICLE IX. AMENDMENTS...............................................................................32 - ----------- ---------- SECTION 9.1 WITHOUT CONSENT OF HOLDERS...............................................................32 ----------- -------------------------- SECTION 9.2 WITH CONSENT OF HOLDERS..................................................................33 ----------- ----------------------- SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT......................................................34 ----------- ----------------------------------- SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS........................................................34 ----------- --------------------------------- SECTION 9.5 NOTATION ON OR EXCHANGE OF SECURITIES....................................................34 ----------- ------------------------------------- SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC..........................................................34 ----------- -------------------------------- ARTICLE X. MISCELLANEOUS............................................................................35 - ---------- ------------- SECTION 10.1 TRUST INDENTURE ACT CONTROLS.............................................................35 ------------ ---------------------------- SECTION 10.2 NOTICES..................................................................................35 ------------ ------- SECTION 10.3 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS..............................................36 ------------ ------------------------------------------- ii SECTION 10.4 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.......................................36 ------------ -------------------------------------------------- SECTION 10.5 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION............................................36 ------------ --------------------------------------------- SECTION 10.6 RULES BY TRUSTEE AND AGENTS..............................................................37 ------------ ---------------------------- SECTION 10.7 LEGAL HOLIDAYS...........................................................................37 ------------ -------------- SECTION 10.8 NO RECOURSE AGAINST OTHERS...............................................................37 ------------ -------------------------- SECTION 10.9 DUPLICATE ORIGINALS......................................................................37 ------------ ------------------- SECTION 10.10 GOVERNING LAW............................................................................37 ------------- ------------- SECTION 10.11 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS............................................37 ------------- --------------------------------------------- SECTION 10.12 SUCCESSORS...............................................................................37 ------------- ---------- SECTION 10.13 SEVERABILITY.............................................................................38 ------------- ------------ SECTION 10.14 COUNTERPART ORIGINALS....................................................................38 ------------- --------------------- SECTION 10.15 TABLE OF CONTENTS, HEADINGS, ETC.........................................................38 ------------- --------------------------------- SIGNATURES .........................................................................................39 - ----------
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 INDENTURE THIS INDENTURE is hereby entered into as of September 28, 2004, by and between American Church Mortgage Company, a Minnesota corporation (the "Company"), and The Herring National Bank, a national banking association, 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 B Secured Investor Certificates of the Company issued pursuant to the Company's registration statement on Form S-11 (Reg. No. 333-116919) declared effective by the Securities and Exchange Commission on or about September 28, 2004 (the "Registration Statement"), with a certain amount of such Series B Investor Certificates reserved for previously registered Series A Investor Certificates which will be eligible for rollover renewal (the "Renewable Securities"): 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. "Change of Control" means such time as any Person is or becomes the beneficial owner, as defined in Rule 13d-3 of the Exchange Act of shares of the Company's capital stock entitling such Person to exercise 50% or more of the total voting power of all shares of the Company's 2 capital stock entitled to vote in elections of directors (or the capital stock of any successor of the Company in the case of a merger or transfer of all or substantially all of the Company's assets). "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 1001 South Harrison Street, Amarillo, Texas 79101, Attention: Mozelle Hedrick, Senior 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 3 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. "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. 3 "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. "SEC" means the U.S. Securities and Exchange Commission. "Security" or "Securities" means, the Company's Series B 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 The Herring National Bank, a national banking association, 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"...................................4.7(b) "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) 4 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. 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 $23,000,000, with up to $3 million of such amount to be reserved for rollover renewals of the Renewable Securities, 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. Each Security shall be in such denominations as may 5 be designated from time to time by the Company. Each Security, except for the Renewable Securities, shall have a term of not less than eight (8) years and not greater than fifteen (15) 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 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 separate from the Renewable 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 6 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. 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; 7 (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 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 8 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. 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. 9 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. (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. 10 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) The Company may redeem all, but not less than all, of the Securities upon the occurrence of a Change of Control by providing thirty (30) days written notice to the Holders thereof. Each such notice shall include the Redemption Date and 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 may at any time and from time to time redeem a sufficient amount of Securities as is necessary to bring the Company into compliance with the provision of its Bylaws that limit the aggregate amount of debt that the Company may have outstanding at any time. The Company may redeem any 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 the paragraph with notice thereof, which notice shall set the Redemption Date and set forth the Redemption Price for the Securities to be redeemed. (c) The Company shall have no mandatory redemption or sinking fund obligations with respect to any of the Securities. (d) In its sole discretion, the Company may offer certain Holders the ability to extend the maturity of an existing Security 11 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. 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 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. 12 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 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 13 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. (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 14 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 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 Colleratal 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. 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 stockholders and the Company's subordinated debt, and (ii) the 15 Company's long term liabilities will not exceed the Company's shareholders' equity at the end of any fiscal year. 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 stockholders 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. 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 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 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 16 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. (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 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. 17 (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 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 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 18 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. (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 19 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 deliver 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. 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; 20 (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 25% 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." 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 25% 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. 21 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. 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, except 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 be waived only upon the consent of the Holders of at least 80% 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 22 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 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 23 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; (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. 24 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 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 (2) of this Section. 25 (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. (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. 26 (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, 2004, 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). (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 27 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. 28 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. 29 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 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) 30 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 (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. 31 (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. 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; 32 (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 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. However, without the consent of at least 80% of the principal amount of the then outstanding Securities, an amendment or waiver under this Section may not (with respect to any Security held by a nonconsenting Holder): (1) reduce the principal amount or change the fixed maturity of Securities or alter the redemption provisions on the price at which the Company may redeem Securities; (2) reduce the rate of or change the time for payment of interest, including default interest, on any Security (other than upon renewal of a Security); (3) make any Security payable in money other than that stated in the Prospectus; (4) modify or eliminate the right of the estate of a Holder or a Holder to cause the Company to redeem a Security upon the death of a Holder pursuant to Article III; provided, however, that the Company may not modify or eliminate such right, as it may be in effect on the Issue Date, of any Security which was issued with such right; (5) make any change in Sections 6.4 or 6.7 hereof or in this sentence of this Section 9.2; (6) unless cured, waive a Default or Event of Default in the payment of principal of, or premium, if any, or interest on, or redemption payment with respect to, any Security (except a rescission of acceleration of the Securities by the Holders of at least a majority in aggregate principal amount of the Securities and a waiver of the payment default that resulted from such acceleration). (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. 33 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. 34 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: THE HERRING NATIONAL BANK 1001 South Harrison Street Amarillo, TX 79101 Attention: Corporate Trust Department 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 35 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. (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 36 (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. 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. 37 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. 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.] 38 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: /s/ Philip J. Myers ----------------------------- Philip J. Myers, President STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) The foregoing was acknowledged before me this 28th day of September, 2004, by Philip J. Myers, in his capacity as President of American Church Mortgage Company, a Minnesota corporation. /s/ Kristen Carlone - ----------------------- Notary Public THE HERRING NATIONAL BANK, a national banking association, as Trustee By: /s/ Catana Gray ----------------------------- Name: Catana Gray Title: Vice President and Manager STATE OF TEXAS ) ) ss. COUNTY OF POTTER ) The foregoing was acknowledged before me this 28th day of September, 2004, by Catana Gray, in her capacity as Vice President and Manager of The Herring National Bank, a national banking association. /s/ Shana Hulin - ------------------------ Notary Public {SIGNATURE PAGE TO INDENTURE} 39 EX-23 7 auditorsconsent.txt Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the inclusion of our report dated February 24, 2004 on the financial statements of American Church Mortgage Company as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 in the Amendment No 1 to Form S-11 Registration Statement of American Church Mortgage Company dated on or about September 24, 2004 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 September 24, 2004 EX-25 8 formt1.txt ______________________________________________________________________________ =============================================================================== 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) ------------------------------------------------------- THE HERRING NATIONAL BANK (Exact name of Trustee as specified in its charter) 75-0330569 I.R.S. Employer Identification No.
- ------------------------------------------------------------ --------------------------------------------------------- 1001 S. Harrison St. Amarillo, Texas 79101 - ------------------------------------------------------------ --------------------------------------------------------- - ------------------------------------------------------------ --------------------------------------------------------- (Address of principal executive offices) (Zip Code) - ------------------------------------------------------------ --------------------------------------------------------- Catana Gray The Herring National Bank 1001 S. Harrison St. Amarillo, Texas 79101 (806) 378-1810 (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 (I.R.S. Employer Identification No.) organization) - ------------------------------------------------------------ --------------------------------------------------------- - ------------------------------------------------------------ --------------------------------------------------------- 10237 Yellow Circle Drive Minnetonka, Minnesota 55343 - ------------------------------------------------------------ --------------------------------------------------------- - ------------------------------------------------------------ --------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) - ------------------------------------------------------------ ---------------------------------------------------------
$23,000,000 - Series B 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. Comptroller of the Currency Washington, D.C. Federal Deposit Insurance Corporation Washington, D.C. 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 Items3-15. 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.(1) 3. A copy of the certificate of authority of the Trustee to exercise corporate trust powers. (1) 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 December 31, 2003, published pursuant to law or the requirements of its supervising or examining authority, attached as Exhibit 7. (1) Original and copies are currently unavailable. Page 2 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, THE HERRING NATIONAL BANK, a national banking association 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 28 day of September, 2004. THE HERRING NATIONAL BANK By: /s/ Catana Gray ---------------------------- Catana Gray Vice President and Manager Page 3 Exhibit 1 THE HERRING NATIONAL BANK OF VERNON Charter No. 7010 ARTICLES OF ASSOCIATION For the purpose of organizing an Association to carry on the business of banking under the laws of the United States, the undersigned do enter into the following Articles of Association: FIRST The title of this Association shall be The Herring National Bank of Vernon. SECOND The main office of the Association shall be in Vernon, County of Wilbarger, State of Texas. The general business of the Association shall be conducted at its main office and its branches. THIRD The Board of Directors of this Association shall consist of such number of its shareholders, not less than five nor more than twenty-five, the exact number of Directors within such minimum and maximum limits to be fixed and determined from time to time by resolution of the shareholders at any annual or special meeting thereof; provided, however, that if the shareholders should fix the number of directors at less than twenty-five, the Board of Directors may from time to time at any regular or special meeting increase the number of Directors to not over twenty-five; but such authority to increase the number of Directors between shareholders' meetings shall in all events be limited to an increase of not more than two directors in any one year. FOURTH The regular annual meeting of the shareholders of this Association shall be held at its main banking house, or other convenient place duly authorized by the Board of Directors, on such day of each year as is specified therefore in the Bylaws. FIFTH The amount of authorized capital stock of this Association shall be Eight Hundred Thousand Dollars ($800,000.00) divided into 40,000 shares of common stock of the par value per share of Twenty Dollars ($20.00) but said capital stock may be increased or decreased from time to time, in accordance with the provisions of the laws of the United States. EXHIBIT 1- Page 1 A. If the capital stock is increased by the sale of additional shares thereof, each shareholder shall be entitled to subscribe for such additional shares in proportion to the number of shares of said capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. The Board of Directors shall have the power to prescribe a reasonable period of time within which the preemptive rights to subscribe to the new shares of capital stock must be exercised. B. If the capital stock is increased by a stock dividend, each shareholder shall be entitled to his proportionate amount of such increase in accordance with the number of shares of capital stock owned by him at the time the increase is authorized by the shareholders, unless another time subsequent to the date of the shareholders' meeting is specified in a resolution adopted by the shareholders at the time the increase is authorized. SIXTH The Board of Directors shall appoint (a) one of its members President of the Association, (b) one of its members Chairman of the Board, (c) one or more Vice Presidents, (d) a Secretary who shall keep minutes of the Directors and Shareholders meetings and be responsible for authenticating the records of the Association, and (e) such other officers and employees as may be required to transact the business of the Association. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the Board of Directors in accordance with the bylaws. The Board of Directors shall have the power to: 1. Define the duties of the officers, employees, and agents of the Association. 2. Delegate the performance of its duties, but not the responsibilities for its duties, to the officers, employees, and the agents of the Association. 3. Fix a compensation and enter into employment contracts with its officers and employees upon reasonable terms and conditions consistent with applicable law. 4. Dismiss officers and employees. 5. Require bonds from officer and employees and to fix the penalty thereof. 6. Ratify written policies authorized by the Association's management or committees of the Board. EXHBIT 1-Page 2 7. Regulate the manner in which any increase or decrease of the capital of the Association shall be made, provided that nothing herein shall restrict the power of shareholders to increase or decrease the capital of the Association in accordance with law, and nothing shall raise or lower from the two thirds of the percentage required for shareholder approval to increase or reduce capital. 8. Manage and administer the business affairs of the Association. 9. Adopt initial bylaws, not inconsistent with law or the Articles of Association, from managing the business and regulating the affairs of the Association. 10. Amend or repeal bylaws, except to the extent that the eleventh article of these Articles of Association reverses this power for the shareholders. 11. Make contracts. 12. Generally to perform all acts that are legal for a Board of Directors to perform. SEVENTH The Corporate existence of this Association shall continue until terminated in accordance with the laws of the United States. EIGHTH The Board of Directors of this Association, or any three or more shareholders owning, in the aggregate, not less than 25 percent of the stock of this Association, may call a special meeting of shareholders at any time. Unless otherwise provided by the laws of the United States, a notice of the time, place, and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least ten days prior to the date of such meeting to each shareholder of record at his address as shown upon the books of this Association. NINTH Any person, his heirs, executors, or administrators may be indemnified or reimbursed by the Association for reasonable expenses actually incurred in connection with any action, suit, or proceeding, civil or criminal, to which he or they shall be made a party by reason of his being or having been a director, officer, or employee of the Association or of any firm, corporation, or organization which he served in any such capacity at the request of the Association: Provided, however, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding as to which he shall finally be adjudged to have been guilty of or liable for negligence or willful misconduct in the performance of his duties the Association: And, provided further, that no person shall be so indemnified or reimbursed in relation to any matter in such action, suit, or proceeding which has been made the subject of a compromise settlement except with the approval of a court of competent jurisdiction, or the holders of record of a majority of the outstanding shares of the Association, or the Board of Directors, acting by vote of directors not parties to the same or substantially the same action, suit, or proceeding, constituting a majority of the whole number of the directors. The foregoing right of indemnification or EXHIBIT 1-Page 3 reimbursement shall not be exclusive of other rights to which such person, his heirs, executors, or administrators, may be entitled as a matter of law. TENTH These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. ELEVENTH The Association's bylaws may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of the Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The shareholders, in amending, repealing, or adopting a particular bylaw may expressly provide that the Board of Directors may not amend or repeal that bylaw. IN WITNESS WHEREOF, we have hereunto set our hands this 9th day of February, 1993. I, Frances Pierce, Certify that: (1) I am the duly constituted Secretary of The Herring National Bank of Vernon and Secretary of its Board of Directors, and as such officer am the official custodian of its records; (2) the foregoing Articles of Association are the Articles of Association of said Bank, and all of them, as now lawfully in force and effect. IN TESTIMONY WHEREOF, I have hereunto affixed my official signature and the seal of the said Bank, in the City of Vernon, on this 9th day of February, 1993. FRANCES PIERCE EXHIBIT 1-Page 4 Exhibit 4 THE HERRING NATIONAL BANK BYLAWS ARTICLE 1 MEETINGS OF SHAREHOLDERS Section 1.1. Annual Meetings. An annual meeting of shareholders of the Corporation shall be held during each calendar year on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of meeting. At such meeting, the shareholders shall elect directors and transact such other business as may properly be brought before the meeting. Section 1.2. Judges of Election. Every election of directors shall be managed by three judges, who shall be appointed from among the shareholders by the Board of Directors. The Judges of Election shall hold and conduct the election at which they are appointed to serve; and, after the election, they shall file with the Cashier a certificate under their hands, certifying the result thereof and the names of the directors elected. The Judges of Election, at the request of the Chairman of the meeting, shall act as tellers of any other vote by ballot taken at such meeting and shall certify the result thereof. Section 1.3. Proxies. Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this Association shall act as proxy. Proxies shall be valid only for one meeting, to be specified therein, and any adjournments of such meeting. Proxies shall be dated and shall be filed with the records of the meeting. Section 1.4. Quorum. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law; but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. A majority of the votes cast shall decide every questions or manner submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association. Section. 1.5. Telephone and Similar Meetings. If not prohibited by the Statutes of the United States, shareholders, directors and committee members may participate in and hold a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting shall constitute presence in person at the 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. EXHIBIT 4-Page 1 ARTICLE II Section 2.1. Board of Directors. The Board of Directors, hereinafter referred to as the "Board" shall have power to manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by said Board. All directors shall be shareholders of not less than fifty shares of common stock in the parent corporation. Section. 2.2. Election. In all elections of directors, each shareholder shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and in deciding all other questions at meetings of shareholders each shareholder shall be entitled to one vote on each share of stock held by said shareholder. Section 2.3. Organization Meeting. The Cashier, upon receiving the certificate of the judges, of the result of any election, shall notify the directors-elect of their election and of the time at which they are required to meet at the Main Office of the Association, take the oath as required by the Statutes of the United States, and meet for the purpose of organizing the new Board and electing and appointing officers of the Association for the succeeding year, appointing committees and fixing salaries for the ensuing year, appointing committees and fixing salaries for the ensuing year. Such meeting shall be appointed to be held on the day of the election or as soon thereafter as practicable, and in any event, within thirty days thereof. If, at the time fixed for such meeting, there shall not be a quorum present, the directors present may adjourn the meeting, from time to time, until a quorum is obtained. Section 2.4. Number. The Board shall consist of not less than five nor more than ten shareholders, the exact number within such minimum and maximum limits to be fixed and determined in accordance with the Articles of Association. Except as otherwise provided herein, all directors shall hold office for one year until their successors are elected and have qualified in accordance with the Statutes of the United States. Section 2.4(a). Eligibility and Retirement. No person shall be eligible for election as a director if such person shall have attained the age of 70 at the date of the annual meeting; provided, however, any person, including but not limited to persons 70 years of age may be appointed by the bank as an advisory member to act in advisory capacities without the power of final decisions in matters concerning the business of the bank. Provided, further, however, any person including but not limited to, persons 75 years of age may be appointed by the bank as an honorary member to act in advisory capacities without the power of final decision in matters concerning the business of the bank. This bylaw may not be amended or repealed by a vote of the Board of Directors. Section 2.5. Regular Meetings. The regular meetings of the Board of Directors shall be held without notice, on the second Tuesday of each month at the Main Office. When any regular EXHIBIT 4-Page 2 meeting of the Board falls upon a holiday, the meeting shall be held on the next business day unless the Board shall designate some other day. Section 2.6. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the President on one day's notice to each director, either personally or by mail or by telegram. Special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two directors. Except as otherwise expressly provided by statute, Articles of Association, or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting need to be specified in a notice or waiver of notice. Section 2.7. Quorum: Majority Vote. At meetings of the Board of Directors a majority of the number of directors fixed by the Articles of Association shall constitute a quorum for the transaction of business. The act of a majority of the directors present at the meeting at which a quorum is present shall be the act of the Board of Directors, except as otherwise specifically provided by statute. The Articles of Association, or these Bylaws. If a quorum is not present at a meeting of the Board of Directors, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. Section 2.8. Removal. Any director may be removed either for or without cause at any special or annual meeting of the shareholders, by the affirmative vote of a majority in number of shares of the shareholders present, 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. Section 2.9. Vacancies. Any vacancy or increase in the number thereof in accordance with Article II in the Board of Directors, shall be filled through appointment by a majority of the remaining directors then in office, though less than a quorum of the Board of Directors and a director so appointed shall hold his place until the next election and until his successor has qualified in accordance with the Statutes of the United States, unless removed in accordance with the bylaws of the Association. Section 2.10. Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Association in any other capacity and receiving compensation therefore. 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. Section 2.11. Procedure. The Board of Directors shall keep regular minutes of its proceedings. The minutes shall be placed in the minute book of the Association. Section 2.12. Action Without Meeting. If not prohibited by the Statutes of the United States, any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the EXHIBIT 4- Page 3 members of the Board of Directors. Such consent shall have the same force and effect as a unanimous vote at a meeting. The signed consent, or a signed copy, shall be placed in the minute book. The consent may be in more than one counterpart so long as each director signs one of the counterparts. ARTICLE III Section 3.1. Loans and Discount Committee. There shall be a Loan and Discount Committee composed of three directors, appointed by the Board annually or more often. The Discount committee shall have power to discount and purchase bills, notes, and other evidence of debts, to buy and sell bills of exchange, to examine and approve loans and discounts, to exercise authority regarding loans and discounts, and to exercise, when the Board is not in session, all other powers of the Board that may lawfully be delegated. The Loan and Discount Committee shall keep minutes of its meetings, and such minutes shall be submitted at the next regular meeting of the Board of Directors at which a quorum is present, and any action taken by the Board with respect thereto shall be entered in minutes of the Board. Section 3.2. Audit and Compliance Committee. There shall be an Audit and Compliance Committee composed of not less than six directors appointed by the Board annually or more often, whose duty it shall be to make an examination every six months into the affairs of the Association, and to report the result of such examination in writing to the Board at the next regular meeting thereafter. Such report shall state whether the Association is in a sound condition, whether adequate internal audit controls and procedures are being maintained and shall recommend to the Board such changes in the manner of doing business or conducting the affairs of the Association as shall be deemed advisable. Section 3.3. Executive Committee. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate an Executive Committee. The Executive Committee shall consist of three or more directors, one of whom shall be the President. The Executive Committee shall serve at the pleasure of the Board of Directors. Section 3.3(a) Authority. The Executive Committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the management of the business and affairs of the corporation. A vacancy occurring in the Executive Committee may be filled by the Board of Directors in the manner provided for original designation. Time, place and notice of Executive Committee meetings shall be determined by the Executive Committee. Section 3.3(b) Quorum; Majority Vote. At meetings of the Executive Committee, a majority of the number of members designated by the Board of Directors shall constitute a quorum for the transaction of business. The act of a majority of the members present at any meeting at which a quorum is present shall be the act of the Executive Committee, except as otherwise specifically provided by the laws of the United States, or these Bylaws. If a quorum is not present at a meeting of the Executive Committee the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The Executive Committee shall keep regular minutes of its proceedings and report the same to the EXHIBIT 4-Page 4 Board of Directors when required. The minutes of the proceedings of the Executive Committee shall be placed in the minute book of the Association. Section 3.3(c). Action Without Meeting. Any action required or permitted to be taken at a meeting of the Executive Committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the Executive Committee. Such consent shall have the same force and effect as an unanimous vote at a meeting. The signed consent, or a signed copy, shall be placed in the minute book. The designation of an Executive Committee and the delegation of authority to it shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. Section. 3.3(d). Legal Counsel. The Executive Committee may exercise the Board of Directors' authority to retain legal counsel to represent the Association. No officer of the Association may retain legal counsel to represent the Association without the prior consent of the Executive Committee of Board of Directors. Section 3.4. Other Committees. The Board of Directors may appoint, from time to time, from its own members, other committees of one or more persons for such purposes and with such powers as the Board may determine. ARTICLE IV Officers and Employees Section 4.1. Chairman of the Board. The Board of Directors shall appoint one of its members to be Chairman of the Board to serve at the pleasure of the Board. He shall preside at all meetings of the Board of Directors. The Chairman of the Board shall supervise the carrying out of the policies adopted or approved by the Board. He shall have general executive powers, as well as the specific powers conferred by these Bylaws. He shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned to him by the board of Directors. Section 4.2. Vice Chairman of the Board. The Board of Directors shall appoint one of its members to be Vice Chairman of the Board to serve at the pleasure of the Board. In the absence of the Chairman of the Board, he shall preside at any meeting of the Board. The Vice Chairman of the Board will have the power and the authority (subject to the approval of the Board) to nominate the Directors to Committees of the Board as well as have such powers and duties as from time to time may be conferred upon, or assigned to him by the Board of Directors. Section 4.3. President. The Board of Directors shall appoint one of its members to be President of the Association. In the absence of the Chairman and Vice-Chairman he shall preside at any meeting of the Board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice, to the office of President, or imposed by these Bylaws. He shall also have and may exercise such other power and duties as from time to time may be conferred upon or assigned to him by the Board of Directors. EXHIBIT 4-Page 5 Section 4.4. Vice President. The Board of Directors may appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors. One Vice President shall be designated by the Board of Directors, in the absence of the President, to perform all the duties of the President. Section 4.5. Secretary. The Board of Directors shall appoint a Secretary, Cashier, or other designated officer who shall be Secretary of the Board and of the Association, and shall keep accurate minutes required by these Bylaws to be given. He shall be custodian of the corporate seal, records, documents and papers of the Association. He shall provide for the keeping of proper records of all transactions of the Association. He shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of Cashier, or imposed by these Bylaws. He shall also perform such other duties as may be assigned to him, from time to time, by the Board of Directors. Section 4.6. Other Officers. The Board of Directors may appoint one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Cashiers, and such other officers and Attorneys-in-fact as from time to time may appear to the Board of Directors to be required or desirable to transact the business of the Association. Such officers shall respectively exercise such powers and perform such duties as pertain to their several officers, or as may be conferred upon, or assigned to, them by the Board of Directors, the Chairman of Board, or the President. Section 4.7. Clerks and Agents. The Board of Directors may appoint, from time to time, such Paying Tellers, Receiving Tellers, Note Tellers, Vault Custodians, bookkeepers and other clerks, agents and employees as it may deem advisable for the prompt and orderly transaction of the business of the Association, define their duties, fix their salaries to be paid them and dismiss them. Subject to the authority of the Board of Directors, the President, or any other officer of the Association authorized by him may appoint and dismiss all or any clerks, agents and employees and prescribe their duties and the conditions of their employments, and from time to time fix their compensation. Section 4.8. Tenure of Office. Unless otherwise specified by the Board at the time of election or appointment, or in an employment contract approved by the Board, each officer's and agent's term shall end at the first meeting of directors after the next annual meeting of shareholders. He shall serve until the end of his term or, if earlier, his death, resignation. Or removal. Section 4.9. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgement the best interest of the corporation will be served thereby. Such removal shall be without prejudice or the contract rights, if any, of the person so removed. Election or appointment or an officer or agent shall not of itself create contract rights. Section 4.10. Vacancies. Any vacancy occurring in any office of the Association may be filled by the Board of Directors. EXHIBIT 4-Page 6 ARTICLE V Stock and Stock Certificates Section 5.1. Shareholder's List. The President and Cashier shall cause to be kept at all times a full and correct list of the names and residences of all the shareholders in the Association, and the number of shares held by each, in the office where its business is transacted. Section 5.2. Transfers. Shares of stock shall be transferable on the books of the Association and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to his shares, succeed to all rights and liabilities of the prior holder of such shares. Section 5.3. Stock Certificates. Certificates of stock shall bear the signature of the President (which may be engraved, printed or impressed) and shall be signed manually or by facsimile process by the Secretary, Assistant Secretary, Cashier, Assistant Cashier or any other officer appointed by the Board of Directors for that purpose, to be known as an Authorized Officer, and the seal of the Association shall be engraved thereon. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the Association properly endorsed. Section 5.4. Lost, Stolen, or Destroyed Certificates. The corporation shall issue a new certificate in place of any certificate for shares previously issued subject to the conditions set forth in Section 5.4(a). and Section 5.5. Section 5.4(a) Requirements. The registered owner of the certificate shall furnish proof in affidavit form that it has been lost, destroyed or wrongfully taken; and requests the issuance of a new certificate before the corporation has notice that the certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim and gives a bond in such form, and with such surety or sureties, with fixed or open in such form, and with such surety or sureties, with fixed or open penalty, as the Association may direct, to indemnify the Association against any claim that may be made on account of the alleged loss, destruction or theft of the certificate; and satisfies any other reasonable requirements imposed by the Association. When a certificate has been lost, apparently destroyed or wrongfully taken, and the holder of record fails to notify the Association within a reasonable time after he has notice of it, and the corporation registers a transfer of the shares represented by the certificate before receiving such notification, the holder of record is precluded from making any claim against the Association for the transfer or for a new certificate. Section 5.5. Registered Owner. Prior to due presentment for registration of transfer of a certificate for shares, the Association may treat the registered owner as the person exclusively entitled to vote, to receive notices and otherwise to exercise all the rights and powers of a shareholder. EXHIBIT 4-Page 7 ARTICLE VI Corporate Seal The President, the Cashier, the Secretary or any Assistant Cashier or Assistant Secretary, or other officer thereunto designated by the Board of Directors, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form: [imprint of seal] ARTICLE VII Miscellaneous Provisions Section 7.1. Fiscal Year. The fiscal year of the Association shall be the calendar year. Section 7.2. Execution of Instruments. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents, may be signed, executed, acknowledged, verified, delivered or accepted on behalf of the Association by the Chairman of the Board, or the President, or any Vice President, or the Secretary, or the Cashier, or by any of said officers. Any such instruments may also be executed, acknowledged, verified, delivered or accepted on behalf of the Association in such other manner and by such other officers as the Board of Directors may from time to time direct. The provisions of this Section 7.2 are supplementary to any other provision of these Bylaws. Section 7.3. Records. The Articles of the Association, the Bylaws, the proceedings of all meetings of the shareholders, the proceedings of the Board of Directors and standing committees of the Board shall be recorded in appropriate minute books provided for that purpose. The minutes of each meeting shall be signed by the Secretary, Cashier or other officers appointed to act as Secretary of the meeting. Section 7.4. Banking Hours. Banking hours of The Herring National Bank and its various branches shall be set by the Board of Directors. Banking hours of the EXHIBIT 4-Page 8 main office of the Association may or may not be consistent with those set at the various branches. Banking hours at all locations will comply with national banking regulations. ARTICLE VIII Bylaws Section 8.1. Inspection. A copy of the Bylaws, with all amendments thereto, shall at all times be kept in a convenient place at the Office of the Association, and shall be open for inspection to all shareholders, during banking hours. Section 8.2. Amendments. These Bylaws may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holder of a majority of the stock of the Association, unless the vote of the holders of a greater amount of stock is required by law and in that case by the vote of the holders of such greater amount. The shareholders, in amending, repealing, or adopting a particular Bylaw may expressly provide that the Board of Directors may not amend or repeal that Bylaw. This Bylaw may not be amended of repealed by a vote of the Board of Directors. ARTICLE IX Fiduciary Activities Section 9.1. Governance. The Vice Chairman shall appoint (subject to the approval of the Board of Directors) those Committees which the Board of Directors deem necessary to implement, transact and monitor the fiduciary duties of the Association in accordance with the applicable laws of the State of Texas and the United States. Section 9.2. Trust Audit Committee. The Vice Chairman shall appoint (subject to the approval of the Board of Directors) a Trust Audit Committee composed of directors, exclusive of any active officer of the Association. The Trust Audit Committee shall also at least once during each calendar year and within 15 months of the last such audit make suitable audits of the Association's fiduciary activities or cause suitable audits to be made by auditors responsible only to the Board of Directors and at such time ascertain whether fiduciary powers have been administered according to law, Part 9 of the Regulations of the Comptroller of Currency and sound fiduciary principles. Section 9.3. Trust Policy Committee. The Vice Chairman shall appoint (subject to the approval of the Board of Directors) a Trust Policy Committee of the Association composed of members who shall be capable and experienced officers and directors of the Association. The Trust Policy Committee shall cause to be written a Policy Manual outlining the fiduciary policies of the Association. The Policy Manual and all additions and deletions to the Manual shall be presented to the Board of Directors for approval. Section 9.4. Trust Operations Committee. The Vice Chairman shall appoint (subject to the approval of the Board of Directors) a Trust Operations Committee of the Association composed EXHIBIT 4-Page 9 of members who shall be capable and experienced officers or directors of the Association. The Trust Operations Committee shall meet as often as necessary to review acceptance or termination of fiduciary accounts, discretionary distributions, annual fiduciary account reviews, all other business which may come before the committee and enact those policies and procedures outlined in the Policy Manual. All actions of the Trust Operations Committee shall be entered in the minutes of this Committee's meetings. The Trust Operations Committee shall report to the Trust Policy Committee no less than semi-annually. Section 9.5. Fiduciary Files. There shall be maintained by the Association all fiduciary records necessary to assure that its fiduciary responsibilities have been properly undertaken and discharged. Section 9.6. Trust Investments. Funds held in a fiduciary capacity shall be invested according to the instrument establishing the fiduciary relationship and local law. Where such instrument does not specify the character and class of investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under local law. IN WITNESS WHEREOF, we have hereunto set our hands this ______ day of _____________, 1996. IN TESTIMONY WHEREOF, I Donna Stribling, Secretary of The Herring National Bank, have hereunto affixed my official signature and the seal of the said Bank, in the City of Vernon, on this _____ day of __________________, 1996. ------------------------------------ Donna Stribling, Secretary APPROVED BY: - ----------------------------------- Curtis Johnson, President EXHIBIT 4-Page 10 Exhibit 6 CONSENT In accordance with Section 321(b) of the Trust Indenture Act of 1939, the undersigned, THE HERRING NATIONAL 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: September 28, 2004 THE HERRING NATIONAL BANK By: /s/ Catanta Gray --------------------------------------------- Catana Gray Vice President and Manager EXHIBIT 6 - Page 1 Exhibit 7 The Herring National Bank Statement of Financial Condition As of 12/31/2003
Assets Cash in Vaults and Due from Banks $ 12,237,000 U.S. Government Agencies & Other Obligations 8,146,000 State, County, and Municipal Bonds and Warrants 13,345,000 All Other Securities 13,080,000 Federal Funds Sold 7,293,000 Loans and Discounts 257,275,000 Banking Premises, Furniture and Fixtures 4,189,000 Other Assets 17,393,000 ------------- Total Assets $332,958,000 Liabilities Deposits $299,202,000 Other Liabilities 4,314,000 ------------- Total Liabilities $303,516,000 Capital Stock $ 1,000,000 Surplus 9,449,000 Undivided Profits 18,993,000 ---------- Total Capital 29,442,000 Total Liabilities and Capital $332,958,000
To the best of the undersigned's determination, as of the date hereof, the above financial information is true and correct. THE HERRING NATIONAL BANK By: /s/ Catana Gray ------------------------------------------------------ Catana Gray Vice President and Manager Date: September 28, 2004 EXHIBIT 7 - Page 1 EX-10 9 secagree.txt SECURITY AGREEMENT THIS SECURITY AGREEMENT ("Security Agreement") is made as of September 28, 2004, by American Church Mortgage Company, a Minnesota corporation (the "Company"), in favor of The Herring National Bank, a national banking association, 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 B Secured Investor Certificates issued by the Company, which may include rollovers (the "Securities"); and WHEREAS, the Company has previously entered into an Indenture dated as of April 26, 2002, with the Trustee (the "Prior 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 A Secured Investor Certificates issued pursuant to the Company's registration statement on Form S-11 (Reg. No. 333-75863) declared effective by the Securities and Exchange Commission on or about April 30, 2002, which come due this year, and which are eligible for rollover renewal for maturities ranging from two (2) to three (3) years (the "Renewable Securities"); and WHEREAS, under the terms of the Indenture and the Prior Indenture, the Company has agreed to pledge certain collateral as security for the payment of principal and interest on the Securities and the Renewable 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; -1- (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 120% of the aggregate principal amount of the Securities then outstanding (the "Minimum Value"); -2- (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 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.ss. 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 -3- (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 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; -4- (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 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. -5- 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 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. -6- 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 If to the Trustee: THE HERRING NATIONAL BANK 1001 South Harrison Street Amarillo, TX 79101 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. -7- (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 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: /s/ Philip J. Myers ------------------------------------ Philip J. Myers, President TRUSTEE: THE HERRING NATIONAL BANK By: /s/ Catana Gray -------------------------------------- Catana Gray Vice President and Manager
SCHEDULE A (Initial Collateral) Date of Loan Recipient Original Principal Outstanding Principal Balance as of Note Value August 4, 2004 05/15/96 Fountain of Life Church 375,000.00 164,962.75 05/06/96 River of Life Church 425,000.00 187,625.36 09/24/98 Mt. Ararat Baptist Church 170,000.00 150,733.27 03/02/99 Praise Chapel International 115,000.00 102,519.49 05/20/99 Greater Hill Zion Baptist Church 500,000.00 446,577.94 07/04/99 Bethel Temple of Longview 500,000.00 451,253.70 09/08/99 Greater Fort Lauderdale 605,000.00 543,022.43 11/22/99 New Growth in Christ 460,000.00 417,680.88 01/21/00 Praise Christian Center 500,000.00 455,646.83 11/02/00 St. Paul AME Church 200,000.00 193,085.59 06/19/01 Second Missionary Baptist Church 225,000.00 210,746.52 05/31/02 Unity of Faith Worship Center 426,000.00 408,293.75 06/26/02 Peniel Baptist Church 555,000.00 535,993.67 07/10/02 New Light Fellowship, Inc. 350,000.00 15,386.41 11/27/02 Full Life Gospel Center 327,000.00 317,880.42 12/30/02 House of Joy & Praise Outreach Center 435,000.00 423,587.21 12/30/02 House of Praise Ministries 610,000.00 597,745.28 02/07/03 New Creation Family Church 500,000.00 487,701.85 02/19/03 United Apostolic Church 950,000.00 936,763.01 02/21/03 Bread of Life Baptist Church of Houston 763,000.00 744,233.02 03/12/03 Life Changing Faith Christian Church 460,000.00 448,338.05 03/13/03 Good News Family Worship Center 567,000.00 559,318.00 06/19/03 Bend Christian Center 445,000.00 439,747.30 05/28/03 United for Christ 267,000.00 263,627.76 05/30/03 Zion Hill Baptist Church 255,000.00 249,143.17 06/30/03 Glad Tidings Community Church 663,000.00 655,966.51 06/30/03 Pembroke Park C.O.G.I.C. 520,000.00 490,923.27 06/30/03 Roanoke Chapel M.B. Church 1,955,000.00 1,955,000.00 08/01/03 Assured Faith C.O.G.I.C. 355,000.00 349,260.25 09/11/03 All Faith's Christian Center 645,000.00 635,648.39 09/11/03 Landmark Apostolic Church 400,000.00 394,200.55 09/19/03 Ekklesia Fellowship Ministries 227,500.00 224,578.67 10/14/03 Grace Christian Center 640,000.00 632,370.81 11/25/03 Praise Tabernacle Jamaica 600,000.00 594,263.24 11/25/03 All Saints Community Church 210,000.00 207,303.41 12/16/03 Word of the Living God 650,000.00 643,785.19 12/19/03 Praise Tabernacle Deliverance Church 500,000.00 496,968.37 04/21/04 Faith Christian Center 475,000.00 472,753.65 04/22/04 Christian Discipleship Ministries 410,000.00 408,799.75 04/29/04 Shilo Temple House of God 500,000.00 497,514.50 05/21/04 Inter-Denominational Fellowship Ministries 240,000.00 239,246.08 ------------------------------------------------------------ $22,060,500.00 $18,513,138.39
EX-1 10 distagreement.txt DISTRIBUTION AGREEMENT $23,000,000 SERIES B SECURED INVESTOR CERTIFICATES AMERICAN CHURCH MORTGAGE COMPANY (THE "COMPANY") AMERICAN INVESTORS GROUP, INC. (THE "UNDERWRITER") September 28, 2004 TABLE OF CONTENTS ARTICLE I. DEFINITIONS 3 Section 1.01 Defined Terms 3 Section 1.02 Accounting Terms 5 ARTICLE II. APPOINTMENT OF UNDERWRITER AND RELATED AGREEMENTS 5 Section 2.01 Appointment; Exclusivity 5 Section 2.02 Compensation to Underwriter 5 Section 2.03 Brokers and Dealers 6 Section 2.04 Underwriter's Unrelated Activities 6 Section 2.05 Best Efforts; Independent Contractor 6 ARTICLE III. SERVICES; STANDARD OF CARE 7 Section 3.01 Services 7 Section 3.02 Reports to the Company 7 ARTICLE IV. REPRESENTATIONS AND COVENANTS OF THE COMPANY 8 Section 4.01 Representations, Warranties and Agreements of the Company 8 Section 4.02 Covenants of the Company 13 ARTICLE V. REPRESENTATIONS AND COVENANTS OF UNDERWRITER; CONDITIONS 15 Section 5.01 Representations and Warranties of Underwriter 15 Section 5.02 Covenants of Underwriter 16 ARTICLE VI. CONDITIONS 17 Section 6.01 Conditions of The Underwriter's Obligations 17 ARTICLE VII. INDEMNIFICATION AND CONTRIBUTION 18 Section 7.01 Company's Indemnification of Underwriter 18 Section 7.02 Underwriter's Indemnification of the Company 19 Section 7.03 Notice of Indemnification Claim 20 Section 7.04 Contribution 20 Section 7.05 Notice of Contribution Claim 21 Section 7.06 Reimbursement 21 Section 7.07 Arbitration 22 ARTICLE VIII. TERM AND TERMINATION 22 Section 8.01 Effective Date of this Agreement 22 Section 8.02 Termination Prior to Initial Closing Date 22 Section 8.03 Notice of Termination 23 Section 8.04 Termination After Effective Date 23 ARTICLE IX. MISCELLANEOUS 24 Section 9.01 Survival 24 Section 9.02 Notices 24 Section 9.03 Successors and Assigns; Transfer 24 Section 9.04 Cumulative Remedies 25 Section 9.05 Attorneys' Fees 25 Section 9.06 Entire Agreement 25 Section 9.07 Choice of Law 25 Section 9.08 Confidentiality 25 Section 9.09 Rights to Investor Lists 25 Section 9.10 Waiver: Subsequent Modification 25 Section 9.11 Severability 26 Section 9.12 Joint Preparation 26 Section 9.13 Captions 26 Section 9.14 Counterparts 26 -2- DISTRIBUTION AGREEMENT THIS DISTRIBUTION AGREEMENT is entered into as of this 28 day of September, 2004, 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 $23,000,000 aggregate principal amount of Series B 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 effort 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) Certificate Holder. The purchaser of any Certificate or any subsequent transferee or other holder thereof. (d) Certificates. Up to $23,000,000 aggregate principal amount of Series B Secured Investor Certificates of the Company with substantially the same terms as are described in the Prospectus, up to $3,000,000 of such amount to be reserved for rollover renewals of the Series A Secured Investor Certificates previously registered pursuant to the Company's registration statement on Form S-11 (Reg. No. 333-75863) declared effective by the Securities and Exchange Commission -3- on or about April 30, 2002, which come due during this year, and which, if renewed, will have maturities ranging from two (2) to three (3) years, and any additional principal amount of Certificates as may be registered from time to time pursuant to the Registration Statement. (e) Commission or SEC. The Securities and Exchange Commission. (f) Company. American Church Mortgage Company, or its successors in interest. (g) Effective Date. The date and time the Registration Statement is or was declared effective by the Commission. (h) Exchange Act. The Securities Exchange Act of 1934, as amended. (i) Governmental Rule. Any law, rule, regulation, ordinance, order, code, interpretation, judgment, decree, policy, decision or guideline by any governmental authority. (j) Indenture. That certain Indenture dated on or about September 21, 2004, by and between the Company and the Trustee with respect to the Certificates. (k) NASD. The National Association of Securities Dealers, Inc. (l) Offering. The offer and sale of the Certificates in accordance with the terms and subject to the conditions set forth in the Registration Statement. (m) 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. (n) 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. (o) Registration Statement. That certain Registration Statement on Form S-11 (File No. 333-116919) 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. (p) Rules and Regulations. The rules and regulations under the Securities Act. (q) Securities Act. The Securities Act of 1933, as amended. -4- (r) Trustee. The Herring National Bank, or its successors or assigns. (s) 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. 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 and renewal 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; operating a toll-free telephone number, and assisting the Company with creating a web site, including any costs of a web developer or other third party consultants; (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 -5- (including the financial statements therein and all amendments, schedules, and exhibits thereto), each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto; (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 Holders; (v) all fees and expenses of the Trustee i 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) $20,000 upon the sale of $1,000,000 of Certificates; and (ii) the balance ($100,000) payable ratably based on the principal amount of Certificates sold thereafter. 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 the NASD 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. -6- 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 NASD 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. -7- 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 333-75836) 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 -8- 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 bylaw 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 -9- 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 filed as part of the Registration Statement, is an independent accounting firm within the meaning of the Securities Act and the Rules and Regulations. The financial statements of the Company set forth in the Registration Statement and Prospectus 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 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. (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: -10- (i) any change in the capital stock or lon 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, stockholders' 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 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. -11- (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 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 -12- 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 fro 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 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 -13- 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 arrang 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 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 -14- 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 th 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 o 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 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. -15- (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. (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. -16- 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 reasonably have requested to enable it to pass upon the matters referred to in this Section. -17- (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 accountants with respect to the Company within the meaning of the Securities Act 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 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 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 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 -18- 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 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 -19- 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 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 -20- 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. 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 -21- 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 rising 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 the NASD. 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 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 -22- to pay costs and expenses of the Company and the Agent (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. -23- 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 -24- 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, assign 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. -25- 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 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] -26- 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: /s/ Philip J. Myers, President -------------------------------- Philip J. Myers, President THE UNDERWRITER: AMERICAN INVESTORS GROUP, INC. By: /s/ Philip J. Myers, President -------------------------------- Philip J. Myers, President -27- 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, and a commission upon each renewal of a Certificate, based on the principal amount of the Certificates sold or renewed in the Offering as follows: (a) upon an original issuance, the commission shall be 3% plus an additional 1% underwriter's management fee on the sale; and (b) upon a renewal, the commission shall be 1.5% ; no underwriter's management fee shall be paid upon a renewal. 28 -----END PRIVACY-ENHANCED MESSAGE-----