UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment Number 2 to Form SB
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
RMX REIT, INC.
(Name of small business issuer in its charter)
WASHINGTON 6599 91-1869110
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
220 WEST MERCER STREET #400, SEATTLE, WA 98119 (206) 282-8221
(Address and telephone number of principal executive offices)
220 WEST MERCER STREET #400, SEATTLE, WA 98119 (206) 282-8221
(Address of principal place of business or intended principal
place of business)
RICHARD A. EKMAN, 220 WEST MERCER STREET #400, SEATTLE, WA 98119
(206) 282-8221
(Name, address and telephone number of agent for service)
Date proposed for sale June 5, 1998
CALCULATION OF REGISTRATION FEE
Title of Dollar Amount Proposed Maximum Proposed maximum Amount of
each class to be offering price offering price registration
of registered Per Unit fees
securities
to be registered
Common $12,000,000 $5 $12,000,000 $3,540
The registrant hereby agrees to amend 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.
This Second Amended Registration Statement consists of a total
of 78 pages.
PROSPECTUS
2,400,000 SHARES
RMX REIT, INC.
220 West Mercer Street #400
Seattle, Washington 98119
This offering is for 2,400,000 shares of common stock in a newly
formed Company. The Company is offering to sell its Common
Stock at $5.00 per share to new investors, insiders, affiliates
and existing shareholders pursuant to its Dividend Reinvestment
Program which is discussed in this prospectus. The Company
intends to use the proceeds of the offering to purchase high
interest bearing mortgage paper securities, secured by real
property in the Pacific Northwest. The Company intends to pay
dividends on a quarterly basis.
The minimum initial investment is Ten (10) shares for a total
investment of Fifty ($50.00) dollars. Insiders and affiliates
may purchase shares at the offering price to meet the initial
minimum offering. Insiders and affiliates presently intend to
purchase no more than 5,000 shares. Each investor must meet
certain investor suitability standards and consider this to be a
long term investment. The only market that is expected to be
available for the shareholders to liquidate their investment is
to sell their stock to a new or an existing shareholder, which
is further restricted as noted in the legend on each
certificate, in order to maintain the REIT federal tax pass
through status. The Company intends to offer a matching service
to facilitate shareholder liquidity, but makes no assurances
that any shareholder will be able to sell their stock when they
desire to do so.
The Company has identified the most significant risks to the
investor is as follows:
New Company - No Operating Experience
No Public Market - Limited Shareholder Investment Liquidity
High Risk Borrowers are Likely to Default
Dependence on its Management Company
Substantial Compensation to its Management Company
Appraisal may Overstate Value of Security
See Risk Factors for Relevant to this Investment in Common Stock
beginning at page ____
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Per unit total Price to Underwriting Proceeds to
Public Discounts the Company
Per unit $ 5.00 $ None $ 5.00
Minimum Offering 350,000 None 350,000
Maximum Offering $ 12,000,000 $ None $ 12,000,000 (i)
(i) Before payment by the Company of legal, accounting, filing
and printing expenses, estimated to be at least $42,500.
No person has been authorized to give any information or to make
any representations other than those contained in this
Prospectus. If given or made, such information or
representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute
an offer to sell securities in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company
since the date hereof.
The Common Stock is exclusively offered on a best efforts basis
for sale directly to investors by the Officers and Directors of
the Company.
The date of this Prospectus is May 27, 1998
AVAILABLE INFORMATION
RMX REIT, INC., UNDERTAKES TO BECOME A VOLUNTARY REPORTING
COMPANY. IN ADDITION TO THE 10Q AND 10K, EACH SHAREHOLDER WILL
BE PROVIDED WITH A QUARTERLY MANAGEMENT REPORT THAT INCLUDES A
FINANCIAL SUMMARY FOR THE PAST QUARTER, THE STATUS OF THE LOAN
PORTFOLIO AND THE DIVIDEND APPROVED BY THE BOARD OF DIRECTORS
FOR THE QUARTER. THE COMPANY ALSO PROVIDES THE SHAREHOLDERS
WITH AN ANNUAL REPORT WHICH CONTAINS THE AUDITED FINANCIAL
STATEMENTS AND THE NOTICE OF THE ANNUAL SHAREHOLDERS MEETING.
THE COMPANY HAS AND DOES INTEND TO COMPLY WITH THE NORTH
AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION (referred to as
"NASAA" herein) GUIDELINES ADOPTED FOR THE MANAGEMENT AND
OPERATION OF REAL ESTATE INVESTMENT TRUSTS (referred to as
"REIT" herein). IN ADDITION, THE COMPANY MUST COMPLY WITH THE
PROVISIONS OF THE INTERNAL REVENUE CODE IN ORDER TO MAINTAIN ITS
FAVORABLE TAX PASS THROUGH STATUS.
RMX REIT, INC., WILL PROVIDE WITHOUT CHARGE TO ANY PERSON WHO
RECEIVES A PROSPECTUS, UPON WRITTEN OR ORAL REQUEST OF SUCH
PERSON, A COPY OF ANY OF THE INFORMATION THAT WAS INCORPORATED
BY REFERENCE IN THE PROSPECTUS (NOT INCLUDING EXHIBITS TO THE
INFORMATION THAT IS INCORPORATED BY REFERENCE UNLESS THE
EXHIBITS ARE THEMSELVES SPECIFICALLY INCORPORATED BY REFERENCE).
IN ORDER TO RECEIVE SUCH INFORMATION, PLEASE CONTACT THE
FOLLOWING DEPARTMENT:
RMX REIT, INC.
ATTN: SHAREHOLDER RELATIONS
220 WEST MERCER STREET #400
SEATTLE, WASHINGTON 98119
(206) 282-8221
ALL QUESTIONS AND REQUESTS FOR INFORMATION BY POTENTIAL
INVESTORS SHOULD BE DIRECTED TO THE ADDRESS AND TELEPHONE NUMBER
NOTED ABOVE. INVESTMENT IN A SMALL BUSINESS INVOLVES A HIGH
DEGREE OF RISK, AND INVESTORS SHOULD NOT INVEST ANY FUNDS IN
THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE THEIR INVESTMENT IN
ITS ENTIRETY.
INVESTORS SHOULD CAREFULLY REVIEW THIS PROSPECTUS, PARTICULARLY
WITH REGARD TO THE RISKS (SEE "RISK FACTORS") AND CONFLICTS OF
INTEREST, (SEE "CONFLICTS OF INTEREST") BEFORE MAKING A DECISION
TO INVEST. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY
ON THEIR OWN EXAMINATION OF THE ENTITY CREATING THE SECURITIES
AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED.
WARNING: The Company is relying on Section 3 (c)(5)(C) that it
is exempt from registration from the provisions of the
Investment Company Act of 1940. Therefore, shareholders cannot
expect the Company to redeem any of its securities.
TABLE OF CONTENTS
Page
Summary of the Offering 11
The Company 11
Principal Business of the Company 11
Management 11
Prior Experience of the Management Company (CLS) 11
Compensation to the Management Company 12
Investment Objectives and Policies 12
Description of Capital Stock 12
Federal Income Tax Considerations 12
Risk Factors and Conflicts of Interest 13
Annual Reports 13
Board of Directors May Delay or Deny
Acceptance of Investors Funds. 13
Risk Factors 14
New Company - No Operating Experience 14
No Public Market - Limited Shareholder Investment 14
High Risk Borrowers 14
Dependence on its Management Company 15
Substantial Compensation to Management Company 15
Appraisal May Overstate Value of Collateral 15
Market Risks 15
Federal Income Tax Status 16
Lack of Portfolio Geographic Diversification 16
Loss on Liquidation of REO 16
Value of Collateral May Decrease 16
Market Interest Rates 16
Conflicts of Interest 16
Leverage 17
Usury 17
Insurance 17
Other Government Regulation 17
Use of Proceeds 17
Determination of Offering Price 18
Selling Security Holders and Matching Service 18
Continued Registration Aids Shareholder Investment
Liquidity 18
Matching Service For Existing Shareholders to Sell
Their Stock 18
Plan of Distribution 19
No Outside Selling Agents 19
Shareholder Ownership Restrictions 19
Investor Suitability Standard 19
Long Term Investment-Funds May Not be Accepted 19
Funds from Stock Sales are Invested in New Loans 19
Board of Directors May Delay or Deny Acceptance of
Investor Funds 20
Legal Proceedings 20
General 20
Usury and Federal Preemption of State Law 20
Home Ownership and Equity Protection Act 20
Investment Company Act of 1940 21
Other Actions 21
Directors, Executive Officers, Promoters
and Control Persons 21
Officers and Directors of the Company 21
Background & Education information regarding
Officers and Directors of the Company 22
Director Responsibilities 23
Independent Director Responsibilities 23
Board approves all loans and fees paid to CLS 23
Quarterly Reports 24
Annual Reports 24
Board Members and Officer Compensation 24
No Employees 24
Involvement in Certain Legal Proceedings 24
Security Ownership of Certain Beneficial Owners
and Management 25
Description of Securities 25
Interests of Named Experts and Counsel 25
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 26
Certain Relationships and Related Transactions 26
General 26
Compensation of Officers 27
Management Relationships 27
Loan Closing and Servicing Relationship 27
Prohibited Lending Practices 27
Summary of the Management Agreement 27
Summary of the Loan Acquisition Process 28
Summary of the Collection Process 29
Management Compensation 30
Payment of Management Fees 30
Payment of Loan Acquisition Fees 30
Payment of Loan Closing, Escrow and Late Fees 30
Fees Projected to be Received by CLS 31
Conflicts of Interest 31
Description of the Business 32
Form and Year of Organization 32
REIT Status 32
Business of the Company 32
Value of Real Estate Collateral 32
Reliance on its Management Company (CLS) 33
Competition 33
Ability to Compete 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations 33
Overview 33
REIT Tax Status 34
Source of Funds to Purchase New Loans 34
Source of Funds to Pay Expenses and Dividends 34
Anticipated Results from Operations in 1998 and 1999 34
Sources of Loans 34
Security for Loans 34
Loan to Value (LTV) and Underwriting Guidelines 35
Investment Restrictions 35
Procedure to Enforce Investment Policy 35
Plan for the Future 35
Capitalization 36
Description of Company Investment Objectives 36
Investment Objectives and Policies 36
Market for Common Equity and Related Transactions 36
No Public Market 36
Ownership Restrictions 36
Distributions of Dividends 36
Dividend Objective and Performance 36
Dividend Reinvestment Plan 37
Executive Compensation 37
Federal Income Tax Considerations 37
Federal Income Taxation of the Company 37
Requirements for Qualification as a REIT 39
Taxation of the Shareholders 44
Taxation of Shareholders on Disposition of Shares 45
Capital Gains and Losses
Glossary
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE
COMPANY CONCERNING THIS OFFERING AND NO PERSON SHALL MAKE
DIFFERENT OR BROADER STATEMENTS THAN THOSE CONTAINED HEREIN.
INVESTORS ARE CAUTIONED NOT TO RELY UPON ANY INFORMATION NOT
EXPRESSLY SET FORTH IN THIS PROSPECTUS.
This Prospectus consists of a total of 46 pages.
SUMMARY OF THE OFFERING
The following is a summary of important information contained in
this Prospectus, but it is not complete and is qualified in its
entirety by reference to the entire Prospectus. The glossary of
definitions of certain banking, insurance and financial terms
used throughout this prospectus is located at the end and should
be referred to as necessary.
The Company. The Company was incorporated in the State of
Washington on June 19, 1997. The Company has not issued any
stock and does not expect to actually begin doing business until
the spring of 1998, after this offering is effective and the
minimum initial offering is sold. The Company expects to ratify
the present directors and ratify the management contract with
CLS. There is a risk that there could be a change in control
since the present management has no significant ownership
interests in the Company. The Company intends to issue stock to
investors and use the funds to purchase fixed term interest
bearing mortgage paper securities ranging from 10% to 18%
annually. The Company intends to qualify and file its federal
tax returns as a Real Estate Investment Trust, thereby passing
its net income in the form of dividends to the shareholders
without federal income taxation at the Company level. The
Company has no debt, except for the amount loaned to the Company
by CLS Financial Services, Inc. ("CLS") to pay for legal and
accounting expenses incidental to this offering.
Principal Business of the Company. The principal business of
the Company is to acquire loans and participations in loans
secured by real property. The primary basis for the loan is the
collateral value of the security, and to a lesser effect, the
ability of the borrower to repay the loan. Generally, the Company will purchase
promissory notes secured by Deeds of Trust. (See "Summary of
the Loan Acquisition Process") The promissory notes are then
indorsed over to the Company and the real estate security
documents, primarily Deeds of Trust, Real Estate Contracts and
or Mortgages are then assigned to the Company. Upon transfer by
assignment, the Company actually owns the interests in the
Mortgage Paper Securities directly. The annual interest rates
on the notes are expected to range from 10% to 18%, with the
average being 12%. CLS and its affiliates escrow and collect on
the accounts under its Custom Servicing Agreement. (See
"Summary of the Collection Process")
Management. The Board of Directors manages the Company and
establishes investment policies and objectives, which have been
incorporated into the Company Bylaws. The Company has only
officers as employees and contracts for all of its services.
The Company has contracted with CLS Financial Services, Inc.,
sometimes referred to herein as the "Management Company," "CLS"
or as the "Advisor" (the term used in the NASAA statements of
policy), to provide the Company with loans to purchase for its
portfolio. The management contract is for one year, which is
renewable, and is cancelable upon sixty (60) days notice without
cause. The Board of Directors has executed a management
contract with CLS, which loaned the Company the initial funds to
initiate this offering. (See "Description of Business" and
"Management Discussion of Financial Condition and Results of
Operations" sections.) The Company corporate records, which
include the stock records, auditors reports, management reports
etc., are maintained at the Corporate headquarters. The loan
closing, escrow function, and collections actions are performed
by CLS in its offices. CLS will originate and then sell the
Company the majority of the loans for the portfolio of the
Company.
Prior Experience of the Management Company (CLS). The Company
expects to purchase the majority of the loans for its portfolio
directly from CLS. CLS was founded by, has been, and is owned
and operated by, its President, and Stockholder, Mr. Gerald C.
Vanhook. CLS was incorporated in the State of Washington in
March 1990, and immediately began operations as CLS Mortgage of
Lynnwood, Inc. In March 1994, CLS amended its Articles of
Incorporation to change its name to CLS Financial Services, Inc.
CLS has three (3) major shareholders, namely Mr. Gerald C.
Vanhook and his wife, Lorrie, Mr. Melvin L. Johnson, Jr. and his
wife, Deidre, and Puget Sound Investment Group, Inc., ("PSIG").
PSIG is owned fifty percent (50%) by the Vanhooks and fifty
percent (50%) by the Johnsons. PSIG owns a subsidiary company,
Puget Sound Real Estate Services Group, Inc., (PSRESG"). CLS
has registered with the State of Washington as a Consumer Loan
Act Lender and has been issued a permit by the State of
Washington to sell Mortgage Paper Securities to Washington
residents. CLS has operated profitably since 1990. During
1997, CLS posted revenues of $1,730,865 from loan fees, interest
and loan servicing. At year end 1997, CLS had assets of
$7,905,735 and a shareholder equity of $1,607.735. A complete
copy of the audited financial statements for year end 1997 is
available upon request.
Compensation to the Management Company (CLS). The Company has
agreed to pay CLS an annual management fee of up to two percent
(2%) of its average invested assets. CLS performs all of the
administrative day to day operations normally associated with a
business. The fee is paid on a monthly basis at one-twelfth of
two percent (2%) of the average of all invested assets
outstanding at the end of the month. There are no other charges
for personnel fees, equipment rental, advertising or other
normal and customary business expenses. The management fee does
not cover legal, auditing and other professional fees or costs
pertaining to this offering. In addition, CLS retains a portion
of the interest rate, the "split" which is part of the servicing
agreement. The amount of the split is determined on a loan by
loan basis, and is expected to range from .25% to 4% and is
expected to average slightly less than 2%, depending on the
market. The purpose of the split is to shift the burden of
collection payment delays and costs from the Company to CLS. In
the event of a default, CLS and/or its affiliate, PSIG through
its subsidiary PSRESG, has agreed to pay the Company its
interest due on the account and pursue collection. There is no
guarantee that CLS, or its affiliated Companies have the
financial resources to keep all accounts current. In the event
that the amount of dividends to be paid to the shareholders is
below 2% (8% annualized) in any given quarter, then CLS agrees
that it will not be entitled to any management fee or a rate
split on the loans in the portfolio. In addition to the
management fee and rate split, CLS is paid a loan acquisition
fee, sometimes referred to as an "origination fee" or a
"discount," of up to 12% from the loan proceeds. The average
rate is expected to be 4% to 6%. The rate is determined by the
market and competition. There is a direct relationship between
the loan principle, the value of the security and the
acquisition fee percentage. In general, as the loan principle
increases, the acquisition fee percentage decreases due in part
to the market and the fixed costs of doing business. At loan
closing, the borrower receives the net proceeds (total loan less
the acquisition fee and costs) and is legally liable to repay
the entire loan, which includes the fee and costs. CLS actually
funds the loans on its own line(s) of credit, then packages and
sells the loan or a participation in the loan to the Company
shortly thereafter. The fee is paid from the loan proceeds
advanced by the Company on a nonrecourse basis, however, the
Company and CLS maintain that the loan acquisition fee is
actually paid by the borrower.
Investment Objectives and Policies. The Company's principal
investment objective is to acquire a portfolio of real estate
collateralized loans which will produce a blended annual net
yield in dividends to its Shareholders. It is the Company's
policy to acquire loans from CLS, in which the borrowers are,
for a variety of reasons, considered high or higher risk. The
loans are secured by real estate generally located in the
Pacific Northwest. Due to the relatively high interest rates,
the majority of loans will actually be paid off early. Policies
on loan to value (LTV) ratios and other investment criteria have
been incorporated into the Company Bylaws. Underwriting
considerations are set forth by the Board of Directors on an as
needed basis according to market conditions.
Description of Capital Stock. The authorized capital stock of
the Company consists of 2.4 million (2,400,000) common shares
which will be issued at $5.00 per share. The offering price
paid by all shareholders and investors who purchase shares in
this offering is Five Dollars ($5) per share. Insiders and
affiliates may purchase stock, and are expected to do so in
order to meet the minimum initial offering. Each new investor
must meet the Company suitability standards and purchase a
minimum of Fifty (10) shares for a minimum investment of Fifty
Dollars ($50). All common shares are voting shares, equally
participating in dividends and there is no cumulative voting.
No individual shareholder, including insiders and affiliates,
may own more than 9.8% of the outstanding and issued stock in
the Company.
Federal Income Tax Considerations. As a REIT, the Company is
allowed to pass through earnings to shareholders without the
earnings being taxed at the Company level. A REIT is not taxed
at the Company level, provided the Company complies with the
investment, shareholder ownership and dividend payment set forth
in the Internal Revenue Code. The REIT status is dependent on
many conditions discussed in detail in the section regarding
Federal Income Tax Considerations. Should the Company fail to
meet any material condition set forth in the Code, it will be
taxed as a "C" corporation, which would reduce the profitability
of the Company and net profits available for distribution as
dividends.
Risk Factors and Conflicts of Interest. Investment in the
shares of the Company is subject to certain risks, including,
but not limited to, the fact that the Company is a business that
has just begun operations and has no operating results, the fact
that there is no public market for the shares and none is likely
to develop causing limited shareholder liquidity, the loans will
be made to relatively high risk borrowers that are likely to
default, the dependence on CLS to manage the Company, the
appraisal may overstate the value of the real estate granted as
security for the loan(s) and that market interest rates may rise
or fall inconsistent with the Company's investment policy and
objectives. There are conflicts of interest since the Secretary
of the Company is also an officer of CLS and its affiliates. In
order to mitigate the potential conflicts of interest, the
Company has adopted procedures to enforce the company
underwriting criteria. (See "Conflicts of Interest" and
"Enforcement of Underwriting Policy" Sections). In addition,
the Company could borrow money and leverage new loans thereby
subordinating the rights of equity holders to creditors, that
the Company may be subject to the usury and consumer protection
laws of the State of Washington and other states and that
insurance may lapse or not be available at reasonable rates to
insure Company property interests. In addition, the Company
could be taxed as a "C" Corporation, in which case the profits
of the Company would be taxed by the Internal Revenue Service
thereby reducing the distributed dividends by the amount taxed.
Additionally, since no stock has been sold, new shareholders
could vote in new directors and a new management company.
Annual Reports. The Company intends to provide Quarterly
Reports and an Annual Report which contains the Audited
Financial Statements to the shareholders. The Quarterly Report
will include a Summary Letter signed by the President, the
unaudited financial statements will include the Income Statement
for the Period, the Balance Sheet, the Loan Portfolio Report,
the Delinquent Account Report, the Report on Company Owned
Property and disclosures of all related party transactions. The
Board of Directors has mandated that the quarterly dividend
checks be distributed to the shareholders with the Quarterly
Report not later than 30 days after the close of each calendar
quarter. The Annual Report will contain a special report to the
Shareholders from the Board of Directors, the Audited Financial
Statements and the Notice of the Annual Shareholder Meeting,
which contains the agenda. The reporting, certain related party
transactions, is intended to conform to the NASAA Statements of
Policy regarding REIT disclosure guidelines and Generally
Accepted Accounting Principles ("GAAP"), Accounting Research
Bulletin ("ARB") number 43 Chapter 1A and Financial Accounting
Standards Board ("FASB") number 57 & 96.
Board of Directors May Delay or Deny Acceptance of Investors
Funds. The Company expects to be able to invest all available
funds by purchasing new loans and participations in loans that
meet its investment policies. The Company has not and does not
intend to retain any outside selling agents. In the event funds
from new investors and or from paid off loans are more than the
Company can invest into new loans, the Board of Directors
intends to delay the acceptance of new investor's funds as
frequently as necessary until the new investor proceeds can be
absorbed into new loans. The Board of Directors and CLS have
plans to increase the loan purchasing capacity, if necessary.
At present, CLS has the capacity to sell the Company up to Two
Million Dollars ($2,000,000) per month in conforming loans. The
maximum offering is for Two Million Four Hundred Thousand
(2,400,000) shares for an offering maximum of Twelve Million
Dollars (12,000,000). The Company expects to issue an average
of one hundred thousand shares (100,000) totaling five hundred
thousand dollars ($500,000) per month until the offering is sold
out. In addition, in event that the Company determines that an
Investor is intending to invest in the shares of the Company on
a short term basis, the Company will deny the investment or a
subsequent reinvestment.
RISK FACTORS
The purchase of the common stock in this offering involves
various risks. The material risks that prospective purchasers
should consider before making a decision to purchase the stock
in RMX REIT, Inc., are set forth below. In addition, businesses
are often subject to risks not foreseen or fully appreciated by
Management. In reviewing this Prospectus, potential investors
should keep in mind other possible risks that could be important.
New Company - No Operating Experience. The Company was
incorporated under the laws of the State of Washington on June
19, 1997 and as yet has not conducted any business.
Accordingly, it has not been engaged in the business of
acquiring, managing and disposing of mortgage-collateralized and
other financial assets and obligations, and has no history of
operations upon which prospective purchasers of the stock can
rely. Although the management company has engaged in similar
activities in the mortgage business, the Board of Directors and
the Company have no history of operations in the market. In
addition, the shareholders could elect new directors and
contract with another management company.
No Public Market - Limited Shareholder Investment Liquidity.
There is no public market for the shares and such a market is
not expected to develop. Investors have no right of redemption
from the Company and cannot expect the Company to repurchase
their stock. Investment in the shares of the Company is and
should be a long term investment. The Secretary is empowered to
void any transfer that would preclude the Company from
qualifying as a REIT for federal tax purposes. This information
is contained in the legend on each stock certificate. The
Company will attempt to assist and facilitate a shareholder in
their attempts to sell their stock by providing the selling
shareholder with the existing shareholder list and advising the
selling shareholder of existing shareholders who have expressed
a desire to purchase additional shares, including those who have
elected to reinvest their quarterly dividends as a method of
improving shareholder liquidity. In order to use the matching
service, the Company intends to require existing shareholders to
sell the shares at the offering price of $5.00 per share. (See
"Ownership Restrictions" section).
High Risk Borrowers Are Likely To Default. The Company intends
to acquire loans that are made to high or higher risk borrowers,
who in many cases have been refused loans or credit by banks and
other lending institutions. Persons indebted to the Company may
default on obligations due the Company for a variety of reasons,
e.g. divorce, illness, death, loss of job, business failure,
bankruptcy, government policy changes, or other uncontrollable
factors unknown to management at the time the persons become
indebted to the Company. Although the Company will take
precautions, there is no assurance that defaults and losses will
not occur in a portfolio of this type. The Company expects that
10% of the loans in the portfolio will be at least 30 days
delinquent at any point in time. (See "Description of the
Business" and "Loan Closing and Servicing" sections). In event
of a foreclosure and subsequent sale in which the net sale
proceeds are less than the loan principle, the Company would
experience a loss. (See "Loss on Liquidation of REO").
Dependence on CLS as its Management Company. The Company has no
employees other than officers and contracts with CLS to manage
its day to day activities. The Company will be heavily
dependent on CLS. The Company also relies on CLS to originate
sufficient loans for the Company to acquire for its loan
portfolio. The loans, once approved by the Board of Directors,
are without recourse. In event CLS would go out of business,
the Company would have to find a new management team and a new
source to purchase loans from which would likely be more
expensive and less experienced in this market. (See "Certain
Relationships and Related Transactions" section.)
Substantial Compensation to Management Company (CLS). The
Company has agreed to pay a fee of up to 2% annually of its
invested assets, paid on a monthly basis. The Board of
Directors of the Company has approved loan acquisition fees that
are paid from the loan proceeds to CLS that in some cases will
likely exceed the acquisition fee of six percent (6%) deemed
presumptively reasonable by the North American Securities
Administrators Association (NASAA) for all REITs offering shares
to the public in the United States and Canada. The Company has
approved the payment to CLS of an acquisition fee of up to 12%
of the loan amount each time a loan is placed in the Company's
portfolio. This fee is paid regardless of how the loan performs
in the future. The average fee is expected to be 4% to 6%. The
Company will recoup this fee only if and when the loan is
repaid. Additionally, since this fee will constitute the
substantial majority of the compensation received by CLS, it has
the incentive to advocate the rapid turnover of the Company's
portfolio. (See "Certain Relationships and Related
Transactions" section and "Conflicts of Interest" subsection
below).
Appraisal May Overstate Value of Collateral. Since the Company
bases its loan purchases on the value of real estate securing
the loan and to a lesser extent the borrower's ability to repay
the loan, the Company relies heavily on the appraisal. The
Company policy requires that all appraisals must be conducted by
a licensed and experienced appraiser. The majority of
appraisals will be done by independent appraisal companies, and
reviewed by in house appraisers from CLS. However, in some
cases, CLS may rely on the tax assessed valuation, and not
require an appraisal in event the loan to value ration is
extremely low. All appraisals are an estimate of value and may
overstate the actual value of the collateral when sold. In the
event of a default and subsequent foreclosure, the value of the
property may be significantly less than the appraisal and could
result in a loss of interest that would have been due on the
loan and a portion of the principal. (See "Description of the
Business" and "Financial Statements" sections.)
Market Risks. The ability of the Company to purchase suitable
mortgage backed securities and to generate income from the net
cash flows relating thereto, will be affected by various
factors, some of which are beyond the control of the Company.
The results of the Company's operations will depend on the
availability of mortgage backed securities to purchase. The
yields will depend upon the nature, terms and conditions in the
financial markets, which is impacted by the fiscal and monetary
policies of the United States Government and the Federal Reserve
Board, competition, regulation and other factors, none of which
can be predicted with any certainty. The Company activities
will be influenced by interest rates, which depend in large part
on the ability of the Company to respond to fluctuations in
market interest rates and to utilize appropriate strategies to
maximize returns to the Company while attempting to minimize the
risks.
Federal Income Tax Status. The Company intends to file its
Corporate tax returns as a REIT for 1998 and beyond. Investors
should note that the REIT status is contingent upon a number of
conditions. There is no assurance that the Company will meet
these conditions. If any one of the conditions are not met,
then the Company will be taxed as a "C" Corporation which would
have the effect of reducing or eliminating earnings per share
and dividend distributions. (See "Federal Income Tax
Considerations" section.)
Lack of Portfolio Geographic Diversification. The substantial
majority of the Company portfolio will be invested in loans
secured by real property, most of which will be located in
Western Washington. In event of a regional reduction in real
property values caused by a variety of uncontrollable market
forces, the security for the loans would be negatively impacted.
The borrowers could also be adversely impacted by any regional
recession causing an increase in delinquency rates. The Company
does not intend to expand its portfolio into other types of
investments for diversity purposes, e.g. stocks, bonds, mutual
funds, etc. In order to maintain its REIT tax status, the
Company is limited as to its investment options. (See "Federal
Income Tax Considerations" section).
Loss on Liquidation of REO. The Company has contracted with
CLS through its affiliate PSIG, to provide it with the custom
servicing agreement. Essentially, PSIG receives a "Rate Split"
to cover the cost of loans in default. (See "Description of the
Business Section"). In consideration of the rate split, PSIG
agrees to maintain the payments to the Company when the loans
are in default and initiate the collection action and advance
costs related thereto. (See "Summary of the Collection
Process"). In further consideration, PSIG or its affiliate,
retains the late charges and default interest when the borrower
brings the account current. In event of a foreclosure, PSIG
advances the costs necessary to complete the foreclosure, sells
the real property and pays the Company the principle balance and
any accrued but unpaid interest. However, there are no
assurances that CLS or its affiliates can maintain all payments
current, should the total default exceed 20% of the portfolio.
In that event, CLS and its affiliates have agreed to forfeit any
payments made to the Company. After the foreclosure, the
Company will then own the property and begin marketing the REO.
An eventual sale may be for an amount less than the principle
balance. In that event the Company would experience a loss.
Value of Collateral May Decrease. The real property granted as
security by the borrower may depreciate in value due to
conditions beyond management's control or the original appraisal
may have been inflated. The actual disposition value of the
property after foreclosure could be lower than the amount owed
at the time of foreclosure. In that event, the Company would
not recover its principle and interest owed. (See also
"Insurance" subsection below).
Market Interest Rates. Market interest rates may rise or fall
and the interest paid to the Company may not reflect the market
rates. When the Company has funds to reinvest, it may not be
able to do so at the same rate it was previously receiving.
This would negatively effect the earnings of the Company. (See
"Description of the Business" section).
Conflicts of Interest. This offering involves numerous
conflicts of interest, principally surrounding CLS and how it is
compensated. Specifically, CLS will receive the majority of its
compensation from the Company by selling loans to the Company.
This encourages CLS to sell shorter term loans to the Company
for its loan portfolio. There are conflicts of interest, since
the Secretary of the Company is also an officer of CLS and its
affiliates. In order to mitigate these potential conflicts of
interest, the company and CLS have adopted procedures to enforce
the company underwriting criteria. (See "Conflicts of Interest"
and "Procedure to Enforce Investment Policy") In addition, the
company could borrow and leverage new loans.
Leverage. While the Company does not currently plan to borrow
additional funds and working capital, the Board of Directors is
authorized to do so. If funds are borrowed and not invested at
a higher rate of interest, the Company may have losses. (See
"Description of the Business" section).
Usury. Washington and other states have usury laws which
establish ceilings on the interest rates that may be charged on
certain types of loans. In Washington the maximum rate is 12%,
but that rate is subject to several exemptions. Violation of
the usury provisions may substantially reduce or eliminate the
lender's recovery of the loan principal and interest. The
Federal Depository Institution of Deregulation and Monetary
Control Act of 1980 preempts state usury laws for federally
related mortgage loans, which are generally first mortgage loans
on a borrower's residence made by a qualified lender. Loans
made for commercial, agricultural or investment purposes are
generally exempt from state usury laws. The Company and CLS
rely on this federal preemption. All loans purchased by the
Company are expected to be exempt from the usury laws of the
state in which the property is located. (See "Legal
Proceedings" section.)
Insurance. In the event of a borrower default, it is customary
in the industry to initiate legal proceedings against the
collateral rather than against the borrower. The borrower is
required to maintain adequate insurance to cover the outstanding
loan balance. In the case where the real estate granted as
security for the loan is partially or wholly destroyed, the
Company would recover from the insurance proceeds. CLS has
policies and procedures in place to regularly check each loan.
However, through administrative oversight, CLS could fail to
follow up on any particular loan thus allowing the insurance
coverage to lapse. The Company could proceed against the CLS
errors and omissions policy. However, that policy may not be
insufficient to cover the total loss. Insurance coverage may
not be available to the borrower to insure the real estate in
which the Company has a collateral property interest
(uninsured). Further, the borrower could maintain insufficient
hazard insurance (underinsured) or the security is damaged by an
act for which no insuring promise was given (e.g. flood, arson,
terrorist act, etc.) (denial of insurance coverage). (See
"Description of the Business" section.)
Other Government Regulation. In 1994, Congress passed the Home
Ownership and Equity Protection Act (HOEPA), which became
effective on October 1, 1995. HOEPA defines certain loans,
including some loans originated by CLS which may be subsequently
purchased by the Company, as "high cost mortgages." Among other
provisions, the legislation prohibits high cost mortgages from
including certain terms, generally not applicable to the
Company. However, since the bill provides for increased civil
liability for violations and enables the borrower to assert such
claims against both the originator of the high cost loan (CLS)
and any persons to which the loan is assigned (the Company), it
is viewed as likely that some borrowers in default may raise the
defenses, whether the defenses are proved to have merit or not.
As of the date of this prospectus, no borrowers in default have
raised the provisions of HOEPA as a defense to loans originated
by CLS. (See "Legal Proceedings" section).
USE OF PROCEEDS
The Company has and intends to use the proceeds of this offering
to purchase new loans and participations in loans secured by
real property. The offering costs are anticipated to be at
least $42,500. The Company intends to compensate its President,
its professional advisors and the management company. The
Company does not expect to incur any other business expenses,
other than offering costs paid to regulators as disclosed
herein. (See "Summary of the Loan Acquisition process" and
"Description of the Business" sections.
DETERMINATION OF OFFERING PRICE
The Company has arbitrarily determined the offering price for
each share to be five dollars ($5.00). The Board of Directors
established the price per share at that amount since the Company
was formed and expects that the policy will remain unchanged.
The Company policy is to require that all authorized shares
shall be purchased from the Treasury of the Company for five
dollars ($5.00) per share. No stock has been or will be issued
for any other amount unless the Articles of Incorporation are
amended. The Company does allow the provision for purchasing
fractional shares rounded to the nearest hundred at the prorated
rate of $5.00 per whole share.
SELLING SECURITY HOLDERS & MATCHING SERVICE
Continued Registration Aids Shareholder Investment Liquidity.
Each investor must view the purchase of the Company stock as a
long term investment. However, the Company has recognized that
due to circumstances beyond the shareholder's control, a small
percentage of the shareholders will desire to liquidate all or a
portion of their investment at some future date. The Company
has no experience with investors desiring to liquidate their
investment in order to make accurate projections. Since the
Company cannot redeem any shareholder's shares, the Company will
make every effort to continue to register its stock for sale to
the public and to provide a matching service to its shareholders
in order to assist them in liquidating their investment when
they desire to do so.
Matching Service For Existing Shareholders to Sell Their Stock.
In the event that an existing shareholder desires to liquidate
all or a portion of their investment, the Company acts as a
facilitator on a first come, first serve basis for the benefit
of the selling shareholder. The Company will not actively
promote the matching service nor will it receive compensation in
any form for doing so. The procedures for using the matching
service are as follows:
1. Upon request, the Secretary will provide any shareholder with
a list of all existing shareholders and, in particular, those
who are most likely to be interested in purchasing the shares.
2. Upon request, the Secretary will allow an existing
shareholder to sell his or her stock to any new or existing
shareholder before the Company sells its stock to that new or
existing shareholder.
3. The Company accepts no fees for the transaction and acts only
in an agency capacity.
4. In event the Company determines that a given shareholder was
merely attempting to invest funds for a short term investment,
or is attempting to sell the stock with the intent of later
repurchasing stock, the Company reserves the right not to assist
that selling shareholder and to deny that investor the ability
to purchase additional shares. (See "Plan of Distribution"
section.)
PLAN OF DISTRIBUTION
The Company plans to distribute the stock itself through the
office of the Secretary of the Company. The most likely
investors are existing shareholders and investors who have
purchased loans from CLS and realtors who belong to the RE/MAX
Real Estate system. No commission is being paid to any selling
agents.
No Outside Selling Agents. The individuals who are acting as
selling agents are corporate Officers, who may be contacted
during business hours. The Company President, Mr. William R.
Sanden, may also be contacted at 14609 22nd Court S.E., Mill
Creek, Washington, 98012 or by telephone at (206) 448-0408.
Shareholder Ownership Restrictions. In order to preserve the
Company's tax status as a REIT, Company policy effectively
restricts any shareholder from owning more than 9.8% of the
Company's outstanding shares. The Secretary may void any
transfer of shares that places the Company's REIT tax status in
jeopardy. (See "Federal Income Tax Considerations" section.)
Investor Suitability Standard. The Company has established
suitability standards which require each individual investor to
have, (1) a net worth of at least Twenty Five Thousand Dollars
($25,000), or (2) an annual income of at least Thirty Thousand
Dollars ($30,000) and a net worth of at least Ten Thousand
Dollars ($10,000), and (3) that money invested in the Company is
not required to be used in support of the family budget for
necessities, other business needs, to repay other obligations,
or to fund other investments in the near future. All
computations of net worth shall exclude the value of the
investor's personal residence, its furnishings and automobiles.
By executing the Subscription Agreement, an investor represents
to the Company that the Investor Suitability Standards are met
at the time the investment is made. The Investor Suitability
Standard does not apply to any donee of a gift or beneficiary of
a Trust. The Company will maintain such suitability records
until the Company terminates its operations. (See "Market for
Common Equity and Related Transactions" section.)
Long Term Investment - Funds May Not be Accepted. An investor
should only acquire the common stock issued by the Company as a
long term investment. Investments or reinvestments of funds
from an investor, who attempts to "park funds" in the Company
shares for a short term investment, will not be accepted. In
addition, because of the various risks, the tax orientation and
the relative lack of liquidity of securities of this type of
investment as compared to other investments, each investor must
be able to appraise themselves of and assume the risks inherent
in the purchase of common stock. All investors, with the
assistance of their investment advisor, must evaluate whether
this investment is suitable based upon their own investment
objectives, financial situation, and needs.
Funds from Stock Sales are Invested in New Loans. The Company
intends to invest funds from stock sales into loans that are
secured by real estate. The Company expects to purchase new
loans and participations in loans that meet its investment
policies from CLS. At present, CLS has the capacity to sell
the
Company up to Two Million Dollars ($2,000,000) per month in
loans that meet the Company's Investment Objectives and
Policies.
Board of Directors May Delay or Deny Acceptance of Investors
Funds. In event that the Company is attracting significantly
more investment proceeds from new investors or from paid off
loans than the Company can invest into new loans, the Board of
Directors may delay or deny acceptance of investor funds as
frequently as necessary until the new investor proceeds can be
absorbed into new loans. No investor funds will be escrowed or
otherwise accepted for a future purchase.
LEGAL PROCEEDINGS
General. The Company is not presently involved, nor does it
expect to be involved, in any legal proceedings, except for
collection actions on loans that are in default. Since the
Company is involved in purchasing loans secured by real
property, it will, by its very nature, always be involved in
activities to enforce collection on past due loans, including
but not limited to Judicial and Nonjudicial Foreclosure of Deeds
of Trusts, Mortgage Foreclosures and Real Estate Contract
Forfeitures. Counsel for the Company is of the opinion that
collection actions on delinquent accounts does not constitute
pending or threatening litigation under Financial Accounting
Standards Board Opinion Number 5 (FASB 5) and is properly
categorized as routine litigation incidental to its business.
Usury and Federal Preemption of State Law. The Company loan
portfolio may contain loans that exceed the usury limits for
consumer loans made to Washington residents secured by real
property located in Washington. The position of Counsel for the
Company is that the Federal Depository Institution of
Deregulation and Monetary Control Act of 1980 preempts state
usury laws for federally related mortgage loans. No Washington
State Appellate Court or Federal Court located in Washington has
ruled directly on the issue. However, there are an abundance of
rulings from other states and other Federal Courts on this issue
supporting counsel's position. Generally, federally related
mortgage loans are first mortgage loans on a borrower's
residence made by a qualified lender. The position of counsel
is that CLS is a qualified lender. The position of counsel for
the Company is that there will likely be no unasserted claims
against the Company on this issue that are probable of assertion
and if asserted would have at least a reasonable possibility of
an unfavorable outcome.
Home Ownership and Equity Protection Act. In 1994, Congress
passed the Home Ownership and Equity Protection Act (HOEPA),
which became effective on October 1, 1995. HOEPA defines
certain loans, including some loans originated by CLS and
subsequently purchased by the Company, as "high cost mortgages."
Among other provisions, the legislation prohibits high cost
mortgages from including certain terms such as prepayment
penalties, balloon payments due in less than five years,
increases in the rate of interest after default ("default
interest"), negative amortization, holding back more than two
months of payments from the loan amount to make monthly
payments, and charging points on refinancing through the same lender. The
bill also provides for increased civil liability for violations
of HOEPA and enables the borrower to assert such claims against
both the originator of the high cost loan (CLS) and any persons
to which the loan is assigned (the Company). Since the loans
purchased by the Company are not likely to contain those certain
terms precluded by HOEPA, the impact is viewed as minimal. The
Company will monitor the loans that are purchased for the
purpose of compliance with the terms of this act.
Investment Company Act of 1940. The Board of Directors and the
Company intend to conduct the operations of the Company so that
the Company will not be subject to regulation under the
Investment Company Act of 1940 (the "Investment Company Act") by
virtue of the exception contained in Section 3(c)(5)(C) thereof.
Accordingly, the Company does not expect to be subject to the
restrictive provisions of the Investment Company Act nor will
the Company redeem any shares from an existing shareholder as
discussed elsewhere in this Prospectus.
Other Actions. The Company and its counsel are not aware of any
proceeding that a governmental authority is contemplating
against the Company. However, the Company can expect that its
financial records will be reviewed or audited by the Internal
Revenue Service for correctness and compliance with the Internal
Revenue Code regarding its REIT tax status. (See "Federal
Income Tax Considerations" section.) The Company also expects
that its operations and financial records will be reviewed by
Federal and or State Security Regulators regarding its
compliance with Security Regulations.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
There are two (2) officers in the Company, namely a President
and a Secretary. The President functions as the Chief Executive
and Financial Officer and the Secretary functions as the
Shareholder Relations Officer. There are five (5) members of
the Board of Directors, four (4) of which are considered outside
independent members. Each Board Member must have at least three
(3) years experience with financial institutions and
investments. All current Board Members have more than three (3)
years experience. Each director is elected for a 1 year term at
the annual meeting by vote of the shareholders or until they are
replaced. The shareholders by majority vote can replace a
director at a special shareholder meeting. Current directors
are expected to complete their term of office on December 31,
1998, or until they are duly replaced by vote at the annual
meeting. Officers serve at the pleasure of the Board of
Directors, and can be replaced at any time, by majority vote at
a regular or special meeting.
Officers and Directors of the Company. The following persons
are the Officers of the Company and are also members of the
Board of Directors.
Name Age Title City/State
1) William R. Sanden *** 46 President Mill Creek, WA
2) Melvin L. Johnson *** 40 Secretary Edmonds, WA
3) Ralph Ripley, Jr. * 61 Director Mill Creek, WA
4) Jerry Vanhook ** 48 Director Mill Creek, WA
5) Vicke L. Swanson * 41 Director Lake Stevens, WA
6) Joe Zimmer * 38 Director Seattle, WA
7) Sue Cooper * 53 Director Everett, WA
* Denotes Independent Director
** Denotes an Inside Director
*** Denotes Officer who is not a Director
Background & Education information regarding Officers and
Directors of the Company. The following section contains the
name, title, employment history and education of all key
officers and all directors of the Company.
(1) William R. Sanden is the President. He has over 25 years
experience in the employee benefits field, specializing in
pension, profit-sharing and 401(k) plans and self-funded health
and welfare plans for large corporate clients. For the past 2
years, Mr. Sanden has been the President of Fortune Management,
Inc., an employee benefits consulting firm, located in Seattle,
Washington. Previously, Mr. Sanden served as Vice-President of
Marketing for National Associates, Inc., N.W. for 17 years.
Mr. Sanden is a graduate of the American College at Bryn Mawr,
Pennsylvania. Mr. Sanden is a Certified Life Underwriter. He
is also active in several professional associations including
the National Association of Health Underwriters, Western Pension
and Benefits, Certified Life Underwriters, and Employee Benefits
Planning Association. Mr. Sanden is also a Founder and Director
of The Bank of Edmonds.
(2) Mel Johnson is the Secretary. He has been employed in a
variety of banking positions with First Interstate Bank from
1981 to 1989. He graduated with a degree in Education from
Central Washington University in 1980. He presently is the
Vice President and a shareholder in CLS Financial Services,
Inc., the management company. He has been with CLS since 1990.
He is also an officer and shareholder of Puget Sound Investment
Group, Inc., an affiliated company.
(4) Ralph Ripley. Jr. is a Director. He has over 35 years
experience in property investments as well as ownership of a
construction, development, and residential real estate sales
company. Mr. Ripley is currently and well over the past 5
years, the President of two large real estate brokerage firms,
RE/MAX Canyon Creek Realty in Bothell, Washington and RE/MAX
Masters, Inc. in Everett, Washington. Mr. Ripley also serves as
trustee for the Profit Sharing Plan for RE/MAX Canyon Creek
Realty and manages the real estate investments for the plan.
(5) Jerry Vanhook is an Inside Director because he is also the
President of the Management Company, CLS. He is and has been
President of CLS since its inception in 1990. Prior to that,
Mr. Vanhook worked for CLS Mortgage, Inc. in Spokane from
February 1984 until November 1989, in which he was responsible
for acquiring and selling similar securities. He has been
employed in several management positions with Consumer Financial
Companies, Mortgage Banks, and Credit Unions since 1969.
(6) Vicke L. Swanson is an Outside Director. She has over 12
years experience in the investment field, specializing in money
management for personal trusts, high net worth individuals,
pensions, profit sharing, and 401(k) plans. Ms. Swanson is
currently a general partner in a financial services company in
Everett, Washington, advising realtors on their profit sharing
investments and assisting individuals in developing their
personal financial plans.
Previously, Ms. Swanson served as Vice President & Sr.
Portfolio Manager for an international Japanese Bank. A
graduate of the University of Minnesota, Ms. Swanson is a
Chartered Financial Analyst. She is a member of the Association for
Investment Management and Research and The Seattle Analyst Society. Ms.
Swanson is also a CPA qualified candidate and is currently pursuing a
Masters Degree in Taxation. Ms. Swanson made All-American in 1980 and was
inducted to the University of Minnesota Hall of Fame in 1985.
(7) Joe Zimmer is an Outside Director. He is a dentist and a
university instructor. He is a personal investor with
experience in the stock market and real estate market. He is a
graduate of the University of Washington and has practiced
dentistry in Seattle for the past ten years.
(8) Sue Cooper is an Outside Director. She has 18 years
experience as an investment manager for retirement plans. She
has been personally investing in Mortgage Paper Securities with
CLS Financial Services, Inc. since 1990. She has served on the
Everett School Board since 1984 and on boards and in leadership
positions of other community organizations (United Way, Big
Brothers/Big Sisters, Campfire Boys & Girls, LINK
- -school/business partnership, League of Women Voters). She is a
former public school teacher. She graduated from the College of
Wooster, Wooster, OH in 1966 with a B.A. in psychology/biology
and received a M.A. in education from Eastern Michigan
University, Ypsilanti, Michigan in 1968.
Director Responsibilities. The Company has incorporated the
NASAA Statements of Policy regarding the management of REITs
into its Bylaws. Board Members are referred to as Trustees in
the NASAA section regarding REITs. The Company and this
Disclosure document interchangeably refer to the Trustees as
Board Members. A Board Member must have at least three years of
experience in financial markets. The Bylaws require that a
majority of the Board consist of independent directors. A
director is independent if he is not, directly or indirectly,
affiliated with CLS, employed by, having a material business,
professional relationship or ownership interest in, or serving
as an officer or director of CLS or an affiliated business
entity of CLS.
Independent Director Responsibilities. The independent
directors are required to monitor the relationship of the
Company with CLS, to review and approve all forms of
compensation paid to CLS or its affiliates, to review the
Company's portfolio to insure that all loans comply with the
Company's investment objectives and policies, to declare
quarterly dividends, to provide Annual Reports to the
shareholders and provide the management with direction regarding
the day to day operations of the Company.
Board approves all loans and fees paid to CLS. The full Board
reviews and approves all loan acquisitions and fees paid to CLS
on a quarterly basis. A majority of the Independent Directors
must approve all loans and fees paid to CLS. The full Board of
Directors has established a committee, consisting of any two
Independent Directors and the President, to review and approve
all loan acquisitions that exceed $200,000 prior to the purchase
of the loan. The Committee may approve, deny or refer the loan
acquisition to the full Board. Since all loans will likely be
purchased from CLS, the Board has the option of approving or
reversing any loan acquisition that is deemed not in compliance
with the Company Investment Policy at the quarterly meeting.
(See "Investment Objectives and Policies" and "Conflict of
Interest" sections).
Quarterly Reports. The Company will provide Quarterly Financial
Reports to the shareholders along with their dividend checks and
statements of stock account balances. The Quarterly Financial
Report will include a Summary Letter signed by the President,
the Unaudited Quarterly Financial Statements which includes the
Income Statement for the Period, the Balance Sheet, the Loan
Portfolio Report, the Report on Company Owned Property and
disclosures of all related party transactions. The Board of
Directors has mandated that the quarterly dividend checks be
distributed to the shareholders with the Quarterly Report not
later than 30 days after the close of each calendar quarter.
Annual Reports. Each year, the Board of Directors will retain a
CPA firm to audit the Company's Financial Statements. The Board
intends to retain the firm of Nelson Watson and Erickson, in
Seattle, Washington to audit the Company records at year end
1998. After receiving the Audit and Management report, the
Board will prepare its Annual Report which will be mailed to the
shareholders within 120 days after year end and at least 30 days
before the Annual Shareholder Meeting. It will contain a
Special Report to the shareholders from the Board of Directors,
the Audited Financial Statements and the Notice of the Annual
Shareholder Meeting and the agenda. The reporting is intended
to conform to the NASAA Statements of Policy regarding REIT
disclosure guidelines and Generally Accepted Accounting
Principles ("GAAP"), Accounting Research Bulletin ("ARB") number
43 Chapter 1A and Financial Accounting Standards Board
("FASB") number 57 & 96.
Board Member and Officer Compensation. The Board of Directors
are not compensated for attending regular quarterly or special
meetings nor have they been compensated for out of pocket
expenses incurred in connection with attendance at the meeting.
The Board of Directors are not prohibited from paying the
Directors to attend meetings and reimburse out of pocket
expenses, provided said payments are approved by the full Board
of Directors. The President's annual compensation is based on
.25% (25 basis points) of a portion of the value of the
outstanding and issued stock. (See "Compensation of Officers")
The officers of CLS are indirectly compensated for their
services as officers, directors, and shareholders in CLS
Financial Services, Inc. and its affiliates. (See "Certain
Relationships and Related Transactions" section).
No Employees. There are no employees other than the President
and the Secretary. The Company expects to contract for legal
and accounting services.
Involvement in Certain Legal Proceedings. The Company, its
officers and directors, its advisors and affiliates have never
filed a Petition in Bankruptcy or Insolvency of any kind. No
officer or director has been convicted in a criminal proceeding
or is the subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses). No officer or
director is subject to any order, judgment or decree limiting
his involvement in any type of business, securities or banking
activity. No Officer or Director has been found to have
violated any federal or state securities or commodities law.
THIS SPACE INTENTIONALLY LEFT BLANK
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All Directors must be Shareholders or Officers in the Company.
However, no Officer or Director can own more than 9.8% of the
outstanding and issued stock of the Company. Furthermore, no
individual shareholder can own more than 9.8% of the issued and
outstanding stock of the Company. Under the Internal Revenue
Code, no five (5) persons can control more than fifty percent
(50%) of the outstanding and issued stock. The Company policy
effectively prohibits any shareholder from owning more than 9.8% of the
outstanding and issued stock. (See "Federal Income Tax Considerations,"
and "Certain Relationships and Related Transactions" sections.)
Until the offering becomes effective, no shares will have been
issued to the public. Board members are not precluded from
purchasing stock in the Company.
DESCRIPTION OF SECURITIES
The securities of the issuer being offered is common equity
stock in a Washington Corporation. All stock issued and
outstanding will be issued for Five Dollars ($5.00), the
arbitrary offering price determined by the Board of Directors,
which is also the par or stated value of the stock. The
Articles of Incorporation require all stock to be issued for
$5.00 in cash consideration only. (See "Market for Common
Equity and Related Transactions" section and its subsection
"Dividend Reinvestment Plan").
The dividends will be declared on a per share basis and paid
quarterly within thirty (30) days after the end of the quarter.
(See "Market for Common Equity and Related Transactions" section and
its subsections "Distributions of Dividends".)
The stock has all rights allowed at law, including equal voting
rights, except that there is no cumulative voting. There are no
preemptive rights. There are limitations applicable to the
percent of ownership that any individual person may acquire.
(See "Plan of Distribution" and "Federal Income Tax
Considerations" sections).
INTERESTS OF NAMED EXPERTS AND COUNSEL
The legality of the stock issued herein and certain securities
and income tax matters have been passed on by DOUGLAS M.
O'COYNE, SR., Attorney at Law, of the law firm of O'Coyne &
Phillips, P.S., with offices at 9 South Washington, Suite 612,
in Spokane, Washington, 99201 and by RICHARD A. EKMAN, Attorney
at Law, of the law firm of Ekman, Bohrer & Thulin, P.S. with
offices at 220 West Mercer Street, Suite 400, in Seattle,
Washington 98119.
The Financial Statements of the Company will be audited by the
accounting firm of Nelson Watson & Erickson, with offices at 200
1st Ave West, in Seattle, Washington, 98119. The auditors will
be paid on an hourly fee basis.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
In general, the Directors are accountable to the shareholders as
fiduciaries and are required to perform their duties in good
faith and in a manner each Director believes to be in the best
interest of the Company, with such care, including reasonable
inquiry, as a prudent person in a like position would use under
similar circumstances. Accordingly, the Directors must
supervise the relationship of the Company with CLS in the
performance of its duties under the Management Agreement, and
must determine that the compensation paid directly and
indirectly to CLS is reasonable in relation to the nature and
quality of the services performed. (See "Certain Relationships
and Related Transactions" section).
The Company has chosen, under its Articles of Incorporation and
Bylaws to indemnify its Directors, Officers, employees and other
agents against certain liabilities incurred in connection with
their service in such capacities. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 (the
"Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company is aware that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of
the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection these securities being registered, the
Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General. The Company has elected to contract with CLS and its
affiliates to perform all of its business functions, rather than
own any equipment, rent any facilities or hire employees. The
Company has contracted with CLS since its inception to perform
the day to day management of the Company and to provide it with
loans to purchase for its portfolio under the Management
Agreement, when the Company becomes operational. The Company
will rely on PSRESG and PSIG to service those loans. The
Company also retains the services of professionals for
accounting, legal and consulting work.
Compensation of Officer. The President's annual compensation is
based on 1/4 of 1% (.25%) (25 basis points) of the value of the
assets of the Company attributed to the stock ownership of
RE/MAX brokers, agents and employees. Such salary may be
increased or decreased from time to time during the period of
employment. The employment agreement may be terminated by
either party without cause with a minimum of sixty (60) day
notice.
Management Relationships. CLS is paid a management fee for
managing and performing the day to day operations of the
Company. (See "Summary of Management Agreement" below). CLS is
also paid a loan acquisition fee from the loan proceeds that the
borrower is responsible to pay. (See "Summary of Loan
Acquisition Process" below). CLS is also paid a rate split and
its affiliate PSRESG, is paid a servicing fee to service the
portfolio and collect on delinquent accounts. PSIG manages the
foreclosure process and the REO by the Company. (See "Summary
of Collection Process").
Loan Closing and Servicing Relationship. PSRESG is paid a
closing fee by the borrower to close the loan, escrow the funds
and service the loan in the escrow account over its term. The
borrower pays the fee, which is customarily under $100 per year.
In event a collection action would be necessary, as part of the
escrow instructions, PSRESG initiates the collection action on
the defaulted loans, in which case it receives the default
interest and the late payments as its compensation for this
service to the Company. The borrower pays the service fee, the
late fee and the default interest. The Company is not charged
any collection fees by PSRESG or PSIG. See "Summary of the
Collection Process" below.
Prohibited Lending Practices. The Company has a policy of
prohibiting the originating or acquiring of any loans made to
any of the Officers, Directors, Shareholders, or other key
personnel of the Company, including making any loans to CLS, its
affiliated companies or its employees.
Summary of the Management Agreement. The Company has executed a
Management Agreement with CLS, with its principal office at 4720
200th Street S.W., Suite #200, Lynnwood, Washington, 98046. The
contract is expected to be renewed in 1999 and thereafter.
The Company has contracted with CLS to provide for all of its
administrative expenses generally associated with managing a
business. CLS pays all expenses typically associated with
maintaining an office and has agreed to provide sufficient
office space, equipment and personnel to accomplish the day to
day function of managing the Company's business as it grows.
CLS is not reimbursed for any administrative costs. CLS is
responsible to provide sufficient loans for the Company to
purchase and through its affiliates, to service the loans and
manage and sell real properties acquired through the foreclosure
process. (See "Summary of the Loan Acquisition Process" below).
CLS is not responsible for the payment of taxes, securities
offering costs, professional accounting fees, legal fees,
property management fees, printing costs or costs directly
related to shareholder relations and for collection costs on
loans not covered in the custom servicing agreement. In event
of a dispute over whether an expense is covered or not, the
Board of Directors must resolve the issue through negotiation or
through mandatory arbitration as set forth in the agreement.
The Company is contractually responsible to pay CLS an annual
management fee up to two percent (2%) of the average invested
assets or 25% of net income, whichever is greater, paid on a
monthly basis. This amount is deemed presumptively reasonable
by the NASAA Statement of Policy. Average invested assets for
any period is the average of the aggregate book value of the
assets of the Company. The Board of Directors will approve the
fee on a quarterly basis.
When CLS sells the loan to the Company, it may retain a portion
of the interest rate, the "rate split," which is part of the
custom servicing agreement. Neither CLS nor the Board of
Directors are obligated to cover each loan with the Custom
Servicing Agreement. The Board of Directors may purchase loans
from another mortgage company, in which case CLS would not be
obligated to cover the loan with the Custom Servicing Agreement.
In addition, the Board of Directors may elect not to cover
certain loans when the risk is not deemed sufficient as to
warrant coverage. In other cases, CLS may not offer coverage on
a particular loan due to unforeseen factors. The present
intention of the Company and CLS is that all CLS originated
loans would be covered under the Custom Servicing Agreement.
CLS and its affiliates then service the loan. CLS may assign
the "split" to PSIG or PSRESG. In event of default, CLS or an
affiliated Company makes the payment due the Company, keeps the
default interest and costs of collection, and forecloses the
property. The Board of Directors is required to continually
monitor the amount of rate split paid to the Company as
commercially competitive, fair and reasonable under the
circumstances. The purpose for the rate split is to reduce the
risk of impact to the Company on defaulted loans (See "Summary
of the Collection Process" section). The amount of the split is
determined on a case by case basis on each loan. The annual
average is expected to be 1 - 2% on all loans in the portfolio.
There is no guarantee that CLS and its affiliates will be able
to continue the custom servicing agreement in event of a default
on a substantial portion of the portfolio. In the event that
the dividends paid is less than 2% per quarter (8% annually),
then CLS or its affiliate(s) will not be entitled to any rate
split nor any management fee for that quarter. The contractual
agreement requires that any dispute be arbitrated in accordance
with the rules of the American Arbitration Association with
Jurisdiction being in the State of Washington and Venue being in
Snohomish County.
Summary of the Loan Acquisition Process. The Company does not
directly engage in the loan origination process. The Company
has adopted the policy of purchasing loans from CLS. At the
closing of the loan purchase, the promissory note is indorsed
over to the Company and the security agreement, the Deed of
Trust, Real Estate Contract or the Mortgage is assigned to the
Company. The assignments are then recorded in the county in the
state where the real estate is located and the promissory note
is stored in a fire proof area with the escrow company. The
Company is free to purchase loans originated by other mortgage
brokers, however it is not expected to do so based upon the
present loan origination capacity of CLS. The Company is not
expected to have the overhead expenses commonly associated with
the loan origination process, e.g. advertising, maintaining
office space, maintaining and training personnel, answering
telephone inquiries, screening borrowers, reviewing the
security, closing the loan, setting up the escrow, etc. The
Company is reliant upon CLS and it's affiliated companies to
perform the entire loan origination, closing and escrow
function. CLS is paid a loan acquisition fee (sometime referred
to as a loan origination fee or a discount fee) from the loan
proceeds at closing. The Borrower is legally obligated to repay
the principal, which includes the acquisition fee and other loan
costs, over the term of the loan. In effect, the Company does
not pay any loan acquisition fee.
CLS is a registered Mortgage Broker Dealer in the State of
Washington and has been in business since 1991. CLS sells whole
and fractionalized obligations secured by real estate to
Washington loan purchasers, who are typically sophisticated
individuals who seek a higher return on their investments than
is available through established markets. CLS does limited
advertising for investors. However, there is no well
established market for investors of the type of loans that the
Company originates. The investors of fractionalized interests
receive a General Offering Circular and a Specific Offering
Circular disclosing information about the loan. The Company
claims an exemption from Federal securities laws under Section
3(a)(11) of the Act and Rule 147. CLS meets the requirements of
a Federally Related Mortgage Lender under the Monetary Act of
1980. (See "Legal Proceedings" section). CLS brokers and
originates several different types of loans to several different
types of borrowers. In the case of loans that are ultimately
sold to the Company, CLS will actually originate the loan to the
Borrower(s) using its line(s) of credit.
PSRESG or an independent closer will close the loan, recording
all legal documents as appropriate and disbursing the funds.
PSRESG then sets up the escrow account and accounts for all loan
payments. The interest will then be sold to the Company. The
Company may purchase the whole loan or just a part of the loan,
which is referred to in the industry as a participation. In a
participation, a portion of the loan would be sold to the
Company and the balance to other private or institutional
investors, under the same terms that the Company receives.
The Board of Directors has approved a loan acquisition fee of up
to 12% to be paid to CLS from the loan proceeds, subject to a
quarterly review. The fee is actually paid by the borrower over
the term of the loan. The loan acquisition fee is negotiated by
the Borrower and CLS. The average fee is generally 4% to 6% of
the loan principal. The Company and CLS have implemented a
review system to account for and approve the loan acquisition
fees paid to CLS on a quarterly basis, as is required in the
NASAA Statements of Policy regarding REITs.
The loan acquisition fee paid to CLS on some loans may exceed
the 6% fee that is generally presumed reasonable by the NASAA
Statements of Policy. As specifically provided for under the
NASAA Statements of Policy, the Board of Directors are required
and will likely approve the acquisition fee paid to CLS as being
commercially competitive, fair and reasonable under the
circumstances. The factors used in forming the Board's
determination are as follows: 1) The borrower is legally
obligated to repay the fee, which is included in the loan
principal, over the term of the loan; 2) CLS fronts all of the
loan origination costs associated with the marketing effort; 3)
CLS originates and actually funds the loans using its own
line(s) of credit; 4) An affiliated company services the loan
in event of a default.
Summary of the Collection Process. The majority of the loans in
the Company portfolio are escrowed with an affiliated company of
CLS, namely PSRESG. There is a separate escrow agreement for
each loan which is executed at loan closing. The borrower pays
PSRESG an escrow set up fee at loan closing and an annual fee
during the term of the loan. In the event a collection action
becomes necessary, PSRESG initiates the collection action on the
defaulted loan, in which case it receives the default interest
and the late payments as its compensation for this service to
the Company, when the payment is made.
In the event the default of 60 days from the payment due date,
and provided no acceptable repayment arrangement is agreed upon,
then PSIG begins making the payment(s) due the Company, curing
any arrearage, and begins the process to foreclose on the
property according to state law pursuant to the custom servicing
agreement. Essentially, PSIG brings the loan current and pays
all costs of Nonjudicial Deed of Trust or Judicial Foreclosures
and Real Estate Contract Forfeitures, including attorney fees.
In the event that a third party purchases the property at the
foreclosure sale, then the outstanding principle on the loan,
plus interest, is paid to the Company. In event that PSIG would
be the successful bidder, then PSIG will continue to make the
payments due on the note to the Company. Upon a private sale by
PSIG, the loan will then be paid off and PSIG will retain any
excess funds from the sale.
The Company expects that 10 - 15% of the loans in the portfolio
will be delinquent at any point in time. The Company expects
that PSIG will maintain the payments current on those loans
covered by the custom servicing agreement. The Company intends
that all loans will be covered by the custom servicing agreement
with PSIG. In event that PSIG fails to make any payment on a
loan covered by the custom servicing agreement, then PSIG will
forfeit any payments made, any rate split payments (held by CLS)
and any interest in the foreclosed property. As a result and in
that event, the Company expects that it will experience payment
delays and some losses on foreclosed property sales.
Management Compensation. The President is compensated based on
a certain portion of the outstanding stock at the annual rate of
.25% (twenty-five basis points). The Company will pay CLS a
management fee monthly and CLS will be paid loan acquisition
fees at closing from the proceeds of loans funded by the
Company. CLS retains the rate split over the term of the loan.
PSRESG will be paid an annual escrow fee, the late payment
charges and default interest for collection action on the
delinquent loans by the borrower.
(1) Payment of Management Fees: The full Board of Directors has
approved the Management Agreement and approves all management
fees paid to CLS in each quarterly director meeting. The
Company will pay CLS an annual fee to manage the operations and
cover the overhead costs of the Company. This annual fee will
be based on 2% of the total balance of all loans, contracts, and
deposits outstanding and payable on a monthly basis not later
that the 5th day of the following month at the rate of 1/12 of
2% of the total balance of the loans, contracts, and deposits
outstanding at the end of each month.
(2) Payment of Loan Acquisition Fees: The Board of Directors of
the Company has approved loan acquisition fees that are paid
from the loan proceeds to CLS that in some cases may exceed the
standard loan acquisition fee deemed presumptively reasonable by
the North American Securities Administrators Association (NASAA)
for all REITs offering shares to the public in the United States
and Canada. CLS charges the borrower the same fee, regardless
of whether the loan is sold to the Company or other loan
purchasers. The full Board of Directors will approve the loan
acquisition fees paid to CLS in each quarterly director meeting.
(3) Payment of Loan Closing, Escrow and Late Fees: CLS funds
loans on its own line(s) of credit, then packages and sells the
loan to the Company shortly thereafter. An escrow set up fee
and an annual fee will be paid by the borrowers over the term of
the loan to PSRESG. In addition PSRESG retains all late fees
and default interest that is actually paid by the borrowers
whose accounts are delinquent. CLS or its affiliate do not
charge the Company for collection activity or for the escrow
fees. The borrower pays all fees due on the Escrow. In event
that a delinquent loan is turned over to an attorney for
collection, the Company is ultimately responsible for all costs
associated with the collection action if the loan is not covered
by the custom servicing agreement. The full Board of Directors
approve all fees and collection costs at each quarterly director
meeting.
(4) Fees Projected to be Received by CLS: CLS will receive a
management fee, a rate split and loan acquisition fees as a
result of this offering. The management fee is paid by the
Company each month. The contract amount is two percent (2%) of
the invested assets, calculated on an annual basis and paid
monthly. The rate split is paid by the borrower and is included
in each payment. The loan closing, escrow fees, late fee and
default interest are paid to an affiliated company, in
consideration for maintaining the payment current on each loan
so serviced. In the event that more that 20% of the portfolio
is in a payment default status, there is no guarantee that CLS
and its affiliates will continue to maintain the payments
current. Other than forfeiting all rate splits, default
interest and late fees on the defaulted loan, CLS and its
affiliates are not contractually obligated to keep the payments
current.
Conflicts of Interest. The Company has agreed to pay CLS an
annual fee (in monthly installments) to manage the operations
and cover the overhead costs of the Company. CLS also receives
a loan acquisition fee on each loan that is sold to the Company.
CLS charges the borrower the same fee, regardless of whether
the loan is sold to the Company or other loan purchasers. CLS
retains the rate split, which is determined at the discretion of
CLS based on the risk of default. PSRESG receives a closing fee
when the loan is closed and escrow, and collection fees as a
result of servicing the loans. (See "Management Agreement and
Compensation" above.) The management fee and the loan
acquisition fee are expected to be less than the amount deemed
presumptively reasonable by the NASAA Statements of Policy. The
acquisition fee will constitute the bulk of the compensation
received by CLS, and is paid regardless of the future
performance of the loan. Due to this fee structure, CLS has an
incentive to encourage the acquisition of shorter term loans and
to generally advocate a more rapid turnover of the portfolio.
CLS is responsible for acquiring loans for the Company and for
managing the Company's day to day affairs under the management
contract. CLS also sells loans, which it has originated, to
clients other than the Company, and may hold loans for its own
account. CLS also determines the amount of the rate split. Due
to these relationships, CLS may not always place the most
profitable or otherwise desirable loans with the Company.
Additionally, CLS may recommend the percentage of the loan
placed in its respective clients' portfolios. If the Company
does not hold a majority percentage of the loan, it will be
unable to control the actions taken by the investor group with
respect to the loan.
In an attempt to mitigate the conflicts of interest, CLS and the
Company have adopted the following criteria:
1. CLS will determine whether the loan is consistent with the
Company's Investment Policy prior to advancing Company loan
proceeds;
2. All loans are approved by the Board of Directors at each
regularly scheduled quarterly meeting;
3. CLS has agreed that the Board of Directors may reverse any
loan purchase if the Board determines that the loan does not
meet the Company's Investment Policy set forth in the Bylaws or
as made more restrictive by the Board;
4. All loans in which the Company's investment exceeds $200,000
are approved in advance by the Special Loan committee composed
of any two Independent Directors and the President or by the
full Board;
5. Where possible, CLS will place an entire loan with the
Company or it will place a loan participation which constitutes
a controlling interest in the loan.
DESCRIPTION OF THE BUSINESS
Form and Year of Organization. The Company was incorporated in
the State of Washington on June 19, 1997. After selling a
minimum of $350,000, the Company intends to begin operations in
early 1998. The Company intends to pass through all net profits
to its shareholders, without the Company paying any Federal
Income Tax.
REIT Status. The Company intends to qualify and be taxed as a
REIT. The REIT status is contingent upon a number of
conditions. There is no assurance that the Company will meet
these conditions. The Company will allow shareholders to
purchase additional stock by "rolling over" or "reinvesting"
dividends into stock. (See Section "Requirements for
Qualification as a REIT" below.)
Business of the Company. The Company can best be described as a
purchaser of above market rate loans that are well secured by
real estate. The Company intends to purchase loans with an
annual interest rate of 11% to 14%, with a term of 15 to 20
years and a balloon payment due in 5 to 7 years. The loans will
be purchased from CLS. The borrowers will generally lack the
credit rating necessary to qualify for the lowest market rate
financing but are willing to pay above market rates. The
profits will be distributed to the shareholders, without being
taxed according to REIT tax rules. (See "Federal Income Tax
Considerations" section). Stockholder capital and loan payoff's
provide the capital base to purchase new loans. Interest income
provides the liquidity to pay expenses and distribute dividends.
Value of Real Estate Collateral. The primary basis for
purchasing the loan is the value of the real estate given for
security, and to a lesser extent, the borrower's ability to
repay the loan. The loans are described as "B" or "C" or
sometimes as "hard money" loans in the industry. The
Loan-to-Value ratio ("LTV") ranges from a maximum of 70% for
residential property to less depending on the type and
marketability of the property. (See "Investment Objectives and
Policies" section.) The Management Company, CLS, has profitably operated in
expects to continue to do so. There is at present no shortage of borrowers
in this market since 1992 and shortage of borrowers who are willing to pay
above "A" market interest rates for loans secured by real estate. However,
due to the above market interest rates the borrowers are paying,
they can be expected to pay off the loans early by either
refinancing the loan at a lower rate of interest or by selling
the property. In some cases, the loan proceeds will be
necessary to start up a new business, that when successful, is
able to seek financing from a bank at a lower interest rate.
Reliance on its Management Company (CLS). The Company relies on
CLS to supply it with the collateralized loans needed for
continued operations. CLS has been in business since 1990.
(See Certain Relationships and Related Transactions" section.)
CLS is a full service mortgage company, with the ability to
service each segment of the mortgage market. CLS brokers loans
guaranteed by the FHA and the VA, conventional loans purchased
by institutions and loans purchased by private sources, such as
the Company. CLS has the capacity to meet the loan purchase
requirements of the Company for the foreseeable future, however
the Company reserves the right to contract with other brokers as
the Board of Directors deems necessary. A complete copy of the
Prospectus regarding CLS Financial Services, Inc.'s mortgage
broker/dealer license is available by contacting CLS Financial
Services, Inc., at 4720 200th St. S.W., Suite #200, Lynnwood,
Washington, 98046, telephone number (206) 744-0386.
Competition. The primary competition in the Pacific Northwest
for loans of this type are from a limited number of Mortgage
Companies and Investment Groups; several Finance Companies, e.g.
Associates Financial Services, Beneficial Financial Services,
ITT Financial Services etc., and individual investors who
actively purchase interests in what is commonly referred to as
Mortgage Paper Securities. The yield expectation of these
lenders is similar to the yield expectations of the Company.
The competition is financially strong, stable and well funded.
Ability to Compete. The Company believes it can effectively
compete in the market because it has signed a Management
Agreement with CLS (See "Certain Relationships and Related
Transactions" section). As previously stated, CLS has
experience in this business over the past five years. CLS is
engaged in originating and acquiring Loans secured by
Mortgages, Deeds of Trust and Real Estate Contracts ("Loans")
which are held in its portfolio or are sold to Loan Purchasers
pursuant to its Mortgage Broker Dealer License. In addition to
reselling whole Loans to financial institutions and private
Investors, CLS also sells undivided fractional interests in the
same loan to up to twenty five loan purchasers pursuant to its
Mortgage Broker Dealer License granted by the State of
Washington, Department of Securities. The Board of Directors
believe that CLS will be able to supply an adequate number of
loans consistent with its investment policy for the foreseeable
future based on its past performance.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND ANTICIPATED RESULTS OF OPERATIONS
Overview. The basic business of the Company is to purchase
loans secured by real estate that yield market interest rates of
11% to 14%. The loans are made based primarily on the value of
the real estate securing the loan and to a lesser extent, the
borrowers credit worthiness. The maximum Loan to Value Ratio
ranges from 70% of the appraised value of residential property
to 40% for undeveloped property. (See "Description of the
Business" and "Investment Objectives and Policies" sections).
REIT Tax Status. In order to pass through income to its
shareholders without being taxed at the Company level, it must
comply with the REIT provisions of the Internal Revenue Code.
(See "Federal Income Tax Considerations" section).
Source of Funds to Purchase New Loans. Revenue from the sale of
stock, principal payments and loan payoffs provide the Company
with the source of funds to invest in new loans. The Company
believes that CLS will be able to provide the Company with
sufficient loans that meet the Company's Investment Objectives
and Policies, now and in the future. (See "Description of the
Business" and "Certain Relationships and Related Transactions"
section).
Source of Funds to Pay Expenses and Dividends. The interest
paid on the loans will provide the funds necessary to pay the
expenses and make dividend distributions to the shareholders.
The Company's expenses are expected to constitute approximately
20% of interest revenues leaving the balance to be paid to the
shareholders in quarterly dividend distributions. The Company
manages its cash by not purchasing new loans toward the end of
the quarter in order to provide the necessary funds to pay the
cash dividends as authorized by the Board of Directors shortly
after the end of each calendar quarter. The Company expects to
continue this type of cash management procedure for the
foreseeable future. (See "Description of the Business,"
"Distributions of Dividends" and "Investment Objectives and
Policies" sections).
Anticipated Results from Operations in 1998 and 1999. The
Company has not yet begun operations and therefore does not have
a reasonable basis to make any projections.
Sources of Loans. The loans will be supplied by CLS. The loans
will be originated by CLS and purchased from its inventory
shortly after the loan is made. The Company will purchase the
entire loan or a participation interest in the loan. If the
Company purchases a participation interest, CLS will sell the
remaining interest to other investors. The Company may also
purchase real estate secured loans on the secondary market in
which the discounted yield is consistent with the Company's
investment objective.
Security for Loans. The Company expects to primarily purchases
loans secured by first liens in the form of Deeds of Trust,
Mortgages, Real Estate Contracts on real property and Mobile
Homes affixed to the land. Occasionally, where appropriate and
when in its best interest, the Company may acquire some loans
secured by a junior lien. The value of the security is
determined by an appraisal conducted by a qualified person, or
in some cases, based upon the tax valuation of the property. In
either instance, the value of the property is an informed
opinion, not a precise fact. As a result, the Company imposes
loan to value (LTV) guidelines to provide for situations when
the actual market value of the property proves to be less than
the appraisal.
Loan to Value (LTV) and Underwriting Guidelines. The Board of
Directors approves all loans on a quarterly basis. (See
"Director Responsibilities" and "Summary of the Loan Acquisition
Process" sections). The Company's Board of Directors has
established the following maximum loan-to-value (LTV) guidelines
for the loans it acquires which have been incorporated into the
Company Bylaws at Article XIV:
SECURITY MAX LTV
Unimproved real property 40%
Productive farm land 50%
Substandard residential and
commercial property 60%
Quality residential property 70%
The Company's general underwriting guidelines requires a showing
that the borrower can service the debt from a stable or
predictable source of income. In essence the guidelines for B
and C grade loans, is forward looking, rather than historical,
as the borrower typically has failed to make payments in a
timely manner. The Company reviews the root causes to predict
whether they will occur in the future, for example, one spouse
was not working for 6 months and now has a job, one spouse or a
child was sick, causing a reduced income and medical expenses
etc. Each case is unique and must be viewed in its totality.
The Company then prices the interest rate to the risk involved
under the current market conditions. The underwriting process
cannot always predict the future with certainty, for example, a
borrower or spouse may lose their job a few months after the
loan is made.
The Company expects to make loans to consumers who are selling
their home and have found another home they wish to purchase,
and require funding for the down payment. The underwriting
guidelines for bridge loans under $100,000 is an LTV up to 90%
of the value of the equity of the home listed for sale. For
loans over $100,000, the LTV is up to 80% of the value of the
home being sold. The borrower must have grade A or A+ credit,
meaning no 30 day lates on any mortgage payment in the last 24
months, and demonstrate adequate stable income to service the
debt.
Investment Restrictions. The Company may not invest more than
10% of its assets in any one loan or in loans secured by
unimproved real estate, under the rules pertaining to
investments by a REIT. Loans that exceed $200,000 of Company
funds must be approved in advance. (See "Director
Responsibilities" section). The Company is prohibited from
making any loan to any member of the Board of Directors, CLS or
any of its affiliates. For other restrictions, see the "Federal
Income Tax Considerations" section.
Procedure for Enforcing Investment Policy. The Board of
Directors meets on a quarterly basis. In event that a loan is
purchased from CLS that does not conform to the Company
investment policy, the Board of Directors has the option of
reversing that loan, in which case CLS would be required to
purchase the loan back from the Company. There is no provision
for the Board to reverse any loan purchase after it has been
approved at the quarterly meeting. (See "Conflicts of Interest"
section.)
Plan for the Future. The Company is committed to offer its
stock for sale to the public for the foreseeable future. The
Company expects to fully invest all available funds through the
purchase of loans. The Company expects to be able to acquire
similar loans in the future. The Company has no plan for
leveraged financing and is not dependant upon any bank or
financial institution to provide for its liquidity.
In the future, the Company will analyze the consumer need for
loans consistent with the Company's investment policies. At
present and for the foreseeable future, the economy in the
Pacific Northwest continues to expand. Real estate values are
increasing and therefore, the value of real estate security
remains strong. The Company forecasts a stable demand for its
services for the foreseeable future, evidenced by the daily loan
inquiries to CLS.
The Company expects that all of the proceeds from this offering
will be immediately absorbed into new loans that have been
originated by CLS. In the unlikely event the amount received
from investors as a result of this offering exceeds the ability
of the Company to purchase loans from CLS, the Board of
Directors has directed the Secretary to delay acceptance of new
investor's funds as necessary, in order to limit the negative
impact on the earnings of the Company.
Projections for Stock Sales in 1998 and 1999. The Company
projects that investors will purchase, on average, Five Hundred
Thousand Dollars ($500,000) monthly until the offering is sold
out. The Company intends to initiate future offerings on a
two-year cycle.
Capitalization. The Company has no debt and is entirely
capitalized through the sale of its stock on the basis of $5.00
per share.
DESCRIPTION OF COMPANY INVESTMENT OBJECTIVES
Investment Objectives and Policies. The Company's principal
investment objective is to acquire a portfolio of real estate
collateralized loans that will enable the Company to make
quarterly distributions of dividends to its shareholders. It is
the Company's policy to primarily acquire loans in which the
borrowers are, for a variety of reasons, considered high or
higher risk, and which are secured by real estate concentrated
in the Pacific Northwest. The Company will generally acquire
loans between $25,000 to $150,000 bearing interest rates between
11% to 14%. The loans will generally be amortized over 15 to 20
years with a balloon payment due in five (5) to seven (7) years.
MARKET FOR COMMON EQUITY AND RELATED TRANSACTIONS
No Public Market. There is no public market for the Company's
stock. The stock has not and is not expected to be listed on
any stock exchange. The Company intends to continue to register
its stock for sale and does offer a matching service in order to
facilitate shareholder liquidity.
Ownership Restrictions. No individual may own more than 9.8% of
the shares issued by the Company without the written
authorization from the Secretary and an opinion of Counsel in
order to insure continued compliance with the requirements of
IRC e 856(h), which mandates that no five (5) shareholders may
own 50% or more of the stock of a REIT. The Secretary may void
any transaction which places the REIT tax status in jeopardy.
(See "Federal Income Tax Considerations" section.)
Distributions of Dividends. The Dividends are expected to be
declared, on a per share basis and distributed quarterly within
thirty (30) days after the end of the quarter. All dividend
calculations will be based on the stated value of $5.00 per
share. A person who is a shareholder for less than the entire
quarter will have the Dividend prorated according to the number
of days the person was a shareholder during the quarter. The
Company intends to distribute at least 95% of the net income
earned each quarter in order to maintain its REIT tax status.
(See "Federal Income Tax Considerations" section).
Dividend Objective and Performance. The Company objective is to
distribute dividends on a quarterly basis providing its
shareholders with an 8% to 10% annual return on their
investment.
Dividend Reinvestment Plan. The Company allows shareholders to
receive cash dividends or elect to "roll over" or "reinvest"
their quarterly dividends into new shares of stock and take
advantage of compounding their investment. The issuing price
for the shares is $5.00 per share. Fractional shares may be
purchased. The date of purchase is the first day of the new
quarter. Typically, cash dividends are paid between 20 and 30
days after the end of the quarter. Any change in the election
must be made in writing prior to the end of each quarter. No
amount of shares have been allocated to the plan. At the end of
each quarter, the shareholder receives a statement indicating
the amount of dividends that have been reinvested into new
shares. The shareholder can change the election at any time
prior to the end of the quarter. There is no policy that would
prohibit a shareholder from changing the election on a quarterly
basis. The shareholder is taxed on reinvested dividends as if
the dividend had been actually paid in cash in the year it was
declared. (See "Federal Income Tax Considerations" section).
EXECUTIVE COMPENSATION
The Company compensates its President at the annual rate of
twenty-five basis points (.25%). (See "Certain Relationships
and Related Transactions" section).
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary prepared by Counsel to the
Company, of the material federal income tax principles
applicable to the Company and its shareholders. The summary is
based on the Internal Revenue Code, Judicial Decisions, Treasury
regulations, rulings, and other administrative interpretations,
all of which are subject to change. Investors should be aware
that the Code has been revised substantially by recent
legislation, much of which remains uninterpreted. No assurance
can be given that future legislation or administrative changes
or court decisions will not be retroactive. The Company has not
requested a ruling from the Internal Revenue Service (the
"Service") with respect to any of the matters discussed below.
The federal income tax provisions governing REITs are highly
complicated. An attempt has been made in this section to
discuss in detail all of the possible tax considerations
applicable to the Company and its shareholders. ACCORDINGLY,
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL AND FOREIGN (IF
APPLICABLE) TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF SHARES OF THE COMPANY.
Federal Income Taxation of the Company. The Company intends to
conduct its operations in a manner that will permit it to
qualify as a REIT for federal income tax purposes. The Company
has not requested, and does not intend to request, a ruling from
the Service that it will qualify as a REIT. The Company will
file a no business conducted federal income tax form in 1997,
and begin filing as a REIT in succeeding years, claiming its
initial election as a REIT in 1998. The REIT qualification
represents the view of the Company based on Counsel's review and
analysis of existing law, which includes very little controlling
precedent. The statutory requirements for the ownership of its
shares, the nature of its assets, the sources of its income and
the amount of its distributions to shareholders all must be met.
While the Board of Directors and its Advisor, CLS, intend to
cause the Company to operate in such a manner that will enable
it to comply with those requirements, there can be no certainty
that such intention will be realized. Moreover, relevant law
may change so as to make compliance with one or more of the REIT
requirements difficult or impracticable. Failure to meet any of
the REIT requirements with respect to a particular taxable year
could result in termination of the Company's election to be a
REIT, effective for the year of such failure and succeeding
years.
Counsel to the Company has based his opinion and legal
conclusions set forth or referred to herein upon various
documents and upon representations by its Officers and its
Advisor, CLS, that; (i) the Company will operate in compliance
with the Articles of Incorporation and the Bylaws; (ii) the
Company will conduct its operations as described in this
Offering Circular and Disclosure Document; (iii) the Company
will not modify its operations so that it becomes either (a) a
financial institution referred to in Section 582(c)(5) of the
Code or (b) an insurance company to which subchapter L of the
Code applies; (iv) the Company will revoke and not subsequently
elect to be treated as an S corporation, a Real Estate Mortgage
Investment Conduit, a Regulated Investment Company, or any
entity other than a REIT for federal income tax purposes; (v)
the Company will invest in Loans conforming to the Investment
Policies set forth in the Company Bylaws to the extent that
acceptable loans are made available under the Management
Agreement by CLS; (vi) the Company will not invest in any assets
other than the Loans that are acquired by the Company to the
extent that the Company fails to satisfy (a) the nature of
assets test described in "Requirements for Qualification as a
REIT" below or (b) the sources of income test described in
"Requirements for Qualification as a REIT" below; (vii) the
Company will satisfy the 30% income test set forth in Section
856(c)(4) of the Code; (viii) the Company will use a calendar
year for federal income tax purposes and will comply with the
dividend payment and record keeping requirements of Sections
857(a)(1) and (2) of the Code and the Treasury regulations
promulgated pursuant thereto; (ix) the Company will properly
elect to be treated as a REIT and will satisfy all relevant
filing and other administrative requirements established by the
Service that must be met in order to elect and to maintain REIT
status; and (x) the Company will have at least 100 shareholders
for at least 335 days to each full taxable year, or
proportionate part of any shorter taxable year, after its first
taxable year. In addition, Counsel has assumed that (i) during
the construction phase of any construction loan, the highest
principal amount of the loan at no point will exceed the fair
market value of the land (or, in the case of a loan secured by a
leasehold interest, the fair market value of such interest) plus
the reasonably estimated cost (as of the time when the loan is
made) of the improvements or developments (other than personal
property) that are to be constructed from the proceeds of the
loan and that are to secure the loan and (ii) during the
permanent phase of each loan, the fair market value of the real
property securing the Loan at no point will be less than such
principal amount.
As long as the Company qualifies as a REIT for federal income
tax purposes, it generally will not be subject to federal income
tax on any income or gain that is distributed to shareholders
pursuant to current Company policy and procedures. However, any
undistributed income or gain will be taxed to the Company at the
regular corporate rates. In addition, the Company may be
subject to (i) a 100% tax on certain income from any "prohibited
transaction" (i.e., sales or other dispositions of property that
is stock in trade, inventory, or held primarily for sale to
customers in the ordinary course of business), (ii) a 100% tax
on the greater of the amount, if any by which it fails the 95%
income test or the 75% income test described below, (iii) a tax
at the highest corporate rate on any net income relating to
"dealer" activities with respect to foreclosure property, (iv) a
potential excise tax on a portion of any undistributed income,
and (v) a minimum tax on any items of tax preference.
If the Company fails to qualify as a REIT for any taxable year,
it will be subject to federal income tax (including any
applicable minimum tax) at regular corporate rates and will not
receive a deduction for dividends paid to shareholders. As a
result, the amount of after tax earnings available for
distribution to shareholders would decrease substantially. In
addition, the Company will not be eligible to elect REIT status
for the four (4) subsequent taxable years, unless its failure to
qualify was due to reasonable cause and not to willful neglect,
and certain other requirements were satisfied. In order to
renew its REIT qualification at the end of the required four
year period, the Company will be required to distribute all of
its current and accumulated earnings and profits before the end
of the period. Any such distributions will be taxable as
ordinary income to shareholders. In addition, the Company will
be subject to taxation on any unrealized gain in its assets. If
the Company were to lose its REIT status, it could liquidate
over a period and in the manner that the Board of Directors
deems to be in the best interest of the shareholders, and such
liquidation likely would be completed before the Company would
be eligible to reelect REIT status.
Requirements for Qualification as a REIT. In order to qualify
as a REIT, the Company must make an election to be taxed as a
REIT and satisfy a variety of complex tests relating to its
Share ownership, assets, income, and distributions. Those
tests are summarized below:
1. Share Ownership. The Company must have at least 100
shareholders for at least 335 days of each full taxable year (or
proportionate part of any shorter taxable year) after its first
taxable year. In addition, no more than 50% (in Value) of the
Shares may be owned, directly or indirectly, by five (5) or
fewer individuals (or certain tax exempt entities) at any time
during the second half of each taxable year of the Company after
its first taxable year. The Company's first taxable year will
begin when it acquires significant assets and begins doing
business. To assure continued compliance with the 50% diversity
of ownership requirement, the Company's Bylaws prohibit any
individual investor from acquiring, directly or indirectly, more
than 9.8% of the outstanding Shares unless the corporate
secretary so approves after making a written finding that no
more than five (5) or fewer individuals own more than 50%
(ownership test) of the issued and outstanding stock. In
addition, a written Opinion of Counsel must be on file before
the Secretary can issue the stock. Treasury regulations require
the Company to maintain records of the actual ownership of its
Shares. In accordance with those regulations, the Company has
the right to demand from shareholders of record a written
statement, annually or more often, which discloses information
concerning the actual ownership of the Shares. Any record
shareholder who does not provide the Company with such
information is required to include certain specified information
relating thereto in his income tax return.
2. Nature of Assets. At the close of each calendar quarter, at
least 75% of the value of the Company's total assets must be
represented by cash or cash items (including certain
receivables), government securities, or "real estate assets"
(i.e., interests in real property, interest in mortgages on real
property to the extent the mortgage balance does not exceed the
value of the associated real property, shares of other qualified
REITs, and, in the case of certain capital contributions to the
Company, temporary investments in stock or debt instruments
during the one year period following the Company's receipt of
such capital). The remainder of the Company's assets may be
invested in virtually any type of asset except securities of any
one nongovernmental issuer in which such securities represent
more than 5% of the value of the Company's total assets or more
than 10% of the outstanding voting securities of such issuer. A
leasehold in real property constitutes an interest in real
property for purposes of the asset test. These loans generally
will qualify largely or entirely as real estate assets under the
75% requirement. (See "Treatment of Loans Containing
Participation Features" and "3. Sources on Income" below). In
addition, to the extent that the Company's funds are not
invested in the Loans, the Advisor, CLS, will attempt to make
investments that are consistent with the 75% asset requirement.
However, no such investments have been identified, and no
assurance can be given that the Company's funds will be placed
in such investments. If a REIT holds stock in a wholly owned
subsidiary meeting certain requirements, the assets of the
subsidiary are attributed directly to the parent REIT. The
Company currently does not plan to form such a wholly owned
subsidiary, although it may decide to do so in the future. If
the Company invests as a partner in a partnership, it will be
deemed to own its proportionate share of each of the
partnership's assets for purposes of the asset requirements.
If the Company inadvertently fails to satisfy the asset
requirements at the end of a calendar quarter, such a failure
would not cause it to lose its REIT status if (i) it satisfied
all of the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the
Company's assets and the standards imposed by the asset
requirements either did not exist immediately after the
acquisition of any particular asset or was not wholly or
partially caused by such an acquisition (i.e., if the
discrepancy arose from changes in the market values of its
assets). If the condition described in clause (ii) of the
preceding sentence was not satisfied, the Company still could
avoid disqualification by eliminating any discrepancy within
thirty (30) days after the close of the calendar quarter in
which it arose.
3. Sources of Income. To qualify as a REIT in any taxable year,
the Company must satisfy three distinct tests with respect to
the sources of its income: the "75% income test," the "95%
income test," and the "30% income test." The 75% income test
requires that the Company derive at least 75% of its gross
income (excluding gross income from prohibited transactions)
from certain real estate related sources, e.g. (i) interest on
obligations secured by mortgages on real property or interests
in real property, (ii) certain types of rent from real property,
(iii) income or gain from real property acquired through
foreclosure or similar proceedings, (iv) gains from the sale or
other disposition of certain real property or interests in real
property that are not "dealer property" (i.e., property that is
stock in trade, inventory, or held primarily for sale to
customers in the ordinary course of business), (v) commitment
fees with respect to mortgage loans, (vi) income from stock or
debt instruments that were acquired as a temporary investment of
new capital, if such income is received or accrued during the
first year after the Company receives the new capital
("qualified temporary investment income"), (vii) dividends or
other distributions on shares of other qualified REITs, (viii)
abatements and refunds of taxes on real property, and (ix) gain
from the sale or other disposition of a real estate asset that
is not a prohibited transaction solely by reason of Section
857(b)(6) of the Code.
In order to satisfy the 95% income test, at least an additional
20% of the Company's gross income for the taxable year must
consist of either income that qualifies under the 75% income
test or certain types of passive income, e.g. (i) dividends from
companies other than REITs; (ii) interest on obligations that
are not secured by interests in real property; (iii) gains from
the sale or other disposition of stock, securities, or real
property, if such assets are not dealer property; and (iv)
payments from certain swap or interest rate agreements entered
into by the REIT to hedge against variable rate indebtedness
incurred to acquire or carry real estate assets ("Hedging
Instruments").
The 30% income test, unlike the other income tests, prescribes
a ceiling for certain types of income. The Company may not
derive more than 30% of its gross income from the sale or other
disposition of (i) stock, securities, or Hedging Instruments
held for less than one year, (ii) dealer property that is not
foreclosure property, and (iii) certain real property (including
interests in real property and interests in real property
mortgages) held for less than four years. A leasehold in real
property constitutes an interest in real property for purposes
of all of the foregoing income tests.
For purposes of the foregoing income tests, if the Company
invests as a partner in a partnership it will take into account
its proportionate share of the partnership's income items, which
will retain the same character (e.g. rent, gain from "dealer
property," etc.) they have at the partnership level. If the
Company fails to meet either the 75% income test or the 95%
income test, or both, in a taxable year, it nonetheless might
continue to qualify as a REIT if its items of gross income were
properly disclosed to the Service. However, in such a case, the
Company would be required to pay a tax equal to 100% of any
excess non-qualifying income. No analogous relief is available
to REITs that fail to satisfy the 30% income test.
If any loan made by the Company were not treated, in whole or
in part, as a real estate asset by reason of the structure of
the security for such loan, the interest income therefrom would
be considered nonqualifying income for purposes of the 75%
income test. However, in the Opinion of Counsel to the Company,
the loans will be treated as real estate assets to the extent
that the loan amount (i.e. the highest principal amount
outstanding during the relevant taxable year) does not exceed
the value of the associated real property (or the sum of the
land value and the reasonable estimated cost, as of the time
when the loan is made, of the related improvements during the
period in which the loan is a construction loan). (See
"Treatment of Loans Containing Participation Features" below).
In the case of any loan, made by the Company, secured by both
real property and other property: if the loan amount exceeds the
value of the real property, an apportionment of the interest
income will have to be made, which may result in some
nonqualifying income for purposes of the 75% test.
4. Loans Containing Participation Features. The Company may
participate in loans with other individuals or companies. The
loans are considered as being one of debtor and creditor for
federal income tax purposes to the extent of the principal and
current interest due on the loans. The Company may share in any
appreciation in the value of the property securing the loans
which will satisfy the REIT asset and income requirements
regardless of whether such feature is treated as a separate
equity interest in the properties securing the loans.
Consequently, the Participation Loans will be qualifying assets,
and the income attributable to the Participation features of
such loans will constitute qualifying incomes for purposes of
the REIT asset and income requirements. However, as described
above, Opinions of Counsel and Management are not binding on the
Service and represent only Counsel's best judgment with respect
to the legal questions presented. The Company may make any
other loans with participation features only if such features
would not (i) cause the Company to be treated as a partner of,
or joint venturer, with the relevant borrower or (ii) endanger
the Company's ability to maintain its status as a REIT.
However, there can be no complete assurance that the Service
will not assert successfully a position adverse to the Company
with respect to any of the loans. If the Service were to
maintain successfully that any loan represented an equity
interest in whole or in part, the Company might fail to qualify
as a REIT. (See "Requirements for Qualification as a REIT"
above).
It is contemplated that any interest from a Loan Participation
feature that is based on the gross revenues from a property
securing a loan (a "Current Participation") would qualify as
"interest" for purposes of the 75% and 95% tests because of a
special rule which allows such treatment if the interest is
based on a fixed percentage or percentages of receipts or sales.
Furthermore, to the extent that a Loan Participation feature
based on the residual cash proceeds from sale of the property
securing a loan (a "Terminal Participation") constitutes a
"shared appreciation provision" (as defined in the Code), income
attributable to such a participation feature will be treated as
gain from the sale of the secured property and, if held for less
than four (4) years, would have to be taken into account in
determining whether the Company meets the 30% requirement. In
the opinion of the Company's Counsel, its current participation
in the loans will constitute interest for purposes of the 75%
and 95% income tests, and the terminal participation in the
loans will constitute shared appreciation provisions or
otherwise will give rise to qualifying gain or income for
purposes of the 75% income test.
5. Required Distributions. For each taxable year the Company
generally must distribute to the shareholders an amount equal to
at least 95% of the sum of its "REIT taxable income" (determined
without regard to the deduction for dividends paid and by
excluding any net capital gain) and any after tax net income
from foreclosure property. "REIT taxable income" is generally
computed in the same manner as taxable income of ordinary
corporations, with several adjustments, e.g. a deduction is
allowed for dividends paid, but not for dividends received. A
general allowance for bad debts is not tax deductible, but is a
generally accepted deduction for computing net income for
financial purposes. As a result, the Company may in fact have
to distribute dividends in excess of book net income in order to
preserve its REIT pass through tax status. The foregoing
distribution requirement is based on the Company's taxable
income (with various adjustments) rather than its available
cash. Therefore, while the Company expects to meet that
requirement, its ability to make the required distributions may
be impaired if it has insufficient cash flow or otherwise has
excessive noncash income or nondeductible expenditures.
Furthermore, the distribution requirement may be determined not
to have been met in a given year be reason of the Service later
successfully challenging the deductibility of a Company
expenditure or the Company's computation of the amount of
original issue discount on a loan. However, in such event, it
generally will be possible to cure the failure to meet the
distribution requirement with a "deficiency dividend," as
discussed below.
In general, a distribution must be made during the taxable year
to which it relates. However, any dividend that is declared by
the Company in the fourth calendar quarter of the year and
payable to shareholders of record as of a specified date in one
of such months will be deemed to have been paid by the Company
and received by shareholders on the record date, if it actually
is paid before February 1, of the following calendar year.
Furthermore, if the Company declares a dividend before the due
date for filing its Federal Income Tax Return for the taxable
year and actually pays the dividend before the first regular
dividend made during the year following that taxable year, it
may elect, under certain circumstances, to treat the first
dividend as relating to the earlier taxable year. Shareholders
would recognize the income from such dividend in the year of
distribution, regardless of the Company's election. If the
Company fails to satisfy the distribution test for a taxable
year as a result of an adjustment in certain of its items of
income, gain, or deduction by a court or the Service, the
Company generally will be permitted to remedy such a failure by
paying (i) a deficiency dividend to shareholders and (ii)
interest and a penalty to the Treasury.
The Company intends to meet all of the foregoing qualification
tests and requirements. However, if it fails to meet one or
more of them and such failure is not mitigated, its election to
be a REIT will terminate, effective for the year of such failure
and all succeeding years. Furthermore, while the Company has no
intention of doing so, it may revoke its election voluntarily.
In the event of any such termination or revocation, a new
election may not be made by the Company for any taxable year
prior to the fifth taxable year following the year of
termination or revocation.
Taxation of the Shareholders. Company distributions (dividends)
declared in any year (including (i) distributions that are
reinvested automatically pursuant to the Dividend Reinvestment
Plan and (ii) distributions received in such year that are taken
into account in computing the Company's dividends paid deduction
for a prior year) will be taxable as ordinary dividend income to
the shareholders in the year they are declared, e.g. fourth
quarter dividends declared but actually paid in January are
taxable to the shareholder in the year declared, except to the
extent they are designated by the Company as capital gain
dividends or to the extent they exceed the current or
accumulated earnings and profits of the Company. Distributions
designated as capital gain dividends will be taxable to the
shareholders as long term capital gain in an aggregate amount
not to exceed the Company's actual net capital gain for the
year. Distributions (other than capital gain dividends) that
exceed current or accumulated earnings and profits of the
Company will constitute a nontaxable return of capital to the
shareholders and will reduce the tax basis of each shareholder
in his shares. Any such distribution in excess of the
shareholder's tax basis in his shares will be taxable to the
shareholder as a capital gain from the sale of the shares
(unless the shares constitute "dealer property" of the
shareholder, in which case such amount will constitute ordinary
income).
Corporate shareholders should note that if the Company acquires
and subsequently disposes of any equity interest in real
property, they may be required to treat up to 20% of certain
capital gain dividends as ordinary income. Furthermore, none of
the distributions from the Company received by corporate
shareholders, whether characterized as ordinary income or
capital gain, will qualify for the dividends received deduction
generally available to corporations.
Although the Company's income generally will be recognized by
the shareholders, rather than by the Company, any net loss
incurred by the Company in a particular taxable year is not
deductible by the shareholders on their personal income tax
returns. Instead, such loss would be carried over by the
Company for potential offset against its future income (subject
to certain limitations). Furthermore, if a shareholder had any
losses from one or more passive activities in a particular year
(such as losses from certain types of limited partnerships in
which the shareholder is a limited partner), the taxable portion
of the distributions received by the shareholder from the
Company in that year may not be offset against such losses
because the income and gain from his investment in the Company
will constitute portfolio income (or perhaps active income if
the Shares are "dealer property" of the shareholder) for
purposes of the passive activity loss rules. It should be noted
that if a shareholder receives capital gain dividends with
respect to Shares and subsequently recognizes a loss on the sale
or exchange of such Shares prior to holding them for more than
six (6) months (determined with reference to certain specified
holding-period rules), such loss will be treated as long term
capital loss up to the amount of the previously received capital
gain dividends.
The alternative minimum tax is designed to impose additional
federal income tax on persons whose regular taxable income is
substantially lower than their economic income because of their
use of incentive (and certain other favorable) tax provisions.
The Code authorizes regulations that apportions income and
expense adjustments affecting the computation of the alternative
minimum tax between REITs and their shareholders. The Company
does not expect to generate a significant amount of such
adjustments. However, the Company may be required to withhold
and remit to the Treasury 31% of the dividends paid to any
shareholder who (i) fails to furnish the Company with a correct
taxpayer identification number, (ii) has under reported dividend
or interest income to the service, or (iii) fails to certify to
the Company that he is not subject to backup withholding. An
individual's taxpayer identification number is his social
security number.
Taxation of Shareholders on Disposition of Shares. In general,
any gain or loss realized upon a taxable disposition of Shares
of the Company by a shareholder who is not a dealer in
securities will be treated as a long term capital gain or loss
if the Shares have been held for more than twelve (12) months
and otherwise as short-term capital gain or loss. However, any
loss realized upon a taxable disposition of Shares held for six
(6) months or less will be treated as a long term capital loss
to the extent of any capital gain dividends received with
respect to such Shares. All or a portion of any loss realized
upon a taxable disposition of Shares of the Company may be
disallowed if other Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within thirty (30) days
before or after the disposition.
Capital Gains and Losses. A capital asset generally must be
held for more than one (1) year in order for the gain of loss
derived from its sale or exchange to be treated as long term
capital gain or loss. Long term capital gains are taxed at 28%.
Short term capital gains are taxed at the same rate as the
taxpayers other income. Capital losses not offset by capital
gains may be deducted against an individual's ordinary income
only up to a maximum annual deduction of Fifteen Hundred Dollars
($1,500) for individual and married couples filing separately
and Three Thousand Dollars ($3,000) for married couples filing a
joint return. Unused capital losses may be carried forward.
All net capital gains of a corporate taxpayer are subject to tax
at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused
losses being carried back three (3) years and forward five (5)
years. Due to the political nature of the capital gains tax,
there can be no assurance that Congress will or will not change
the tax law effective at any time.
EACH PROSPECTIVE INVESTOR IS URGED TO CONSULT HIS OR HER OWN
TAX ADVISOR WITH REFERENCE TO HIS OR HER OWN TAX SITUATION,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND OTHER
TAX LAWS AND ANY POSSIBLE CHANGES IN THE TAX LAWS AFTER THE DATE
HEREOF.
GLOSSARY
The following glossary includes definitions of certain banking,
insurance and financial terms not otherwise defined in this
Prospectus.
Accredited investor shall mean any person who comes within any
of the following categories, or who the issuer reasonably
believes comes within any of the following categories, at the
time of the sale of the securities to that person: (1) Any bank
as defined in section 3(a)(2) of the Securities Act of 1933
("Act"), or any savings and loan association or other
institution as defined in section 3(a)(5)(A) whether acting in
its individual or fiduciary capacity; any broker or dealer
registered pursuant to section 15 of the Securities Exchange Act
of 1934; any insurance company as defined in section 2(13) of
the Act; any investment company registered under the Investment
Company Act of 1940 or a business development company as defined
in section 2(a)48) of that act; any small business investment
company licensed by the U.S. Small Business Administration under
section 301(c) or (d) of the Small Business Investment Act of
1958; any private business development company as defined in
section 202(a)(22) od the Investment Advisers Act of 1940; any
director, executive officer, or general partner of the issuer of
the securities being offered or sold, and any other accredited
investor under Reg. D Sec. 230.501.
Affiliate shall mean a person who "controls," is "controlled
by," or "is under common control with" another person, as these
terms are defined in Rule 405 promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Asset/liability management is the means by which financial
institutions such as banks, savings and loan associations and
insurance companies control exposure to interest rate risk and
provide stable net interest income growth. In an environment of
rising interest rates, this is achieved by shortening the
average maturity of a financial institution's investment
portfolio in order to achieve a more asset sensitive position,
thereby allowing quicker asset repricing. Conversely, in a
declining interest rate environment the philosophy is to
lengthen the average maturity of the investment portfolio and
thereby make the institution more sensitive to the interest
rates paid on deposits and other of its liabilities.
Capital adequacy refers generally to a financial institution's
position with respect to prescribed regulatory capital
requirements. These requirements are imposed, with respect to
bank holding companies and banks, by the Board of Governors of
the Federal Reserve System ("Federal Reserve Board"), the office
of the Comptroller of the Currency ("OCC"), the Federal Deposit
insurance Corporation ("FDIC") and state regulatory authorities;
with respect to savings and loan associations, by the Federal
Reserve Board, the FDIC, the Office of Thrift Supervision
("OTS") and state regulatory authorities; and with respect to
insurance companies, by state regulatory authorities acting in
conjunction with the National Association of Insurance
Commissioners ("NAIC").
CLS is the abbreviated name for CLS Financial Services, Inc.,
the "Management Company", also referred to as the "Advisor".
Code shall refer to the Internal Revenue Code of 1986, as
amended.
Commercial loans are loans made by financial institutions to
businesses for various purposes, and include revolving lines of
credit, equipment financing loans and letters of credit.
Commercial loans generally mature within one year, have
adjustable interest rates and are secured by inventory, accounts
receivable, equipment or real property.
Commercial paper is a short-term (less than one year to
maturity) negotiable promissory note issued in bearer form at a
discount from its face value. It is one of the so-called "money
market" instruments, along with treasury bills, negotiable
certificates of deposit and bankers' acceptances. The principal
issuers of commercial paper are financial institutions,
industrial and commercial enterprises, and municipalities.
The consent of a person shall mean the agreement of such person
to do the act or thing for which the approval or consent is
solicited, or the act of granting such approval, as the consent
may require.
Consumer loans are made by financial institutions to enable
their individual customers to purchase automobiles, boats and
other large consumer items. Such loans generally are evidenced
by promissory notes and are secured by liens and security
interests in the consumer items purchased with the loan
proceeds. Consumer loans generally have maturities of five
years or less and fixed interest rates.
A deed of trust is an instrument used in many states by which
the legal title to real property is placed in one or more
trustees to secure the payment of a sum of money or the
performance of some other obligation. A deed of trust is akin
to, and serves the same purpose as, a mortgage.
The Federal Deposit Insurance Corporation or FDIC operates as a
bureau within the Department of the Treasury and insures
deposits in depository institutions such as banks and savings
and loan associations. The FDIC also acts as the receiver of
certain failed institutions.
Fiscal Year shall mean the fiscal year of the Company, being
the twelve-month period ending December 31st of each year.
Foreclosure is the term applied to any of the various methods,
statutory or otherwise, of enforcing payment of a debt or other
obligation secured by a mortgage or deed of trust of real
property, or a lien or security interest in personal property,
by causing such property to be sold and the proceeds applied to
the debt.
Interest expense, as used in the context of a financial
institution, is the interest paid on deposits and borrowing by
such institution. Interest income is interest earned by a
financial institution on its loan and investment portfolios.
Net interest income or interest income is the difference between
interest income and interest expense.
Lease financing obligations are the obligations of a lessee of
equipment or other property to pay lease rental and other sums
to the lessor of such equipment or property. Lease financing
obligations are primarily incurred in capital lease financing
transactions which afford the parties to such transactions
certain tax benefits.
A lien is a charge or security or encumbrance upon real or
personal property. One whose debt or claim is secured by a lien
on a particular property is known as a lien creditor.
Liquidity measures a financial institution's ability to respond
to requirements for funds. Liquidity sources include both
assets and liabilities. Internal sources of liquidity are
generally represented by the investment portfolio, federal funds
sold and current maturities of certain categories of loans.
External sources include market rate consumer deposits generated
by the institution's customer base, time deposits, federal funds
purchased and other short-term borrowing.
Loan loss allowances represent a financial institution's
recognition of the risks of extending credit and its evaluation
of the quality of its loan portfolio. The allowance, which is
accounted for as a reserve on the institution's balance sheet,
is generally maintained at a level considered adequate to
provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio.
This assessment takes into consideration a review of problem
loans, business conditions and loss experience, and an overall
evaluation of the quality of the underlying collateral, holding
and disposal costs, and the cost of funds to the institution.
A mortgage is an interest in real estate created by a
conveyance intended to secure the payment of money or the
performance of some other obligation by the grantor of the
mortgage, and which becomes void if the payment is made or the
other obligation is performed at the time prescribed.
Net interest margin or net interest spread is the difference
between gross interest earned by a financial institution less
gross interest paid during the reported period, as adjusted for
loan loss allowances. Gross interest earned and gross interest
paid are typically determined by reference, respectively, to the
weighted average portfolio balances of the interest-earning
assets and interest-bearing liabilities of the institution
during such period.
Nonperforming assets of a financial institution, in general,
are those of its assets that present reasonable doubts as to the
collectibility of interest. For financial and regulatory
reporting purposes, these assets consist of nonaccrual and
restructures loans, other real estate owned and other assets of
questionable financial integrity.
Operating Expenses shall mean all necessary and reasonable
costs and expenses incurred in connection with the operation of
the Corporation other than organization and offering costs.
Organization and Offering Costs shall mean all costs and
expenses incurred in preparing the registration statement of
which this Prospectus is a part, offering and marketing the
Units, and organizing the Corporation, including legal and
accounting fees, printing expenses, filing a recording fees, and
sales commissions and expenses.
Other real estate owned or "OREO" or "REO" is property acquired
by a financial institution in foreclosure proceedings or by
acceptance of deeds in leu of foreclosure. A loan is treated as
an "in substance foreclosure" when the financial institution has
concluded that the prospect of payment by a borrower is remote
and that its only means of collecting on the loan is foreclosure
on the collateral.
A person is any individual, partnership, corporation,
unincorporated organization or association, trust or other
entity.
The profits of the Corporation and the losses of the
Corporation shall mean the profits and the losses of the
Corporation for federal income tax purposes, including, without
limitation, each item of Corporation income, gain, loss,
deduction or credit, tax-exempt income and nondeductible
expenses of the Corporation.
The Prospectus means this prospectus dated December 11, 1997,
which is included as part one of the Corporation's registration
statement on Form SB-2 under the Securities Act of 1933, as
amended.
PSIG is the abbreviated name for Puget Sound Investment Group,
Inc., an affiliated Company of CLS.
PSRESG is the abbreviated name for Puget Sound Real Estate
Service Group, Inc., a wholly owned subsidiary of PSIG.
Real Estate Investment Trust ("REIT") is a corporation, trust
or association (other than a real estate syndication) which 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, as further defined and
regulated under e856 of the Internal Revenue Code and the laws
of the state of incorporation, namely Washington, the
Administrative Code ("WAC") promulgated by the Securities
Division of the Department of Financial Institutions.
Repricing refers to the practice of a financial institution of
periodically changing the mix of its investment portfolio by
selling investments or buying investments that more closely
match the institution's interest income requirements and its
assessment of economic conditions and future changes in interest
rates.
Resolution Trust Corporation or RTC was established by Congress
under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") to act as the receiver of
failed federally insured commercial banks and savings and loan
associations, among other things, and to liquidate the assets of
such institutions. The RTC operates as a bureau within the
Department of the Treasury.
Risk-based capital ratios are regulatory formulae applied to
most financial institutions which serve as an early warning tool
to identify weakly capitalized institutions for purposes of
initiating further regulatory action. These formulae vary among
the various sectors of the financial industry--for example, the
risk-based capital requirements for banks and savings and loan
associations are not necessarily the same as those for insurance
companies--but are designed generally to establish capital
requirements for various categories of risk.
A security interest is generally defined as an obligation,
pledge, deposit, mortgage, deed of trust or lien given by a
debtor in order to ensure the payment or performance of his debt
or obligation, which furnished the creditor with a resource
(usually real or personal property) which can be resorted to in
case the debtor fails in his obligation.
Statutory accounting practices are those accounting practices
prescribed or permitted by an insurance company's domiciliary
state insurance regulator for purposes of financial reporting to
regulators.
Statutory admitted assets are assets which are included in
measuring an insurance company's statutory surplus for statutory
accounting purposes. Other assets, consisting principally of
overdue amounts, certain amounts due from insurance agents,
prepaid expenses and furniture and equipment are non-admitted
for statutory accounting purposes.
Statutory reserves are amounts established pursuant to state
insurance regulations that an insurance company must have
available to provide for future obligations with respect to all
policies. Reserves are liabilities on the balance sheets of
financial statements prepared in conformity with statutory
accounting practices.
Statutory surplus is the excess of statutory admitted assets
over statutory liabilities as shown on an insurer's statutory
financial statements.
The Uniform Commercial Code or UCC is a compendium of laws that
have been adopted with only slight variation in all 50 states of
the United States which focus on commercial transactions,
including the creation and perfection of liens and security
interests in some types of real property and in personal
property, and the effect and negotiability of commercial paper,
notes and other financial instruments and obligations.
Unimproved Real Property means the property of a REIT which has
the following three characteristics : (1) an equity interest in
property which was not acquired for the purpose of producing
rental or other operating income, (2) has no development or
construction in process on such land, and (3) no development or
construction on such land is planned in good faith to commence
on such land within one year.
THIS SPACE INTENTIONALLY LEFT BLANK
No person has been authorized to give any information or to make
any representations other than those contained in this
Prospectus. If given or made, such information or
representations must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute
an offer to sell securities in any jurisdiction to any person to
whom it is unlawful to make such offer in such jurisdiction.
Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company
since the date hereof.
AVAILABLE INFORMATION
The Company will provide without charge to any person who
receives a Prospectus, upon written or oral request of such
person, a copy of any of the information that was incorporated
by reference in the Prospectus (not including Exhibits to the
information that is incorporated by reference unless the
Exhibits are themselves specifically incorporated by reference).
In order to receive such information, please contact the
following department:
RMX REIT, INC.
ATTN: SHAREHOLDER RELATIONS
220 WEST MERCER STREET #400
SEATTLE, WASHINGTON 98119
(206) 282-8221
All questions and requests for information by potential
investors should be directed to the address and telephone number
noted above. Investment in a small business involves a high
degree of risk, and investors should not invest any funds in
this offering unless they can afford to lose their investment
in its entirety.
Each shareholder is provided with a quarterly management report
that includes a financial summary for the past quarter, the
status of the loan portfolio and the dividend approved by the
Board of Directors for the Quarter. The Company also provides
the shareholders with an annual report which contains the
audited financial statements and the notice of the annual
shareholders meeting. The Company has and does intend to comply
with the North American Securities Administrators Association
(referred to as "NASAA" herein) guidelines adopted for the
management and operation of real estate investment trusts
(referred to as "REIT" herein). In addition, the Company must
comply with the applicable provisions of the Internal Revenue
Code in order to maintain its favorable tax pass through status.
INVESTORS SHOULD CAREFULLY REVIEW THIS PROSPECTUS, PARTICULARLY
WITH REGARD TO THE RISKS (SEE "RISK FACTORS") AND CONFLICTS OF
INTEREST, (SEE "CONFLICTS OF INTEREST") BEFORE MAKING A DECISION
TO INVEST. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY
ON THEIR OWN EXAMINATION OF THE ENTITY CREATING THE SECURITIES
AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND
RISKS INVOLVED.
PART II
This section contains information, list of Exhibits,
undertakings and signatures required to be set forth in Part II
of Form SB-2nd.
Table of Contents
Indemnification of Directors and Officers 53
Other Expenses of Issuance and Distribution 53
Recent Sales of Unregistered Securities 53
Exhibits Index 52
Undertakings 100
Signatures 101
EXHIBITS
EXHIBITS TABLE ITEM Page
1. Underwriting agreement N/A
2. Plan of Acquisition, reorg., arrngmnt, liquid, or
succession N/A
3. Certificate of Incorporation 54
Articles of Incorporation w/amendments, 55
Bylaws w/amendments, Resolutions, 65
Meetings 78
4. Stock Certificates, Subscription & Investment Letter 83,85,87
5. Opinion re: Legality of Stock 88
6. No Exhibit Required N/A
7. Opinion re: Liquidation Preference N/A
8. Opinion re: Tax matters 91
Opinion re: Usury 93
9. Voting Trust agreement N/A
10. Material contracts-Management Agreement 95
11. Statement re: Computation of per sharing earnings N/A
12. No exhibit required N/A
13. Annual or quarterly reports, Form 10-Q N/A
14. Material foreign patents N/A
15. Letter on unaudited interim financial information N/A
16. Letter on change in certifying accountant N/A
17. Letter on director resignation N/A
18. Letter on change in accounting principles N/A
19. Previously unfiled documents N/A
20. Reports furnished to security holders N/A
21. Other documents or statements to security holders N/A
22. Subsidiaries of the registrants N/A
23. Published report regarding matters submitted to vote N/A
24. Consent of experts and counsel 99
25. Power of attorney N/A
26. Statement of eligibility of trustee N/A
27. Invitations for competitive bids N/A
28. Additional exhibits - N/A
29. Information from reports furnished to
State Insurance Authorities N/A
Indemnification of Directors and Officers. The Company has the
authority to indemnify its Directors and Officers pursuant to
the Statutory provisions set forth in the Revised Code of
Washington Chapter 23B.08 et al.
The Company has not limited the Statutory authorization for
Permissive or Mandatory Indemnification in its Articles of
Incorporation. Generally, the Corporation would be expected to
indemnify any individual made a party to a proceeding, simply
because the individual is or was a Director, against liability
incurred in the proceeding if that individual acted in good
faith and that the individual reasonably believed that his/her
conduct was in the best interest of the Corporation, or at least
not opposed to its best interests. The Company expects that it
would be required to indemnify an Officer, Director, Shareholder
or Agent for actions set forth in the Chapter 23B.08.500-590 of
the Revised Code of Washington as presently in force or as
hereinafter modified.
Other Expenses of Issuance and Distribution. The Company has
projected that the expenses of Issuance and Distribution will be
as follows:
Legal & Accounting Fees $35,000
Copy & Mailing Costs 2,500
Registration Fees 5,000
Total $42,500
See "Use of Proceeds" section.
Recent Sales of Unregistered Securities. The Company has not
sold any securities previous to this offering.
STATE OF WASHINGTON
SECRETARY OF STATE
CERTIFICATE OF INCORPORATION
to
RMX REIT, INC.
UBI Number: 601 799 020 Date: June 19, 1997
ARTICLES OF INCORPORATION
OF
RMX REIT, INC.
ARTICLE I
The name of the corporation is RMX REIT, INC.
ARTICLE II
The term of existence of this corporation shall be perpetual.
ARTICLE III
This corporation is organized for any lawful purposes more
specifically described as follows:
(1) The general purpose of this corporation is to purchase and
manage interest in real property, whose principal income shall
be derived form and relating to those interest in real property.
(2) The corporation may conduct and perform any and all other
activities reasonably connected with, or similar to, or
incidental to, carrying out the above purpose.
(3) This corporation shall have the power:
(a) To have perpetual succession by its corporate name.
(b) To sue and be sued, complain and defend, in its corporate name.
(c) To have a corporate seal which may be altered at pleasure,
and to use the same by causing it, or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
(d) To purchase, take, receive, lease, or otherwise acquire,
own, hold, improve, use and otherwise deal in and with, real or
personal property, or any interest therein, wherever situated.
(e) To sell, convey, mortgage, pledge, lease, exchange,
transfer and otherwise deal in and with, real or personal
property, or any interest therein, wherever situated.
(f) To lend money and use its credit to assist its
stockholders.
(g) To purchase, take, receive, subscribe for, or otherwise
acquire, own, hold, vote, use, employ, sell, mortgage, lend,
pledge, or otherwise dispose of, and otherwise use and deal in
and with, shares or other interests in, or obligations of, other
domestic or foreign corporations, associations, partnerships or
individuals, or foreign corporation, associations, partnerships
or individuals, or direct or indirect obligations of the United
States or of any other government, state, territory,
governmental district or municipality or of any instrumentality
thereof.
(h) To make contracts and incur liabilities, borrow money at
such rates of interest as the corporation may determine, issue
its notes, bonds, and other obligations, and secure any of its
obligations by mortgage or pledge of all or any of its property,
franchises and income.
(i) To make guarantees respecting the contracts, securities,
or obligations of any person (including, but not limited to, any
shareholder, any affiliated or unaffiliated individual, domestic
or foreign corporation, partnership, association, joint venture
or trust) if such guarantee may reasonably be expected to
benefit, directly or indirectly, the guarantor corporation. As
to the enforceability of the guarantee, the decision of the
board of directors that the guarantee may be reasonably expected
to benefit, directly or indirectly, the guarantor corporation
shall be binding in respect to the tissue of benefit to the
guarantor corporation.
(j) To lend money for its corporate purposes, invest and
reinvest its funds, and take and hold real and personal property
as security for the payment of funds so loaned or invested.
(k) To conduct its business, carry on its operations, and have
offices and exercise the powers granted by these articles of
statutes of the State of Washington, within or without the State
of Washington.
(l) To elect or appoint officers and agents of the
corporation, and define their duties and fix their compensation.
(m) To make and alter bylaws, not inconsistent with these
articles of incorporation or the laws of the State of
Washington, for the administration and regulation of the affairs
of the corporation.
(n) To make donations for the public welfare or for
charitable, scientific or educational purposes; and in times of
war to make donations in aid of war activities.
(o) To transact any lawful business which the board of
directors finds will be of a benefit to the corporation.
(p) To pay pensions and establish pension plans, pension
trusts, profit-sharing plans, stock bonus plans, stock option
plans and other incentive plans for any or all of its directors,
officers and employees.
(q) To be a promoter, partner, member, associate, or manager
of any partnership, joint venture, trust, or other enterprise.
(r) To cease its corporate activities and surrender its
corporate activities and surrender its corporate franchise.
(s) To exercise all powers necessary or convenient to effect
its purposes.
PROVIDED, HOWEVER, that nothing herein contained shall be
deemed to authorize or permit the corporation to carry on any
business, to exercise any power or do any act which a
corporation formed under the Washington Business Corporation Act
of the State of Washington, or any amendment thereto or
substitute therefore, may not at any time lawfully carry on or
do.
ARTICLE IV
The address of the registered officer of the corporation is 220
West Mercer Street #400, Seattle, Washington 98119, and the name
of the registered agent at such address is Richard A. Ekman.
ARTICLE V
The total authorized number of shares of the common stock in
the corporation is TWO MILLION FOUR HUNDRED THOUSAND (2,400,000)
SHARES and shall be initially issued at an offering price not
less than five dollars ($5.00) per share. In event the initial
offering is ceased, those remaining authorized but unissued
shares shall be available to existing shareholders at the
offering price of five dollars ($5.00) per share. Subsequent
shares may be issued by Board of Director's resolution after
amendment of these Articles of Incorporation to existing
shareholders as follows:
(1) The shares may be issued for such consideration as shall be
authorized by the Board of Directors establishing a price (in
money or other consideration) or a minimum price or a general
formula or method by which the price will be determined.
(2) Upon authorization by the Board of Directors, the
corporation may issue its own shares in exchange for or in
conversion of its outstanding shares, or distribute its own
shares, pro rata to its shareholders to effectuate stock
dividends or splits, and any such transaction shall not require
consideration.
(3) Shares may be issued at a price determined by the Board of
Directors, or the Board may set a minimum price or establish a
formula or method by which the price may be determined.
(4) Consideration for shares may consist of cash, promissory
notes, services performed, contracts for services to be
performed, or any other tangible or intangible property. If
shares are issued for other than cash, the Board of Directors
shall determine the value of the consideration.
(5) Shares issued when the corporation receives the
consideration determined by the board are validly issued, fully
paid, and nonassessable.
(6) A good faith judgment of the Board of Directors as to the
value of the consideration received for shares is conclusive.
(7) The corporation may place shares issued for a contract for
future services or a promissory note in escrow, or make other
arrangements to restrict the transfer of the shares, and may
credit distributions in respect of the shares against their
purchase price, until the services are preformed or the note is
paid. If the services are not performed or the note is not
paid, the shares escrowed or restricted and the distributions
credited may be canceled in whole or in part.
(8) The reasonable charges and expenses of organization or
reorganization of this corporation, and the reasonable expenses
of any compensation for the sale of its shares, amy be paid or
allowed by such corporation out of the consideration received by
it in payment for its shares without thereby rendering such
shares assessable. The reasonable expenses are determined in
accordance with paragraph (6) above.
ARTICLE VI
(1) The holders of the common stock of the corporation do not
have any preemptive right to purchase shares of the corporation
that may be authorized but not issued.
(2) The Board of Directors may reasonably restrict the sale or
subsequent transfer of the stock of this corporation in order to
protect the favorable tax status of the corporation, to the
extent necessary to do so.
(3) In the event that any stockholder(s) disagrees, and has a
legal basis for the disagreement, the controversy shall be
submitted to arbitration pursuant to Article XII below.
ARTICLE VII
All corporate powers shall be exercised by and under authority
of, and the business and affairs of this corporation shall be
managed under the direction of, the Board of Directors according
to the laws of the State of Washington and as contained in these
Articles of Incorporation.
(1) The directors of the corporation shall be five (5) in
number.
(2) The first directors shall serve until the first meeting of
shareholders and until their successors are elected and
qualified. There shall be five (5) members of the Board of
Directors unless a bylaw is adopted changing the number of board
members. The number of directors necessary to constitute a
quorum shall be three (3) board members or a simple majority of
the members of the board, whichever is more. The board of
directors may fill any vacancy by the affirmative vote of the
majority of the remaining directors for the unexpired term of
the director whose position was vacated. Any director may be
removed and replaced by a special meeting of the shareholders
for any reason.
(3) The initial bylaws of the corporation shall be adopted by
the first directors by simply majority vote. The power to
alter, amend or repeal the bylaws or adopt new bylaws, subject
to repeal or change by action of the shareholders, shall be
vested exclusively in the board of directors. The bylaws may
contain any provisions for the regulation and management of the
affairs of the corporation, including the terms of the board of
director, not inconsistent with the law or these articles of
incorporation.
(4) The board of directors shall have the authority to carry
out the purposes of the corporation as stated in Article III
above, subject only to the restrictions of the laws of the State
of Washington or the laws of the United States.
(5) The board of directors shall be elected by every
shareholder entitled to vote, in person or by proxy. The term
of office shall be one year and all directors shall be elected
at the annual meeting of the shareholders. Each share, entitled
to be voted, shall be entitled to one vote per share on all
business matters, including the election or removal of Board
Members. There is no cumulative voting in this corporation.
(6) Three (3) directors, or a simple majority of the members of
the board, whichever is greater, constitutes a quorum sufficient
to accomplish the business of the corporation. Any director
attending the meeting shall be deemed to have waived notice of
the meeting, because that person had actual notice of the
meeting. A five day notice of the meeting shall be given, if
necessary, in such a manner reasonably calculated to effectuate
actual notice. The meeting may be held at such place within or
without the State of Washington as may be stated in or fixed in
accordance with the Bylaws. If no place is so stated in the
notice, the meeting shall be held at the principal place of
business of the corporation.
(7) The directors may participate in a meeting of the directors
by means of a conference telephone or similar communications
equipment by means of which all persons participating in the
meeting can hear each other at the same time, and participation
by such means shall constitute presence in person at a meeting.
(8) Special meetings of the directors may be called by the
board of directors or by any individual director. A simple
majority of those directors present shall constitute the act of
the Board of Directors.
(9) Any action required by the directors to be taken at a
meeting of the directors of this corporation, or any action
which may be taken at a meeting of the directors, may be taken
without a meeting if a consent is writing, setting forth the
action so taken, is signed by a two thirds majority of the
directors entitled to vote with respect to the subject matter
thereof. The consent shall have the same force and effect as a
majority vote of directors.
(10) No contracts or other transactions between the corporation
and any other corporation, and no act of the corporation shall
in any way be affected or invalidated by the fact that any of
the directors of the corporation are pecuniarily or otherwise
interested in, or are directors or officers of, such other
corporation.
(11) Any director individual, or any firm in which any director
may be a member, may be a party to, or may be pecuniarily or
otherwise interested in, any contracts or transactions of the
corporation, provided that eh fact that any or such firm is so
interested shall be disclosed or shall have been known to the
Board of Directors or a majority thereof.
(12) Any vacancy occurring in the board of directors may be
filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the board of directors.
A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any directorship
to be filled by reason of an increase in the number of directors
may be filled by the board of directors for a term of office
continuing only until the next election of directors by the
shareholders.
(13) The Board of Directors shall be empowered to take
appropriate action to maintain the REIT tax status (IRC Section
856 et. seq.) of the corporation.
(14) The Board of Directors may appoint an executive committee
of at least three (3) Board members who shall be empowered to
conduct all corporate business except the following:
(a) Amend these Articles of Incorporation:
(b) Making recommendations to the shareholders without full
Board of Directors concurrence;
(c) Approving any act contrary to the general purpose of the
corporation.
ARTICLE VIII
There shall be only one type of Common Stock, that being TWO
MILLION FOUR HUNDRED THOUSAND (2,400,000) shares of common stock
unless these Articles of Incorporation be duly amended. The
Board of Directors shall have the authority to issue any other
type of stock allowed by law, provided these Articles of
Incorporation shall be first duly amended.
ARTICLE IX
(1) There shall be at least one annual stockholders meeting,
notice of which shall be given according to the laws of the
State of Washington. The percentage of shares entitled to vote
shall be at least thirty three percent (33%) in order to
constitute a quorum sufficient to accomplish the business of the
corporation. Any shareholder attending the meeting shall be
deemed to have waived notice of the meeting, because that person
had actual notice of the meeting. Notice of the meeting shall
be given according to the laws of the State of Washington. The
meeting may be held at such place within or without the State of
Washington as amy be stated in or fixed in accordance with the
bylaws. If no place is so stated in the notice, the meeting
shall be held at the principal place of business of the
corporation.
(2) The shareholders may participate in a meeting of the
shareholders by means of a conference telephone or similar
communications equipment by means of which all persons
participating the meeting can hear each other at the same time,
and participation by such means shall constitute presence in
person a meeting.
(3) Special meetings of the shareholders may be called by the
board of directors or the holders of not less than one-tenth
(1/10th) of all the shares entitled to vote at the meeting.
(4) Any action required by the shareholders to be taken at a
meeting of the shareholders of this corporation, or any action
which may be taken at a meeting of the shareholders, may be
taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by all of the shareholders
entitled to vote with respect to the subject matter thereof.
The consent shall have the same force and effect as a unanimous
vote of shareholders.
ARTICLE X
The Board of Directors, upon ratification of a majority of the
shareholders of record, shall have the right to amend, alter,
change or repeal any provision constrained in these Articles of
Incorporation.
ARTICLE XI
The directors shall be deemed to be in a fiduciary relationship
to the shareholders. The directors shall be indemnified and
held harmless by the company for losses arising from the
operations of the Company if all of the following conditions are
met;
(1) The director has determined, in good faith, that the course
of conduct which caused the loss of liability was in the best
interest of the company, and
(2) Such liability or loss was not the result of negligence or
misconduct by the director, and
(3) Such indemnification or agreement to hold harmless is
recoverable only out of the assets of the company and not from
the shareholders. Indemnification will not be allowed for any
liability imposed by judgment, and costs associated therewith,
including reasonable attorney fees, arising from or out of any
violation of state or federal securities laws associated with
the offer and sale of company shares. Indemnification shall be
allowed for settlements and related expenses of lawsuits
alleging securities law violations, and for expenses incurred in
successfully defending such lawsuits, provided that a court
either;
(a) Approve the settlement and find the indemnification of the
settlement and related costs should be made, or
(b) Approve indemnification of litigation costs if a
successful defense is made.
(4) Every application for registration must contain an
undertaking that the director seeking indemnification will
appraise the court of the position of the Administrator of the
Securities Division of the Department of Financial Institutions
for the State of Washington.
ARTICLE XII
Any controversy or claim arising out of or relating to these
Articles of Incorporation or the By-Laws of this corporation,
including but not limited to the interpretation of any term
herein contained, any voting deadlock regarding the Board of
Directors or the Stockholders, or the breach thereof, shall be
settled by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association, and
the judgment upon the award rendered by the Arbitrator(s) shall
be binding and may be entered in any court having jurisdiction
thereof. Jurisdiction for all internal corporate disputes shall
be in the State of Washington and venue shall be in Spokane
County (or the Federal Court for the Eastern District of
Washington only if that Court has proper jurisdiction as
established by law or custom.)
ARTICLE XIII
The Corporation shall make every effort to qualify as a Real
Estate Investment Trust pursuant to the Internal Revenue Code
Section 846 et.seq. as presently in adopted and in force in
1997, or as amended thereafter. In order to comply with IRC
Code Section 856(h), no individual shareholder shall be entitled
to won more than 9.8% of the outstanding and issued stock of the
corporation unless the Corporate Secretary affirms in writing
that the company will be in full compliance with the Internal
Revenue Code Sections regarding closely held determinations and
also obtain an opinion of Counsel, to be placed in the records
of the corporation prior to the issuance of said stock. The
Board of Directors shall also insure that the Bylaws and
management of the corporation conforms to the relevant
provisions of the Internal Revenue Code, the NASAA guidelines
and the Washington Administrative Code regarding the operations
of this company as a Real Estate Investment Trust. In event of
a conflict between the provisions of the Internal Revenue
Code,the NASAA guidelines and the Washington Administrative
Code, the directors shall adhere to the provisions contained int
eh Internal Revenue Code to maintain the REIT status for the
company.
ARTICLE IX
The name and address of the incorporator is: Douglas M.
O'Coyne, Sr., South 9 Washington, Suite 612, Spokane,
Washington, 99201.
IN WITNESS WHEREOF, the incorporator has affixed his signature
below this 12 day of June, 1997.
DOUGLAS M. O'COYNE, SR.,
Incorporator
STATE OF WASHINGTON )
) ss.
County of Spokane )
On this day personally appeared before me, DOUGLAS M. O'COYNE,
SR. to me known to be the individual described herein and who
executed these Articles of Incorporation, and acknowledged that
he signed the same as his free and voluntary act and deed for
the uses and purposes therein mention.
GIVEN under my hand and official seal this 12 day of
June 1997.
Original Document Notarized
Notary Public in and for the State
of Washington, residing at Spokane
Print Name: Shari L. Holdren
My Commission Expires: 8/26/98.
CONSENT TO APPOINTMENT AS REGISTERED AGENT
I, Richard A. Ekman, hereby consent to serve as Registered
Agent, in the State of Washington, for the corporation herein
named, RMX REIT, INC. I understand that as agent for the
corporation, it will be my responsibility to accept service of
process in the name of the corporation; to forward corporate
license renewal mailings to the corporation; and to immediately
notify the Office of the Secretary of State in the event of my
resignation or of any change in the Registered Office address of
the corporation for which I am agent.
DATED this 18 day of June, 1997.
RMX REIT, INC.
Original Document Signed
By: RICHARD A. EKMAN
Registered Agent for the Corporation
STATE OF WASHINGTON )
) ss.
County of Spokane )
On this day personally appeared before me, richard a. Ekman to
me known to be the individual described herein and who hereby
consented to serve as the registered agent for service of
process as stated above by affixing his signature above, and he
did acknowledge that he signed the same as his free and
voluntary act and deed, for the uses and purposes therein
mentioned.
GIVEN under my hand and official seal this 18 day of
June, 1997.
Original Document Notarized
Notary Public in and for the State
of Washington, residing at Seattle
Print Name: Robbie D. Goodrich
My Commission Expires: 9-29-2000
BY-LAWS OF RMX REIT, INC.
Amendment Number 1
Under the authority of Article III, paragraph 3(m) of the
Articles of Incorporation, the Board of Directors hereby amend
Article VIII dividends to read as follows:
Article VIII
DIVIDENDS
8.1 General Policy. The Board of Directors may, from time to
time, declare and the Corporation may pay dividends on its
outstanding shares in the manner and upon the terms and
conditions provided by law and its Articles of Incorporation.
The policy shall be to declare and pay quarterly dividends,
provided profits are available for distribution.
8.2 Cash Dividends. Cash dividends shall be paid on a per
day owned basis by Company check mailed to the last known
mailing address of each shareholder, not later than 30 days
after the end of each calendar quarter, i.e., April 30, July 30,
October 30, and January 30.
8.3 Reinvested Dividends. Shareholders may elect to be paid
stock dividends based on the per share issue price of $5.00 per
share. The stock shall be effective on the first day of the
next succeeding quarter, e.g., the first calendar quarter ends
on March 31 and the stock shall be issued effective on the 1st
day of April. Any change in the election must be made in
writing and transmitted to the Secretary not later than 10 days
prior to the end of the calendar quarter. Any change in said
election shall remain automatically effective until subsequently
changed.
8.4 Stock Dividend Restrictions. The Secretary shall restrict
reinvested dividends in the company stock in the event that the
policy is inconsistent with any State of Federal Securities Law.
8.5 Taxation. The Shareholders shall be taxed on the stock
dividends the same as on cash dividends as provided for in any
applicable State and Federal Income Tax Code.
ADOPTED BY RESOLUTION OF THE BOARD OF DIRECTORS on the 27 day
of May, 1998.
ATTEST:
/S/ Melvin L. Johnson, Jr.
Secretary
/S/ William R. Sanden
President
APPROVED:
/S/ Sue M. Cooper, Vicke L. Swanson & Joe Zimmer
Independent Members of the Board of Directors
/S/ Jerry Vanhook
Other Members of the Board of Directors
<PAGE>
BY-LAWS OF RMX REIT, INC.
PREAMBLE
RMX REIT, Inc. is a Real Estate Investment Trust organized for
the purposes of aggregating equity capital from investors and
purchasing loans secured by real estate, which provide as high a
rate of return as possible consistent with the risk factors
associated with the loan. It is the intent of the Board of
Directors that this Company shall continue to meet the Internal
Revenue Service definition for a Real Estate Investment Trust as
set forth in 26 USC 856, in order for the Company to be able to
deduct the dividends paid to the investors from gross income as
set forth in 26 USC 857. It is the further intent of the Board
of Directors that these By-laws of the Company shall conform to
the WAC 460-16A-205(e), which adopts the NASAA statements of
policy as set forth in Sections 3401 et. seq. regarding the
management and operations of Real Estate Investment Trusts. In
event of a conflict between the Internal Revenue Service Code
and the Washington Administrative Code regarding Real Estate
Investment Trusts, the Internal Revenue Service Code shall be
deemed to preempt the provisions of the Washington
Administrative Code. The Board of Directors shall be authorized
to take any action necessary to preserve the REIT Federal Income
Tax Status of the Company.
Article I
OFFICES
1.1 The principal office of the Corporation is in the State of
Washington and shall be located at 220 West Mercer Street #400,
in the City of Seattle, and the County of King with a zip code
of 98119. The Corporation may have such other offices, either
within or without the State of Washington, as the Board of
Directors may designate or as the business of the Corporation
may require from time to time.
1.2 The registered office of the Corporation, required by the
Washington Business Corporations Act to be maintained in the
State of Washington, is the same as the principal office in the
State of Washington. The principle office and the registered
office of the Corporation may be changed from time to time by
the Board of Directors.
Article II
STOCKHOLDERS
2.1 Annual Meeting. The annual meeting of the Stockholders
shall be held on the Thirtieth (30th) day of November in each
year, beginning with the year 1997, at the hour of 10:00 o'clock
a.m., or such other time on such day within such month as shall
be fixed by the Board of Directors, for the purpose of electing
Directors and for the transaction of such other business as may
come before the meeting. If the day fixed for the annual
meeting shall be a legal holiday in the State of Washington,
such meeting shall be held when directed by the Board of
Directors shall cause the election to be held at a special
meeting of the Stockholders as soon thereafter as conveniently
may be.
2.2 Special Meetings. Special meetings of the Stockholders, for
any purpose or purposes, unless otherwise prescribed by statute,
may be called by the Chairman of the Board of Directors, and
shall be called by the Chairman at the request of the holders of
not less than one-tenth of all outstanding shares of the
Corporation entitled to vote at the meeting.
2.3 Place of Meeting. The Board of Directors may designate any
place, either within or without the State of Washington, as the
place of meeting for any annual meeting or for any special
meeting called by the Board of Directors. A waiver of notice
signed by all Stockholders entitled to vote at a meeting may
designate any place, either within or without the State of
Washington, as the place for the holding of such meeting. If no
designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal office of
the Corporation in the State of Washington.
2.4 Notice of Meeting. Written notice stating the place, day
and hour of the meeting and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall,
unless otherwise prescribed by statute, be delivered not less
than ten nor more than fifty days before the date of the
meeting, either personally or by mail, by or at the direction of
the President, or the Secretary, or the Officer or other persons
calling the meeting, to each Stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to
be delivered when deposited in the U.S. mail, addressed to the
Stockholder at his address as it appears on the stock transfer
books of the Corporation, with postage thereon prepaid.
2.5 Closing of Transfer Books or Fixing of Record Date. For
any purpose of determining Stockholders entitled to notice of or
to vote at any meeting of Stockholders or any adjournment
thereof, or Stockholders entitled to receive payment of any
dividend, or in order to make a determination of Stockholders
for any other proper purpose, the Board of Directors of the
Corporation may provide that the stock transfer books of the
Corporation may provide that the stock transfer books shall be
closed for a stated period but not to exceed, in any case, fifty
days. If the stock transfer books shall be closed for the
purpose of determining Stockholders entitled to notice of or to
vote at a meeting of Stockholders, such books shall be closed
for at least ten days immediately preceding such meeting. In
lieu of closing the stock transfer books, the Board of Directors
may fix in advance a date as the record date of any such
determination of Stockholders, such date in any case to be not
more than fifty days, and in case of a meeting of Stockholders,
not less than ten days prior to the date of which the particular
action requiring such determination of Stockholders entitled to
notice of or to vote at a meeting of Stockholders, or
Stockholders entitled to receive payment of a dividend, the date
on which notice of the meeting is mailed or the date on which
the resolution of the Board of Directors declaring such dividend
is adopted, as the case may be, shall be the record date for
such determination of Stockholders. When a determination of
Stockholders entitled to vote at any meeting of Stockholders has
been made as provided in this section, such determination shall
apply to any adjournment thereof.
2.6 Voting Record. The officer or agent having charge of the
stock transfer books for shares of the Corporation shall make a
complete record of the Stockholders entitled to vote at each
meeting of Stockholders or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares
held by each. Such record shall be produced and kept open at
the time and place of the meeting and shall be subject to the
inspection of any Stockholder during the whole time of the
meeting for the purposes thereof.
2.7 Quorum. A simple majority of the outstanding shares of
the Corporation entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of Stockholders.
A majority of the shares so represented may adjourn the meeting
from time to time without further notice. At such adjourned
meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at
the meeting as originally noticed. The Stockholders present at
a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough
Stockholders to comprise less than a quorum.
2.8 Proxies. At all meetings of Stockholders, a Stockholder
may vote in person or by proxy executed in writing by the
Stockholder or by his duly authorized attorney-in-fact. Such
proxy shall be filed with the Secretary of the Corporation
before or at the time of the meeting. No proxy shall be valid
after eleven months from the date of its execution, unless
otherwise provided in the proxy.
2.9 Voting of Shares. Subject to the provisions of Section 12
of this Article II, each outstanding share entitled to vote
shall be entitled to one vote upon each matter submitted to a
vote at a meeting of Stockholders.
2.10 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 By-laws of such Corporation may prescribe,
or, in the absence of such provision, as the Board of Directors
of such other Corporation may determine.
Shares held by an administrator, executor, guardian or
conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares
standing in the name of a trustee may be voted by him, either in
person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his
name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver
may be voted by such receiver without the transfer thereof into
his name if authority so to do be contained in an appropriate
order of the court by which such receiver was appointed.
A Stockholder whose shares are pledged shall be entitled to
vote such shares until the shares have been transferred into the
name of the pledgee, and thereafter the pledgee shall be
entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the
Corporation, nor shares held by another Corporation if a
majority of the shares entitled to vote for the election of
Directors of such other Corporation are held by the Corporation,
shall be voted at any meeting or counted in determining the
total number of outstanding shares at any given time for
purposes of any meeting.
2.11 Informal Action by Shareholders. Any action required or
permitted to be taken at a meeting of the Stockholders may be
taken without a meeting if a consent in writing, setting forth
the action so taken, shall be signed by all of the Stockholders
entitled to vote with respect to the subject matter thereof.
2.12 Stock Transfer Restriction. The authorized and issued
stock in this Corporation is not restricted. However, the
Corporation retains the right to refuse to recognize or to void
any stock transfer that would make the Corporation ineligible to
meet the Internal Revenue Code provisions for maintaining the
favorable Real Estate Investment Trust profit pass through
provisions.
2.13 Redemption of Shares. The Secretary shall not redeem
shares from existing shareholders, in order to preserve its
exemption from compliance with the provisions of the Investment
Company Act of 1940. In event a shareholder desires to sell
his/her stock, the Secretary shall provide the selling
Shareholder with a by name list of all Shareholders, and the
addresses, and may inform other Shareholders or potential
Shareholders that the stock is for sale. The Secretary may also
authorize the dividend roll overs to be aggregated toward their
purchase of the selling Shareholders stock, but must do so on
advise and consent of counsel.
Article III
BOARD OF DIRECTORS
3.1 General Powers. The business and affairs of the
Corporation shall be managed by the Board of Directors.
3.2 Number, Tenure and Qualifications. The number of
Directors of the Corporation shall be five (5), at least three
(3) shall be Independent Board Members as defined by the NASAA
statements of policy as adopted by the Washington Administrative
Code and as interpreted by the written opinion of Counsel in the
event of a disagreement by Board Members. Each Director shall
hold office until the next annual meeting of Stockholders and
until their successors have been elected and qualified.
Directors need not be residents of the State of Washington but
must be shareholders of the Corporation.
3.3 Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this By-law
immediately after, and at the same place as, the annual meeting
of Stockholders or the Company Offices or other designated
meeting place. The Board shall meet at a minimum of once each
quarter, during the months of January, April, July and October
for the purposes of discussing the financial performance during
the preceding quarter, to declare dividends, to formally approve
loans acquired during the preceding quarter, to approve payments
made to the management company and to discuss other business.
The Board of Directors may provide, by resolution, the time and
place, either within or without the State of Washington, for the
holding of additional regular meetings without other notice than
such resolution. The meeting may be held by telephone
conference or by written instrument as authorized by the
Articles of Incorporation.
3.4 Special Meetings. Special meetings of the Board of
Directors may be called by or at the request of the President or
by any individual Director. The person or persons authorized to
call special meetings of the Board of Directors may fix any
place, either within or without the State of Washington, as the
place for holding any special meeting of the Board of Directors
called by them. The meeting may be held by telephone conference
or by written instrument as authorized by the Articles of
Incorporation.
3.5 Notice. Notice of any special meeting shall be given at
least two days previously thereto by written notice delivered
personally or mailed to each Director at his business address,
or by telegram. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail, so
addressed, with postage thereon prepaid. If notice be given by
telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. Any Director
may waive notice of any meeting. The attendance of a Director
at a meeting shall constitute a waiver of notice of such
meeting, except where a Director attends a meeting for the
express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither
the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
3.6 Quorum. A majority of the number of Directors fixed by
Section 2 of this Article III shall constitute a quorum for the
transaction of business at any meeting of the Board of
Directors, but if less than such majority is present at a
meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.7 Manner of Acting. The act of the majority of the
Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
3.8 Action Without a Meeting. Any action required or
permitted to be taken by the Board of Directors at a meeting may
be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the
Directors.
3.9 Vacancies. Any vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of
the remaining Directors though less than a quorum of the Board
of Directors. A Director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office.
Any directorship to be filled by election by the Board of
Directors for a term of office continuing only until the next
election of Directors by the Stockholders.
3.10 Compensation. By resolution of the Board of Directors,
each Director may be paid for out of pocket expenses, if any, of
attendance at each meeting of the Board of Directors, and may be
paid a stated salary as director or a fixed sum for attendance
at each meeting of the Board of Director or both. No such
payment shall preclude any Director from serving the Corporation
in any other capacity and receiving compensation therefor.
3.11 Presumption of Assent. A Director of the Corporation who
is present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be presumed to
have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file
his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a Director who voted in
favor of such action.
Article IV
OFFICERS
4.1 Number. The Officers of the Corporation shall be a
President, one or more Vice Presidents (the number thereof to be
determined by the Board of Directors), a Secretary, and a
Treasurer, each of whom shall be elected by the Board of
Directors. The President of the Corporation shall also be the
Chairman of the Board of Directors. Any two or more Offices may
be held by the same person, except the Offices of President and
Secretary.
4.2 Election and Term of Office. The Officers of the
Corporation to be elected by the Board of Directors shall be
elected annually by the Board of Directors at the first meeting
of the Board of Directors held after each annual meeting of the
Stockholders. If the election of Officers shall not be held at
such meeting, such election shall be held as soon thereafter as
conveniently may be. Each Officer shall hold office until his
successor shall have been duly elected and shall have qualified
or until his death or until he shall resign or shall have been
removed in the manner hereinafter provided.
4.3 Removal. Any Officer or agent may be removed by the Board
of Directors whenever in its judgment the best interest of the
Corporation will be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an Officer or agent
shall not of itself create contract rights.
4.4 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be
filled by the Board of Directors for the unexpired portion of
the term.
4.5 President. The president shall be the Principal Executive
Officer of the Corporation and, subject to the control of the
Board of Directors, shall in general supervise and control all
of the businesses and affairs of the Corporation. He shall,
when present, preside at all meetings of the Stockholders and of
the Board of Directors. He shall also have the title of
Chairman of the Board of Directors and therefore, the title of
President and Chairman may be used interchangeably. He may sign,
with the Secretary or any other property Officer of the
Corporation thereunto authorized by the Board of Directors,
certificates for shares of the Corporation and deeds, mortgages,
bonds, contracts, or other instruments which the Board of
Directors has authorized to be executed, except in cases where
the signing and execution thereof shall be expressly delegated
by the Board of Directors or by these By-laws to some other
Officer or agent of the Corporation, or shall be required by law
to be otherwise signed or executed; and in general shall perform
all duties incident to the office of President and such other
duties as may be prescribed by the Board of Directors from time
to time.
4.6 The Vice Presidents. In the absence of the President or
in the event of his death, inability or refusal to act, the Vice
President (or in the event there be more than one Vice
President, the Vice Presidents in the order designated at the
time of their election, or in the absence of any designation,
then in the order of their election) shall perform the duties of
the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Any
Vice President may sign, with the Secretary or an Assistant
Secretary, certificates for shares of the Corporation; and shall
perform such other duties as from time to time may be assigned
to him by the President or by the Board of Directors.
4.7 The Secretary. The Secretary shall: (a) keep the minutes
of the proceedings of the Stockholders and of the Board of
Directors in one or more books provided for that purpose; (b)
see that all notices are duly given in accordance with the
provision of these By-laws or as required by the law; (c) be
custodian of the corporate records and of the seal of the
Corporation and see that the seal of the Corporation is affixed
to all documents the execution of which on behalf of the
Corporation under its seal duly authorized; (d) keep a register
of the post office address of each Stockholder which shall be
furnished to the Secretary by such Stockholder; (e) sign with
the President, or a Vice President, certificates for shares of
the Corporation, the issuance of which shall have been
authorized by resolution of the Board of Directors; (f) have
general charge of the stock transfer books of the Corporation;
(g) in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be
assigned to by the President or by the Board of Directors.
4.8 The Treasurer. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of
the Corporation; (b) receive and give receipts for monies due
and payable to the Corporation from any source whatsoever, and
deposit all such monies in the name of the Corporation in such
banks, trust companies or other depositories as shall be
selected in accordance with the provision of Article V of these
By-laws; and (c) in general perform all of the duties incident
to the office of Treasurer and such other duties as from time to
time may be assigned to him by the President or by the Board of
Directors. If required by the Board of Directors, the Treasurer
shall give a bond for the faithful discharge of his duties in
such sum and with such surety of sureties as the Board of
Directors shall determine.
4.9 Assistant Secretaries and Assistant Treasurer. The
Assistant Secretaries, when authorized by the Board of
Directors, may sign with the President or Vice President
certificates for shares of the Corporation the issuance of which
shall have been authorized by a resolution of the Board of
Directors. The Assistant Treasurer shall respectively, if
required by the Board of Directors, give bonds for the faithful
discharge of their duties in such sums and with such sureties as
the Board of Directors shall determine. The Assistant
Secretaries and Assistant Treasurer, in general, shall perform
such duties as shall be assigned to them by the Secretary or the
Treasurer, respectively, or by the President of the Board of
Directors.
4.10 Salaries. The salaries of the Officers shall be fixed
from time to time by the Board of Directors and no Officer shall
be prevented from receiving such salary by reason of the fact
that he is also a Director of the Corporation.
Article V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 Contracts. 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, such authority may be general or
confined to specific instances.
5.2 Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in
its name unless authorized by a resolution of the board of
Directors. Such authority may be general or confined to
specific instances.
5.3 Checks, Drafts, etc. 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 such Officer or Officers, 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.
5.4 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.
Article VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 Certificates for Shares. Certificates representing shares
of the Corporation shall be in such form as shall be determined
by the Board of Directors. Such certificates shall be signed by
the President or a Vice President and by the Secretary or an
Assistant Secretary and sealed with the corporate seal or a
facsimile thereof. The signatures of such Officers upon a
certificate is manually signed on behalf of a transfer agent or
a registrar, other than the Corporation itself or one of its
employees. Each certificate for shares shall be consecutively
numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with
the number of shares and date of issue, shall be entered on the
stock transfer books of the Corporation. All certificates
surrendered to the Corporation for transfer shall be cancelled
and no new certificates shall be issued until the former
certificate for a like number of shares shall have been
surrendered and cancelled, except that in case of a lost,
destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the Corporation as the
Board of Directors may prescribe.
6.2 Transfer of Shares. The transfer of shares of the
corporation shall be made only on the stock transfer books of
the corporation by the holder of record thereof or by his/her
legal representation, who shall furnish proper evidence of
authority to transfer, or be his attorney thereunto authorized
by power of attorney duly executed and filed with the Secretary
of the Corporation, and on surrender for cancellation of the
certificate for such shares. The person in whose name shares
stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes. The
Secretary shall approve all transfers prior to said transfers
being recorded on the Corporate Stock Record. The Corporate
Board of Directors hereby empowers the Secretary to void any
transfer of stock for the purpose of maintaining the REIT tax
status of the Corporation (IRC 856 et seq).
Article VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day
of January and end on the thirty-first day of December in each
year.
Article VIII
DIVIDENDS
The Board of Directors may, from time to time, declare and the
Corporation may pay dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law and its
Articles of Incorporation. The policy shall be to declare and
pay quarterly dividends, provided profits are available for
distribution.
Article IX
CORPORATE SEAL
The Board of Directors shall provide a corporate seal which
shall be circular in form and shall have inscribed thereon the
name of the Corporation and the state of incorporation and the
words "Corporate Seal".
Article X
WAIVER OF NOTICE
Whenever any notice is required to be given to any Stockholder
or Director of the Corporation under the provisions of these
By-laws or under the provisions of the Articles of Incorporation
or under the provisions of the Washington Business Corporation
Act, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the stated
therein, shall be deemed equivalent to the giving of such notice.
Article XI
AMENDMENTS
These By-laws may be altered, amended or repealed and new
By-laws may be adopted by the Board of Directors or by the
Stockholders at any regular or special meeting.
Article XII
EXECUTIVE COMMITTEE AUTHORIZED AND ADOPTED BY RESOLUTION
12.1 Appointment. The Board of Directors by resolution
adopted by a majority of the full Board, may designate three or
more of its members to constitute an executive committee, which
shall include a majority of Independent Members. The
designation of such committee and the delegation thereto of
authority shall not operate to relieve the board of Directors,
or any member thereof, of any responsibility imposed by law.
12.2 Authority. The executive committee, when the Board of
Directors is not in session shall have and may exercise all of
the authority of the Board of Directors except to the extent, if
any, that such authority shall be limited by the resolution
appointing the executive committee and except also that the
executive committee shall not have the authority of the Board of
Directors in reference to amending the Articles of
Incorporation, adopting a plan of merger of consolidation,
recommending to the Stockholders the sale, lease or other
disposition of all or substantially all of the property and
assets of the Corporation otherwise than in the usual and
regular course of its business, recommending to the Stockholders
a voluntary dissolution of the Corporation or a revocation
thereof, or amending the By-laws of the Corporation.
12.3 Tenure and Qualifications. Each member of the executive
committee shall hold office until the next regular annual
meeting of the Board of Directors following his designation and
until his successor is designated as a member of the executive
committee and is elected and qualified.
12.4 Meetings. Regular meetings of the executive committee
may be held without notice at such times and places as the
executive committee may fix from time to time by resolution.
Special meetings of the executive committee may be called by any
member thereof upon not less than one day's notice stating the
place, date and hour of the meeting, which notice may be written
or oral, and if mailed, shall be deemed to be delivered when
deposited in the United States mail addressed to the member of
the executive committee at his business address. Any member of
the executive committee may waive notice of any meeting and no
notice of any meeting need be given to any member thereof who
attends in person. The notice of a meeting of the executive
committee need not state the business proposed to be transacted
at the meeting.
12.5 Quorum. A majority of the members of the executive
committee shall constitute a quorum for the transaction of
business at any meeting thereof, and action of the executive
committee must be authorized by the affirmative vote of a
majority of the members present at a meeting at which a quorum
is present.
12.6 Action Without a Meeting. Any action required or
permitted to be taken by the executive committee at a meeting
may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by all of the members
of the executive committee.
12.7 Vacancies. Any vacancy in the executive committee may be
filled by a resolution adopted by a majority of the full Board
of Directors.
12.8 Resignations and Removal. Any member of the executive
committee may be removed at any time with or without cause by
resolution adopted by a majority of the full Board of Directors.
Any member of the executive committee may resign from the
executive committee at any time by giving written notice to the
President or Secretary of the Corporation, and unless otherwise
specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
12.9 Procedure. The executive committee shall elect a
presiding officer from its members and may fix its own rules of
procedure which shall not be inconsistent with these By-laws.
It shall keep regular minutes of its proceedings and report the
same to the Board of Directors for its information at the
meeting thereof held next after the proceedings shall have been
taken.
Article XIII
EMERGENCY BY-LAWS
The Emergency By-laws provided in this Article XIII shall be
operative during any emergency in the conduct of the business of
the Corporation resulting from an attack on the United States or
any nuclear or atomic disaster, notwithstanding any different
provision in the preceding Articles of the By-laws or in the
Articles of Incorporation of the Corporation or in the
Washington Business Corporation Act. To the extent not
inconsistent with the provisions of this Article, the By-laws
provided in the preceding Articles shall remain in effect during
such emergency and upon its termination the Emergency By-laws
shall cease to be operative.
During any such emergency:
(a) A meeting of the Board of Directors may be called by any
Officer or Director of the Corporation. Notice of the time and
place of the meeting shall be given by the person calling the
meeting to such of the Directors as it may be feasible to reach
by any available means of communication. Such notice shall be
given at such time in advance of the meeting as circumstances
permit in the judgment of the person calling the meeting.
(b) At any such meeting of the Board of Directors, a quorum
shall consist of two (2) Directors or two fifths (2/5) of the
Directors.
(c) The Board of Directors, either before or during any such
emergency, may provide, and from time to time modify, lines of
succession in the event that during such an emergency any or all
Officers or agents of the Corporation shall for any reason be
rendered incapable of discharging their duties.
(d) The Board of Directors, either before or during any such
emergency, may, effective in the emergency, change the head
office or designate several alternative head offices or regional
offices, or authorize the Officers to do so.
No Officer, Director or employee acting in accordance with
these Emergency By-laws shall be liable except for willful
misconduct.
These Emergency By-laws shall be subject to repeal or change by
further action of the Board of Directors or by action of the
Stockholders, but no such repeal or change shall modify the
provisions of the next preceding paragraph with regard to action
taken prior to the time of such repeal or change. Any amendment
of the Emergency By-laws may make any further or different
provision that may be practical and necessary for the
circumstances of the emergency.
Article XIV
INVESTMENT POLICY
The Investment Policy adopted by the Shareholders are
incorporated herein as follows.
(a) The Company shall purchase loans with investors' funds and
proceeds from the pay-off of loans, which shall be secured with
equity income or an interest in real property and personal
property. The security for the loan shall be land located in
the Pacific Northwest (Washington, Oregon and Idaho), unless
approved by the Board of Directors by specific resolution or any
continuing resolution. The loans and monthly payments shall
generally be amortized over fifteen (15) to thirty (30) years at
fixed interest rates. Balloon payments at (5) to (7) years are
to be encouraged, so as to reduce the interest rate risk. All
loan fees shall be paid by the borrowers including the
acquisition fee paid to the management company or any other loan
originator.
(b) The investment criteria shall be as follows, loans (i) on
unimproved real property, which is defined as that property not
acquired for the purpose of producing rental or other operating
income, has no development or construction in progress on the
land and has no development construction planned on the land to
commence within one year, a maximum of forty percent (40%) loan
to value ratio, (ii) on productive farm land, fifty percent
(50%) loan to value ratio, (iii) on substandard residential and
commercial property, sixty percent (60%) loan to value ratio,
and (iv) on real property and residential and commercial
property up to seventy percent (70%) loan to value ratio.
(c) The Board of Directors and advisors shall purchase loans
with a target annual return of 8% to 10% to the shareholders in
the form of regular quarterly dividend distributions.
(d) The Company shall not invest more than ten percent (10%)
of its total assets in unimproved real property or loans secured
by unimproved real property. The Company shall not commit more
than twenty five percent (25%) of its total assets in any one
loan until the total assets reach four million dollars
($4,000,000), then no more than twenty percent (20%) of its
total assets in any one loan until the total assets reach five
million dollars ($5,000,000), then no more than fifteen percent
(15%) of its total assets in any one loan until the total assets
reach seven million dollars ($7,000,000, then no more than ten
percent (10%) of its total assets after the total assets total
more than ten million dollars ($10,000,000).
(e) The Board of Directors shall approve all loans made during
the calendar quarter at the quarterly meeting of the Board of
Directors. A special committee composed of any two (2)
Independent Board Members shall approve in advance by a written
resolution all loans acquired that exceed $200,000 of company
funds.
ADOPTED BY RESOLUTION OF THE BOARD OF DIRECTORS on this 12
day of September, 1997.
ATTEST:
/S/ Melvin L. Johnson, Jr.
Secretary
/S/ William R. Sanden
President
APPROVED:
/S/ Sue M. Cooper, Vicke L. Swanson & Joe Zimmer
Independent Members of the Board of Directors
/S/ Jerry Vanhook
Other Members of the Board of Directors
MINUTES OF THE ORGANIZATIONAL MEETING
OF THE BOARD OF DIRECTORS
OF
RMX REIT, INC.
TIME AND PLACE
The organizational meeting of the Board of Directors named in
the Articles of Incorporation of RMX REIT, INC. was held at CLS
Financial Services, Inc., 4720 200th Street SW, Suite 200, in
the City of Lynnwood, in the State of Washington at 11:00 a.m.,
on September 12, 1997, pursuant to a Waiver of Notice signed by
each Director.
PRESENT
William R. Sanden presided over the meeting and appointed Mel
Johnson to act as Secretary of the meeting. Present was Ralph
Ripley, Jerry Vanhook, Vickie L. Swanson, Joe Zimmer and Sue
Cooper. Also present was DOUGLAS M. O'COYNE, SR. and RICHARD A.
EKMAN, the attorneys for the Corporation. All persons by their
presence did waive notice of the meeting.
ARTICLES OF INCORPORATION
The Chairman reported that the Company's Articles of
Incorporation had been filed in the office of the Secretary of
State of the State of Washington, on June 19, 1997. A
counterpart of the Articles, bearing the approval of the
Secretary of State and having attached the Certificate of
Incorporation, was presented to the meeting, and the Secretary
was instructed to place the copy of the Articles in the minute
book of the Company. The corporate registration number is 601
799 020.
BYLAWS
A set of proposed Bylaws for the regulation and government of
the affairs of the Company was presented to the meeting. After
discussion, and upon motion duly made and seconded, the
following resolution was unanimously adopted:
RESOLVED, that the Bylaws in the form presented to this meeting
are hereby approved and adopted as the Bylaws of the Company,
and that the Secretary is directed to file them in the minute
book.
APPOINTMENT OF DIRECTORS
The meeting was declared open for the appointment of directors
of the Corporation. After discussion, upon motion duly made and
seconded the following directors were unanimously appointed to
serve until December 31, 1998, or until their respective
successors are elected and qualified, provided each director
signs an affidavit stating that he has had no criminal charges
or bankruptcy charges.
Director and Chairman of the Board Ralph Ripley
Director Jerry Vanhook
Independent Director Vickie L. Swanson
Independent Director Joe Zimmer
Independent Director Sue Cooper
ELECTION OF OFFICERS
The meeting was declared open for the election of officers.
After discussion, upon motion duly made and seconded, the
following officers were unanimously elected to serve until the
next annual meeting and until their respective successors are
elected and qualified.
President and Chief Executive Officer William R. Sanden
Secretary Mel Johnson
STOCK CERTIFICATES
A form of stock certificate was submitted to be utilized by the
Company in issuing its stock.
After discussion, and upon motion duly made and recorded, the
following resolution was unanimously adopted:
RESOLVED, that the form of stock certificate presented is
hereby approved and adopted as the form of certificate to be
utilized by the corporation in issuing its stock, and the
Secretary is directed to file a copy of such stock certificate
with the minutes of this meeting.
STOCK OFFERING
The Chairman discussed the advantages and disadvantages of
registering the stock under Federal Regulation SB. After
discussion, and upon motion duly made and recorded, the
following resolution was unanimously adopted:
RESOLVED, that the Corporation is authorized to complete the
administrative requirements for issuance of not more than two
million four hundred thousand (2,400,000) shares at the offering
price of five dollars ($5.00) per share pursuant to Rule SB.
After review of the offering as completed, and after discussion
and upon motion duly made and recorded.
IT WAS FURTHER RESOLVED, that the Registration Statement as
proposed is approved to be filed with the SEC in Washington,
D.C., and with the Securities Division of the Department of
Financial Institutions in the State of Washington.
IT WAS FURTHER RESOLVED, that the officers shall open an
interest bearing FDIC insured escrow account for deposit of all
offering funds until the minimum offering is collected and on
deposit.
BANK ACCOUNT
It was considered advisable for the Company to establish a bank
account. The Board authorized the President and Secretary to
establish an appropriate bank account for checking and an
appropriate bank account for savings on behalf of the
Corporation.
The Chairman presented to the meeting that the Stockholders
proposed that each Stock Certificate be issued in/not in Joint
Tenancy with the Right of Survivorship to the other stockholder.
Upon motion duly made the seconded, the following resolution
was unanimously adopted:
RESOLVED, that the Directors shall establish a corporate bank
account for the uses and purposes deemed commercially necessary
by the Directors.
MANAGEMENT CONTRACT
The Chairman presented the Management Contract with CLS
Financial Services, Inc. After discussion, upon motion duly
made and recorded, the following resolution was adopted:
RESOLVED, that the Contract as negotiated between RMX REIT,
INC. and CLS Financial Service, Inc. is authorized to be
executed by the Corporate Officers and the Secretary is directed
to file a copy of such agreement with the minutes of this
meeting.
COMPENSATION OF DIRECTORS
The Chairman discussed the pros and cons for compensating
directors. After discussion, upon motion duly made and
recorded, the following resolution was adopted:
RESOLVED, that the Directors shall not be entitled to be
compensated for attendance at meetings.
COMPENSATION OF OFFICERS
The Chairman presented the Employment Contracts with the
President. After discussion, upon motion duly made and
recorded, the following resolution was adopted:
RESOLVED, that the Employment Contract as negotiated between
the Company and its President, regarding compensation and the
performance of his duties, as further agreed to by the
Employment Contract is authorized to be executed by the
Corporate Officers and the Directors, and the Secretary is
directed to file a copy of such agreement with the minutes of
this meeting.
FISCAL YEAR
The Corporation's fiscal year was discussed. Upon motion duly
made and seconded, the following resolution was unanimously
adopted:
RESOLVED, that this Corporation adopt a fiscal year, ending
December 31st of each calendar year.
SUBSCRIPTION AGREEMENT
The Chairman then exhibited to the directors a proposed Stock
Subscription Agreement form and Investment Letter. Upon motion
duly made and seconded, the following motion was unanimously
adopted:
RESOLVED, that the Stock Subscription Agreement form and
Investment Letter examined by the directors at this meeting is
adopted as the Stock Subscription Agreement form and Investment
Letter of the Corporation. The Secretary is directed to insert
a copy of the form in the form and letter in the minute book and
attach it to the minutes of this meeting.
There being no further business to come before the meeting, the
meeting was adjourned.
Executed on the 12 day of September, 1997.
ATTEST:
Original Document Signed
MELVIN L. JOHNSON, Jr.
Secretary
Original Document Signed
WILLIAM R. SANDEN
President
APPROVED:
Original Document Signed by: Sue M. Cooper, Vicke Swanson and
Joe Zimmer
Independent Members of the Board of Directors
Original Document Signed by: Jerry Vanhook
Chairman and other Members of the Board of Directors
RMX REIT, INC.
Common Stock
Incorporated Under the Laws of
the State of Washington
Certificate Number: Shares:
This certifies that SSN; , is the owner of ( )
fully paid and nonassessable shares of the common stock of RMX
REIT, INC., transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed.
This certificate is not valid until signed by the Corporation
President.
This restrictions on the reverse side of this Certificate are
an integral part hereof. Said Stock is/is not held in Joint
Tenancy with the right of survivorship with spouse;
SSN; .
IN WITNESS WHEREOF, the Corporation has caused this Certificate
to be signed by its duly authorized officers.
DATED this day of , 19 .
WILLIAM R. SANDEN, President
MELVIN JOHNSON, Secretary
A full statement of the designation, relative rights,
preferences, and limitations of the shares of the class
authorized to be issued; and the designation, relative rights,
preferences, and limitations of the shares of this class so far
as the same have been fixed by the Board of Directors will be
furnished to any shareholder upon request and without charge.
This stock is "Section 1244 Stock" under the definitions
provided for under Section 1244 of the Internal Revenue Code of
the United States.
This stock may be pledged according to the Bylaws of the
Corporation, however, the record owner of these shares
represented by this Certificate shall retain all voting rights.
Said shares shall not be transferred on the Corporate records
without the written acknowledgment of the Secretary of the
Corporation. The Secretary of the Corporation is empowered to
VOID any transfer or attempted transfer of these shares that
would preclude the Company from electing to file its Federal
Income Tax Return as a Real Estate Investment Trust (REIT).
Record of Stock Transfer
For value received, I hereby sell, assign and transfer unto
,
(name, address, and social security or other identifying number
of assignee) share(s) of the common stock
represented by the within Certificate, and do hereby irrevocably
constitute and appoint , as
attorney to transfer the said stock on the books of the
within-named Corporation with full power of substitution in the
premises.
DATED this day of , 19 .
, Stockholder
APPROVED this day of , 19 .
, Secretary of the Corporation
NOTICE: The signature to this assignment must correspond with
the name as written upon the fact of this Certificate in every
particular, without alteration or enlargement, or any change
whatever.<PAGE>
RMX REIT, INC.
<PAGE>
STOCK SUBSCRIPTION PRE-EFFECTIVITY AGREEMENT
The undersigned hereby subscribes for _________________ shares
of the common stock, par value $5.00 per share, of RMX REIT,
INC., a Washington Corporation (the "Corporation") and agrees to
pay the Corporation the sum of $_________________ for such
shares.
The undersigned agrees that prior to being bound to purchase the
shares, that the offering must be ordered effective, that the
undersigned will be provided with a copy of the prospectus, then
and only when the undersigned executes the investment letter on
the reverse side of this agreement and actually tenders the
funds to purchase said stock.
DATED this ______ day of __________________, 1997.
Shareholder Signature
Name
Address
City/State
Zip Code
Telephone
SSN
Joint Shareholder Signature
(if applicable) Name
Address
City/State
Zip Code
Telephone
SSN
Please Circle: JTWROS Yes No
Certificate Desired Yes No
Reinvest Dividends Yes No
ACCEPTANCE
The foregoing subscription agreement and the consideration
reflected therein are hereby accepted. Certificate # ____ is
authorized for issue.
DATED this ______ day of _________________, 1997.
RMX REIT, INC.
By:
Its:
<PAGE>
RMX REIT, INC.
STOCK SUBSCRIPTION AGREEMENT
The undersigned hereby subscribes for _________________ shares
of the common stock, par value $5.00 per share, of RMX REIT,
INC., a Washington Corporation (the "Corporation") and agrees to
pay the Corporation the sum of $_________________ for such
shares.
The undersigned agrees that prior to the issuance of the shares,
he/she will execute an investment letter in the form attached
hereto to reflect that he/she is acquiring such shares for the
term of the investment.
DATED this ______ day of __________________, 199__.
Shareholder Signature
Name
Address
City/State
Zip Code
Telephone
SSN
Joint Shareholder Signature
(if applicable)Name
Address
City/State
Zip Code
Telephone
SSN
Please Circle: JTWROS Yes No
Certificate Desired Yes No
Reinvest Dividends Yes No
ACCEPTANCE
The foregoing subscription agreement and the consideration
reflected therein are hereby accepted pending effectivity of the
issue. Certificate # ____ is being held for issue .
DATED this ___ day of _________, 199__.
RMX REIT, INC.
By:
Its:
<PAGE>
RMX REIT, INC.
INVESTMENT LETTER
Gentlemen:
I acknowledge receipt of the Prospectus regarding the Issuance
of Common Stock in RMX REIT, INC., a Washington Corporation (the
"Company"). In connection with my acquisition of these
securities, I acknowledge that I have been delivered a copy of
the Prospectus.
I acknowledge that the Company has established investor
suitability standards and that I meet those standards. I
certify that I have, (1) a net worth of at least Twenty Five
Thousand Dollars ($25,000), or (2) an annual income of at least
Thirty Thousand Dollars ($30,000) and a net worth of at least
Ten Thousand Dollars ($10,000), and (3) that money invested in
the Company is not required to be used in support of the family
budget for necessities, other business needs, to repay other
obligations or to fund other investments in the near future.
All computations of net worth exclude the value of my personal
residence, its furnishings and automobiles. I understand that I
am not being asked, nor am I surrendering any right that I may
have under federal and state security laws.
I am acquiring this common stock as a long term investment. I
understand that I may exercise the option to reinvest the
dividends on a quarterly basis and to change the option any time
before the quarter ends.
My stock certificate will be issued and mailed to me when the
Company has reached the minimum subscription level of $350,000.
I acknowledge that the Company is relying on Section 3(c)(5)(c)
that it is exempt from registration from the provisions of the
INVESTMENT ACT OF 1940 and cannot redeem any of the securities.
I acknowledge that the Company will not redeem the stock
represented by this certificate. Initial _____
DATED this ____ day of ________, 199__.
_____________________________________
Print Name and Sign, Shareholder
_____________________________________
Print Name and Sign, Joint Shareholder
(if applicable)
O'COYNE & PHILLIPS P.S.
ATTORNEYS & COUNSELORS AT LAW
A Professional Services Corporation
* DOUGLAS M. O'COYNE, SR. LEGAL ASSISTANTS:
+ SCOTT A. NIEBLING MICHELLE L. HUNT
ROBERT F. PHILLIPS 1929-1991 THERESA SANDERSON
* Admitted to practice in Washington,
Idaho & the U.S. Tax Court
+ Admitted to practice in Washington
December 11, 1997
RMX REIT, Inc.
Attn: Board of Directors
220 West Mercer Street #400
Seattle, Washington 98119
RE: RMX REIT, Inc.
Federal SB Offering
Legality of Stock And Legal Proceedings Opinion
Gentlemen:
This opinion is furnished to you in connection with the federal
registration under Rule SB of RMX REIT, Inc. ("RMX" hereinafter)
regarding the legality of stock being issued in connection with
the federal offering.
In connection with our Opinion, we have reviewed:
The Articles of Incorporation filed with the Corporation
Division of the Office of the Secretary of State in and for the
State of Washington on June 19, 1997; and,
The Bylaws dated September 12, 1997, and,
The Records contained in the Corporate Book; and,
Such other information, including the representations made by
the Officers of the Company, as deemed necessary to adequately
form the basis for the opinion expressed herein.
In such examination, we have assumed the genuineness and
authenticity of all signatures on the original documents, the
authenticity of all items submitted to us and reviewed by us as
originals and the conformity with original documents of all items
submitted to us as copies.
Our opinion is expressed only with respect to the laws governing
corporations incorporated in the State of Washington and we
express no opinion with respect to the incorporation laws of any
other jurisdiction.
Based upon the foregoing, and subject to the further
qualifications set forth below, we are of the opinion that;
1. The Company is a Washington Corporation, duly organized and
validly existing under the laws of the State of Washington, and
has authority to carry on its business as described in the
pending Registration Statement.
2. The Company stock to be issued in connection with the
Federal Registration under Rule SB represents shares authorized
for issue by the Shareholders pursuant to RCW 23B.06.010 at the
arbitrary offering price of five dollars ($5.00) per share is
allowed under RCW 23B.06.210.
3. The restriction on the transfer of the shares for the
purposes of preserving the company's ability to elect to file
its Federal Income Tax Returns as a REIT under IRC 856 et. seq.
is permitted under RCW 23B.06.270(3)(a).
4. The Shares may be issued without certificates pursuant to
RCW 23B.06.260. The Company policy not to issue Certificates
unless the Shareholder requests that a Certificate be issued in
writing, is allowable under Washington Corporation Law. The
Certificate form to be issued in connection with the Federal
Registration under Rule SB meets the requirements of RCW
23B.06.250.
5. The Company is not presently involved nor does it expect to
be involved in any legal proceedings, excepting collection
actions on loans that are in default. Since the Company will be
involved in purchasing loans secured by real property, it will,
by its very nature always be involved in collection activities
to enforce collection on past due loans, including but not
limited to Judicial and Nonjudicial Foreclosure of Deeds of
Trusts, Mortgage Foreclosures and Real Estate Contract
Forfeitures. The undersigned Counsel is of the opinion that
collection actions on delinquent accounts does not constitute
pending or threatening litigation under Financial Accounting
Standards Board Opinion Number 5 (FASB 5) and is properly
categorized as routine litigation incidental to its business.
6. Counsel is not aware of any proceeding that a governmental
authority is contemplating against the Company. However, the
Company can expect that its financial records will be reviewed
or audited by the Internal Revenue Service for correctness and
compliance with the Internal Revenue Code regarding its REIT tax
status. The Company can also expect that its operations and
financial records will be reviewed by Federal and or State
Security Regulators regarding its compliance with Security
Regulations.
7. The position of Counsel for the Company is that there are no
unasserted claims against the Company that are probable of
assertion and if asserted would have at least a reasonable
possibility of an unfavorable outcome.
This opinion is delivered to you for use with your registration
filing with the Security and Exchange Commission pursuant to
Rule SB and is not to be used or relied on by you or any other
person for any other purpose.
Sincerely yours,
By: Original Signed
DOUGLAS M. O'COYNE, SR.
Attorney at Law
DOC/rs
cc: Company Officers, RMX REIT, Inc.
O'COYNE & PHILLIPS P.S.
ATTORNEYS & COUNSELORS AT LAW
A Professional Services Corporation
* DOUGLAS M. O'COYNE, SR. LEGAL ASSISTANTS:
+ SCOTT A. NIEBLING MICHELLE L. HUNT
ROBERT F.PHILLIPS 1929-1991 THERESA SANDERSON
* Admitted to practice in Washington,
Idaho & the U.S. Tax Court
+ Admitted to practice in Washington
December 11, 1997
RMX REIT, Inc.
Attn: Board of Directors
220 West Mercer Street #400
Seattle, WA 98119
RE: RMX REIT, Inc.
Federal SB Offering
Opinion on Federal Income Tax Consequences
Gentlemen:
This opinion is furnished to you in connection with the federal
registration under Rule SB of RMX REIT, Inc. ("RMX" hereinafter)
regarding the Federal Income Tax Consequences associated with
this stock being issued in connection with the federal offering.
In connection with our Opinion, we have reviewed the Articles of
Incorporation, the By-laws, the Certified Stock Register, the
Records contained in the Corporate Book and such other
information, including the representations made by the Officers
of the Company, as deemed necessary to adequately form the basis
for the opinion expressed herein.
In such examination, we have assumed the genuineness and
authenticity of all signatures on the original documents, the
authenticity of all items submitted to us and reviewed by us as
originals and the conformity with original documents of all
items submitted to us as copies.
Our opinion is expressed only with respect to the laws governing
Corporations incorporated in the State of Washington which has
no Income Tax, and the provision applicable to a Real Estate
Investment Trust (REIT) in the Internal Revenue Code of the
United States.
Based upon the foregoing, and subject to the further
qualifications set forth below, we are of the opinion that;
1. The Company qualifies as a REIT for Federal Income Tax
purposes so long as it meets and continues to meet the
definition set forth in the Internal Revenue Code for the
Company to make the election to file its Federal Income Tax as a
REIT.
2. The Opinion regarding the Federal Income Tax Consequences
related to the Issuer and its shareholders is attached hereto
and incorporated herein as if fully set forth and is
incorporated into the body of the Disclosure Document.
This opinion is delivered to you for use with your registration
filing with the Securities and Exchange Commission pursuant to
Rule SB and is not to be used or relied on by you or any other
person for any other purpose.
Sincerely yours,
By: Original Letter Signed
DOUGLAS M. O'COYNE, SR.
Attorney at Law
DOC/trs
cc: Company Officers, RMX REIT, Inc.
O'COYNE & PHILLIPS P.S.
ATTORNEYS & COUNSELORS AT LAW
A Professional Services Corporation
* DOUGLAS M. O'COYNE, SR. LEGAL ASSISTANTS:
+ SCOTT A. NIEBLING MICHELLE L. HUNT
ROBERT F. PHILLIPS 1929-1991 THERESA SANDERSON
* Admitted to practice in Washington,
Idaho & the U.S. Tax Court
+ Admitted to practice in Washington
December 11, 1997
RMX REIT, Inc.
Attn: Board of Directors
220 West Mercer Street #400
Seattle, Washington 98119
RE: RMX REIT, Inc.
Federal SB Offering
Usury Opinion
Gentlemen:
This opinion is furnished to you in connection with the federal
registration under Rule SB of RMX REIT, Inc. ("RMX"
hereinafter). CLS Financial Services, Inc., ("CLS"
hereinafter), is the management company for RMX under a
Management Contract. Under the marketing provisions of the
Management Contract, CLS has agreed to sell Mortgage Paper
Securities (the "loans") to RMX. CLS advertises and negotiates
the terms of the loans, including the discount fee, directly
with the Borrowers. CLS then originates the loans using its
line of credit with a Bank and/or a private investor, closes the
loans, escrows the loans with its affiliate company, Puget Sound
Real Estate Services Group, Inc., ("PSRESG" hereinafter).
Shortly thereafter a portion of the loans will be sold to RMX.
All of the loans sold to RMX will consist of Promissory Notes
secured by Deeds of Trust, Real Estate Contracts, Mortgages, and
undivided fractional interests therein. Some of the loans will
be secured either by (a) first lien on one to four family
residential real properties located in the State of Washington,
("first lien loans") or junior liens on real property located in
the State of Washington ("junior lien loans").
You have asked whether the interest rate charged on loans will
be limited by the Washington State Usury Statute (Chapter 19.52
of the Revised Code of Washington). In expressing our opinion,
we have (a) relied, as to matters of fact, on the
representations contained in the Registration Statement of the
Mortgage Paper Securities Offering on file with the Securities
Division, of the Department of Financial Institutions for the
State of Washington made by CLS Financial Services, Inc; and (b)
we have reviewed the proposed forms of the Promissory Note,
Deeds of Trust, Real Estate Contract, Mortgage and business
purpose affidavit (the loan documents), which have been
delivered to the Securities Division of the Department of
Financial
Institutions in and for the State of Washington; and (c) assumed
(i) with respect to each loan, that the loan was originated by
CLS and it was documented using those loan documents, and (ii)
with respect to each junior lien loan, that the junior lien loan
has been made primarily for an agricultural, commercial,
investment, or a business purpose (hereinafter referred to as
"Business Purpose") and (iii) with respect to each first lien
loan, that the first lien is secured by a first lien on a one to
four family residential property and (iv) that CLS is in fact in
the business of brokering and otherwise conducting a lending
business and (v) that the total annual volume of new loans made
by CLS and secured by residential real property (regardless of
lien position), exceeds $1,000,000; and assumed that the
Promissory Note is properly indorsed and delivered to RMX and
the Deed of Trust, Mortgage or Real Estate Contract are properly
assigned to RMX and Recorded in the County Auditor's Office.
Based on and subject to the foregoing, and so long as all of the
assumptions set forth in the preceding paragraphs remain true,
it is our opinion with regard to first lien loans that (1) CLS
meets the definition of a creditor contained in 15 USC 1602(f),
which is incorporated into the definition of federally related
mortgage loans by 12 USC 1735(f)-5(b)(2)(D), and that (2) said
loans are federally preempted from Washington Usury Law under
the provisions of the Depository Institution of Deregulation and
Monetary Control Act of 1980 ("DIDMA"). Consequently after the
loan is properly assigned to RMX and in the event of a default
by a borrower in performing certain obligations set forth in one
of the loans described above, the borrower would not be entitled
to raise usury as a defense under RCW 19.52 et seq. It is our
opinion with regard to second lien loans that, in event of a
default by a borrower in performing the obligations set forth
above in one of the second lien loans, the borrower would not be
entitled to raise the defense of usury under RCW 19.52 et seq.
RMX would be able to enforce the terms of the Promissory Note or
elect to foreclose on the real property nonjudicially or
judicially consistent with the applicable provisions of Chapter
61 of the Revised Code of Washington.
Any questions regarding this Opinion should be directed to the
undersigned. The opinions expressed in this letter are limited
to matters governed by the Federal Laws of the United States and
the laws of the State of Washington, and we express no opinion
as to the laws of any other jurisdiction. This Opinion is
delivered to CLS Financial Services, Inc., and the Board of
Directors of RMX REIT, Inc. in connection with the federal
offering under Rule SB. This Opinion is not to be used or
relied on by you or any other person for any other purpose.
Sincerely yours,
By: Original Letter Signed
DOUGLAS M. O'COYNE, SR.
Attorney at Law
DOC/trs
cc: Board of Directors, RMX REIT, Inc.
GENERAL MANAGEMENT AGREEMENT
CONTENTS
CLAUSE
1. Introduction
2. Contract for Services
3. Term of Agreement
4. Payment to Contractor
5. Closing and Escrow Fees
6. Custom Servicing Agreement
7. Contractor's Duties
8. Office Space and Administrative Support
9. Reimbursement of Expenses
10. Termination of Agreement on Sale or Termination of Company's
Business
11. Arbitration of Controversies
12. Waiver of Breach of Agreement
13. Company May Not Assign Agreement
14. Marketing Agreement
15. Entire Agreement
1. Introduction. This agreement is dated July 15, 1997, between
RMX REIT, INC., ("Company"), with principal offices at 220 West
Mercer Street #400, Seattle, Washington, 98119 and CLS Financial
Services, Inc. ("Contractor"), with principal offices at 4720
200th Street SW, Suite #200, in Lynnwood, Washington, 98046, and
intended to be effective by the parties on July 15, 1997,
provided this agreement is ratified and adopted by resolution by
the Board of Directors at a regularly scheduled meeting.
2. Contract for Services. Company contracts for services and
overhead expenses with Contractor, subject to and in accordance
with the terms and conditions of this agreement.
3. Term of Agreement. This management contract will begin on
June 19, 1997 and end on December 31, 1998. Company has the
right to contract for an additional term of one (1) year, on
written notice to Contractor given not less than thirty (30)
days prior to the end of the term.
4. Payment to Contractor. Company will pay Contractor an annual
fee to manage the operations and cover the overhead costs of the
Company. This annual fee will be based on 2% of the total
balance of all loans, contracts and deposits outstanding and
payable on a monthly basis not later than the 5th day of the
following month at the rate of 1/12 of 2% of the total balance
of the loans, contracts and deposits outstanding at the end of
each month. (For example, assuming a balance of $500,000.00 in
loans and contracts on January 31, 1998, the yearly expense for
the management contract of the Company would be $10,000.00
(500,000 x .02) and the monthly fee would be $833.33 for the
month of January in 1998, which will be due and payable on the
5th day of the subsequent month. In this example, $833.33 would
be due on February 5, 1998, for services rendered in January of
1998.)
5. Closing and Escrow Fees. Contractor or the closing agent, is
paid a closing fee by the borrower to close the loan. Loan
closing costs are not part of the management fee. During the
term of the loan, the Contractor through its affiliate, Puget
Sound Real Estate Services Group, Inc. ("PSRESG"), administers
the funds and services the loan in the escrow account over its
term. In the event a collection action becomes necessary,
Contractor through its affiliate PSRESG, agrees to initiate the
collection action on the defaulted loans, in which case it is
entitled to retain the default interest, the late payment fees
and costs of collection as its compensation for this service to
the Company. The Contractor agrees to advance all costs of
collection, until the account is either current or the
foreclosure is complete and the property is sold. The Company
remains liable for all Contractor advanced costs of collection.
6. Custom Servicing Agreement. Contractor may retain a portion
of the interest rate, commonly referred to as the "rate split"
as part of its custom servicing agreement with the Company. In
an event of default, CLS or an affiliated company agrees to make
the payment due the Company in a timely manner, to the extent
the Contractor has available funds to do so. The Contractor is
entitled to retain all default interest, penalties, costs of
collection and proceeds in excess of the loan amount from the
foreclosure action. In the event that the Contractor fails to
make the payments when due, then the Contractor shall refund to
the Company all rate split interest income that was or has been
collected on the loan(s) in default, within thirty (30) days.
7. Contractor's Duties. Company contracts with Contractor who
will provide the following services to the Company:
Contractor will provide the following general and
administrative support to include: dues and subscriptions,
vehicle expense, rent, telephone, supplies, utilities,
advertising, repairs and maintenance of Company equipment,
property insurance and computerized month to month bookkeeping
support. The Contractor will provide the necessary personnel to
answer telephone inquiries and provide initial contacts with
potential customers. The Contractor may perform other duties or
provide other services for the Company on a reimbursable basis.
Contractor will not be responsible for the payment of
professional accounting, legal or property management fees. The
Contractor will not be responsible for any cost directly
relating to the management of a foreclosure or forfeiture of any
company property.
8. Office Space and Administrative Support. Contractor will
furnish Company with an office, general telephone and general
secretarial support and any other facilities and services that
are adequate for the performance of this contract at the rate
specified in paragraph 4.
9. Reimbursement of Expenses. Contractor may incur reasonable
expenses in managing the Company's business, including advancing
costs for the start up of the Company. The Company will
reimburse the Contractor for all start up expenses incurred by
the Contractor, pursuant to the terms of a promissory note,
which is incorporated herein as if fully set forth. The
Contractor agrees that initial start up expenses shall not
exceed $35,000 unless said expenses are approved by the
Company's Board of Directors. The Contractor agrees to forgive
an amount not to exceed 20% of the original promissory note each
year, so long as the Company renews this agreement. In event
the Company elects to terminate this agreement at any time prior
to five (5) years hence, then the entire promissory note, plus
all forgiven funds, is agreed to become due and payable, within
thirty (30) days after termination.
10. Termination of Agreement on Sale or Termination of Company's
Business. Despite anything contrary contained in this
agreement, Company may terminate Contractor's agreement upon 30
days notice to Contractor if any of the following events occur:
(a) Sale of Company Assets. The sale of substantially all of
the Company's assets to a single purchaser or a group of
associated purchasers;
(b) Sale of Company Shares. The sale, exchange or other
disposition, in one transaction of 80% of the company's
outstanding corporate shares after the initial sale of the
Company stock;
(c) Termination of Company's Business. Company's bona fide
decision to terminate its business;
(d) Merger on Consolidation. The merger of consolidation of
Company and a transaction which Company shareholder's receive
less than 30% of the outstanding voting shares of the new or
continuing corporation;
(e) Sixty (60) Day Written Notice. Notwithstanding any
provision above, this Agreement may be terminated upon sixty
(60) days written notice to the other party by either party.
11. Arbitration of Controversies. Any claim or controversy that
arises out of or relates to this agreement or breach of it will
be settled by arbitration in the City of Lynnwood, in the State
of Washington, in accordance with the rules then obtaining of
the American Arbitration Association. Judgment upon the award
rendered may be entered in the Snohomish County Superior Court
in the State of Washington.
12. Waiver of Breach of Agreement. If either party waives a
breach of this agreement by the other party, that waiver will
not operate or be construed as a waiver of later similar
breaches.
13. Company May Not Assign Agreement. The Company may not
assign this agreement. The Company's rights and obligations
under this agreement will not inure to the benefit of and will
not be binding upon the Company's successors and assignees.
14. Marketing Agreement. CLS Financial Services, Inc., further
agrees to provide a market for the Company's resources. This
marketing effort is in addition to those duties in paragraph 6
and nothing in this contract shall preclude Contractor from
assessing the borrower or recipient of the Company's resources,
a brokerage fee, an interest rate split, or a discount fee.
15. Entire Agreement. This agreement is the entire agreement of
the Company and the Contractor. Oral changes will have no
effect. This agreement may be altered only by a written
agreement, signed by the party against whom enforcement of any
waiver change, modification extension or discharge is sought.
IN WITNESS WHEREOF, the parties have signed the Agreement on
the 12th day of September, 1997.
CLS Financial Services, Inc., Contractor RMX REIT, Inc, Company
By: /s/Jerry Vanhook By: /s/William R. Sanden
Its: President Its: President
By: /s/Lorrie Vanhook By: /s/Mel Johnson
Its: Secretary Its: Secretary
O'COYNE & PHILLIPS P.S.
ATTORNEYS & COUNSELORS AT LAW
A Professional Services Corporation
* DOUGLAS M. O'COYNE, SR. LEGAL ASSISTANT:
+ SCOTT A. NIEBLING RACHEL M. SMESTAD
ROBERT F. PHILLIPS 1929-1991
* Admitted to practice in Washington,
Idaho & the U.S. Tax Court
+ Admitted to practice in Washington
May 27, 1998
Securities and Exchange Commission
Attn: Richard Wulff
Washington, D.C. 20549
Re: RMX Real Estate Investment Trust, Inc.
SB-2 Registration
Consent to inclusion in disclosure document of attorney's
opinion
File No. 333-42975
Dear Gentlemen:
As the attorneys for RMX Real Estate Investment Trust, Inc., we
hereby consent to the use of our name in the above referenced
matter and to all references to our firm included in or made a
part of the Offering Circular and Disclosure Document for the
sale of its Common Stock.
Sincerely yours,
Original Signed
DOUGLAS M. O'COYNE, SR.
Attorney at Law
Nelson, Watson & Erickson, L.L.P.
Certified Public Accountants
John Nelson, P.S. Dan Watson, P.S.
Curtis Erickson, P.S.
May 27, 1998
Securities and Exchange Commission
Attn: Richard Wulff
Washington, D.C. 20549
Re: RMX Real Estate Investment Trust, Inc.
SB-2 Registration
Consent to inclusion in disclosure document of accountant's
opinion
File No. 333-42975
Dear Gentlemen:
As the accountants for RMX Real Estate Investment Trust, Inc.,
we hereby consent to use of our name in the above referenced
matter and to all references to our firm included in or made a
part of the Offering Circular and Disclosure Document for the
sale of its Common Stock.
Sincerely yours,
Original Signed
DAN WATSON, CPA
Certified Public Accountant
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
RMX Seed Financial Statements are to be provided under separate transmission.
The Balance Sheet will show no assets, no liabilities and no net equity in
this Company. After effectivity, stock will be sold to insiders, affiliates,
and others until the minimum offering amount is sold. At that time, the
Company will begin doing business.
</TABLE>
UNDERTAKINGS. The Company is registering these Securities under
Rule SB of the Securities Act. The Company will file, during
any period which it offers or sells securities, a post-effective
amendment to this registration statement to:
(a) Include any prospectus required by section 10(a)(3) of the
Securities Act; and
(b) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and
(c) Include any additional or changed material information on
the plan of distribution, including the most recent Unaudited
Quarterly Financial Statements, the Annual Report and the Annual
Audited Financial Statements.
(d) The Company will voluntarily file periodic reports as
required under the applicable reporting rules.
SIGNATURES OF COMPANY OFFICERS
In accordance with 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 of filing on Form
SB-2 and authorized this registration statement to be signed on
its behalf by the undersigned, in the City of Spokane, State of
Washington, on this 11 day of November, 1997.
RMX REIT, Inc.
by: Original document signed
William R. Sanden, its President
The Chief Financial Officer signing this form does hereby
certify that the financial statements submitted fairly state the
Company's financial position and results of operations, or
receipts and disbursements, as of the dates and periods
indicated, all in accordance with generally accepted accounting
principals consistently applied (except as stated in the notes
thereto) and (with respect to year-end figures) including all
adjustments necessary for fair presentation under the
circumstances as of this 11 day of November, 1997.
RMX REIT, Inc.
by: Original document signed
Melvin L. Johnson, its Secretary
and Chief Financial Officer
SIGNATURES OF BOARD OF DIRECTORS
A majority of the Directors and the Chief Executive and
Financial Officers of the Company have signed this Disclosure
Document on behalf of the Company and by so doing thereby
certify that each has made diligent efforts to verify the
material accuracy and completeness of the information herein
contained. By signing this Disclosure Document, the Chief
Executive and Chief Financial Officers agree to make themselves,
the Company's books and records, copies of any contract, lease
or other document referred to in the Disclosure Document, or any
other material contract or lease (including stock options and
employee benefit plans), except any proprietary or confidential
portions thereof, and a set of the exhibits to this Disclosure
Document, available to each investor prior to the time of
investment, and to respond to questions and otherwise confirm
the information contained herein prior to the making of any
investment by such investor.
ORIGINAL Document Signed ORIGANAL Document Signed ORIGINAL Document Signed
Ralph Ripley Gerald C. Vanhook Vickie L. Swanson
Director 3/15/98 Director 12/11/97 Director 12/11/97
ORIGINAL Document Signed ORIGINAL Document Signed
Joseph R. Zimmer Susan M. Cooper
Director 12/11/97 Director 12/11/97
