<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1999
FILE NO. 33-71399
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT 4 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SFG MORTGAGE AND INVESTMENT COMPANY, INC.
(Exact name of issuer as specified in its charter)
WASHINGTON
(State or other jurisdiction of incorporation or organization)
923 POWELL AVENUE SW
RENTON, WASHINGTON 98057
(425) 271-3550
(Address and telephone number of registrant's principal executives offices)
GREGORY B. ELDERKIN, VICE-PRESIDENT
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
923 POWELL AVENUE SW
RENTON, WASHINGTON 98057
(425) 271-3550
(Name, address, and telephone number of agent for service)
--------------------------
COPY TO:
JACK G. ORR, ESQ.
LAW OFFICES OF JACK G. ORR
3019 NORTH NARROWS PLACE
TACOMA, WASHINGTON 98407
(253) 756-9795
<TABLE>
<S> <C>
(Primary Standard 91-1916172
industrial (I.R.S. Employer
Classification Code Identification
Number) Number)
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c)under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE:
<TABLE>
<CAPTION>
PROPOSED MAXIMUM CALCULATION OF
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Investment Debentures Series I.............. $25,000,000 $1 $25,000,000 $6,950.00
</TABLE>
(1) This amount includes the amount of any principal or interest payments that
holders of the debentures may, at their option elect to reinvest by
purchasing additional amounts of principal under the debentures.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(A) MAY DETERMINE.
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<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY
$25,000,000 INVESTMENT DEBENTURES, SERIES I
<TABLE>
<S> <C>
SFG Mortgage and Investment We invest in non conventional equity
Company, Inc. loans, real estate and promissory
923 Powell Avenue SW notes secured by real estate.
Renton, WA 98057
(425)271-3550.
</TABLE>
<TABLE>
<S> <C> <C> <C>
This is our initial offering of deben-
The offering: tures. Prior to this offering there was
We are offering the debentures investors at no trading market for the debentures and
the following interest rates: none is expected to develop as a
<CAPTION>
result of the offering.
AMOUNT INVESTED TERM INTEREST RATE
- ---------------- ---------- -------------
<S> <C> <C> <C>
$2,000-$9,999 61 Months 7.0% This offering involves a high degree of
$10,000-$24,999 61 Months 8.0% risk. You should purchase the deben-
$25,000-$99,999 61 Months 8.35% tures only if you can afford a loss in
$100,000-$249,999 61 Months 8.65% your investment. See "Risk Factors"
$250,000+ 61 Months 9.0% beginning on page 6 of this prospec-
- ------------------------ tus.
For the first 30 days after issued the
debenture will earn interest at the rate of
4.0% per annum.
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have entered into a "best efforts" selling agreement with Pacific West
Securities, Inc. for the sale of the debentures in this offering.
PACIFIC WEST SECURITIES, INC.
The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT COVER OF PROSPECTUS
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from the information contained in this prospectus. We are offering to sell, and
seeking offers to buy, the debentures only in jurisdictions where offers and
sales are permitted.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 4
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 9
Business................................................................................................... 10
Deed of Trust and Mortgage Financing in General............................................................ 19
Management................................................................................................. 23
Principal Shareholders..................................................................................... 25
Capitalization............................................................................................. 27
Plan of Distribution....................................................................................... 28
Description of Debentures.................................................................................. 28
Debenture Holder's Prepayment Rights....................................................................... 31
Reinvestment of Interest Payments.......................................................................... 31
Indemnification............................................................................................ 31
Legal Matters.............................................................................................. 32
Experts.................................................................................................... 32
Available Information...................................................................................... 32
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
We were formed to make direct, non conventional equity loans and to invest
in real estate and promissory notes secured by real estate. The proceeds from
sale of the debentures will be used by SFG Mortgage to establish a fund from
which loans, secured by real property, will be made to borrowers that meet our
lending guidelines and to acquire real estate and secured notes for investment.
We were established and incorporated in the State of Washington in September
1998. Our principal executive offices are at 923 Powell Avenue SW, Renton, WA
98057 and our mailing address is P.O. Box 860, Renton, WA 98057. If you want to
reach us by telephone the number to call is (425)271-3550. While we are a new
business we do have several experienced affiliates that provide a variety of
services to us. They also receive compensation from us for those services.
Seattle Funding Group, Ltd. provides us with real estate loan origination
services. SFG Data Services, Inc. services the real estate loans which we have
in our loan portfolio.
SFG Mortgage's principal offices are located in a commercial building near
downtown Renton, Washington at which it shares space with its affiliate Capital
Management Group, Inc., which provides management services.
THE OFFERING
<TABLE>
<S> <C> <C>
OFFERING.......................... This offering consists of $25,000,000 in principal
amount of our Investment Debentures, Series I, which are
offered to investors at the investment amounts, and
interest rates on the cover page of this prospectus. The
total principal amount of the debentures includes the
reinvestment of interest payments by debenture holders.
DEBENTURES........................ Payment of the debentures is not secured by any
collateral. Each of the debentures has a 61 month term
for repayment.
USE OF PROCEEDS................... We will use the proceeds received from sale of the
debentures to provide funds for investments in real
estate loans, real estate acquisition and/or
development, and for our general corporate purposes.
PRINCIPAL AND INTEREST PAYMENTS... The debentures pay interest to investors at the stated
rate. The interest will be calculated on a 365-day year,
and will be paid by us without any compounding of
interest.
EARLY REDEMPTION OF DEBENTURES.... Each of the debentures is subject to a limited right of
prepayment at the debenture holder's option beginning,
on the first anniversary of the date the debenture was
issued.
CALL OF DEBENTURES BY COMPANY..... We may also "call" some or all of the debentures for
payment beginning on the first anniversary on the date
each debenture was issued. This means that we may prepay
the debentures. If we decide to do this, we must pay the
amounts set forth below, plus all accrued and unpaid
interest to the date of prepayment:
Between First and Second 100.50% of
Anniversary........................ Principal
Between Second and Third 100.25% of
Anniversary........................ Principal
Thereafter......................... 100.00% of
Principal
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The financial data shown below as of March 31, 1999 have been derived from,
and should be read in conjunction with, our financial statements and the related
notes which are contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD ENDED
NOVEMBER 9, 1998
----------------
<S> <C>
STATEMENTS OF INCOME DATA:
Revenues...................................................................................... $ 0
Expenses...................................................................................... 0
Gross Profit.................................................................................. 0
Operating Income (loss)....................................................................... 0
Net Income (loss)............................................................................. 0
PER COMMON SHARE DATA(2):
Net Income (loss) per share................................................................... $ 0
Weighted average number of shares outstanding(2).............................................. 40,000
BALANCE SHEET DATA:
Working capital............................................................................... $ 40,000
Total assets.................................................................................. 40,000
Total Liabilities............................................................................. 0
Shareholders equity........................................................................... 40,000
</TABLE>
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(1) We were recently formed and have not engaged in any operations, other than
organizing and qualifying this debenture offering. Prior to this offering we
have not generated any revenues and all expenses we have incurred in
connection with the organization and qualification of the offering have been
paid by our affiliate CMGI.
(2) We issued 40,000 shares of our common stock at a price of $1.00 per share
shortly after we incorporated.
5
<PAGE>
RISK FACTORS
Investment in our debentures does involve a certain degree of risk. Each
prospective investor should carefully consider the following information before
making an investment decision. This prospectus contains forward-looking
statements which involve risks and uncertainties.
OUR BORROWERS SHOULD BE CONSIDERED HIGHER RISKS FOR DEFAULT.
We will be making loans to borrowers who, for a variety of reasons, have
elected to borrow funds at terms less favorable than are available from
conventional lending institutions. These borrowers should generally be
considered higher risks for default in repayment of their loan. In order to
reduce this risk we will attempt to qualify the borrowers and will always
require real property to collateralize our loans. However, it is possible that
we might experience a higher than average default rate on our loans. If this
occurs, we will almost certainly incur additional costs, including legal
expenses, to collect the defaulted loans. In some instances we may have to
foreclose on the collateral property in order to collect payment on a defaulted
loan. These events might reduce our overall profitability, and in some instances
could reduce our capital base. Recently there have been several "sub-prime
lenders" that have experienced financial difficulties, including the filing of
bankruptcy petitions. While this is further indication that the lending and
investment activities in which we will engage are higher risk than conventional
lending, we also believe that we have structured our operations in a manner
which reduces the overall risk to our investors.
Among the factors which we believe will reduce these risks are that:
- the loan origination activities will be conducted by SFG Ltd., one of our
affiliates, and not by us. This means that we will not bear the costs and
overhead associated with such business activities,
- in making loans we will use loan-to-value ratios that are generally lower
than those used by most "sub-prime" lenders, and
- we will acquire and hold our loans for investment.
This means that we will not be dependant upon resale of our loans to generate
revenues to fund our operations or to repay the debentures.
ALL OF OUR ASSETS WILL BE COMMITTED TO OUR LENDING AND RECEIVABLES AND REAL
ESTATE INVESTING ACTIVITIES.
We will not be engaged in any other activity. Accordingly, since we will not
have any other operations nor investments which would spread the risk of our
lending activities, repayment of the principal and interest due under the
debentures will be dependent, among other things, upon our success in
identifying qualified borrowers and obtaining adequate collateral to secure the
loans we make and in selecting, maintaining and successfully selling our real
estate investments at a profit.
WE WILL NOT OBTAIN A FORMAL APPRAISAL.
We will seek to verify through the services of an independent appraiser or
other real estate professional that the property collateralizing our loans will
have a market value equal to or in excess of the loan principal in the event of
a default. Generally we will not obtain a formal MAI appraisal. There can be no
assurance that the properties we take as collateral will have a sufficient
value, or that even if they do when a loan or loans are made, that in the event
of default we will be able to obtain sufficient net proceeds upon liquidation of
the collateral to satisfy the loan obligation. Thus, we could incur a loss of
capital if a borrower defaults and we are unable to liquidate the property for
an amount equal to or in excess of the borrower's obligation to us.
6
<PAGE>
SOME OF OUR LOANS WILL NOT BE SECURED BY A FIRST POSITION DEED OF TRUST OR
MORTGAGE.
We expect to make loans from time to time that will not be secured by a
first position deed of trust or mortgage, but rather a deed of trust or mortgage
which is in a junior position behind another lien(s), including deeds of trust
or mortgages. We also expect to make loans that will be secured by property
which has not been developed at all or is only partially developed. Each of
these types of loans will present a higher risk of loss to us if the borrower
defaults in repayment of the loan. In the case of a loan secured by a junior
mortgage or deed of trust, if the borrower defaults in payment of an obligation
which is in a superior position to ours, we may need to take steps to protect
our security interest in the property. Such steps could include curing the
default of the obligation that is in the superior position and/or paying such
obligation in full in order to keep our interest in the property from being
foreclosed upon. In the case of undeveloped property, we may incur additional
expenses to retain our collateral interest in the property, such as the payment
of real estate taxes, LID assessments or other liens. These circumstances could
also reduce the overall return to us from our portfolio of loans. We intend to
minimize these risks by having no more than twenty percent (20%) of our loan
portfolio in junior position loans and no more than twenty percent (20%) of our
loan portfolio secured by undeveloped property at any point in time. Further, no
loan which is secured by a junior position deed of trust or mortgage or by
undeveloped or partially developed property may have a loan to value ratio which
exceeds 65%.
THE TRUST INDENTURE ONLY PARTIALLY RESTRICTS OUR ABILITY TO BORROW FUNDS AND USE
OUR ASSETS AS COLLATERAL.
The debentures are issued pursuant to an Indenture which, while it does
place some restrictions on our ability to incur certain debt, it does not
require us to maintain any specified financial ratios, minimum net worth or
minimum working capital. Further, it places only limited restrictions on our
ability to issue additional debentures. We may use some or all of our real
estate assets to secure additional recourse or nonrecourse debt. We expect that
a lender will require us to pledge some or all of our assets as collateral. In
order to reduce the risks associated with the use of leverage, under the
Indenture the total amount of our borrowings may not exceed thirty five percent
(35%) of the principal amount due under the issued and outstanding debentures at
any time. Even with this limitation, and while the use of leverage can result in
an increase in returns on our investments, if we were to default in repayment of
such debt, it could result in a loss of our equity in some or all of the assets
that have been used to collateralize our borrowing. In order to meet our
obligations to a lender, we may have to delay or discontinue payments to the
debenture holders, resulting in a default in payment of some or all amounts due
under the debentures.
CERTAIN SERVICES WILL BE PROVIDED TO US BY OUR AFFILIATES.
We will primarily rely on our affiliates to provide us with certain services
including loan origination, loan servicing and management services. SFG Ltd.
will provide us with loan origination services by initiating, processing and
initially funding a substantial portion of the mortgage loans which we acquire.
In connection with such services, SFG, Ltd. will not be directly compensated by
us. SFG Ltd will be compensated by retaining all or most of the loan origination
fees paid by the borrower in connection with the generation of such loan. It
will not retain any interest in or otherwise by compensated by us after we have
acquired a particular loan from SFG Ltd. SFG Data will service the mortgage
loans which we hold for investment, which services will include the collecting
and remitting of loan payments, accounting for principal and interest,
contacting delinquent borrowers, and generally administering the loans. SFG Data
will not be directly compensated by us since the fees and charges related to
loan servicing will be paid by the borrower and/or CMGI from the 1% overhead
allowance allocated to it. In addition, these or other of our affiliates may
provide additional services to us from time to time for which they will receive
compensation.
We will be obligated to pay our affiliates fees for their services,
regardless of our profitability. The compensation to be paid to our affiliates
was not determined by arms-length negotiations. The amount that we are obligated
to pay affiliates is limited to the compensation paid in connection with the
offer and
7
<PAGE>
sale of the debentures and management fees payable to CMGI under the management
agreement we have with CMGI. The amount of such fees is calculated based upon
the total principal amount due under the issued and outstanding debentures of
SFG Mortgage. As examples, Pacific West Securities (which is not considered an
affiliate, but is controlled by the mother and sister of one of our officers and
directors) will receive 1.5% of the outstanding principal balance of the
debentures on an annual basis as compensation for its services to us in selling
the debentures to investors. The amount of compensation which we will be
obligated to pay Pacific West Securities is $15,000 per year for each $1,000,000
in principal amount of the debentures, or approximately $75,000 for the
debentures' term for each $1,000,000 in principal amount of the debentures. CMGI
is entitled to receive 1.0% of the principal amount of our outstanding
debentures on an annual basis for management services it will provide to us. The
amount of this compensation which we will be obligated to pay CMGI is $10,000
per year for each $1,000,000 in principal amount of the debentures, or
approximately $50,000 for the debentures' term for each $1,000,000 in principal
amount of the debentures.
Certain conflicts of interest may arise between or among us and our
affiliates. A common management group directs the activities of all of the
companies in the affiliated group providing services to us. As a result of these
affiliated relationships, certain conflicts of interest may now exist and may
arise between or among us and our affiliates. The investors in our debentures
must rely on our integrity and corporate responsibilities, that of our
management and the management of our affiliates, in making appropriate business
decisions and directing our operations.
We believe that our affiliates have sufficient experience in regard to the
kinds and nature of the services they will be providing to us so that our needs
for such services will be competently and adequately met. Further, we believe
that the compensation which the affiliates will receive for rendering such
services, whether from us, borrowers or third parties is reasonable and no more
than the usual and customary amounts paid for such services. However, there can
be no assurance that our affiliates will be able to continue to provide services
to us in the future, or that there are not now, or may be in the future, other
businesses that might be able to provide similar services to us in a more
efficient, competent and/or less costly manner.
AN INVESTMENT IN THE DEBENTURES IS FOR A SPECIFIC PERIOD OF TIME, THERE IS NO
TRADING MARKET, AND THEREFORE THERE IS A LACK OF LIQUIDITY.
The debentures which we offer will be issued for specified terms and should
not be considered liquid investments. Investors should be prepared to hold the
debentures until maturity. The debentures are not traded on any stock exchange
and there is no independent public market for the debentures. At present,
management does not anticipate applying for a listing for such public trading.
8
<PAGE>
USE OF PROCEEDS
DEBENTURE PROCEEDS: If all the debentures offered are sold, SFG Mortgage
expects net proceeds from this debenture offering of $25,000,000. There can be
no assurance, however, that any of the debentures can be sold. Sales commissions
will not be paid from the offering proceeds or by the purchasers of debentures.
Rather they will be paid from SFG Mortgage's operating revenues in an amount
equal to 1.5% of the principal amount of debentures, including reinvestments or
new purchases, due on a quarterly basis.
In conjunction with the other funds available to SFG Mortgage through
operations and/or borrowings, we will utilize the proceeds of the debenture
offerings for the following purposes, shown in their descending order of
priority: funding investments in real estate receivables, which is expected to
include establishing a pool to purchase mortgage loans which will have been
originated by one or more of our affiliates, and purchasing and/or developing
real estate now held or which may be acquired. To the extent internally
generated funds are insufficient or unavailable for the retirement of maturing
debentures in the future, proceeds of this offering may be used for retiring
maturing debentures and for general corporate purposes.
The following table sets forth the estimated use of the proceeds from sale
of the debentures at the maximum $25,000,000 offering and at a presumed
$5,000,000 offering.
<TABLE>
<CAPTION>
MINIMUM (1) MAXIMUM
---------------------------- -----------------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE
----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Total Proceeds................................................ $ 5,000,000 100% $ 25,000,000 100%
Less:
Selling Expenses(2)......................................... 0 0% 0 0%
----------- --- ------------ ---
Net Proceeds.................................................. 5,000,000 100% $ 25,000,000 100%
----------- --- ------------ ---
----------- --- ------------ ---
Use of Net Proceeds:
Real Estate Lending(3)...................................... $ 5,000,000 100% $ 25,000,000 100%
----------- --- ------------ ---
----------- --- ------------ ---
</TABLE>
- --------------------------
(1) There is no minimum amount of debentures that must be sold in the offering.
We have used the amount of $5,000,000 only for illustration purposes.
(2) All expenses incurred in connection with the offering of the debentures will
be paid by our affiliate Capital Management Group, Inc.
(3) Initially all proceeds from sale of the debentures will be used to acquire
real estate receivables or make direct mortgage loans. In the future we may
use some of the offering proceeds to acquire and/or develop real estate.
Currently, there are no specific acquisition or development plans. We may
also use some of the offering proceeds to retire maturing debentures and/or
for other general corporate purposes, but have no present plans to do this.
Management anticipates that some of the proceeds of this offering will be
invested in money market funds, bank repurchase agreements, commercial paper,
U.S. Treasury Bills and similar securities investments while awaiting use as
described above. Due to our inability to accurately forecast the total amount of
debentures to be sold pursuant to this offering, no specific amounts have been
allocated for any of the foregoing purposes.
TERMS OF THE DEBENTURES
We are offering the Investment Debentures, Series I on the terms set forth
in this prospectus. The debentures are unsecured debt instruments, senior in
liquidation to our outstanding equity securities, but subordinate to our
collateralized debt, if any (the amount of which is limited pursuant to the
terms of a trust indenture agreement). The debentures are on parity with our
unsecured accounts payable and accrued liabilities and on parity with all other
debentures issued in this offering, and possibly in subsequent offerings of
debentures which we might make. No offering will be made pursuant to this
prospectus subsequent to May 31, 2000.
A holder of our debentures may elect to receive payment of interest due
under the debenture quarterly, without compounding; or at the election of the
debenture holder, if interest is left with us it will compound quarterly until
maturity, with the entire amount of principal and accrued interest due at the
maturity date of the debenture or upon early redemption by a debenture holder or
prepayment by SFG Mortgage.
9
<PAGE>
BUSINESS
OVERVIEW
SFG Mortgage was established as a corporation in the State of Washington in
September 1998 to engage in the business of making and acquiring direct,
non-conventional equity loans and investing in real estate and receivables
secured by real estate. Through growth and acquisitions, we intend to become a
diversified institution, with operations in non-conventional real estate
mortgage financing, receivables acquisition and real property ownership and
management. Our principal affiliates are Seattle Funding Group, Ltd., a
non-conventional mortgage loan origination business, SFG Income Funds I, II, III
and IV which acquire and hold real estate receivables, primarily first position
real estate mortgages for investment, SFG Equity Fund, LLC which invests in real
estate receivables and real estate, SFG Data Services, Inc., a receivable
servicer and Capital Management Group, Inc. which provides management services
to the SFG Funds and which will provide management services to SFG Mortgage
pursuant to a management agreement.
To date, the principal business activity of our affiliates is investing in
real estate receivables. The real estate receivables primarily consist of real
estate contracts and promissory notes collateralized by first liens on real
estate. The affiliated group predominantly invests in real estate receivables
where the borrower or the collateral does not qualify for conventional
financing. This market is commonly referred to as the non-conventional or "B/C"
market. The affiliated group began originating and investing in non-conventional
loans during 1994 through SFG Ltd.
We will use the proceeds from sale of the debentures to establish a fund
from which loans, secured by real property, will be made or acquired and for
direct investments in real estate. The borrowers under such loans must meet our
lending guidelines. The borrowers will generally be persons or businesses that
have been unable to secure loans in a timely manner from conventional lending
institutions due to the increased restrictions and constraints imposed on
borrowers by such institution. Such borrowers are expected to be willing to pay
interest rates in excess of conventional mortgage interest rates in order to
secure a loan quickly or under non-conventional terms such as interest only
payments. SFG Mortgage's real estate investment activities are expected to
concentrate on properties acquired from sellers who are facing foreclosure and
properties which are being offered below market value. We intend to hold such
properties for investment, which will involve both short and long terms. It is
expected that some properties will be placed on the market soon after we acquire
them while we may hold others as investment properties for longer terms.
MORTGAGE LENDING AND MORTGAGE BROKERAGE OPERATIONS
SFG Mortgage was formed in part to engage in the business of making direct,
non-conventional equity loans, either by itself or in conjunction other lenders
or investors and to acquire existing loans which meet its portfolio guidelines,
including loans which may already be in default. The proceeds from sale of the
debentures will be used to establish a fund from which loans, secured by real
property, will be made to borrowers that meet our lending guidelines. The
borrowers will generally be persons or businesses that have been unable to
secure loans in a timely manner from conventional lending institutions due to
the increased restrictions and constraints imposed on borrowers by such
institution. Such borrowers are expected to be willing to pay interest rates in
excess of conventional mortgage interest rates in order to secure a loan quickly
or under non-conventional terms such as interest only payments. The loans will
have shorter terms, generally five to ten years, than conventional mortgage
loans. All loans made or acquired by us will be secured by a deed of trust or
mortgage on real property with a total loan to value ratio that will generally
not exceed 65% of the total value of the subject property, and in no event will
exceed 75% of the total value of the subject property. In some instances we may
act as a co-lender with other lenders, some of which may be our affiliates.
10
<PAGE>
We expect to generate returns on our lending activities that will be higher
than those earned on more conventional loans. The higher return will generally
be the result of interest rates being paid on the loans at higher rates than
conventional loans. SFG Mortgage believes that by carefully qualifying the
borrowers, which may include requiring the borrowers to provide us with a
specific "exit plan" showing how the loan will be serviced and paid, and by
carefully reviewing and evaluating the property that secures the loan, we can
substantially limit the risks that are usually associated with non-conventional
loans, while at the same time enjoying the higher returns such loans generate.
REAL ESTATE INVESTMENTS
We intend to acquire and hold real estate for investment. We expect to
acquire such properties from two primary sources: "highly motivated sellers" who
are borrowers under loans which are in foreclosure and cash purchases of
properties that are offered at prices generally below current market values. The
purchase of properties from motivated sellers would generally occur by
purchasing the property at a foreclosure sale or by purchasing the loan from the
lender prior to foreclosure and proceeding with foreclosure. We will also look
for properties which are being offered below current market rates with the
intention of making an immediate all cash offer funded by our cash reserves. We
believe that by making an all cash offer on such properties we will be able to
negotiate better prices because the sellers will not be asked to finance some or
all of the purchase price and, because our offer may not be subject to any
financing contingencies, the seller can expect the sale of the property to occur
more quickly. We believe that we can locate properties which we will be able to
resell at a profit, even in a short term, or properties which we can hold for
income and investment and eventually sell at a profit over a longer term.
We expect to realize income from our real estate investments through gains
on resale of property and cash flow and income from the property through
rentals. Even though we anticipate that all of our real estate investments will
initially be purchased for cash, in some instances we may elect to borrow
against or "leverage" a particular property in order to realize cash from such
borrowing to be used for its mortgage lending and acquisition activities or for
reinvestment in other property. SFG Mortgage has established a policy that the
total principal amount of any loans, operating lines of credit or other
indebtedness which it may obtain cannot exceed 35% of the principal amount of
its issued and outstanding debentures at the time any such indebtedness is
incurred. Some or all of this indebtedness may be secured by its asset
portfolio. There is no assurance of the receipt of any of cash, income or gain
generally or in any particular case in connection with SFG Mortgage's real
estate investment activities. The net amount of any income or profits that SFG
Mortgage will generate will, of course, depend upon SFG Mortgage's success in
identifying attractive real estate investment opportunities and in negotiating
favorable terms for SFG Mortgage' s acquisition of such real estate. Similarly,
the economic performance of the properties in which SFG Mortgage invests,
interest rates, economic conditions generally and real estate market conditions
specifically, and numerous other factors will affect the net amount of income or
profit that SFG Mortgage will generate.
Management of properties held by SFG Mortgage may be conducted either by
independent property management companies or by one or more affiliates of SFG
Mortgage. In any case, SFG Mortgage will pay the cost of such services, at the
prevailing rate in the community where such property is located, including
payments to its affiliates. Further, when properties are acquired or sold it is
likely that real estate commissions will be incurred and paid by SFG Mortgage,
including payments to affiliates of SFG Mortgage.
THE NEED FOR NON-CONVENTIONAL LOANS
SFG Mortgage believes that there is a growing demand for non-conventional
consumer and commercial loans. The demand generally comes from borrowers who
have a need for financing more quickly than a conventional lender can fund a
loan or who, for a variety of reasons do not qualify for a conventional loan.
Seattle Funding Group, Ltd., an affiliate of SFG Mortgage has been servicing the
needs of borrowers
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through brokering or directly lending money in private loan transactions since
1988. It currently is placing in excess of $3,000,000 per month in private money
loans in the Western Washington area. SFG Mortgage believes that this growth in
loan volume was the result of increased marketing efforts that expanded the
market base resulting in more qualified borrowers; a borrowing public that is
more informed on the benefits of borrowing private money; and, the market itself
has grown as conventional lenders continue to turn more good loans and good
borrowers away. SFG Mortgage believes these trends will continue for the
immediate future.
Among the reasons why borrowers are willing to obtain private money,
non-conventional loans under terms less favorable from a conventional lender
are:
- Make funds available to pay off underlying mortgage at a discount
- Bring property out of foreclosure of financial difficulty
- Purchase property at a discount for a quick resale
- Funds are not available from conventional sources
- Non-conforming borrowing entity, e.g. corporations, trusts, etc.
- Non-conforming property type, e.g. 5+ units, mixed use
- To take advantage of a time sensitive opportunity
- Faster processing time, with fewer questions and processing steps
LOAN GUIDELINES
The loans which SFG Mortgage makes or acquires can generally be expect to be
newly originated, "unseasoned" mortgage loans. The loans are generally expected
to have the following terms and conditions:
<TABLE>
<S> <C>
Loan term: 5 to 10 years
Interest
Rate: 11% to 12% per annum minimum(1)
Loan Fees: 2% to 5% of principal amount of loan(2)
First or junior deed of trust or mortgage on real
Security: property(3)(4)
</TABLE>
- ------------------------
(1) In some instances the interest rate that a lender may pay at the beginning
of a loan may be less than the overall interest rate for the loan. These
blended or graduated interest loans will generally have the same effective
interest rates as the other loans which SFG Mortgage makes or purchases.
(2) SFG Mortgage generally will not receive any loan origination fees from
Seattle Funding Group, Ltd. or other affiliates of SFG Mortgage in
connection with loans acquired from SFG Ltd., or its other affiliates. Such
loan fees will be retained by them as compensation for their services in
assisting SFG Mortgage in originating, negotiating, evaluating and/or
acquiring SFG Mortgage's loans. SFG Mortgage may receive loan origination
fees in connection with loans which it originates for its own account
without the services of SFG Ltd. or other of its affiliates.
(3) All loans will be secured by a first position or sometimes a junior position
deed of trust or mortgage on commercial, investment or residential real
property, including undeveloped or partially developed property on a limited
basis. The total amount of loans which are secured by junior position deeds
of trusts or mortgages, or which are secured by undeveloped land, will not
exceed twenty percent (20%) of SFG Mortgage's total loan portfolio for
either category of loan. In some instances SFG Mortgage may require or
accept other collateral as secondary security for a loan.
(4) SFG Mortgage will require all loans to be secured by a deed of trust or
mortgage on real property, with a total loan to value ratio that generally
will not exceed 65%, but in no event will exceed 75% of the value of the
property collateralizing the loan at the time any loan is made or acquired.
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LOAN ORIGINATION
Seattle Funding Group, Ltd. will provide loan origination services to SFG
Mortgage on a non-exclusive basis under a loan origination agreement with the
Company. Under that agreement, SFG Ltd. will present SFG Mortgage with the
opportunity to acquire mortgage loans which loans SFG Ltd. is in the process of
making or acquiring. The decision to acquire or not to acquire any loan shall be
exclusively in the discretion of SFG Mortgage. When SFG Mortgage makes the
decision to acquire a loan from SFG Ltd., SFG Mortgage will pay 100% of the
principal amount due under the loan to SFG Ltd. in order to acquire the loan and
upon payment of the purchase price, SFG Ltd. will assign 100% of the principal
and interest due under the acquired loan to SFG Mortgage, without discount or
premium, and without the retention by SFG Ltd. of any economic interest in any
such loan acquired by SFG Mortgage. SFG Ltd. shall have the right to retain any
and all loan fees or "points" that the borrower has or will pay in connection
with the origination of any loan acquired by SFG Mortgage.
Seattle Funding Group, Ltd., through its operations, advertising and
personal contacts in the mortgage brokerage community, believes it has
established a reputation as a quality source for non-conventional money needs.
It has been on a long marketing campaign to mortgage brokers in the Pacific
Northwest. It takes a systematic approach in marketing through advertising,
mailing and visiting with mortgage brokers on a consistent basis in order to get
"first look" referrals from these brokers. SFG Ltd. spends an average of 10% of
its gross revenues in each year on marketing (exclusive of sales personnel
costs) which is above the industry average. These marketing costs are not paid
by SFG Mortgage. The typical wholesale mortgage lender will have one or two
representatives canvassing mortgage broker offices. SFG Ltd. has developed a
marketing system and approach that results in 4,000 mortgage brokers in the
Pacific Northwest every two weeks receiving informational letters and four color
brochures explaining and offering SFG Ltd's. services. This report is both a
marketing resource as well as a resource for the mortgage broker to educate them
on private non conventional financing.
SFG Mortgage expects that SFG Ltd. will originate the majority of loans on
its behalf. It is anticipated that the majority of such loans, from wherever
originated, will come as referrals from mortgage brokers or from borrowers or
referrals from borrowers who have previously borrowed money from SFG Ltd.
LOAN SERVICING
Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, contacting delinquent borrowers, and generally
administering the loans. SFG Data Service, Ltd., an affiliate of SFG Mortgage,
was established in November, 1994 to provide loan servicing for loans placed by
SFG Ltd., including SFG Mortgage's loans. Under a Loan Servicing Agreement with
SFG Mortgage, SFG Data Service, Ltd., will be responsible for overall loan
administration of SFG Mortgage's loans and its services will include those
described above. SFG Mortgage believes that the fees and charges paid to SFG
Data Service are no more than those that are charged by other organizations
providing similar services. The fees and charges related to loan servicing will
be paid by the borrower and/or CMGI from the 1% overhead allowance allocated to
it.
EXAMPLE OF LOAN ORIGINATION, ASSIGNMENT AND SERVICING TRANSACTION
In order to demonstrate the process of the origination of a loan, the
acquisition of it by SFG Mortgage and the servicing of that loan after
acquisition, including the fees and other compensation which affiliates of the
might receive, the following is an example of the what SFG Mortgage believes
will be a typical loan transaction. THE FOLLOWING INFORMATION IS INTENDED ONLY
AS AN EXAMPLE OF A LOAN TRANSACTION IN WHICH SFG MORTGAGE MIGHT PARTICIPATE AND
IS NOT INTENDED TO REFLECT ANY SPECIFIC TRANSACTION IN WHICH SFG MORTGAGE HAS OR
MIGHT ENGAGE.
LOAN ORIGINATION. SFG Ltd. will, at least initially, be the largest source
for loan acquisitions by SFG Mortgage. SFG Ltd. will generate loans from its own
marketing activities as a mortgage lender and by
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referrals from other mortgage brokers. In either event, SFG Ltd. will initiate
the loan transaction by establishing direct contact with the prospective
lenders. It will take a loan application from the borrowers, which application
will include a borrowers' loan application statement from the borrowers, a
description of the property which the borrowers propose as collateral for the
loan and the payment of a deposit by the borrowers to be applied against various
fees and expenses that SFG Ltd. will incur in connection with processing the
loan application. Such fees and expenses generally include appraisal fees,
credit report fees and title report fees. SFG Ltd. has the responsibility of
providing the borrowers with all of the information and loan disclosure
statements that are required of a lender under state and federal law. These
statements and disclosures include a Good Faith Estimate of the settlement
charges and a Truth in Lending Statement which are furnished to the borrowers at
or shortly after the time the loan application is taken.
In connection with the making of a loan, the borrower will be required to
pay all of the costs associated with origination and processing of the loan and,
in addition, will be charged a "loan origination" and/or "loan discount" in
order to obtain the loan. The loan fees are generally calculated as a percentage
of the principal amount of the loan to be made and can be expected to range
between 3% and 10% of the principal amount of the loan. The amount of such fees
will be negotiated between SFG Ltd., if it is the lender, and the borrower and
will depend upon a number of factors including the current interest rates,
market conditions, and the credit worthiness of the borrower. SFG Ltd. will
retain the loan fees as compensation for its services in originating, processing
and generating the loan. By way of example, in connection with a loan in the
principal amount of $100,000 the borrower can be expected to pay loan processing
fees, appraisal fees, escrow fees, credit report fees and miscellaneous fees in
the area of $1,500.00. Most of such fees will be paid to third parties for their
services, by SFG Ltd. However, the loan processing fee, and in some cases the
appraisal fee, will be paid to SFG Ltd. If the negotiated loan origination/loan
discount is 5%, then the total of such fee will be $5,000 which amount will be
retained by SFG Ltd.
As the loan is being processed, or after it has been completed, by SFG Ltd.
it will be offered to SFG Mortgage for investment. SFG Mortgage and SFG Ltd.
have established a procedure for the evaluation of loans for acquisition by SFG
Mortgage. Under the procedure, SFG Mortgage is provided with a copy of SFG Ltd's
loan file which includes all of the information related to the loan including
the loan application, credit report, title report, property appraisal and loan
documents. SFG Mortgage reviews the materials and makes a decision of whether or
not to acquire the loan. If SFG Mortgage elects to acquire the loan it notifies
SFG Ltd. It then delivers to SFG Ltd. an amount equal to the remaining principal
balance due under the loan and SFG Ltd. executes, delivers and records the
appropriate documents to assign the rights under the promissory note evidencing
the loan, the deed of trust or mortgage securing the loan and any other
necessary or appropriate documents to fully and completely assign the loan to
SFG Mortgage. SFG Mortgage acquires the entire amount of the principal and
interest remaining due under terms of the loan and SFG Ltd. releases and assigns
all of its remaining rights and interest in the loan to SFG Mortgage in exchange
for payment of an amount equal to 100% of the principal amount due under the
loan.
LOAN SERVICING. The loans which SFG Mortgage acquires are currently
serviced by SFG Data, an affiliate of SFG Mortgage under the Loan Servicing
Agreement. Under that Agreement, SFG Data establishes loan payment collection
and processing procedures, collects and disburses payments received under the
loans, issues late payment and delinquency notices, calculates and allocates the
interest and principal payments received and issues monthly reports to SFG
Mortgage on the status of each loan being serviced. In the event of a default in
payment of any of SFG Mortgage's loans SFG Data continues to service the loan
until it becomes 60 days past due, at which time the loan is referred back to
SFG Mortgage for further collection action. Any late payment fees, default
interest or other charges made to a defaulting borrower are paid to SFG Mortgage
and not to SFG Data.
SFG Mortgage is not obligated to pay SFG Data any amounts for its servicing
of SFG Mortgage's loans. CMGI is obligated to pay SFG Data an amount equal to
0.00625% of the principal amount of loans being serviced on behalf of SFG
Mortgage on a quarterly basis. This amount is paid by CMGI from the
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overhead allowance it receives under its management agreement with SFG Mortgage,
and is not an obligation of SFG Mortgage.
LOAN DEFAULTS AND FORECLOSURES. When and if there is a default in payment
of one or more of SFG Mortgage's loans, it is SFG Mortgage's obligation to
pursue collection of the defaulted loan after it has reached 60 days past due
status. SFG Data refers all loans that are 60 or more days in default to SFG
Mortgage and discontinues its servicing of such loans on behalf of SFG Mortgage.
SFG Mortgage pursues collection of such loans through its management, CMGI
and/or its attorneys. If SFG Mortgage is unable to bring the loan current
through its own collection procedures then it will initiate a foreclosure action
in order to collect the amounts due, including late fees, default interest
payments and collection charges. In some instances, affiliates of SFG Mortgage
may provide services to SFG Mortgage and receive compensation in connection with
the collection and/or foreclosure of a defaulted loan. There is no agreement in
place with any affiliate of SFG Mortgage in regard to the rendering of any such
services.
LOAN FRACTIONALIZATION
From time to time SFG Mortgage anticipates that it will be presented with an
opportunity to make loans with large principal balances. Such loans could have
principal balances in excess of $1,000,000. Because such a loan would represent
a substantial portion of SFG Mortgage's capital it may elect to "fractionalize"
its investment in such loan by offering participation interests in the loan to
third parties as an investment. The sale of such participation interests may be
either for its own account or through the services of a third party. There are a
number of mortgage lenders which already offer loan participation programs as an
investment vehicle, including SFG Investments, Inc., an affiliate of SFG
Mortgage.
While the specifics will vary from loan to loan, these loans will be
required to meet SFG Mortgage's lending guidelines, including a loan to value
ratio no larger than 75% and must be secured by real property. SFG Mortgage will
seek to obtain an interest rate on such "jumbo loans" in the same average amount
as the other loans in its receivables portfolio. Following funding of a
particular jumbo loan SFG Mortgage may seek to offer third parties participation
interests in the loan, either through its own means or the services of a third
party, including one of its affiliates. SFG Mortgage anticipates that the
offering to acquire a "participation interest" in all or a portion of the
principal amount of such a jumbo loan would be at an interest rate less than the
face amount of the loan. SFG Mortgage would then be entitled to retain all or a
portion of the excess interest amount.
As an example, assume SFG Mortgage funds a loan with a principal amount of
$1,000,000 with an interest rate of 12% per annum. SFG Mortgage may elect to
offer third parties the opportunity to purchase for cash interests in the loan
in an amount up to $750,000 of the principal amount, at an interest rate of 10%.
Such participation interests would be acquired pursuant to loan participation
agreements entered into between SFG Mortgage and the third parties investing in
the loan. The investors would pay SFG Mortgage their respective portions of the
principal amount due, thus reducing SFG Mortgage's capital invested in the loan.
In this example, if the participation interests were fully funded SFG Mortgage's
capital investment in the loan would be reduced to $250,000. As payments are
collected from the borrower by SFG Mortgage, under the Loan Participation
Agreements SFG Mortgage would be obligated to pay to each of the participants an
amount equal to their pro rata participation in the principal amount of the loan
together with interest on such principal amount at the rate that was agreed upon
or 10% in the example. Thus, SFG Mortgage would receive all of the interest paid
by the borrower on that portion of the loan which SFG Mortgage has retained, in
the example, 12% on the initial principal balance of $250,000. In addition, SFG
Mortgage would also be entitled to retain the difference between the interest
rate on the face amount of the loan (12%) and the interest rate offered to the
loan participation investors (10%) on the remaining principal balance of the
loan, in the example, 2% on the initial principal balance of $750,000. Because
SFG Mortgage would be entitled to receive all interest on the loan in excess of
the amount owed to the loan participants, in this case 2% of the outstanding
principal balance of $1,000,000
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even though its investment in the principal amount due was $250,000, it would
increase its return on the loan above the interest rate paid by the borrower
while further diversifying its asset base.
BUILDERS' ASSISTANCE PROGRAM
SFG Mortgage has established a "builders' assistance program" through which
it may make loans to contractors or homeowners for new construction or
remodeling. In making such loans SFG Mortgage will require that the borrower
agree to progress payments which will be made as the construction progresses and
holdbacks for contingencies at the completion of construction. The loans will
otherwise generally be on the same terms and conditions as SFG Mortgage's other
mortgage loans.
PURCHASE OF DEFAULTED LOANS AND FORECLOSURE ON PROPERTY SECURING LOANS
In some cases loans which SFG Mortgage has made will go into default. In
other cases SFG Mortgage may purchase loans, including loans from affiliate and
third parties which are already in default. In purchasing a loan which is
already in default SFG Mortgage would anticipate generating a higher return than
it realizes from its other loans because the default rate of interest may be
higher and/or there may also be late fees accruing. When and if the borrower
wishes to cure a defaulted loan, SFG Mortgage may require the payment in full of
all default interest, late fees and other costs incurred in connection with the
default. In selecting a defaulted loan to purchase, SFG Mortgage would only
purchase a loan which was secured by real estate that it would want to own. In
such instance it would anticipate acquiring the property through foreclosure and
then either reselling the property at a profit in the short term or holding the
property for income and investment and selling the property at a profit in the
longer term.
SFG Mortgage's primary remedy for collecting all amounts due it under any
defaulted loan will be to foreclose on the property securing the loan. SFG
Mortgage may elect to accept an amount at foreclosure which, in some cases, may
be less than the actual amount due in order to recover its invested funds and
reinvest them in another loan or property. Affiliates of SFG Mortgage may bid at
such foreclosures and SFG Mortgage may elect to accept their bid, even if it is
for less than the full amount due. SFG Mortgage may also make its own bid for
the property at a foreclosure sale, and in a case where there are other bidders
and SFG Mortgage desires to acquire the property, such bid may be for an amount
in excess of the minimum amount needed to cover the amount due SFG Mortgage plus
its costs of foreclosure. If SFG Mortgage is the highest bidder then it will own
the property and may hold the property or resell it for any price it can obtain.
If SFG Mortgage is not the successful bidder then any bid in excess of the
minimum which has been made by a third party will result in SFG Mortgage
recovering all of the principal, interest and late fees due it, as well as its
costs of foreclosure.
SALE OF LOANS
SFG Mortgage may from time to time elect to sell one or more of the loans in
its portfolio. The reasons for selling a loan or loans may include an offer to
purchase at a premium which would increase the yield to SFG Mortgage, a need for
cash to meet redemption requests, the desire to generate capital to fund a new
loan or investment opportunity, or an attempt to reduce SFG Mortgage's risk from
a particular loan or loans. In such event, an affiliate of SFG Mortgage,
including CMGI, may from time to time be a purchaser of a loan or loans from SFG
Mortgage. Generally, any purchase of a loan by an affiliate will be for no less
than the total of all principal and accrued interest, together with any and all
other costs or amounts due, such as foreclosure costs if the loan is in default.
However, a loan may be purchased by an affiliate for an amount less than full
amount due in order to recover and reinvest the company's funds because of the
condition of the property, market conditions, interest rates, or other factors.
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USE OF LEVERAGE
In order to enhance SFG Mortgage's ability to take advantage of
opportunities to invest in receivables and or real estate, it may from time to
time leverage its assets under limited conditions. The trust indenture under
which the debentures will be issued permits SFG Mortgage to borrow funds and use
its assets as security for such borrowings. The amount of borrowings may not
exceed thirty-five percent (35%) of the total principal amount due under the
issued and outstanding debentures at the time such borrowings are secured. SFG
Mortgage expects that such borrowings would be used to enhance its operations
and its expected return on investment, primarily in two methods. SFG Mortgage
believes that an operating line of credit can be used to fund the acquisition of
receivables and/or real property acquisitions or development pending the receipt
by SFG Mortgage of term financing or additional capital investment. SFG Mortgage
also believes that by borrowing funds under a term lending arrangement,
generally expected to be secured by its real estate assets, it can leverage the
equity it has in those assets to acquire other assets which are expected to
provide a return in excess of the cost of the borrowed funds. In order to secure
these borrowings SFG Mortgage may agree to pledge some or all of its assets
and/or subordinate payment of the debentures to payments due to the lenders. The
trustee is required to take all actions reasonably necessary to assist SFG
Mortgage in securing such borrowings within the guidelines established in the
trust indenture, including executing collateral assignment agreements and
subordination agreements as may be required by a lender.
REGULATION
SFG Mortgage's private non-conventional lending business is generally not
subject to the rules and regulations of FHA, VA, FNMA, FHLMC, GNMA or Washington
state rules and regulations with respect to originating, processing, selling and
servicing mortgage loans. However, SFG Mortgage's mortgage origination
activities will generally be subject to the Equal Credit Opportunity Act, the
Federal Truth in Lending Act, the Real Estate Settlement Procedures Act (RESPA)
and the regulations promulgated thereunder which prohibit discrimination and
require the disclosure of certain basic information to mortgagors concerning
credit and settlement costs.
Conventional mortgage lending is subject to Washington state usury statutes.
However, the private non-conventional lending activities of SFG Mortgage will
generally be exempt from such usury statutes since the loans will be made either
for commercial purposes or consumer lending transactions which are exempted from
coverage under the Washington state usury laws.
COMPETITION
SFG Mortgage competes with other private money lenders and mortgage bankers
and brokers and to a lesser extent commercial banks, savings and loan
associations, credit unions and insurance companies. Some of its competitors
have substantially greater resources than SFG Mortgage as well as larger and
more sophisticated marketing programs which could put SFG Mortgage at a
competitive disadvantage.
YEAR 2000 COMPLIANCE
SFG Mortgage has undertaken a program to address the technical and business
issues related to the Year 2000. SFG Mortgage's program includes:
- an awareness of and an overall assessment of the year 2000 issue;
- an inventory of environments to be remediated or replaced;
- the remediation or replacement of affected systems;
- testing of remediated or new systems;
- implementation of Year 2000 compliant systems.
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SFG Mortgage believes that all systems critical to its business operations
were Year 2000 compliant as of July 31, 1999. Because SFG Mortgage is recently
organized and will primarily rely upon third parties (particularly Capital
Management Group, Inc., Seattle Funding Group, Ltd., and SFG Data Services,
Ltd.) to provide the various services necessary to operate its business, its
direct efforts to ensure Year 2000 compliance are not expected to be difficult
or costly to achieve. SFG Mortgage is also instituting a program to survey each
of its vendors to determine whether or not they are or will be Year 2000
compliant. It expects that each of its vendors will be Year 2000 compliant well
in advance of January 1, 2000 or that suitable alternative service vendors that
are Year 2000 compliant will be available to SFG Mortgage, if necessary.
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DEED OF TRUST AND MORTGAGE FINANCING IN GENERAL
The following is a discussion of the terms and practices in real estate
financing which may be relevant to SFG Mortgage's mortgage lending activities.
DEEDS OF TRUST. Deeds of trust are commonly used to secure the payment of
debts or performance of other obligations with an interest in real estate.
A deed of trust grants a third party, called the trustee, the authority to
sell the real estate upon default of the borrower without the necessity of
filing a lawsuit. Upon the default of the borrower, the trustee follows a
statutory procedure affording interested parties notice and an opportunity to
cure defaults. If the defaults are not cured, then the trustee conducts a
trustee's sale for the benefit of the lender who is the "beneficiary" of the
deed of trust. If the borrower repays the note secured by the deed of trust, the
trustee executes a full reconveyance back to the grantor. A deed of trust must
be in writing, signed (by both spouses when community property is involved) and
acknowledged, must contain a legal description of the real estate, a description
of the obligation secured, a power of sale, and a provision that the property is
not used principally for agricultural or farming purposes. If the deed of trust
does not contain a power of sale and a nonagricultural provision, it will be
treated as a mortgage. It should be recorded promptly with the auditor of the
county in which the property is located.
The advantage of a deed of trust is that the lender can choose whether to
proceed by a judicial foreclosure or by a nonjudicial foreclosure. Some of the
advantages of proceeding by a nonjudicial foreclosure include avoidance of
overcrowded court dockets and elimination of all redemption periods. Title vests
immediately in the purchaser at a trustee's sale, and the purchaser is entitled
to possession twenty days after the sale. The nonjudicial procedure and the
generally shorter time period required to realize on the security of the
defaulting debtor can be attractive to a lender. If a nonjudicial foreclosure of
a deed of trust occurs, however, the lender cannot obtain a judgment against the
borrower and may not be able to obtain a deficiency judgment against any
guarantor on the note for any deficiency. A deficiency judgment is a judgment
against the borrower requiring the payment of that portion of the obligation
which was not paid with the net proceeds realized upon the sale of the property
securing the obligations.
NONJUDICIAL FORECLOSURE OF DEEDS OF TRUST. In Washington State a
nonjudicial foreclosure of a deed of trust is commenced by the trustee sending,
publishing and posting on the property a statutorily prescribed notice of
default. Thirty days after the notice of default is issued, a notice of sale and
notice of foreclosure is issued. These notices allow the borrower or buyer (and
all other parties with any interest in the property) an opportunity to cure the
default. A default may be cured even if the deed of trust contains an
acceleration clause which would automatically entitle the holder of the deed of
trust to collect the entire balance of the secured debt in a judicial
foreclosure.
The trustee's sale of the property may be conducted in a minimum of ninety
days after issuance of the notice of sale. Consequently, the total time period
for foreclosure of a deed of trust will be not less than 120 days from issuance
of the notice of default until the sale is conducted. In addition, the
nonjudicial foreclosure statute does not permit the trustee's sale to occur
earlier than 190 days from the date of default.
At the trustee's sale, the trustee sells the property to the higher bidder
and conveys title to the property by a trustee's deed which is then recorded.
However, the borrower or buyer (or any other party with a record interest in the
property) may cancel a nonjudicial foreclosure at any time prior to eleven days
before the trustee's sale by curing the default set forth in the notice of sale.
Upon discontinuance of the foreclosure, the deed of trust is reinstated and the
obligation remains as though no default had occurred. During the eleven days
prior to the sale, the foreclosure can be discontinued if the deed of trust
contains acceleration provisions only by payment of the entire amount of the
obligation, plus costs, expenses and the trustee's fee. No deficiency judgment
may be obtained in a nonjudicial foreclosure.
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MORTGAGES. A mortgage can also be used to secure the performance of an
obligation to pay money. In the usual real estate transaction, the buyer of real
estate needs or wants to borrow money to pay the seller the difference between
the down payment and the purchase price. When the lender (mortgagee) loans the
money, the buyer-borrower (mortgagor) signs a promissory note for the amount
borrowed and executes a mortgage as a lien against the property to secure the
debt. The purpose of the promissory note is to create personal liability for
payment by the buyer-borrower. The purpose of the mortgage is to create a lien
on the mortgaged property to secure the obligation to repay. The mortgage is not
effective until and unless there is a valid debt, and the debt must be described
and identified in the mortgage document. The mortgage document is frequently
lengthy and contains many clauses such as provisions for acceleration,
subordination, release, waivers, and covenants to pay taxes, to keep the
premises in repair and to maintain adequate insurance.
A secured note can be sold by the lender to another party and the mortgage
can be assigned to the new holder of the note. In that way, the borrower becomes
legally obligated to pay the new holder according to the terms of the original
note. The new holder's right to payment is secured by the property and the new
holder can look to the property if the borrower defaults. If SFG Mortgage
purchases a note secured by a mortgage (or any other form of security
instrument), the note will be endorsed to SFG Mortgage, the security instrument
is assigned to SFG Mortgage, and SFG Mortgage will become the mortgagee.
If the borrower defaults on the obligation to pay, the holder of the
mortgage will have legal recourse against the mortgaged property to satisfy the
debt. Unlike a deed of trust, the mortgagee must bring judicial foreclosure
proceedings to foreclose its lien and cause the mortgagee's interest in the
property to be sold, as provided by statute, subject to the redemption rights of
third parties discussed more fully below. If the proceeds of sale are less than
the amount owed, the mortgagee may obtain a deficiency judgment against the
mortgagor for the balance, unless the mortgagee is deemed to have waived its
right to a deficiency judgment. In some cases, more than one lien exists against
a piece of property, and the priority of the lien usually is determined by the
date and time the lien is recorded in the office of the county auditor. The
priority of the lien can be important because if the property is foreclosed, the
superior liens will usually be in a better position to be paid off than will the
lower priority (or "subordinate") liens.
The mortgage must be in writing, legally describe the mortgaged property,
state the consideration, contain a mortgaging clause, state the amount of the
debt and whether it bears interest, and be signed by the borrower. In addition,
the borrowers should state their marital status, and, if community property is
involved, both spouses must sign the mortgage. The mortgage must be
"acknowledged" (language reciting that the individuals signing the document were
positively identified and that they signed freely and voluntarily) before a
notary public. The mortgage should then be recorded in the auditor's office of
the county where the property is located.
The "lien theory" of mortgages is generally recognized in Washington and
Oregon. Under this theory, the title to the property remains with the borrower
and is not transferred to the mortgagee. The mortgage placed on the property is
only a charge or a lien on the title.
When property is sold, in some cases the existing mortgages may be assumed
by the buyer or may remain enforceable against the property and against the
seller. Alternatively, the mortgage may be paid off by the seller of the
property. This usually occurs when mortgages become due in full at the time the
property is sold because the mortgage contains a "due on sale" clause.
REAL ESTATE CONTRACTS. A real estate contract, also known as a land sales
contract, is used to convey property. It is a written agreement between the
seller and buyer for the purchase of real property by installment payments. The
real estate contract provides that the buyer must pay the purchase price in
installments over the period of the contract with the balance due at maturity.
While SFG Mortgage generally will not make loans where there is a real estate
contract involved, it may on occasion take a seller's (vendor's) interest in a
real estate contract as collateral.
20
<PAGE>
When the buyer completes his required payments, the seller is obligated to
convey good legal title to the buyer by a fulfillment deed. Under the terms of
the real estate contract, the buyer is given possession of the property and is
said to have equitable title to the property, while the seller retains legal
title to the property as security for payment of the purchase price.
The real estate contract usually contains the names of the buyer and seller,
the sales price, the terms of payment, a full legal description, and a lengthy
statement of the rights and obligations of the parties relating to the use and
maintenance of the premises, risk of loss, payment of taxes and insurance, and
remedies in case of default. The contract is signed by both parties (both
spouses must sign when community property is being bought or sold), acknowledged
and recorded.
JUDICIAL FORECLOSURE. Foreclosure is the legal procedure in which a lender
realizes on property that is security for a debt. A lender or seller has the
right to commence foreclosure proceedings if the borrower or buyer fails to pay
the note as required, or fails to pay or perform any other covenant or
obligation as required by the mortgage, deed of trust or real estate contract.
In Washington deeds of trust may be foreclosed as mortgages, although
nonjudicial procedures (such as a nonjudicial foreclosure or a nonjudicial
forfeiture) are used more frequently, unless the lender desires to seek a
deficiency judgment.
The judicial mortgage foreclosure action is brought in the Superior Court of
the county in which the real property is located. If the lender is able to
establish that it is entitled to a judgment of foreclosure, the court orders a
sale of the property to the highest bidder. Anybody wishing to bid on the
property may do so by paying in cash the bid price at the sale conducted by the
sheriff. The lender or seller is entitled to bid the amount of its judgment
(unpaid principal balance and interest, together with court awarded legal fees
and costs) without having to deposit any additional cash with the sheriff. If
the lender wishes to bid more than the amount of its judgment, then the lender
or seller will have to pay the excess amount in cash. Following court
confirmation of the sale, the highest bidder receives a certificate of sale. The
certificate of sale does not transfer title, which remains in the mortgagor
until the sheriff's deed is issued. The mortgagor and junior lienholders may
redeem the property by paying the purchaser the amount of the purchase bid at
the sale, together with interest, assessments, taxes, and certain other
expenses, if the purchaser is also a creditor having a lien prior to that of the
redemptioner, other than the judgment under which the purchase was made, then
the amount of the purchaser's lien, with interest. If the property is commercial
property, a setoff may be allowed for rents received. If none of the parties
entitled to redeem the property have done so within the applicable redemption
period, the sheriff executes a deed to the holder of the certificate of sale.
The statutory period of redemption in Washington is generally one year. If
the security instrument contains certain prescribed provisions, such as a
nonagricultural provision, and if the right to a deficiency judgment is waived,
then the period of redemption is only eight months. When nonagricultural
property improved with a structure is abandoned for six months or more and no
payments are made on the debt during such period, the borrower forfeits his or
her rights or redemption. The redemption period may be extended if there are a
series of successive redemptions by the borrower or junior lienholders or if the
lender fails to timely notify the appropriate parties of the expiration of the
redemption period on homestead property. Ordinarily, the borrower must yield
possession to the successful bidder on the date of sale, but if the property
constitutes the borrower's "homestead," he or she is entitled to retain
possession through the entire period of redemption. Other parties may also be
entitled to retain possession of the property during all or part of the
redemption period, such as a tenant under an unexpired lease, the occupant of
property used for farming purposes, or the mortgagor as the mortgage so
stipulates.
If there are any excess proceeds of the foreclosure sale after deducting
expenses, they are paid to the mortgagor. If, on the other hand, the proceeds
from the sale are not sufficient to repay the foreclosed debt, recourse may be
had against the debtor for the deficiency, if the judgment allows for such
recourse.
ACCELERATED INDEBTEDNESS. The lender generally has the right upon default
by the borrower to "accelerate" the indebtedness if this right is provided for
in the deed of trust, mortgage or note. This
21
<PAGE>
means that the lender may sue the borrower for the entire amount of the note due
immediately upon default and the borrower has the right to cure the default
merely by paying the delinquent installments and accrued interest. However, if a
seller under a real estate contract or a lender forecloses nonjudicially, the
borrower may pay the delinquent installments and prevent acceleration of the
mortgage.
SUPERIOR ENCUMBRANCES. The property securing a payment obligation may be
subject to prior security interests in favor of other lenders. It may also be
subject to liens securing obligations such as real property taxes, construction
bills and public improvement assessment lines, which, by operation of law, are
or may become superior to a deed of trust or mortgage. These prior security
interests and liens are commonly referred to as superior encumbrances. If a
default occurs on a superior encumbrance, there is a risk of losing the security
interest in the property through foreclosure of a superior encumbrance.
By law, the holder of a subordinate lien or encumbrance has the right to pay
off a superior encumbrance, and may, depending on the nature of the superior
encumbrance and the terms of the subordinate encumbrance, have the right to cure
defaults. SFG Mortgage may from time to time make loans and take a security
interest in property which has a superior encumbrance. If there is a default on
an obligation secured by such senior encumbrance, SFG Mortgage may decide it is
necessary or advisable, in order to avoid a loss, to pay the periodic
installments due on or the entire amount secured by the superior encumbrance.
This could require SFG Mortgage to make additional cash outlays for an
indefinite period of time. There may be additional costs for court and attorney
fees and other expenses incidental to protecting the investment.
RISK OF LOSS. In the event that a holder of a superior interest forecloses
on the property, lienholders who have lower priority interests will be paid only
to the extent, if any, that the sales price for the property exceeds the amount
of all superior liens. Accordingly, unless the price at which the property is
sold is sufficient to satisfy SFG Mortgage's security interest and all superior
liens involved in the foreclosure proceedings, SFG Mortgage faces the risk of
losing all or part of its investment. If such were to occur, SFG Mortgage may
have the right to obtain a personal judgment against the borrower, but would
have to institute additional legal proceedings to do so and would not be able to
take any further action with respect to the particular property which had
secured the borrower's obligation. SFG Mortgage's ability to recover from the
borrower would depend upon the existence of other assets of the borrower which
might be reached through such court proceedings.
USURY. Usury is charging a rate of interest in excess of that permitted by
law. The statutory usury rate in Washington is the higher of twelve percent, or
four percentage points above a floating rate prescribed by statute. Any
commission, bonus, fee, premium, penalty or other charge, compensation or
gratuity, whether in money, credit or other thing of value given as
consideration for the purpose of compensation or inducement for obtaining a
loan, renewal or extension is deemed part of the interest charged on such loan.
In the event the contract does provide for a usurious rate of interest, the
contract itself is still valid. However, in any action on such contract, if
there is proof that a greater rate of interest has been directly or indirectly
contracted for or taken or reserved, the creditor is only entitled to the
principal, less the amount of interest accruing thereon at the rate contracted
for. If interest has been paid, the creditor is only entitled to the principal
less twice the amount of the interest paid and less the amount of all accrued
and unpaid interest. The debtor is entitled to costs and reasonable attorneys'
fees plus the amount by which the amount he has paid under the contract exceeds
the amount to which the creditor is entitled. Only consumer loans and
residential loans are covered by the usury statute.
22
<PAGE>
MANAGEMENT
THE MANAGERS
Under the Articles of Incorporation and Bylaws of SFG Mortgage, its
management and control is vested in its officers and directors. SFG Mortgage has
also entered into a management agreement with Capital Management Group, Inc.,
under which CMGI will provide management and administrative services to SFG
Mortgage. CMGI will provide all services it considers proper and necessary to
act in the capacity of supervisory management agent, will maintain all records
of the interest of Company and its debenture holders, will arrange for the
preparation and execution of all assignments of debentures and record such
assignments, will maintain financial books and records, will calculate and make
interest payments under the debentures, will maintain the books and records of
SFG Mortgage, prepare reports, and will assist SFG Mortgage's accountants in the
preparation of financial reports and tax returns. The success of SFG Mortgage
will, to a large extent, depend on SFG Mortgage's management. Accordingly, no
person should purchase any debentures unless he or she is willing to entrust all
aspects of SFG Mortgage's management to the officers and directors and CMGI and
has evaluated their capabilities to perform such services. The management and
their affiliates will receive compensation and fees from SFG Mortgage.
SFG Mortgage was formed as a corporation in the state of Washington on
September 17, 1998. SFG Mortgage is an affiliate of Seattle Funding Group, Ltd.,
a Washington corporation which has engaged in the business of originating and
making non-conventional loans since 1988. John Odegard, the founder and Chief
Executive Officer of Seattle Funding Group, Ltd., is the president and a manager
of SFG Mortgage. SFG Ltd. will generally act as the marketing agent, loan
originator, and loan processor for SFG Mortgage. It will be entitled to receive
any and all loan fees generated in connection with any loan made by SFG Mortgage
originated and processed by SFG Ltd. for its services.
A summary of the history and operations of Seattle Funding Group, Ltd., and
the experience of management of SFG Mortgage follows.
SEATTLE FUNDING GROUP, LTD. ("SFG Ltd.") originated in 1988 to service the
growing demand for non-conventional commercial and consumer loans. At its
inception it operated primarily as a mortgage broker assisting borrowers who
were unable to secure loans in a timely manner from conventional lending
institutions due to increasing restrictions being placed on such institutions.
As SFG Ltd. became more known in the brokerage community it began to receive
loan requests from other mortgage brokers as well as unsolicited loan requests
from borrowers. For the past several years, SFG Ltd. has operated as a direct
private funding portfolio using invested funds to fund its non-conventional
mortgage lending activity. SFG Ltd. will serve as a marketing agent and loan
originator for SFG Mortgage.
SFG Ltd. has nine loan executives whose responsibilities are to gather loan
requests, package and present them to SFG Ltd.'s underwriting department for
approval. It has developed an account base in excess of four thousand mortgage
brokers from which it receives referrals. The brokers are contacted on a regular
basis in person and by mail with brochures, newsletters and reports of
successful loan transactions. In this matter SFG Ltd. is able to keep its name
in front of the mortgage brokerage community on a regular basis. SFG Ltd. is
currently placing an average of $3,000,000 per month in loans in the Pacific
Northwest area. The average loan size is approximately $140,000.
JOHN ODEGARD. President and Manager; 35 years old. Mr. Odegard is the
President and founder of Seattle Funding Group, Ltd. Seattle Funding Group, Ltd.
was organized in 1988 to engage in private mortgage lending. He is the President
and a Director of Capital Management Group, Inc. and the President of SFG Income
Funds III and IV, which are limited liability companies. He is also the Vice
President and a co-founder of Home Assistance Services, Inc., a real estate
consulting and acquisition firm which also began operations in 1988. Mr. Odegard
has attended three years of college during which he studied real estate finance
and development. He has been a speaker on local and national media regarding
real estate investing and financing and is the author of a two volume manual for
real estate investing. He
23
<PAGE>
also has testified as an expert on real estate and related matters at the
request of the largest law firm in the Pacific Northwest.
GREGORY B. ELDERKIN. Vice-President, Secretary and Manager; 35 years old.
Mr. Elderkin is the Vice President and designated broker of Pacific West
Brokerage, Inc., a commercial and investment real estate concern. Prior to his
affiliation with Pacific West Brokerage, Inc., Mr. Elderkin was affiliated with
Century 21 Pacific West Properties where he concentrated on commercial property
management and brokerage. He is also the Vice-President and a Director of
Capital Management Group, Inc. and the Vice-President of SFG Income Funds III
and IV, which are limited liability companies. Mr. Elderkin graduated with
honors from Washington State University in 1986 with a Bachelor of Arts degree
in Business Administration/ Finance.
MARK SPENO. Treasurer and Manager; 38 years old. Mr. Speno has been the
Vice President of Operations for SFG Ltd. since joining that organization in
1992. He has designed, implemented and is responsible for maintaining SFG Ltd.'s
compliance to lending regulations and quality control standards. He is the
Treasurer and a Director of Capital Management Group, Inc. and the Treasurer of
SFG Income Funds III and IV, which are limited liability companies. Prior to
joining SFG Ltd., he was a casualty and life insurance broker with Nationwide
and Wausau Insurance Companies emphasizing in commercial and real estate risk
for developers and real estate portfolios for developers and real estate
investment firms. Prior to entering the insurance business Mr. Speno was a U.S.
Naval Officer. He graduated from Washington State University in 1982 with a
Bachelor of Arts degree in Business Administration.
CAPITAL MANAGEMENT GROUP, INC. Capital Management Group was incorporated in
the state of Washington on September 16, 1993. It is the General Partner of SFG
Income Fund Limited Partnership and SFG Income Fund II, L.P., both of which are
Washington limited partnerships organized to provide a loan fund to service the
need for non-conventional mortgage financing. SFG Income Fund Limited
Partnership raised $5,000,000 and SFG Income Fund II, L.P. raised $4,975,500
through sale of units of limited partnership interests. It is also the
supervisory managing agent for SFG Income Fund III, L.L.C., and SFG Income Fund
IV, L.L.C., Washington limited liability companies which were also organized to
provide funds to service the need for non-conventional mortgage financing. SFG
Income Funds III and IV raised $9,730,000 and $6,966,954 (as of September 30,
1998) through the issuance of redeemable secured promissory notes. Capital
Management Group is also the Managing Member of SFG Equity Fund, L.L.C., a
limited liability which engages in mortgage lending and the acquisition of real
estate and has raised over $1,950,000 in equity capital.
THE MANAGEMENT AGREEMENT
Under terms of the management agreement to be entered into between CMGI and
SFG Mortgage, CMGI will be appointed to manage the day to day operations of SFG
Mortgage. The management of SFG Mortgage will set the policies under which SFG
Mortgage will operate and CMGI will, subject to such direction, direct the
operations of SFG Mortgage and pay all overhead expenses incurred by SFG
Mortgage, except for extraordinary expenses incurred by SFG Mortgage such as
foreclosure expenses and/ or litigation costs.
The management agreement has an initial term of five years and automatically
renews for two year terms thereafter unless canceled by either SFG Mortgage or
CMGI upon written notice to the other no less than 60 days prior to the
expiration of the current term of the agreement. CMGI will receive a management
fee on an annual basis equal to equal to 1.5% of SFG Mortgage's total principal
amount of the outstanding debentures to be paid from SFG Mortgage's gross
operating income. This amount is to be paid quarterly from SFG Mortgage's
operating revenues. CMGI is also entitled to receive an overhead allowance in an
amount equal to, on an annual basis, 1.0% of SFG Mortgage's total principal
amount of the outstanding debentures to be paid from SFG Mortgage's gross
operating income. From this overhead allowance CMGI will pay all expenses
incurred in operating SFG Mortgage, except certain extraordinary
24
<PAGE>
expenses such as costs of foreclosure and/or litigation. Payment of the
management fee and overhead allowance is subordinated to SFG Mortgage's payment
of its principal and interest obligations due under the debentures.
Under the management agreement CMGI, subject to the direction of SFG
Mortgage's management will, among other things, direct SFG Mortgage's mortgage
lending activities, maintain all records of SFG Mortgage, arrange for the
preparation and execution of all assignments of debentures record such
assignments, maintain SFG Mortgage's financial books and records, and will
calculate and make interest payments under the debentures and calculate and pay
all commissions, fees, allowances and other expenses for which SFG Mortgage is
obligated. In addition, CMGI will supervise the maintenance of SFG Mortgage's
books and records, arrange the preparation of all necessary tax and information
returns of, and the preparation and distribution of an annual profit and loss
statement and balance sheet.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of November 30, 1998
with respect to those persons or groups known to SFG Mortgage who beneficially
own more than five percent of SFG Mortgage's Common Stock, for each officer and
director and for all officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENT BEFORE PERCENT AFTER
NAME AND ADDRESS OF OWNER(1) SHARES OFFERING OFFERING(2)
- ---------------------------------------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
John Odegard........................................ 10,000 25% 25%
Gregory B. Elderkin................................. 10,000 25% 25%
Mark Speno.......................................... 10,000 25% 25%
Loretta N. Elderkin(2).............................. 10,000 25% 25%
All officers and Directors as a group
(3 persons)....................................... 30,000 75% 75%
</TABLE>
- ------------------------
(1) The address for all persons listed is 923 Powell Avenue SW, Renton, WA
98057.
(2) Ms. Elderkin holds the shares as her separate property. She is the mother of
Gregory Elderkin.
THE COMPANY AND AFFILIATES' LOANS ON REAL ESTATE
As of the commencement date of this offering, SFG Mortgage has not engaged
in any lending or real estate investment activities. However, its affiliated
group of companies have been engaged in real estate lending activities since
1994.
SCHEDULE OF MANAGED FUNDS
The information presented in the following table represents the historical
experience of the SFG Income Fund, L.P., SFG Income Fund II, L.P., SFG Income
Fund III, L.L.C., SFG Equity Fund, L.L.C. and SFG Income Fund IV, L.L.C.
programs. This information has been subjected to an attestation engagement (a
review) performed by Peterson Sullivan PLLC. Whose report, dated December 8,
1998, is included in the Financial Statement section of this prospectus.
Investors in the debentures should not assume that they will experience
returns, if any, comparable to those experienced by investors in the programs
displayed below. All the information set forth below was obtained from unaudited
financial statements. Investors purchasing a debenture will not, by such
purchase, obtain any interest in the programs described in the following tables.
25
<PAGE>
<TABLE>
<CAPTION>
SFG INCOME FUND, L.P. SFG INCOME FUND II, L.P. SFG INCOME FUND III, L.L.C. SFG EQUITY FUND, L.L.C.
---------------------- ------------------------- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
Type of Investment
Offered.............. Limited Partnership Limited Partnership Units 10.5% Promissory Notes (debt Limited Liability
Units (equity (equity securities) securities) Membership Units (equity
securities) securities)
Date Offering
Commenced............ September 15, 1993 February 1, 1995 November 20, 1995 November 18, 1996
Date Offering
Completed............ January 13, 1995 November 17, 1995 February 10, 1997 June 13, 1997
Total Amount of
Offering............. $5,000,000 $5,000,000 $10,000,000 $2,000,000
Total Amount Raised
through Offering..... $5,000,000 $4,975,500 $9,733,073 $1,966,960
Nature of Company
Business............. Non-Conventional Non-Conventional Mortgage Non-Conventional Mortgage Non-Conventional
Mortgage Lending Lending Lending Mortgage Lending and
Real Estate Ownership
Average Annualized
Distributions to
Investors from
Program inception to
09/30/98............. 11.34% 11.07% 10.50% 9.76%
<CAPTION>
MORTGAGE PORTFOLIO
(AS OF 09/30/98) SFG INCOME FUND, L.P. SFG INCOME FUND II, L.P. SFG INCOME FUND III, L.L.C. SFG EQUITY FUND, L.L.C.
- --------------------- ---------------------- ------------------------- ---------------------------- ------------------------
<S> <C> <C> <C> <C>
Invested Portfolio... $6,315,610 $4,940,970 $11,383,170 $1,206,250
Number of Loans...... 43 37 68 11
Average Loan Size.... $146,875 $133,540 $167,400 $109,659
Average Value of
Security............. $281,326 $265,243 $346,919 $211,636
Average Loan Size as
a % of Invested
Portfolio............ 2.33% 2.70% 1.47% 9.09%
Average Loan
Term--Months......... 104.9 99.4 110.1 120
<CAPTION>
INVESTOR INFORMATION
(AS OF 09/30/98)
- ---------------------
<S> <C> <C> <C> <C>
Investor Funds
(including
reinvestment)........ $6,463,319 $5,221,233 $11,036,537 $2,177,106
Average Investment... $76,039 $62,158 $68,978 $34,557
Total Investors...... 85 84 160 63
<CAPTION>
DELINQUENCY
(AS OF 09/30/98)
- ---------------------
<S> <C> <C> <C> <C>
90 Days or more...... 1 4 6 1
In Foreclosure
(included above)..... 1 5 7 1
Real Estate Owned.... 0 0 0 6(2)
<CAPTION>
SFG INCOME FUND IV, L.L.C.
----------------------------
<S> <C>
Type of Investment
Offered.............. 10.0% Promissory Notes (debt
securities)
Date Offering
Commenced............ September 1, 1997
Date Offering
Completed............ N/A
Total Amount of
Offering............. $10,000,000
Total Amount Raised
through Offering..... $6,966,955(1)
Nature of Company
Business............. Non-Conventional Mortgage
Lending
Average Annualized
Distributions to
Investors from
Program inception to
09/30/98............. 10.00%
MORTGAGE PORTFOLIO
(AS OF 09/30/98) SFG INCOME FUND IV, L.L.C.
- --------------------- ----------------------------
<S> <C>
Invested Portfolio... $7,160,500
Number of Loans...... 45
Average Loan Size.... $159,122
Average Value of
Security............. $298,789
Average Loan Size as
a % of Invested
Portfolio............ 2.22%
Average Loan
Term--Months......... 120
INVESTOR INFORMATION
(AS OF 09/30/98)
- ---------------------
<S> <C>
Investor Funds
(including
reinvestment)........ $7,163,433
Average Investment... $44,771
Total Investors...... 160
DELINQUENCY
(AS OF 09/30/98)
- ---------------------
<S> <C>
90 Days or more...... 3
In Foreclosure
(included above)..... 3
Real Estate Owned.... 0
</TABLE>
- ----------------------------------
(1) As of 09/30/98
(2) SFG Equity Fund, L.L.C. was formed, in part, to purchase and own properties
in its portfolio.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of SFG Mortgage at March
31, 1999 and as adjusted to reflect the sale of the maximum of $25,000,000 in
debentures in connection with this offering. This table should be read in
conjunction with the financial statements and related notes included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL MAXIMUM OFFERING
--------- -----------------
<S> <C> <C>
Long-term debt payable, net of current portion............................ $ -0- $ -0-(1)
Stockholders' Equity:
Common Stock (no par value), 10,000,000 shares authorized and 40,000
issued at November 9, 1998............................................ 40,000 40,000
Retained Earnings (Deficit)............................................... -0- -0-
--------- -------
Total Stockholders' Equity............................................ 40,000 40,000
--------- -------
Total Capitalization.................................................. $ 40,000 $ 40,000
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) Because there is no assurance that the maximum amount of debentures will be
sold, these amounts do not include the total of $25,000,000 in debentures
that would be sold at the maximum. If all of the debentures are sold, the
total capitalization will be $25,040,000.
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
OPERATIONS
SFG Mortgage was recently formed primarily to make and/or invest in
promissory notes secured by real estate originated by Seattle Funding Group,
Ltd., an affiliate of SFG Mortgage. These real estate receivables are
non-conventional as they are not originated by a regulated financial institution
and are not underwritten to FNMA or FHA underwriting guidelines. Typically,
either the borrower or the collateral will not meet sufficient FNMA or FHA
underwriting guidelines to qualify for conventional financing. These borrowers
are expected to be willing to pay interest rates in excess of conventional
mortgage rates for the above reasons and for the ability to secure a loan in an
expeditious manner in contrast to the typically lengthy approval process for
conventional financing. Because the borrowers in this market may have blemished
credit records and SFG Mortgage generally does not require income/employment
verification, underwriting practices focus primarily on the collateral value as
the ultimate source of repayment. While higher delinquency rates are expected in
this market as compared to the conventional mortgage market, SFG Mortgage
believes this risk is generally offset by the value of the underlying collateral
relative to SFG Mortgage's investment therein and the superior yields
achievable.
SFG Mortgage will also, to a lesser extent, acquire real estate for
investment or resale. SFG Mortgage's real estate acquisition activities are
expected to concentrate on properties acquired from highly motivated sellers who
are offering their properties at below market value, in management's opinion.
Such Sellers may be facing foreclosure or willing to take a discounted price in
consideration of purchase terms that may include all cash and/or a
non-contingent transaction. By investing in such real property acquisitions, SFG
Mortgage expects to build its asset base and profits through eventual resale. It
is anticipated that real estate acquisition will not occur until SFG Mortgage
has created sufficient excess income through its receivables investments so that
such real estate investment will not negatively effect SFG Mortgage's ability to
service the debentures and pay its operating expenses.
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<PAGE>
REVENUES, EXPENSES, FINANCING AND CAPITAL RESOURCES
As SFG Mortgage has not yet commenced operations, the revenues and expenses
can only be predicted. However, SFG Mortgage has used historical experience from
affiliated companies which were created for similar purpose. It is anticipated
that the interest income generated from SFG Mortgage's prospective investments
in receivables will be sufficient to meets its obligations. SFG Mortgage's
anticipated expenses are variable based upon the total amount of the debentures
outstanding. Through this structure, Management believes SFG Mortgage can meet
its obligations regardless of how much capital the offering of debentures
generates.
Liquidity and capital resources are expected initially to be generated
through the sale of debentures. Once SFG Mortgage has commenced operations,
receivable payoffs and sale of receivables will add to this source. In addition,
it is anticipated that the company may borrow additional funds secured by its
assets. Per the debenture trust indenture, SFG Mortgage is limited to a maximum
of 35% of the total principal amount of the debentures for such additional
borrowing. SFG Mortgage expects that such borrowing will enhance the operations
of SFG Mortgage and its return on investment. It is anticipated that a line of
credit will be secured that will allow SFG Mortgage to fund receivables that are
available pending receipt of additional debenture subscriptions and/or
receivable payoffs. Management believes that a line of credit facility will
provide a consistent source of liquidity assisting SFG Mortgage in maintaining
its source of receivables. Further, as SFG Mortgage acquires real estate to be
held for investment, it is anticipated that it will secure a modest level of
term financing secured by the specific property, not expected to exceed 70% of
the property's value. Management believes that the risks associated with this
modest use of leverage will be offset by the potential enhanced return on
investment.
PLAN OF DISTRIBUTION
GENERAL
SFG Mortgage is offering up to $25,000,000 face value of the Series I
debentures directly to the public on a continuing best efforts basis through
Pacific West Securities, Inc ("PWSI"). Pacific West Securities, Inc. is a member
of the National Association of Securities Dealers, Inc. ("NASD"). No securities
sales commissions will be paid from the offering proceeds received from sale of
the debentures. However, PWSI will receive on an annual basis from SFG
Mortgage's gross operating income an amount equal to one-quarter percent (0.25%)
of the principal amount of the outstanding debentures for its services as the
Principal Distributor and an amount equal to one and one quarter percent (1.25%)
of the principal amount of outstanding debentures as a securities sales
commission. Some or all of the sales commission may be reallowed to Selected
Dealers, who are members of the NASD, and to certain foreign dealers who are not
eligible for membership in the NASD, which agree to participate in the offer and
sale of the debentures. Loretta Elderkin, the president, and Janilee Jefferies,
the owner of 100% of the issued and outstanding shares of PWSI, are,
respectively the mother and sister of Gregory Elderkin, the Vice-President and a
director of SFG Mortgage. Mr. Elderkin is neither an officer nor director of
PWSI and holds no ownership interest in PWSI.
LACK OF TRADING MARKET
There is not now and SFG Mortgage does not expect that there will be a
public trading market for the debentures in the future. PWIS does not intend to
make a market for the debentures.
DESCRIPTION OF DEBENTURES
GENERAL
The debentures will be issued under an indenture dated as of ,
1999. The following statements relating to the debentures and the indenture are
summaries and do not purport to be complete. Such summaries are subject to the
detailed provisions of the indenture and are qualified in their entirety by
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<PAGE>
reference to the indenture, a copy of which is filed as an exhibit to the
Registration Statement and is also available for inspection at the office of the
trustee.
The debentures will represent unsecured general obligations of SFG Mortgage
and will be issued in book entry form without coupons, in fractional
denominations of $0.01 or more subject to the stated minimum investment amount
requirements. The debentures will be sold at 100% of the principal amount. The
debentures will have the minimum investment amounts, maturities and interest
rates set forth on the cover page of this prospectus.
Debentures may be transferred or exchanged for other debentures of the same
series of a like aggregate principal amount subject to the limitations set forth
in the indenture. No service charge will be made for any transfer or exchange of
debentures. SFG Mortgage may require payment of taxes or other governmental
charges imposed in connection with any such transfer or exchange. Interest will
accrue at the stated rate from the date of issue until maturity. The debentures
are not convertible into capital stock or other securities of SFG Mortgage.
The debentures are subject to redemption prior to maturity and may also be
prepaid pursuant to the prepayment provisions described below. Also, subject to
regulatory restrictions affecting redemptions and exchanges of securities during
an offering, and the restrictions set forth in the debenture and/or the trust
indenture, SFG Mortgage will be obligated to honor requests for an early payout
of a debenture. Such early payout requests, when received, are honored in the
order received.
PAYMENT OF PRINCIPAL AND INTEREST
Interest will be payable to debenture holders quarterly with the principal
and any accrued, but unpaid interest due and payable at the maturity date of the
debenture, unless the debenture is renewed pursuant to its terms. A debenture
purchaser may elect to have interest paid on a quarterly basis, without
compounding; or may elect to leave all or fifty percent (50%) of the accrued
interest with SFG Mortgage in which case it will compound quarterly at the
stated interest rate. Debenture holders may change the interest payment election
at any time by written notice to SFG Mortgage.
Unless debenture holders are notified in writing by SFG Mortgage of its
intention to renew all or some portion of the debentures, all accrued interest
and the principal balance will be paid in full by SFG Mortgage within 15 days of
the maturity date of the debenture. Debentures do not earn interest after the
maturity date. SFG Mortgage will pay the principal and accumulated interest due
on matured debentures to the registered owner(s) in cash at SFG Mortgage's main
office in Renton, Washington or by check mailed to the address designated by the
registered owner.
CALL OF DEBENTURES BY COMPANY
The debentures are callable at SFG Mortgage's option beginning on the first
anniversary on the date each debenture was issued. On or after such date the
debenture will be subject to prepayment at the option of SFG Mortgage, in whole
or in part, at the prices set forth below, plus accrued and unpaid interest
thereon, if any, to the date of prepayment:
<TABLE>
<CAPTION>
<S> <C>
Between First and Second Anniversary................................. 100.50% of Principal
Between Second and Third Anniversary................................. 100.25% of Principal
Thereafter........................................................... 100.00% of Principal
</TABLE>
REGARDING THE TRUSTEE
The debentures will be issued under, and at all times, will be subject to
the terms and conditions of the indenture. U.S. Bank, N.A. ("trustee")
designated as the trustee under the indenture. The trustee is a national banking
association, with a combined capital and surplus in excess of $ million. SFG
29
<PAGE>
Mortgage and certain of its subsidiaries may maintain deposit accounts and from
time to time, may borrow money from the trustee and conduct other banking
transactions with it. As of the date of this prospectus, no loans from the
trustee were outstanding. In the event of default, the indenture permits the
trustee to become a creditor of SFG Mortgage and its subsidiaries, and does not
preclude the trustee from enforcing its rights as a creditor, including rights
as a holder of collateralized indebtedness. The fees of the trustee will be paid
by CMGI pursuant to the terms of the Management Agreement with SFG Mortgage.
RIGHTS AND PROCEDURES IN THE EVENT OF DEFAULT
Events of default include the failure of SFG Mortgage to pay interest on any
debenture for a period of 30 days after it becomes due and payable; the failure
to pay the principal or any required installment thereof of any debenture when
due; the failure to perform any other covenant in the indenture for 60 days
after notice; and certain events in bankruptcy, insolvency or reorganization
with respect to SFG Mortgage. Upon the occurrence of an event of default, either
the trustee or the holders of 25% or more in principal amount of debentures then
outstanding may declare the principal of all the debentures to be due and
payable immediately.
The trustee must give the debenture holders notice by mail of any default
within 90 days after the occurrence of the default, unless it has been cured or
waived. The trustee may withhold such notice if it determines in good faith that
such withholding is in the best interest of the debenture holders, except if the
default consists of failure to pay principal or interest on any debenture.
Subject to certain conditions, any such default, except failure to pay
principal or interest when due, may be waived by the holders of a majority (in
aggregate principal amount) of the debentures then outstanding. Such holders
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, or of exercising any power
conferred on the trustee, except as otherwise provided in the indenture. The
trustee may require reasonable indemnity from holders of debentures before
acting at their direction.
Within 120 days after the end of each fiscal year, SFG Mortgage must furnish
to the trustee a statement of certain officers of SFG Mortgage concerning their
knowledge as to whether or not SFG Mortgage is in default under the indenture.
MODIFICATION OF THE TRUST INDENTURE
Debenture holders' rights may be modified with the consent of the holders of
66 2/3% of the outstanding principal amounts of debentures, and 66 2/3% of those
series specifically affected. In general, no adverse modification of the terms
of payment and no modifications reducing the percentage of debentures required
for modification is effective against any debenture holder without his or her
consent.
RESTRICTIONS ON CONSOLIDATION, MERGER, ETC.
SFG Mortgage may not consolidate with or merge into any other corporation or
transfer substantially all its assets unless either SFG Mortgage is the
continuing corporation or the corporation formed by such consolidation, or into
which SFG Mortgage is merged, or the person acquiring by conveyance or transfer
of such assets shall be a corporation organized and existing under the laws of
the United States or any state thereof which assumes the performance of every
covenant of SFG Mortgage under the indenture and certain other conditions
precedent are fulfilled.
TRANSFER AGENT AND REGISTRAR
SFG Mortgage acts as its own transfer agent and registrar of the debentures,
but may elect in the future to contract with a third party to provide such
services.
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<PAGE>
DEBENTURE HOLDER'S PREPAYMENT RIGHTS
The debenture holder's will have the opportunity to request prepayment of
the principal amount of the debentures, together with any unpaid interest owed
to them by SFG Mortgage. Beginning upon the first anniversary of the date each
debenture was issued, SFG Mortgage will be obligated to prepay the balance due a
debenture holder requesting early redemption in a ninety (90) day period
beginning the first day of the first full month after receipt of a request for
prepayment from such debenture holder. The redemption payment amount shall be
equal to the principal amount due under the debenture, together with all accrued
and unpaid interest. Provided, that SFG Mortgage may from time to time, charge a
redemption processing fee which in no event will exceed $500.00 per debenture.
Initially, SFG Mortgage does not intend to charge such fee. SFG Mortgage has the
right under the debentures to limit, in its sole discretion, the amount of
debentures redeemed to a maximum of twelve and one-half percent (12.5%) of the
then outstanding total principal balance of debentures in any ninety (90) day
period, if in SFG Mortgage's opinion, the redemption of debentures during that
period of time would compromise its ability to pay its obligations (including
principal and interest payments on the remaining debentures) in the ordinary
course of business. At the end of the term of any such suspension period,
redemptions will be processed and paid in the order first received in proper
form by SFG Mortgage. If, in any ninety (90) day period, during which SFG
Mortgage has limited the debenture holder's right to redemption SFG Mortgage
receives requests for prepayment from debenture holders which exceed twelve and
one-half percent (12.5%) of the total principal amount due under all outstanding
debentures, SFG Mortgage may, at its option, pay to all debenture holders
requesting prepayment a pro rated amount, which amount shall be based upon the
principal amount due under each debenture holder who has requested early
redemption.
REINVESTMENT OF INTEREST PAYMENTS
Each debenture holder may elect to reinvest all or fifty percent (50%) of
that debenture holder's interest payments under the Secured Note. If a debenture
holder makes such an election, the amount reinvested will be treated as an
additional principal due under the debenture holder's Secured Note. By
increasing such electing debenture holder's principal balance due, the interest
payable under that debenture holder's Secured Note will be proportionately
increased. Reinvested funds will be held by SFG Mortgage, placed in money market
funds or other temporary instruments and then invested in deeds of trust,
mortgages or real estate investments as they become available. SFG Mortgage may
terminate or restrict the reinvestment option at any time upon written notice to
the debenture holder's.
INDEMNIFICATION
SFG Mortgage's Articles of Incorporation provide for indemnification of SFG
Mortgage's directors, officers and employees for expenses and other amounts
reasonably required to be paid in connection with any civil or criminal
proceedings brought against such persons by reason of their service of or
position with SFG Mortgage unless it is adjudged in such proceedings that the
person or persons are liable due to willful malfeasance, bad faith, gross
negligence or reckless disregard of his or her duties in the conduct of his or
her office. Such right of indemnification is not exclusive of any other rights
that may be provided by contract or other agreement or provision of law. Such
indemnification is not currently covered by insurance.
As of the date of this prospectus, no contractual or other agreements
providing for indemnification of officers, directors or employees were in
existence other than as set forth above. Pursuant to Washington State law, SFG
Mortgage is required to indemnify any director for his or her reasonable
expenses incurred in the successful defense of any proceeding in which such
director was a party because he or she was a director of SFG Mortgage.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to SFG Mortgage's officers, directors or controlling
persons pursuant to the foregoing provisions, SFG
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<PAGE>
Mortgage has been informed 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.
LEGAL MATTERS
LEGAL OPINION
The legality of the debentures offered hereby is being passed upon for SFG
Mortgage by the Law Offices of Jack G. Orr, 3019 Narrows Place, Tacoma, WA
98407.
LEGAL PROCEEDINGS
There are no material legal proceedings or actions pending or threatened
against SFG Mortgage, or any of the affiliated group of companies, or to which
its property is subject.
EXPERTS
The Financial Statements of SFG Mortgage as of March 31, 1999 and December
31, 1998 in this prospectus, have been included herein in reliance on the
report, of Peterson Sullivan, PLLC independent accountants, given on the
authority of that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
SFG Mortgage has filed with the Securities and Exchange Commission in
Washington, D.C. (the "Commission"), a Registration Statement on Form SB-2 under
the Securities Act of 1933, as amended, with respect to the debentures offered
hereby. Prior to the effective date of the Registration Statement SFG Mortgage
was not subject to the information requirements of the Securities Exchange Act
of 1934, as amended, (the "Exchange Act"). At the time of the effectiveness of
the Registration Statement SFG Mortgage became a "reporting company" and is
required to file reports pursuant to the provisions of the Exchange Act. This
prospectus does not contain all of the information set forth in the Registration
Statement, as permitted by the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and exhibits thereto for
further information with respect to SFG Mortgage and the debentures to which
this prospectus relates. Copies of the Registration Statement and other
information filed by SFG Mortgage with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C. at 450 Fifth Street, NW, Washington, DC 20549 and at certain of
its regional offices which are located in the New York Regional Office, Seven
World Trade Center, Suite 1300, New York, NY 10048, and the Chicago Regional
Office, CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. In addition, the Commission maintains a World Wide Web site that
contains reports, proxy statements and other information regarding registrants
such as the Issuer, that filed electronically with the Commission at the
following Internet address: (http:www.sec.gov).
DEFINITION OF CERTAIN TERMS USED IN THIS PROSPECTUS
For your ease in reading, the following is a compilation of several of the
terms which we have used in this prospectus.
AFFILIATED GROUP: This refers to several businesses including CMGI, SFG
Ltd., SFG Data, the SFG Funds and us.
CAPITAL MANAGEMENT GROUP, INC. OR CMGI: Capital Management Group, Inc., is
our affiliate and provides us with management and administrative services to SFG
Mortgage.
DEBENTURES: When this term is capitalized, it refers to the investment
debentures which we are offering to investors. When this term is not
capitalized, it refers to debentures generally.
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<PAGE>
RECEIVABLES: Investments in cash flows, consisting of obligations
collateralized by real estate and other investments.
SFG DATA: SFG Data Services, Inc., is our affiliate and will provide us with
loan payment processing and collection services.
SFG FUNDS: These are SFG Income Limited Partnership (hereinafter SFG Fund
I), SFG Funds II, III, and IV and SFG Equity Fund, which are our affiliates that
also engage in real estate lending and investing.
SFG LTD. OR SEATTLE FUNDING GROUP: This term referes to Seattle Funding
Group, Ltd., another of our affiliates that will "originate" the majority of the
loans that we make.
SFG MORTGAGE: This term refers to us as the issuer of the debentures and
does not include our affiliates.
33
<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
FINANCIAL REPORT
THREE MONTHS ENDED MARCH 31, 1999, AND
PERIOD FROM SEPTEMBER 17, 1998 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................................................... 1
FINANCIAL STATEMENTS
Balance sheets........................................................................................... 2
Statements of cash flows................................................................................. 3
Notes to financial statements............................................................................ 4-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
SFG Mortgage & Investment Company, Inc.
Renton, Washington
We have audited the accompanying balance sheets of SFG Mortgage and
Investment Company, Inc. as of March 31, 1999 and December 31, 1998, and the
related statements of cash flows for the three months ended March 31, 1999, and
the period from September 17, 1998 (date of incorporation) to December 31, 1998.
These financial statements are the responsibility of SFG Mortgage's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SFG Mortgage as of March 31,
1999 and December 31, 1998, and its cash flows for the three months ended March
31, 1999, and the period from September 17, 1998 (date of incorporation) to
December 31, in conformity with generally accepted accounting principles.
As described in Note 4, at March 31, 1999, SFG Mortgage has not commenced
operations. Therefore, statements of operations for the three months ended March
31, 1999, and the period from September 17, 1998 (date of incorporation) to
December 31, 1998, have not been included in these financial statements.
/s/ Peterson Sullivan PLLC
May 20, 1999
Seattle, Washington
1
<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH DECEMBER
31, 31,
1999 1998
------- -------
<S> <C> <C>
Cash....................................................................... $40,000 $40,000
------- -------
------- -------
Stockholders' Equity
Common stock, no par value, 1,000,000 shares authorized, 40,000 shares
issued and outstanding............................................... $40,000 $40,000
------- -------
------- -------
</TABLE>
See Notes to Financial Statements
2
<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999, AND THE PERIOD FROM SEPTEMBER 17, 1998
(DATE OF INCORPORATION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
THREE
MONTHS INCORPORATION
ENDED TO
MARCH DECEMBER
31, 31,
1999 1998
------- -------
<S> <C> <C>
Cash Flows from Financing Activities
Proceeds from sale of common stock........................................ $ -- $40,000
------- -------
Net increase in cash....................................................... -- 40,000
Cash, beginning of year.................................................... 40,000 --
Cash, end of year.......................................................... $40,000 $40,000
------- -------
------- -------
</TABLE>
See Notes to Financial Statements
3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS
SFG Mortgage and Investment Company, Inc. ("SFG Mortgage") was incorporated
on September 17, 1998, in Washington for the purpose of making direct,
non-conventional equity loans secured by real estate and to directly invest in
real estate. On November 16, 1998, SFG Mortgage issued 40,000 shares of no par
common stock for $40,000 in cash.
SFG Mortgage's business will be concentrated in non-conventional mortgage
lending activities. This market segment generally has higher default rates than
conventional mortgage lending. SFG Mortgage's default rates could also be
negatively impacted by risks that are inherent to mortgage lending activities.
Such risks include, but are not limited to, fluctuating interest rates and
property values, and changes in economic conditions and government rules and
regulations.
Non-conventional equity loans include loans to persons/businesses that have
been unable to secure loans in a timely manner from conventional lending
institutions. SFG Mortgage expects that these borrowers will be willing to pay
interest rates in excess of conventional mortgage interest rates. The loans will
generally have terms of five to ten years. All loans will be secured by a deed
of trust or mortgage on real property with a total loan to value ratio that
generally will not exceed 65% but will in no event exceed 75% of the value of
the property. SFG Mortgage's real estate investment activities will be
concentrated on properties acquired from sellers who are facing foreclosure
and/or properties which, in management's opinion, are being offered at below
market.
SFG Mortgage's private non-conventional lending business is generally not
subject to the rules and regulations of FHA, VA, FNMA, FHLMC, GNMA or Washington
state rules and regulations with respect to originating, processing, selling and
servicing mortgage loans. SFG Mortgage's mortgage origination activities will
generally be subject to the Equal Credit Opportunity Act, the Federal Truth in
Lending Act and regulations promulgated thereunder which prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit and settlement costs.
SFG Mortgage is currently preparing to offer up to $25 million in debentures
to the public in order to fund operations. No operations have yet taken place.
SFG Mortgage's fiscal year is December 31.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
Cash consists of amounts held in demand deposit accounts.
MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable will be held for investment purposes and will be
carried at amortized cost net of any allowances for credit losses. Discounts
originating at the time of purchase, net of capitalized acquisition costs, will
be amortized using the interest method. Interest income will be recognized when
earned using the interest method for those notes which are not deemed impaired.
ALLOWANCE FOR LOSSES
The allowances for losses on mortgage notes receivable will include amounts
for estimated probable losses on receivables determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan," as amended. Specific allowances
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
will be established for delinquent receivables, as necessary. Additionally, SFG
Mortgage will establish allowances, based on prior delinquency and loss
experience, for currently performing receivables and smaller delinquent
receivables. Allowances for losses will be based on the net carrying values of
the receivables, including accrued interest.
REAL ESTATE HELD FOR SALE
Real estate will be stated at the lower of cost or fair value less estimated
costs to sell. SFG Mortgage intends to acquire real estate through acquisition
and foreclosure. Cost will be determined by the purchase price of the real
estate or, for real estate acquired by foreclosure, at the lower of (a) the fair
value of the property at the date of foreclosure less estimated selling costs,
or (b) cost (unpaid receivable carrying value). SFG Mortgage will periodically
review its carrying values of real estate held for sale by obtaining independent
appraisals and adjusting its carrying values to the lower of cost or net
realizable value, as necessary.
Income from sales of real estate will be recognized when a purchaser's
initial and continuing investment is adequate to demonstrate (1) a commitment to
fulfill the terms of the transaction, (2) that collectibility of the remaining
sales price due is reasonably assured, and (3) SFG Mortgage maintains no
continuing involvement or obligation in relation to the property sold and has
transferred all the risks and rewards of ownership to the buyer.
STOCK RESTRICTIONS
Shares of SFG Mortgage's common stock may not be disposed of without first
being offered to the non-selling shareholders. The price to be paid is to be
determined between the shareholders.
INCOME TAXES
Income taxes will be accounted for using the asset and liability approach,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income taxes will be provided for
the temporary differences between the financial reporting basis and the tax
basis of SFG Mortgage's assets and liabilities. A valuation allowance will be
recognized for deferred tax assets not likely to be realized. Deferred taxes are
to be measured by the provisions of currently enacted tax laws.
USE OF ACCOUNTING ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting period.
Actual results could differ from those estimates.
3. AFFILIATES
SFG Mortgage has affiliates which are in the business of acquiring, holding,
selling, originating and servicing mortgage notes receivables primarily in the
Pacific Northwest. Certain of these affiliates will
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. AFFILIATES (CONTINUED)
provide services to and receive compensation from SFG Mortgage. The following is
a list of affiliates, their relationships to SFG Mortgage, and a brief
description of services that they will provide:
- Seattle Funding Group, Ltd. will provide mortgage notes receivable
origination services to SFG Mortgage and other affiliates. Seattle Funding
Group, Ltd. and SFG Mortgage have certain common shareholders and
officers. Seattle Funding Group, Ltd. expects to be compensated for the
origination service by the mortgagee.
- Capital Management Group, Inc. ("CMGI") is a corporation owned, in part,
by the principles of Seattle Funding Group, Ltd. and Pacific West
Securities, Inc. Certain officers of CMGI are also shareholders and
officers of SFG Mortgage. SFG Mortgage entered into a five year management
agreement with CMGI whereby CMGI will be paid a management fee and an
overhead allowance. The management fee and overhead allowance are 1.5% and
1%, respectively, of the outstanding total principal balance due under all
debentures issued by SFG Mortgage. The overhead allowance will cover all
expenses incurred in operating SFG Mortgage, except certain extraordinary
expenses such as costs of foreclosure and/or litigation which will be paid
separately. Payment of any amounts under the management agreement will be
subordinate to payment of SFG Mortgage's debentures. The management
agreement contains an automatic renewal for two-year periods unless
terminated. CMGI will subcontract some of these services to Pacific West
Investment Services, Inc., which is owned by relatives of an officer and
shareholder of SFG Mortgage.
In addition, CMGI will pay all organizational and offering expenses
incurred by SFG Mortgage related to the offer and sale of the debentures
that are discussed in Note 5. CMGI may borrow up to $60,000 for a period
not to exceed two years from SFG Mortgage at an interest rate of 13% per
annum to pay these expenses.
A subsidiary of CMGI, SFG Investments, Inc., may invest fractionally in
mortgage notes receivable which are originally acquired by SFG Mortgage.
- SFG Data Services, Inc. provides mortgage notes receivable services to SFG
Mortgage and other affiliates. SFG Data Services, Inc. will be partially
compensated from the 1% overhead allowance fee that is charged by CMGI and
fees to be paid by mortgagees. Certain officers of SFG Data Services, Inc.
are also shareholders and officers of SFG Mortgage.
- Pacific West Securities, Inc. provides brokerage services and will serve
as the principal distributor of SFG Mortgage's debentures. Pacific West
Securities, Inc. will receive annually, a distribution fee and a sales
commission fee of .25% and 1.25%, respectively, of the principal amount of
outstanding debentures. The president and owner of Pacific West
Securities, Inc. are related to one of the officers and shareholders of
SFG Mortgage.
SFG Mortgage is affiliated with the SFG Family of Funds ("the Funds") which
include two Washington limited partnerships and three Washington limited
liability companies all of which engage primarily in non-conventional mortgage
financing. The SFG Family of Funds and their relationships to SFG Mortgage and
its affiliates are as follows:
- SFG Income Fund, L.P.--CMGI is the general partner.
- SFG Income Fund II, L.P.--CMGI is the general partner.
- SFG Income Fund III, L.L.C.--This fund has common ownership and officers
with SFG Mortgage. Also, CMGI is the contract manager.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. AFFILIATES (CONTINUED)
- SFG Equity Fund, L.L.C.--CMGI is the managing member of this fund.
- SFG Income Fund IV, L.L.C.--This fund has common ownership and officers
with SFG Mortgage. Also, CMGI is the contract manager.
Seattle Funding Group, Ltd. may offer the same mortgage notes receivable it
originates to the Funds as well as to SFG Mortgage. These offerings will be on a
rotating basis which may allow the Funds with available cash to invest in
mortgage notes receivable which would otherwise be offered to SFG Mortgage.
NOTE 4. STATEMENT OF OPERATIONS
As of March 31, 1999, SFG Mortgage has not commenced operations and thus has
not included statements of operations in these financial statements. Since
inception, all costs associated with incorporation and preparation of the public
offering of debentures have been paid by CMGI pursuant to the management
agreement described in Note 3. Payments of management fees to CMGI will not
begin until the debentures are issued.
NOTE 5. COMMITMENTS
PUBLIC OFFERING OF DEBENTURES
SFG Mortgage expects to offer to the public up to $25 million in debentures.
The debentures will be offered on a continuous, best effort basis at minimum
investment amounts. The debentures will be sold at 100% of the principal amount
and have a five-year term with an option to renew for an additional five years.
Interest rates will be dependent upon the amount of the investment and will be
payable quarterly without compounding. The debentures are unsecured debt
instruments, senior in liquidation to outstanding equity securities of SFG
Mortgage, and will be subordinate to any collateralized debt. No trading market
is expected for the debentures.
Each of the debentures will be subject to a limited right of prepayment at
the holders' option beginning on the first anniversary of the date that the
debenture was issued. SFG Mortgage will be obligated to redeem any debenture
upon ninety days written notice from the holder following the first anniversary.
The amount of redemptions may be limited by SFG Mortgage to a maximum of 12.5%
of the outstanding principal balance of debentures in any ninety day period, if
SFG Mortgage believes the redemption during the period would affect its ability
to pay obligations. The debentures will not be convertible into capital stock or
other securities of SFG Mortgage.
LINE OF CREDIT
The Trust Indenture under which the debentures will be issued permits SFG
Mortgage to borrow money. SFG Mortgage is currently negotiating an operating
line of credit with a financial institution. Terms have not been finalized.
The amount of money that SFG Mortgage can borrow is limited by the Trust
Indenture. Borrowings may not exceed thirty-five percent of the total principal
amount due under the issued and outstanding debentures at the time of the
borrowing. In order to secure these borrowings, SFG Mortgage may pledge some or
all of its assets.
7
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION.
Article VIII of the Registrant's Articles of Incorporation provides as
follows:
The personal liability of a director or the directors to the corporation or
its shareholders for monetary damages is hereby eliminated for any conduct as a
director except acts or omissions that involve intentional misconduct or a
knowing violation of law by a director, for conduct violating RCW 23B.08.310, or
for any transaction from which a director will personally receive a benefit in
money, property, or services to which a director is not legally entitled.
If the Washington Business Corporation Act is hereafter amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director shall be eliminated or limited to
the full extent permitted by the Washington Business Corporation Act, as so
amended. Any repeal or modification of this Article shall not adversely affect
any right or protection of a director of the corporation existing at the time of
such repeal or modification for or with respect to an act or omission of such
director occurring prior to such repeal or modification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 6,950
NASD Filing Fee................................................... 3,000
Blue Sky Qualification Fees and Expenses.......................... 10,000*
Accounting Fees and Expenses...................................... 20,000*
Legal Fees and Disbursements...................................... 37,500*
Printing Expenses................................................. 5,000*
Miscellaneous Expenses............................................ 10,000*
----------
Total Expenses.................................................... $ 88,450*
</TABLE>
- ------------------------
* Estimated Item
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the organization of the Registrant, a total of 40,000
shares of Common Stock of the Registrant were sold at a price of $1.00 per share
for an aggregate price for all shares of $40,000. The shares were sold to the
officers and directors and to one family an officer and director of the
Registrant in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
The names and identities of the persons to whom the securities were issued
are as follows:
<TABLE>
<CAPTION>
NUMBER OF
LAST NAME FIRST NAME(S) IDENTITY SHARES $ AMOUNT
- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Odegard John Individual 10,000 $ 10,000.00
Elderkin Gregory B. Individual 10,000 10,000.00
Elderkin Loretta N. Individual 10,000 10,000.00
Speno Mark Individual 10,000 10,000.00
</TABLE>
II-1
<PAGE>
ITEM 27. EXHIBITS
The following is a list of exhibits filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ------------- -----
<C> <S> <C>
1.3 Best Efforts Underwriting and Selected Dealers Agreements**
2.1 Articles of Incorporation**
2.2 Bylaws**
3.1 Form of Debenture**
3.2 Trust Indenture Agreement**
4 Subscription Agreement**
6.1 Management Agreement with Capital Management Group, Inc.**
6.2 Loan Origination Agreement with Seattle Funding Group, Ltd.**
6.3 Master Collection Contract and Loan Servicing Agreement with SFG Data Services, Inc.**
10.1 Consent of Peterson Sullivan, L.L.P.*
10.2 Consent of Law Offices of Jack G. Orr, P.S.*
11 Opinion of Law Offices of Jack G. Orr, P.S.*
</TABLE>
- ------------------------
* Filed Herewith
** Previously Filed
ITEM 28. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission
II-2
<PAGE>
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 registrant of expenses incurred
or paid by a director, officer, or controlling persons of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) For the purpose of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective. For the purpose of
determining any liability under the Securities Act of 1933, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
ITEM 29. FINANCIAL STATEMENTS.
Not Applicable
II-3
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
The following is a list of exhibits filed with this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ------------- ---------
<C> <S> <C>
1.2. Best Efforts Underwriting and Selected Dealers Agreements**
2.1 Articles of Incorporation**
2.2 Bylaws**
3.1 Form of Debenture**
3.2 Trust Indenture Agreement*
4 Subscription Agreement**
6.1 Management Agreement with Capital Management Group, Inc.**
6.2 Loan Origination Agreement with Seattle Funding Group, Ltd.**
6.3 Master Collection Contract and Loan Servicing Agreement with SFG Data Services, Inc.**
10.1 Consent of Peterson Sullivan, P.L.L.C.*
10.2 Consent of Law Offices of Jack G. Orr, P.S.**
11 Opinion of Law Offices of Jack G. Orr, P.S.**
</TABLE>
- ------------------------
* Filed Herewith
** Previously Filed
II-4
<PAGE>
SIGNATURES
The issuer has duly caused this offering statement to be signed on its
behalf by the undersigned, hereunto duly authorized, in the City of Seattle,
State of Washington, on August 3, 1999.
<TABLE>
<S> <C> <C>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
By: /s/ JOHN ODEGARD
-----------------------------------------
John Odegard
PRESIDENT
</TABLE>
This registration statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ JOHN ODEGARD
- ------------------------------ President, Chief Executive 8/3/99
John Odegard Officer And Director
/s/ GREGORY B. ELDERKIN
- ------------------------------ Vice-President And 8/3/99
Gregory B.Elderkin Director
/s/ MARK SPENO
- ------------------------------ Treasurer And Director 8/3/99
Mark Speno
</TABLE>
II-5
<PAGE>
EXHIBIT 3.2
TRUST INDENTURE AGREEMENT
<PAGE>
TRUST INDENTURE AGREEMENT
THIS INDENTURE is dated as of , 1999 between SFG
Mortgage & Investment Company, Inc., a Washington corporation (hereinafter
called the "Company"), having its principal office at 923 Powell Avenue SW,
Renton, Washington 98057, and US Bank, a national banking association
(hereinafter called the "Trustee"), having its corporate trust office at 601
Union Street, Suite 2120, Seattle, Washington 98104.
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance of its Investment Debentures, to be issued
in one or more series (hereinafter called the "Debentures"), as in this
Indenture provided. The initial series of Debentures to be issued hereunder is
to be known as the Company's Investment Debentures, Series I, limited to the
aggregate principal amount of $25,000,000, the further terms and provisions of
which are set forth in Section 3-12.
All things necessary to make the Debentures when executed by the Company,
authenticated by the Trustee, delivered as authorized by the Company and duly
issued by the Company, the valid obligations of the Company, and to make this
Indenture a valid agreement of the Company, in accordance with their and its
terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Debentures
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Debentures, as follows:
ARTICLE ONE
Definitions and Other Provisions of General Application
Section 1-1. DEFINITIONS.
(a) For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) "This Indenture" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
(2) All references in this instrument to designated "articles,"
"sections" and other subdivisions are to the designated Articles, Sections and.
other subdivisions of this instrument as
<PAGE>
originally executed. The words "herein," "hereof," and 'hereunder," and other
words of similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision.
(3) The terms defined include the plural as well as the singular.
(4) All other terms used herein which are defined in the Trust Indenture
Act of 1939, either directly or by reference therein, have the meanings assigned
to them therein.
(5) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles.
(b) Certain terms, used principally in Article Six, are defined in that
Article.
(c) Other definitions:
"Act" when used with respect to any Debentureholder has the meaning
specified in Section 1-4.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control' when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling' and "controlled" have meanings correlative to the
foregoing.
"Applicable Debentures" has the meaning set forth in Section 5-2.
"Authorized Newspaper" means a newspaper of general circulation in the
relevant area, printed in the English language and customarily published on
each business day, whether or not Published on Saturdays, Sundays or holidays.
Whenever successive weekly publications in an Authorized Newspaper are required
hereunder they may be made (unless otherwise expressly provided herein) on the
same or different days of the week and in the same or in different Authorized
Newspapers.
"Board of Directors" means either the board of directors of the Company or
any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
-2-
<PAGE>
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in the City of Seattle,
Washington are authorized by law to close.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor corporation shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Request", "Company Order" and "Company Consent" mean,
respectively, a written request, order or consent signed in the name of the
Company by its Chairman of the Board, President or a Vice President, and by its
Treasurer, an Assistant Treasurer, Controller, an Assistant Controller,
Secretary or an Assistant Secretary, and delivered to the Trustee.
"Debentureholder" means a Person in whose name a Debenture is registered in
the Debenture Register.
"Debenture Register" and 'Debenture Registrar" have the respective meanings
specified in Section 3-7.
"Defaulted Interest" has the meaning specified in Section 3-9.
"Event of Default" has the meaning specified in Article Five.
"Holder" when used with respect to any Debenture means a Debentureholder.
"Independent" when used with respect to any specified Person means such a
Person who (1) is in fact independent, (2) does not have any direct financial
interest or any material indirect financial interest in the Company or in any
other obligor upon the Debentures or in any Affiliate of the Company or of such
other obligor, and (3) is not connected with the Company or such other obligor
or any Affiliate of the Company or of such other obligor, as an officer,
employee, promoter, underwriter, trustee, partner, director or person performing
similar functions. Whenever it is herein provided that any Independent Person's
opinion or certificate shall be furnished to the Trustee, such Person shall be
appointed by a Company Order and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer has
read this definition and that the signer is Independent within the meaning
hereof.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Debentures.
-3-
<PAGE>
"Investment Debentures of Series I," "Investment Debentures, Series I" or
"Series I Investment Debentures" means the Debentures established by Section
3-12 hereof.
'Maturity" when used with respect to any Debenture means the date on which
the principal of such Debenture becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"Notice of Default" has the meaning specified in Article Five.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President or a Vice President, and by the Treasurer, an Assistant
Treasurer, the Controller, an Assistant Controller, the Secretary or an
Assistant Secretary of the Company, and delivered to the Trustee. Wherever this
Indenture requires that an Officers' Certificate be signed also by an engineer
or an accountant or other expert, such engineer, accountant or other expert
(except as otherwise expressly provided in this Indenture) may be in the employ
of the Company, and shall be acceptable to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may (except as
otherwise expressly provided in this Indenture) be counsel for the Company, and
shall be acceptable to the Trustee.
"Outstanding" when used with respect to Debentures means, as of the date of
determination, all Debentures' theretofore authenticated and delivered under
this Indenture, EXCEPT:
(i) Debentures theretofore canceled by the Company;
(ii) Debentures for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any Paying
Agent in trust for the Holders of such Debentures, PROVIDED that, if such
Debentures are to be redeemed, notice of such redemption has been duly given
pursuant to this Indenture or provision therefor satisfactory to the Trustee
has been made; and
(iii) Debentures in exchange for or in lieu of which other Debentures
have been authenticated and delivered pursuant to this Indenture;
PROVIDED, however, that in determining whether the Holders of the requisite
principal amount of Debentures Outstanding have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Debentures owned
by the Company or any other obligor upon the Debentures or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon ANY such request, demand, authorization, direction, notice,
consent or waiver, only Debentures which the Trustee knows to be so owned shall
be so disregarded. Debentures so owned which have been pledged in good faith
may be regarded as Outstanding if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right so to act with respect to such Debentures and
that the pledgee is
-4-
<PAGE>
not the Company or any other obligor upon the Debentures or any Affiliate of the
Company or such other obligor.
When used with respect to Debentures of a given series, the foregoing
definition shall be applicable to Debentures of such series as though only the
Debentures of such series were referred to therein.
"Paying Agent" means any Person authorized by the Company, including
Persons employed by or affiliated with the Company, to pay the principal of and
premium, if any, or interest on any Debentures on behalf of the Company.
"Person" means any individual,- corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment" with respect to Investment Debentures, Series I, means
the City of Renton, State of Washington, and with respect to Debentures of other
series, the City of Renton, State of Washington or such other place or places as
may be specified in the supplemental indenture creating such series.
"Predecessor Debentures" of any particular Debenture means every previous
Debenture evidencing all or a portion of the same debt as that evidenced by such
particular Debenture; and, for the purposes of this definition, any Debenture
authenticated and delivered under Section 3-8 in lieu of a lost, destroyed or
stolen Debenture shall be deemed to evidence the same debt as the lost,
destroyed or stolen Debenture.
"Redemption Date" when used with respect to any Debenture to be redeemed
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Debenture to be redeemed
means the price at which it is to be redeemed pursuant to this Indenture.
"Regular Record Date" for the interest payable on any Interest Payment Date
means, with respect to Investment Debentures, Series I, the 15th day (whether or
not a Business Day) of the calendar month next preceding the Interest Payment
Date as specified on each Investment Debenture, Series I, and with respect to
Debentures of other series, such date as shall be specified in the supplemental
indenture creating such series.
"Responsible officer" when used with respect to the Trustee means the
chairman or vice-chairman of the board of directors, the chairman or
vice-chairman of the executive committee of the board of directors, the
president, any vice president, the secretary, any assistant secretary, the
treasurer, any assistant treasurer, the cashier, any assistant cashier, any
trust officer or assistant trust officer, the controller and any assistant
controller or any other officer of the Trustee customarily performing functions
similar to those performed by any of the above designated officers and also
-5-
<PAGE>
means, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of his knowledge of and familiarity with
the particular subject.
"Special Record Date" for the- payment of any Defaulted Interest (as
defined in Section 3-9) means a date fixed by the Trustee pursuant to Section
3-9.
"Stated Maturity" when used with respect to any Debenture or any
installment of interest thereon means the date specified in such Debenture as
the fixed date on which the principal of such Debenture or such installment of
interest is due and payable.
"Trustee" means the Person named as the 'Trustee" in' the first paragraph
of this instrument until a successor Trustee shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as in
force at the date as of which this instrument was executed.
"Vice President" when used with respect to the Company or the Trustee means
any vice president, whether or not designated by a number or a word or words
added before or after the title "vice president".
Section 1-2. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
Counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;.
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that each such individual has made such examination or
investigation as, in such individual's opinion, is necessary to enable such
individual to express an informed opinion as to whether or not such covenant or
condition has been complied with; and
-6-
<PAGE>
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
Section 1-3. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered bv the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Comoany, unless such Counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
Section 1-4. ACTS OF DEBENTUREHOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Debentureholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Debentureholders in person or by
agent duly appointed in writing; and, except as -herein otherwise expressly
provided,' such action shall become effective when such instrument or
instruments are delivered to the Trustee, and, where it is hereby expressly
required, to the Company. Such instrument or instruments (and the action
embodied therein and evidenced thereby) are herein sometimes referred to as the
"Act" of the Debentureholders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 6-1)
conclusive in favor of the Trustee and the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
-7-
<PAGE>
such execution is by an officer of a corporation or a member of a partnership,
on behalf of such corporation or partnership, such certificate or affidavit
shall also constitute sufficient proof of his authority. The fact and date of
the execution of any such instrument or writing, or the authority of the Person
executing the same, may also be proved in any other manner which the Trustee
deems sufficient.
(c) The ownership of Debentures shall be proved by the Debenture
Register.
(d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Debenture shall bind the Holder of
every Debenture issued upon the transfer thereof or in exchange therefor or in
lieu thereof, in respect of anything done or suffered to be done by the Trustee
or the Company.in reliance thereon, whether or not notation of such action is
made upon such Debenture.
Section 1-5. NOTICES, ETC., TO TRUSTEE AND COMPANV.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Debentureholders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with:
(1) the Trustee by any debentureholder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with the Trustee at its principal corporate trust office, located
at 601 Union Street, Suite 2120, Seattle, Washington 98101 or at such other
address previously furnished in writing to the Company by the Trustee for such
purpose, or
(2) the Company by the Trustee or by any Debentureholder shall be
sufficient for every purpose hereunder if in writing and mailed, first-class
postage prepaid, to the Company addressed to it at 923 Powell Avenue SW,
Washington 98057, or at such other address previously furnished in writing to
the Trustee by the Company for such purpose.
Section 1-6. NOTICES TO DEBENTUREHOLDERS; WAIVER.
Where this Indenture provides for notice to Debentureholders of any event,
such notice shall be sufficiently given (unless otherwise herein expressly
provided) if in writing and desposited in the United States mail, first-class
postage prepaid, to each Debentureholder affected by such event, at his address
as it appears in the Debenture Register, not later than the latest date, and not
earlier than the earliest date, prescribed for the giving of such notice. In
any case where notice to Debentureholders is given by mail, neither the failure
to mail such notice, nor any defect in any notice so mailed, to any particular
Debentureholder shall affect the sufficiency of such notice with respect to
other Debentureholders, and any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the Person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
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notice by Debentureholders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case, by reason of the suspension of publication of any Authorized
Newspaper, or by reason of any other cause, it shall be impossible to make
publication of any notice in an Authorized Newspaper or Authorized Newspapers as
required by this Indenture, then (notwithstanding such provision) such method of
publication or notification as shall be made with the approval of the Trustee
shall constitute a sufficient publication of such notice.
Section 1-7. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Indenture by any of
the provisions of TIA, such required provision shall control.
Section 1-8. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
Section 1-9. SUCCESSORS AND ASSIQNS.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
Section 1-10. SEVERABILITY CLAUSE.
In case any provision in this Indenture or in the Debentures shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 1-11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Debentures, express or implied, shall
give to any Person, other than the parties hereto and their successors hereunder
and the Debentureholders, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
Section 1-12. GOVERNING LAW.
This Indenture shall be construed in accordance with and be governed by the
laws of the State of Washington.
Section 1-13. LEGAL HOLIDAYS.
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In any case where any Interest Payment Date, any Redemption Date, or the
Stated Maturity of any Debenture, or any date on which any Defaulted Interest is
proposed to be paid, shall not be a Business Day, then (notwithstanding any
other provision of this Indenture) payment of interest, principal and premium,
if any, need not be made on such date, but may be made on the next succeeding
Business Day with the same force and effect as if made on the Interest Payment
Date or Redemption Date or at the Stated Maturity, or on the date on which the
Defaulted Interest is proposed to be paid, and no interest shall accrue for the
period from and after such Interest Payment Date, Redemption Date or Stated
Maturity or date fdr the payment of Defaulted Interest, as the case may be.
Section 1-14. EXECUTION IN COUNTERPARTS.
This Indenture may be executed in any number of counterparts, each of which
so executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
ARTICLE TWO
Debenture Forms
Section 2-1. FORMS GENERALLY.
The Debentures and the certificates of authentication thereon shall be
substantially in the forms set forth in this Article Two, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange, or as may,
consistently herewith, be determined by the officers executing such Debentures,
as evidenced by their execution of the Debentures. Any portion of the text of
any Debenture may be set forth on the reverse thereof , with an appropriate
reference thereto on the face of the Debenture.
The definitive Debentures shall be printed, lithographed or engraved or
produced by any combination of these methods or may be produced in any other
manner permitted by the rules of any securities exchange, all as determined by
the officers executing such Debentures, as evidenced by their execution of such
Debentures.
Section 2-2. FORM OF INVESTMENT DEBENTURES, SERIES I.
SFG MORTGAGE & INVESTMENT COMPANY, INC.
923 Powell Avenue SW
Renton, Washington 98057
Investment Debenture, Series I
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Issued To:
Principal Amount:
Issue Date:
Maturity Date:
Interest Rate:
Certificate Number:
Interest Payable:
1. THE DEBENTURE
This is a duly authorized Debenture of SFG Mortgage & Investment Company,
Inc. ("SFG Mortgage"). This Debenture is issued under an Indenture dated
, 1999 ("Indenture") between SFG Mortgage and US Bank as Trustee
("Trustee"). The Indenture permits SFG Mortgage to issue an unlimited amount of
Debentures, the terms of which may vary according to series. This Debenture is
of the series stated above; that series is limited in aggregate principal amount
as stated in the Indenture (or supplemental indentures). The Indenture (and
supplemental indentures) contains statements of the rights of the
Debentureholders, SFG Mortgage and the Trustee and provisions concerning
authentication and delivery of the Debentures. Definitions of certain terms
used in this Debenture are also found in the Indenture (and supplemental
indentures) .
2. PAYMENT OF PRINCIPAL
For value received, SFG Mortgage promises to pay the principal amount of
this Debenture at the maturity date stated above. Payment will be made to the
Person to whom this Debenture is issued, or registered assigns.
3. PAYMENT OF INTEREST
SFG Mortgage promises to pay interest on the principal amount of this
Debenture from the issue date until the principal amount is paid or made
available for payment. Interest will be computed at the annual interest rate
stated above and payable quarterly. Interest will be payable or reinvested as
stated above or as otherwise elected by the Person entitled to payment of
interest. SFG Mortgage will pay interest to the Person in whose name this
Debenture (or one or more Predecessor Debentures) is registered at the close of
business on the Regular Record Date for the payment of interest. The Regular
Record Date is the 15th day of the calendar month immediately preceding an
Interest Payment Date.
4. DEBENTURE HOLDER'S' PREPAYMENT RIGHTS
The Person to which payment is owed under this Debenture shall have,
subject to the limitations set forth herein, have the opportunity to request
prepayment of the principal amount of the Debenture, together with any unpaid
interest owed to them by SFG Mortgage. Beginning upon the first anniversary of
the date each Debenture was issued, SFG Mortgage will be obligated to prepay the
balance due a Debenture holder requesting early redemption in a ninety (90) day
period
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beginning the first day of the first full month after receipt of a request for
prepayment from such Debenture holder. The redemption payment amount shall be
equal to the principal amount due under the Debenture, together with all accrued
and unpaid interest. Provided, that SFG Mortgage may charge a redemption
processing fee for its reasonable costs incurred in processing the prepayment
request, which fee in no event will exceed $500.00 per Debenture.
SFG Mortgage has the right to limit, in its sole discretion, the total
amount of Debentures redeemed in any ninety (90) day period to a maximum of
twelve and one-half percent (12.5%) of the then outstanding total principal
balance of Debentures if, in SFG Mortgage's opinion, the redemption of
Debentures during that period of time would compromise SFG Mortgage's ability to
pay its obligations (including principal and interest payments on the remaining
Debentures) in the ordinary course of business. At the end of the term of any
such suspension period, redemptions will be processed and paid in the order
first received in proper form by SFG Mortgage. If, in any ninety (90) day
period, during which SFG Mortgage has limited the Debenture holder's right to
redemption SFG Mortgage receives requests for prepayment from Debenture holders
which exceed twelve and one-half percent (12.5%) of the total principal amount
due under all outstanding Debentures, SFG Mortgage may, at its option, pay to
all Persons requesting prepayment a pro rated amount, which amount shall be
based upon the principal amount due under each Debenture holder who has
requested early redemption.
5. REINVESTMENT OF INTEREST PAYMENTS
The Person to which payment is owed under this Debenture may elect to
reinvest all or fifty percent (50%) of the interest payments under this
Debenture upon thirty (30) days written notice to SFG Mortgage. If the Person
makes such an election, the amount reinvested will be treated as an addition to
the principal amount due under this Debenture. SFG Mortgage may terminate or
restrict the reinvestment option at any time upon written notice to the holder
of this Debenture. The holder of this Debenture may upon thirty (30) days
written notice to SFG Mortgage elect to change the terms of the reinvestment or
discontinue it altogether. Provided, however, any amounts previously reinvested
shall not become due and payable except upon the due date of the principal
amount due under this Debenture.
6. CALL OF DEBENTURES BY COMPANY
Some or all of the Debentures are callable at the Company's option
beginning on the first anniversary of the date each Debenture was issued. On or
after such dates each of the Debentures will be subject to prepayment at the
option of the Company, in whole or in part, at the prices set forth below, plus
accrued and unpaid interest thereon, if any, to the date of prepayment:
<TABLE>
<S> <C>
Between First and Second Anniversary 100.50% of Principal
Between Second and Third Anniversary 100.25% of Principal
Thereafter 100.00% of Principal
</TABLE>
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7. MISCELLANEOUS
The provisions on the reverse are part of this Debenture.
This Debenture is not entitled to any benefit under the Indenture nor is
this Debenture valid or obligatory for any purpose unless the certificate of
authentication below has been executed by the Trustee by manual signature.
This Debenture is not insured by the United States government, the State of
Washington nor any agency thereof.
In witness whereof, SFG Mortgage has caused this Debenture to be duly
executed under its corporate seal.
SFG MORTGAGE & INVESTMENT
COMPANY, INC.
(Corporate Seal)
By
------------------------
Authorized Officer
[INSERT TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
[FORM OF REVERSE OF INVESTMENT DEBENTURE, SERIES I]
8. TRANSFER AND EXCHANGE
Transfer and exchange of this Debenture are conditioned by certain
provisions in the Indenture. To effect a transfer, the Holder must surrender
this Debenture at SFG Mortgage's office or agency in Renton, Washington. This
Debenture must be duly endorsed or accompanied by a written instrument of
transfer satisfactory to SFG Mortgage. Upon transfer, one or more new
Debentures of the same series, of authorized denominations and for the same
aggregate principal amount will be issued to the designated transferee or
transferees. Prior to due presentment for registration of transfer, SFG
Mortgage, the Trustee or any of their agents may treat any Person in whose name
this Debenture is registered as the owner of this Debenture, regardless of
notice to the contrary or whether this Debenture might be overdue.
This Debenture is issuable only as a registered Debenture; it does not bear
coupons. As provided in the Indenture, this Debenture is exchangeable for other
Debentures of the same series of authorized denominations with the same
aggregate principal amount. To effect an exchange, the Holder must surrender
this Debenture at SFG Mortgage's office or agency in Renton, Washington. The
Debenture must be duly endorsed or accompanied by a written instrument of
exchange satisfactory to SFG Mortgage.
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No service charge will be made for a transfer or exchange, but SFG Mortgage
may require payment of a sum sufficient to cover any governmental charge payable
in connection with such transaction.
9. AMENDMENT OF THE INDENTURE; WAIVER OF RIGHTS
With certain exceptions, the Indenture may be amended, the obligations
and rights of SFG Mortgage may be modified and the rights of the
Debentureholders may be modified by Metrooolitan at any time with the consent
of the Holders of 66-2/3% in aggregate principal amount of the Debentures at
the time Outstanding. The Indenture allows the Holders of specified
percentages in aggregate principal amount of the Debentures of a particular
series to waive compliance by SFG Mortgage with certain Indenture provisions
and to waive past defaults and their consequences on behalf of all the
Holders of Debentures of that series. Any such consent or waiver by the
Holder of this Debenture will be binding upon that Holder. The consent or
waiver will also be binding upon all future Holders of this Debenture and of
any Debenture issued upon the transfer of, or in exchange for or in lieu of
this Debenture, whether or not that consent or waiver is noted upon the
Debenture.
10. FAILURE TO PAV INTEREST; EVENTS OF DEFAULT
If interest is not punctually paid or duly provided for, it shall cease to
be payable to the registered Holder of this Debenture on the applicable Regular
Record Date. Instead, the Trustee will fix a Special Record Date for payment of
the Defaulted Interest. The Trustee will give the Debentureholders notice of
the Special Record Date at least 10 days prior to the Special Record Date. The
Person in whose name this Debenture (or one or more Predecessor Debentures) is
registered at the close of business on the Special Record Date will be entitled
to payment of the Defaulted Interest. If the Debentures are listed on a
securities exchange, however, the Defaulted Interest may be paid at any time and
in any lawful manner consistent with the requirements of the exchange.
If an Event of Default occurs, the principal of all the Debentures may be
declared due and payable as provided in the Indenture.
11. FORM OF PAYMENT
Payment of principal and interest will be made at the office or agency of
SFG Mortgage maintained for that purpose in Renton, Washington. Payment will be
made in coin or currency of the United States of America that is legal tender
for payment of public and private debts at the time of payment. At SFG
Mortgage's option, however, payment of interest may be made by check mailed to
the Person entitled to the interest at that Person's address as it appears in
the Debenture Register.
12. BUSINESS DAYS
Whenever any Interest Payment Date, the Stated Maturity of this Debenture
or any date on which any Defaulted Interest is proposed to be paid is not a
Business Day, the appropriate payment
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or compounding of interest or principal may be made on the next succeeding
Business Day without accrual of additional interest.
13. CERTAIN DEFINITIONS
SFG Mortgage is a Washington corporation. The term "SFG Mortgage" includes
any successor corporation under the Indenture. The term "Trustee includes any
successor Trustee under the Indenture.
Section 2-3. FORM OF TRUSTEE'S CERTIFICATION OF AUTHENTICATION.
This is one of the Debentures referred to in the within mentioned
Indenture.
US BANK, as Trustee
By
-------------------------------
Authorized Officer
ARTICLE THREE
The Debentures
Section 3-1. GENERAL LIMITATIONS.
The aggregate principal amount of Debentures which may be authenticated and
delivered and Outstanding under this Indenture is not limited except as may be
limited by law.
Section 3-2. ISSUABLE IN SERIES; GENERAL TITLE.
The Debentures may be issued in series as from time to time shall be
authorized by the Board of Directors. The Debentures of all series shall be
entitled generally "Debentures." With respect to the Debentures of any
particular series, the Company may incorporate in or add to the general title of
such Debentures any words, letters or figures designed to distinguish that
series.
Section 3-3. TERMS OF PARTICULAR SERIES.
The Debentures of each series (other than Investment Debentures, Series I
as to which specific provision is made in Section 3-12) shall be payable at such
place or places, shall mature on such date or dates, shall bear interest at such
rate or rates payable in such installments and on such dates and at such place
or places and to Holders registered as such, and may be redeemable at such
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price or prices and upon such terms, all as shall be provided for in the
supplemental indenture creating that series.
The Company may at the time of the creation of any series of Debentures or
at any time thereafter make, and the Debentures of such series may contain,
provision for:
(1) the redemption of all, or of all or any part, of the Debentures of
such series prior to maturity;
(2) a sinking, amortization improvement or otheranalogous fund;
(3) limiting the aggregate principal amount of the Debentures of such
series;
(4) the exchange or conversion of the Debentures of that series, at the
option of the Holders thereof, for or into new Debentures of a different series
and/or shares of stock of the Company and/or other securities;
(5) exchanging Debentures of that series, at the option of the Holders
thereof, for other Debentures of the same series of the same aggregate principal
amount of a different authorized kind and/or authorized denomination or
denominations; and/or
(6) the appointment by the Trustee of an Authenticating Agent in one or
more places other than the location of the office of the Trustee with power to
act on behalf of the Trustee and subject to its direction in the authentication
and delivery of the Debentures of any one or more series in connection with such
transactions as shall be specified in the provisions of this Indenture creating
such series or in a supplemental indenture;
all upon such terms as the Board of Directors may determine. All Debentures of
the same series shall be substantially identical in tenor and effect.
Each series of Debentures, except Investment Debentures, Series I, shall be
created by an indenture supplemental hereto authorized by a Board Resolution.
Section 3-4. FORM AND DENOMINATIONS.
The Debentures of each series shall be in registered form and substantially
in the form hereinbefore recited for the Investment Debentures,, Series I,, with
such omissions, variations and insertions as are permitted by this Indenture,
and may have such letters, numbers or other marks of identification and such
legends or endorsements printed, lithographed or engraved thereon, as may be
required to comply with the rules of any securities exchange or to conform to
any usage in respect thereof, or as may, consistently- herewith, be prescribed
by the Board of Directors or by the officers executing such Debentures, such
determination by said officers to be evidenced by their signing the Debentures.
The form of the Debentures of each series (except Investment Debentures, Series
I) shall be established by the supplemental indenture creating such series. The
Debentures of each
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series shall be distinguished from the Debentures of other series in such manner
as may be prescribed in the supplemental indenture creating such series.
The definitive Debentures of each series other than Investment Debentures,
Series I shall be as required by the applicable supplemental indenture. The
definitive Investment Debentures, Series I shall be printed or prepared in a
manner to be determined by the officers executing such Debentures, as evidenced
by their execution of such Debentures.
The Debentures of each series shall be issued in such denominations as
shall be provided in the supplemental indenture creating such series or as the
Board of Directors may determine, except that the Investment Debentures, Series
I shall be issued in the denominations provided for in Section 3-12.
Section 3-5. EXECUTION, AUTHENTICATION AND DELIVERY AND DATING.
The Debentures shall be executed on behalf of the Company by its Chairman
of the Board, its President or one of its Vice Presidents under its corporate
seal reproduced thereon and attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Debentures may be
manual or facsimile.
Debentures bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Debentures or did not
hold such offices at the date of such Debentures.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Debentures executed by the Company to the
Trustee for authentication; and the Trustee shall authenticate such Debentures
as in this Indenture provided and not otherwise, and shall deliver such
Debentures as authorized by the Company.
No Debenture shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears 'on such Debenture a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Debenture shall be conclusive evidence, and the only evidence, that such
Debenture has been duly authenticated hereunder
Section 3-6. TEMPORARY DEBENTURES.
Pending the preparation of definitive Debentures of any series, the Company
may execute, and upon Company Order the Trustee shall authenticate (and if so
authorized deliver), temporary Debentures which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any denomination,
substantially of the tenor of the definitive Debentures in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the
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officers executing such Debentures may determine, as evidenced by their
execution of such Debentures.
If temporary Debentures of any series are issued, the Company will cause
definitive Debentures of such series to be prepared without unreasonable delay.
After the preparation of definitive Debentures, the temporary Debentures shall
be exchangeable for definitive Debentures upon surrender of the temporary
Debentures at the office or agency of the Company in a -Place of Payment,
without charge to the Holder. Upon surrender for cancellation of any one or
more temporary Debentures the Company shall execute and the Trustee shall
authenticate in exchange therefor a like aggregate principal amount of
definitive Debentures of authorized denominations, which shall be delivered as
authorized by the Company. Until so exchanged the temporary Debentures shall in
all respects be entitled to the same benefits under this Indenture as definitive
Debentures.
Section 3-7. REGISTRATION TRANSFER AND EXCHANGE.
The Company shall cause to be kept at its office in Renton, Washington a
register (herein sometimes referred to as the "Debenture Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Debentures and for transfers of Debentures. The
Company will act as "Debenture Registrar" for the purpose of the registration of
Debentures and transfers of Debentures as herein provided.
Upon surrender for transfer of any Debenture of any series at the off ice
or agency of the Company in a Place of Payment, the Company shall execute, and
the Trustee shall authenticate, in the name of the designated transferee or
transferees, one or more new Debentures of the same series of any authorized
denominations, of a like aggregate principal amount, which shall be delivered as
authorized by the Company.
At the option of the Holder, Debentures may be exchanged for other
Debentures of the same series of any authorized denominations, of a like
aggregate principal amount, upon Surrender of the Debentures to be exchanged at
such office or agency. Whenever any Debentures are so surrendered for exchange,
the Company shall execute, and the Trustee shall authenticate, the Debentures
the Debentureholder making the exchange is entitled to receive, which Debentures
shall be delivered as authorized by the Company.
All Debentures issued upon any transfer or exchange of Debentures shall be
the valid obligations of the Company, evidencing the same debt, and entitled to
the same benefits under this Indenture, as the Debentures surrendered upon such
transfer or exchange.
Every Debenture presented or surrendered for transfer or exchange shall (if
so required by the Company or the Trustee) be duly endorsed, or be accompanied
by a written instrument of transfer in form satisfactory to the Company, as the
Debenture Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing.
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No service charge shall be made for any transfer or exchange of Debentures,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any transfer or
exchange of Debentures, other than exchanges pursuant to Section 3-6 or 9-6 not
involving any transfer.
The Company shall not be required (i) to issue, transfer or exchange any
Debenture of any series during a period beginning at the opening of business 15
days before the day of the mailing of a notice of redemption of Debentures
selected for redemption under Section 11-4 and ending at the close of business
on the day of such mailing, or (ii) to transfer or exchange any Debenture so
selected for redemption in whole or in part.
Section 3-8. MUTILATED, DESTROYED, LOST AND STOLEN DEBENTURES.
If (i) any mutilated Debenture is surrendered to the Company, or the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Debenture, and (ii) there is delivered to. the
Company and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Debenture has been acquired by a bona fide purchaser, the
Company shall execute and upon its request the Trustee shall authenticate, in
exchange for or in lieu of any such mutilated, destroyed, lost or stolen
Debenture, a new Debenture of like tenor and principal amount, bearing a number
not contemporaneously outstanding, which shall be delivered as authorized by the
Company.
In case any such mutilated, destroyed, lost or stolen Debenture has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Debenture, pay such Debenture.
Upon the issuance of any new Debenture under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Debenture issued pursuant to this Section in lieu of any
destroyed, lost or stolen Debenture shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Debenture shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Debentures duly issued hereunder.
The provisions of this Section are exclusive and shall -preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures.
Section 3-9. PAYMENT OF INTEREST; INTEREST RIQHTS PRESERVED.
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Interest on any Debenture of any series which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date for Debentures of such
series shall be paid to the Person in whose name that Debenture (or one or more
Predecessor Debentures) is registered at the close of business on the Regular
Record Date for such interest in respect of Debentures of such series (unless
that Debenture, or one or more Predecessor Debentures, is called for redemption
on a date that is prior to such Interest Payment Date, in which case interest
shall be paid thereon as provided in Article Eleven or in the provisions with
respect to redemption or sinking fund contained in the supplemental indenture
creating the series of which that Debenture is a part).
Any interest on any Debenture which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date for Debentures of such series
(herein called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Regular Record Date by virtue of having been
such Holder; and such Defaulted Interest may be paid by the Company, at its
election in each case, as provided in Clause (1) or Clause (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Debentures (or their respective Predecessor
Debentures) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Debenture and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 nor less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee .shall promptly notify the
Company of such Special Record Date and, in the name and at the expense of the
Company, shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be mailed, first-class postage prepaid,
to each Debentureholder at his address as it appears in the Debenture Register,
not less than 10 days prior to such Special Record Date. The Trustee may, in
its discretion, in the name and at the expense of the Company, cause a similar
notice to be published at least once in an Authorized Newspaper in each Place of
Payment for Debentures of such series, but such publication shall not be a
condition precedent to the establishment of such Special Record Date. Notice of
the proposed payment of such Defaulted Interest and the Special -Record Date
therefor having been mailed as aforesaid, such Defaulted Interest shall be paid
to the Persons in whose names the Debentures of such series (or their respective
Predecessor Debentures) are registered on such Special Record Date and shall no
longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Debentures of the series in respect of which interest is in default
may be listed, and upon such notice as may be
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required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this Clause, such payment shall
be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Debenture
delivered under this Indenture upon transfer of or in exchange for or in lieu of
any other Debenture shall carry the rights to interest accrued and unpaid, and
to accrue, which were carried by such other Debenture.
Section 3-10. PERSONS DEEMED OWNERS.
Prior to due presentment for transfer, the Company, the Trustee and any
agent of the Company or the Trustee may treat any Person in whose name any
Debenture is registered as the owner of such Debenture for the purpose of
receiving payment of principal of and premium, if any, and (subject to Section
3-9) interest on, such Debenture and for all other purposes whatsoever, whether
or not such Debenture be overdue, and neither the Company, the Trustee nor any
agent of the Company or the Trustee shall be affected by notice to the contrary.
Section 3-11. CANCELLATION.
All Debentures surrendered for payment, redemption, transfer, exchange or
conversion shall be promptly cancelled by the Company. No Debentures shall be
authenticated in lieu of or in exchange for any Debentures cancelled as provided
in this Section, except as expressly permitted by this Indenture.
Section 3-12. INVESTMENT DEBENTURES, SERIES I.
There shall be an initial series of Debentures entitled "Investment
Debentures, Series I" and the form thereof shall be substantially as
hereinbefore recited. The aggregate principal amount of Investment Debentures,
Series I, at any one time Outstanding shall be limited to $25,000,000 exclusive
of Investment Debentures, Series I authenticated and delivered under Section
3-8. The initial Investment Debentures, Series I shall be issued in the
maturities and denominations with interest rates upon the unpaid principal
amounts thereof as follows provided, that for the first thirty (30) days of
the term of each debenture the interest rate shall be 4.0% per annum:
<TABLE>
<CAPTION>
AMOUNT OF INVESTMENT TERM TO MATURITY ANNUAL INTEREST RATE
--------------------- ----------------- ---------------------
<S> <C> <C>
$2,000-$9,999 61 Months 7.0%
$10,000-$24,999 61 Months 8.0%
$25,000-$99,999 61 Months 8.35%
$100,000-$249,999 61 Months 8.65%
$250,000+ 61 Months 9.0%
</TABLE>
The interest rates of Investment Debentures, Series I may be changed at any
time by the Company, but no such change will affect any Investment Debentures,
Series I issued prior to such change. Holders of Investment Debentures, Series
I, will receive interest payments quarterly or may elect to allow all or 50% of
the interest payable to be compounded and paid as set forth in
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paragraph 5 of the form of the Investment Debenture, Series I in Section 2-2.
Payment of the principal of and interest on Investment Debentures, Series I will
be made at the office or agency of the Company maintained for that purpose in
Renton, Washington. All such payments shall be made in such coin or currency of
the United States of America as at the time of payment is legal tender for
payment of public and private debts; provided, however, that payment of interest
may be made at the option of the Company by check mailed to the address of the
Person entitled thereto as such address shall appear on the Debenture Register.
In the event of the death of any registered owner of an Investment Debenture,
Series I, any party entitled to receive some or all of the proceeds of such
Investment Debenture, Series I may elect to have his or her share of such
investment Debenture, Series I prepaid under the terms, conditions and
limitations set out in paragraph 4 of the form of the Investment Debenture,
Series I in Section 2-2 hereof.
ARTICLE FOUR
Satisfaction and Discharge
Section 4-1. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall cease to be of further effect (except as to any
surviving rights of conversion or transfer or exchange of Debentures herein
expressly provided for) , and the Trustee, on demand of and at the expense of
the Company, shall execute proper instruments acknowledging satisfaction and
discharge of this Indenture, when:
(1) either:
(A) all Debentures theretofore authenticated and delivered (other than
(i) Debentures which have been destroyed, lost or stolen and which have been
replaced or paid as provided in Section 3-8, and (ii) Debentures for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust, as provided in Section 10-3) have been delivered to the Trustee
cancelled; or
(B) all such Debentures not theretofore delivered to the Trustee
cancelled
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within 1 year,
or
(iii) are to be called for redemption within 1 year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company, in the
case of (i) , (ii) or (iii) above, has deposited or caused to be deposited with
the Trustee as trust funds in trust for the purpose an amount sufficient to pay
and discharge the entire indebtedness on such Debentures not theretofore
delivered to the Trustee cancelled, for principal and premium, if any, and
interest to the date of such deposit (in the case of
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Debentures which have become due and payable) , or to the Stated Maturity or
Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company;
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with; and
(4) the Company has delivered to the Trustee a statement that it does
not intend to authorize any further series of Debentures under this Indenture.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 6-7 shall survive.
Section 4-2. APPLICATION OF TRUST MONEY.
All money deposited with the Trustee pursuant to Section 4-1 shall be held
in trust and applied by it, in accordance with the provisions of the Debentures
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Company may
determine, to the Persons entitled thereto, of the principal and premium, if
any, and interest for-whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
ARTICLE FIVE
Remedies
Section 5-1. EVENTS OF DEFAULT.
"Event of Default," with respect to the Investment Debentures, Series 1,
means any one of the events specified below in this Section 5-1 and "Event of
Default" with respect to each other series of Debentures shall mean such events
as are set forth in the supplemental indenture creating such series (in each
case whatever the reason for such Event of Default and whether it shall be
voluntary or involuntary or be effected by operation of law, or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Investment
Debenture, Series I when such interest becomes due and payable, and continuance
of such default for a period of 30 days; or
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(2) default in the payment of the principal of (or premium, if any, on)
any Investment Debenture, Series I at its Maturity; or
(3) default in the performance, or breach, of any covenant or warranty
of the Company in this Indenture (other than a covenant or warranty a default in
whose breach is elsewhere in this Section specifically dealt with), and
continuance of such default or breach for a period of 60 days after there has
been given, by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 10% in principal amount
of the Outstanding Investment Debentures, Series I, a written notice specifying
such default or breach and requiring it to be remedied and stating that such
notice is a 'Notice of Default" hereunder; or
(4) the entry of a decree or order by a court having jurisdiction in the
premises adjudging the Company a bankrupt or insolvent, or approving as properly
filed a petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company under- the Federal Bankruptcy Act or any other
applicable Federal or State law, or appointing a receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and the continuance of any such decree or order unstayed and in
effect for a period of 60 consecutive days; or
(5) the institution by the Company of proceedings to be adjudicated a
bankrupt or insolvent, or the consent by it to the institution of bankruptcy or
insolvency proceedings against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under the Federal Bankruptcy Act or
any other applicable Federal or State law, or the consent by it to the filing of
any such petition or to the appointment of a receiver, liquidator, assignee
trustee, sequestrator (or other similar official) of the Company or of any
substantial part of its property, or the making by it of an assignment for the
benefit of creditors, or the admission by it in writing of its inability to pay
its debts generally as they become due, or the taking of corporate action by the
Company in furtherance of any such action.
Section 5-2. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default occurs and is continuing, then and in every such
case the Trustee or the Holders of not less than 25% in principal amount of the
Outstanding "Applicable Debentures" (as hereinafter defined) may declare the
Applicable Debentures to be due and payable immediately, by a notice in writing
to the Company (and to the Trustee if given by the Holders of the Applicable
Debentures), and upon any such declaration the principal of, premium, if any,
and accrued interest on the Applicable Debentures to the extent not then already
due and payable shall become immediately due and payable. The term "Applicable
Debentures" shall mean the Investment Debentures, Series I in the case of an
Event of Default set forth in Section 5-1 and the Debentures of each other
series in the case of an Event of Default with respect to such series as
provided in any supplemental indenture relating to, the Debentures of such
series; but in no event shall the term "Applicable Debentures" include
Debentures of more than one series.
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At any time after such a declaration of acceleration has -been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of such Applicable Debentures outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) the Company has paid or deposited with the Trustee a sum sufficient
to pay:
(A) all overdue installments of interest on such Applicable Debentures,
(B) the principal of and premium, if any, on such Applicable Debentures
which have become due otherwise than by such declaration of acceleration and
interest thereon at the respective rates borne by such Applicable Debentures,
(C) to the extent that payment of such interest is lawful, interest upon
overdue installments of interest at the respective rates borne by such
Applicable Debentures, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, in each case, with respect to such Applicable
Debentures;
and
(2) all Events of Default, other than the nonpayment of the principal of
such Applicable Debentures which have become due solely by such acceleration,
have been cured or waived as provided in Section 5-13.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Section 5-3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if:
(1) default is made in the payment of any installment of interest on any
Applicable Debenture when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if
any, on) any Applicable Debenture at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it,' for the benefit of the
Holders of such Applicable Debentures, the whole amount then due and payable on
such, Applicable Debentures for principal and premium, if any, and interest,
with interest upon 'the overdue principal and premium,
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if any, and, to the extent that payment of such interest shall be legally
enforceable, upon overdue installments of interest, at the rate borne by the
Applicable Debentures; and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
If the Company fails to pay such amount forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Applicable Debentures and
collect the moneys adjudged or decreed to be payable in ' the manner provided by
law out of the property of the Company or any other obligor upon the Applicable
Debentures, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders of such Applicable Debentures by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
Section 5-4. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Debentures or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Debentures
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise:
(i) to file and prove a claim for the wh ole amount of principal and
premium, if any, and interest owing. and unpaid in respect of the Debentures and
to file such other papers or documents as may be necessary or advisable in order
to have the claims of the Trustee (including' any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel) and of the Debentureholders allowed in such judicial proceeding,
and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any receiver, assignee, trustee, liquidator, sequestrator (or other similar
official) in any such judicial proceeding is hereby authorized by each
Debentureholder to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the
Debentureholders, to pay the Trustee any amount due to it for the reasonable
compensation,
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expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 6-7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Debentureholder any
plan or reorganization, arrangement, adjustment or composition affecting the
Debentures or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Debentureholder in any such proceeding.
Section 5-5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF DEBENTURES.
All rights of action and claims under this Indenture or the Debentures may
be prosecuted and enforced by the Trustee without the possession of any of the
Debentures or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Debentures in respect of which such judgment has been
recovered.
Section 5-6. APPLICATION OF MONEY COLLECTED.
Any money collected or to be applied by the Trustee with respect to a
series of Debentures pursuant to this Article shall be applied in the following
order, at the date or dates fixed by the Trustee and, in case of the
distribution of such money on account of principal or premium, if any, or
interest, upon presentation of the Outstanding Debentures of such series and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
First: To the payment of amounts due the Trustee under Section 6-7;
Second: To the payment of the amounts then due and unpaid upon the
Debentures of such series for principal and premium, if any, and interest, in
respect of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the amounts
due and payable on such Debentures of such series for principal and premium, if
any, and interest, respectively.
Section 5-7. LIMITATION ON SUITS.
No Holder of any Applicable Debenture shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to Applicable Debentures of the same
series;
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(2) the Holders of not less than 25% in principal amount of the
Outstanding Applicable Debentures shall have made written request to the Trustee
to institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Applicable Debentures;
it being understood and intended that no one or more Holders of Debentures shall
have any right in any manner whatever by virtue of, or by availing of, any
provision of this Indenture to affect, disturb or prejudice the rights of any
other Holders of Debentures, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this Indenture,
except in the manner herein provided and for the equal and ratable benefit of
all the Holders of Debentures.
Section 5-8. UNCONDITIONAL RIGHT OF DEBENTUREHOLDERS TO RECEIVE PRINCIPAL;
PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the Holder of any
Debenture shall have the right which is absolute and unconditional to receive
payment of the principal of and premium, if any, and (subject to Section 3-9)
interest on such Debenture on the respective Stated Maturities expressed in such
Debenture (or, in the case of redemption, on the Redemption Date) and to
institute suit for the enforcement of any such payment, and such right shall not
be impaired without the consent of such Holder.
Section 5-9. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Debentureholder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Debentureholder, then and in every such case the Company,
the Trustee and the Debentureholders shall, subject to any determination in such
proceeding, be restored severally and respectively to their former positions
hereunder, and thereafter all rights and remedies of the Trustee and the
Debentureholders shall continue as though no such proceeding had been
instituted.
Section 5-10. RIGHTS AND REMEDIES CUMULATIVE.
No right or remedy herein conferred upon or reserved to the Trustee or to
the Debentureholders is intended to be exclusive of any other right or remedy,
and every right and
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remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 5-11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Debenture to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Debentureholders may be exercised from time to time, and
as often as may be deemed expedient, by the Trustee or by the Debentureholders,
as the case may be.
Section 5-12. CONTROL BY DEBENTUREHOLDERS.
The Holders of a majority in principal amount of the Outstanding Debentures
of any series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Debentures of
such series, provided that:
(1) such direction shall not be in conflict with any rule of law or with
this Indenture, and
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction.
Section 5-13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Debentures of any series may on behalf of the Holders of all the
Debentures of such series waive any past default hereunder and its consequences,
except a default
(1) in the payment of the principal of or premium, if any, or interest
on any Debenture of such series, or
2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of each
outstanding Debenture affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
Section 5-14. UNDERTAKING FOR COSTS.
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All parties to this Indenture agree, and each Holder of any Debenture by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the .
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Debentureholder or group of
Debentureholders, holding in the aggregate more than 10% in aggregate principal
amount of any series of Debentures, or to any suit instituted by any
Debentureholder for the enforcement of the payment of the principal of or
premium, if any, or interest on any Debenture on or after the respective Stated
Maturities expressed in such Debenture (or, in the case of redemption, on or
after the Redemption Date) .
Section 5-15. WAIVER OF STAY OR EXTENSION LAWS.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every power as though no such law had been enacted.
ARTICLE SIX
The Trustee
Section 6-1. CERTAIN DUTIES AND RESPONSIBILITIES.
(a) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; but in the case of
any such certificates or opinions which by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the requirements of
this Indenture.
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(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act,, or its own willful misconduct, except that:
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the Trustee
was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of the
Holders of a majority in principal amount of the Outstanding Debentures of any
series relating to the time.. method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or Power conferred
upon the Trustee with respect to the Debentures Of such series, under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
(d) Whether or not herein expressly so provided, every provision of this
Indenture relating to the conduct affecting the liability of or affording
protection to Trustee shall be subject to the provisions of this Section.
Section 6-2. NOTICE OF DEFAULTS.
Within 90 days after the occurrence of any default hereunder with respect
to a series of Debentures, the Trustee shall transmit by mail to all Holders of
Debentures of such series, as their names and addresses appear in the Debenture
Register, notice of such default hereunder known to the Trustee, unless such
default shall have been cured or waived; provided, however, that, except in the
case of a default in the payment of the principal of or premium, if any, or
interest on any Debenture of such series or in the payment of any sinking or
purchase fund installment due on such Debenture, the Trustee shall be protected
in withholding such notice if and so long as the Board of Directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determine that the withholding of such
notice is in the interests of the Holders of Debentures of such series; and
provided, further, that in the case of any default of the
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character specified in Section 5-1(3) no such notice to such Holders shall be
given until at least 30 days after the occurrence thereof. For the purpose of
this Section, the term "default' means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to
Debentures of such series.
Section 6-3. CERTAIN RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 6-1:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder the Trustee (unless other evidence be
herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith-and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Debentureholders pursuant to this Indenture, unless such
Debentureholders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be incurred by
it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion,, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
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Section 6-4. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF DEBENTURES.
The recitals contained herein and in the Debentures, except the
certificates of authentication, shall be taken as the statements of the Company,
and the Trustee assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of this Indenture or
of the Debentures. The Trustee shall not be accountable for the use or
application by the Company of Debentures or the proceeds thereof.
Section 6-5. MAY HOLD DEBENTURES.
The Trustee, any Paying Agent, Debenture Registrar or any other agent of
the Company, in its individual or -any other capacity, may become the ' owner or
pledgee of Debentures and, subject to Sections 6-8 and 6-13 hereof in the case
of the Trustee, may otherwise deal with the Company with the same rights it
would have if it were not Trustee, Paying Agent, Debenture Registrar or such
other agent.
Section 6-6. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed with the Company.
Section 6-7. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation for
all services rendered by it hereunder (which compensation shall not be limited
by any provision of law in regard to the compensation of a trustee of an express
trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances
incurred or made by the Trustee in accordance with any provision of this
Indenture (including the reasonable compensation and the expenses and
disbursements of its agents and counsel) , except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless against, any
loss, liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of this
trust,, including the costs and expenses of defending itself against any claim
or liability in connection with the exercise or performance of any of its powers
or duties hereunder.
As security for the performance of the obligations of the Company under
this Section the Trustee shall have a lien prior to the Debentures upon all
property and funds held or collected by the
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Trustee as such, except funds held in trust for the payment of principal of and
premium, if any, or interest on Debentures.
Section 6-8. DISQUALIFICATION; CONFLICTING INTERESTS.
(a) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section, it shall, within 90 days after ascertaining that it has
such conflicting interest, either eliminate such conflicting interest or resign
in the manner and with the effect hereinafter specified in this Article.
(b) In the event that the Trustee shall fail to comply with the
provisions of Subsection (a) of this Section the Trustee shall, within 10 days
after the expiration of such 90-day period, transmit by mail to all
Debentureholders, as their names and addresses appear in the Debenture Register,
notice of such failure.
(c) For the purpose of this Section, the Trustee shall be deemed to have
a conflicting interest if:
(1) the Trustee is trustee under another indenture under which any other
securities, or certificates of interest or participation in any other
Securities, of the Company are outstanding, unless such other indenture is a
collateral trust indenture under which the only collateral consists of
Debentures issued under this Indenture, provided that there shall be excluded
from the operation of this paragraph any indenture or indentures under which
other securities, or certificates of interest or Participation in other
securities, of the Company are outstanding, if:
(i) this Indenture and such other indenture or indentures are wholly
unsecured and such other indenture or indentures are hereafter qualified under
TIA, unless the Commission shall have found and declared by order pursuant to
Section 305(b) or Section 307(c) of TIA that differences exist between the
provisions of this Indenture and the provisions of such other indenture or
indentures which are so likely to involve a material conflict of interest as to
make it necessary in the public interest or for the protection of investors to
disqualify the Trustee from acting as such under this Indenture and such other
indenture or indentures, or the company shall have sustained the burden of
proving, on application to the Commission and after opportunity for hearing
thereon, that trusteeship under this Indenture and such other indenture or
indentures is not so likely to involve a material conflict of interest as to
make it necessary in the public interest or for the protection of investors to
disqualify the Trustee from acting as such under one of such indentures;
(2) the Trustee or any of its directors or executive officers is an
obligor upon the Debentures or an underwriter for the Company;
(3) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control with the
Company or an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers is a
director, officer, partner,
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employee, appointee or representative of the Company, or of an underwriter
(other than the Trustee itself) for the Company who is currently engaged in the
business of underwriting, except that (i) one individual may be a director or an
executive officer, or both, of the Trustee and a director or an executive
officer, or both, of the Company but may not be at the same time an executive
officer of both the Trustee and the Company; (ii) if and so long as the number
of directors of the Trustee in office is more than nine, one additional
individual may be a director or an executive officer, or both, of the Trustee
and a director of the Company; and (iii) the Trustee may be designated by the
Company or by any underwriter for the Company to act in the capacity of transfer
agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or
depositary, or in any other similar capacity, or, subject to the provisions of
paragraph (1) of this Subsection, to act as trustee, whether under an indenture
or otherwise;
(5) 10% or more of the voting securities of the Trustee is beneficially
owned either by the Company or by any director, partner, or executive officer
thereof, or 20% or more of such voting securities is beneficially owned,
collectively, by any two or more of such persons; or 10% or more of the voting
securities of the Trustee is beneficially owned either by an underwriter for the
Company or by any director, partner or executive officer thereof, or is
beneficially owned, collectively, by any two or more such persons;
(6) the Trustee is the beneficial- owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), (i) 5% (5r more of the voting securities, or 10% or more of
any other class of security, of the Company not including the Debentures issued
under this Indenture and securities issued under any other indenture under which
the Trustee is also trustee, or (ii) 10% or more of any class of security of an
underwriter for the Company;
(7) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 5% or more of the voting securities of any person who, to
the knowledge of the Trustee, owns 10% or more of the voting securities of, or
controls directly or indirectly or is under direct or indirect common control
with, the Company;
(8) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined) , 10% or more of any class of security of any person who, to
the knowledge of the Trustee owns 50% or more of the voting securities of the
Company; or
(9) the Trustee owns, on May 15 in any calendar year, in the capacity of
executor, administrator, testamentary or inter vivos trustee, guardian,
committee or conservator, or in any other similar capacity, an aggregate of 25%
or more of the voting securities, or of any class of security, of any person,
the beneficial ownership of a specified percentage of which would have
constituted a conflicting interest under paragraphs (6) , (7) or (8) of this
Subsection. As to any such securities of which the Trustee acquired ownership
through becoming executor, administrator, or testamentary trustee of an estate
which included them, the provisions of the preceding sentence shall not apply,
for a period of two years from the date of such acquisition, to the extent that
such securities included
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in such estate do not exceed 25% of such voting securities or 25% of any such
class of security. Promptly after May 15 in each calendar year, the Trustee
shall make a check. of its holdings of such securities in any of the
above-mentioned capacities as of such May 15. If the Company fails to make
payment in full of the principal of, or the premium, if any, or interest on, any
of the Debentures when and as the same becomes due and payable, and such failure
continue's for 30 days thereafter, the Trustee shall make a prompt check of its
holdings of such securities in any bf the above-mentioned capacities as of the
date of the expiration of such 30-day period, and after such date,
notwithstanding the foregoing provisions of this paragraph, all such securities
so held by the Trustee, with sole or joint control over such securities vested
in it, shall, but only so long as such failure shall continue, be considered as
though beneficially owned by the Trustee for the purposes of paragraphs (6), (7)
and (8) of this Subsection.
The specification of percentages in paragraphs (5) to (9) inclusive, of
this Subsection, shall not be construed as indicating that the ownership of such
percentages of the securities of a person is or is not necessary or sufficient
to constitute direct or indirect control for the purposes of paragraph (3) or
(7) of this Subsection.
For the purposes of paragraphs (6) (7) (8) and (9) of this Subsection only,
(i) the terms "security' and n securities" shall include only such securities as
are generally known as corporate securities, but shall not include any note or
other evidence of indebtedness issued to evidence an obligation to repay moneys
lent to a person by one or more banks, trust companies or banking firms, or any
certificate of interest or participation in any such note or evidence of
indebtedness; (ii) an obligation shall be deemed to be 'in default' when a
default in payment of principal shall have continued for 30 days or more and
shall not have been cured; and (iii) the Trustee shall not be deemed to be the
owner or holder of (A) any security which it holds as collateral security, as
trustee or otherwise, for an obligation which is not in default as defined in
clause (ii) above, or (B) any security which it holds as collateral security
under this Indenture, irrespective of any default hereunder, or (C) any security
which it holds as agent for collection, or as custodian, escrow agent, or
depositary, or in any similar representative capacity.
(d) For the purposes of this Section:
(1) The term "underwriter when used with reference to the Company means
every person who, within three (3) years prior to the time as of which the
determination is made, has purchased from the Company with a view to, or has
offered or sold for the Company in connection with, the distribution of any
security of the Company outstanding at such time, or has participated or has had
a direct or indirect participation in any such undertaking, or has participated
or has had a participation in the direct or indirect underwriting of any such
undertaking, but such term shall not include a person whose interest was limited
to a commission from an underwriter or dealer not in excess of the usual and
customary distributors' or sellers' commission.
(2) The term "director" means any director of a corporation, or any
individual performing similar functions with respect to any organization whether
incorporated or unincorporated.
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(3) The term "Person" means an individual, a corporation, a partnership,
an association, a joint-stock company, a trust, an unincorporated organization,
or a government or political subdivision thereof. As used in this paragraph,
the term "trust" shall include only a trust where the interest or interests of
the beneficiary or beneficiaries are evidenced by a security.
(4) The term "voting security" means any security presently entitling
the owner or holder thereof to vote in the direction or management of the
affairs of a person, or any security issued under or pursuant to any trust,
agreement or arrangement whereby a trustee or trustees or agent or agents for
the owner or holder of such security are presently entitled to vote in the
direction or management of the affairs of a person.
(5) The term "Company" means any obligor upon the Debentures.
(6) The term "executive officer" means the president, every vice
president, every trust officer, the cashier, the secretary, and the treasurer of
a corporation, and any individual customarily performing similar functions with
respect to any organization whether incorporated or unincorporated, and shall
include the chairman of the board of directors.
(e) The percentages of voting securities and other securities specified
in this Section shall be calculated in accordance with the following provisions:
(1) A specified percentage of the voting securities of the Trustee, the
Company or any other person referred to in this Section (each of whom is
referred to as a "Person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or holders
thereof to cast such specified percentage of the aggregate votes which the
holders of all the outstanding voting securities of such person are entitled to
cast in the direction or management of the affairs of such person.
(2) A specified percentage of a class of securities of a person means
such percentage of the aggregate amount of securities of the class outstanding.
(3) The term "amount," when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of shares
if relating to capital shares, and the number of units if relating to any other
kind of security.
(4) The term "outstanding" means issued and not held by or for the
account of the issuer. The following securities shall not be deemed outstanding
within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating to
securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating to another
class of securities of the issuer, if the obligation evidenced by such other
class of securities is not in default as to principal or interest or otherwise;
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(iii) securities pledged by the issuer thereof as security for an
obligation of the issuer not in default as to principal or interest or
otherwise; and
(iv) securities held in escrow if placed in escrow by the issuer thereof;
provided, however, that any voting securities of an issuer shall be deemed
outstanding if any person other than the issuer is entitled to exercise the
voting rights thereof.
(5) A security shall be deemed to be of the same class as another
security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges; provided, however, that, in the
case of secured evidences of indebtedness, all of which are issued under a
single indenture, differences in the interest rates or maturity dates of various
series thereof shall not be deemed sufficient to constitute such series
different classes and provided, further, that, in the case of unsecured
evidences of indebtedness, differences in the interest rates or maturity dates
thereof shall not be deemed sufficient to constitute them securities of
different classes, whether or not they are issued under a single indenture.
Section 6-9. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any State, authorized under such laws to exercise corporate trust
powers, having a combined capital and surplus of at least $50,000,000, subject
to supervision or examination by Federal or State authority. If such
corporation publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section, it
shall resign immediately in the manner and with the effect hereinafter specified
in this Article.
Section 6-10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 6-11.
(b) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Debentures, delivered to the
Trustee and to the Company.
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(d) If at any time:
(1) the Trustee shall fail to comply with Section 6-8(a) after written
request therefor by the Company or by any Debentureholder who has been a bona
fide Holder of a Debenture for at least 6 months, or
(2) the Trustee shall cease to be eligible under Section 6-9 and shall
fail to resign after written request therefor by the Company or by any such
Debentureholder, or
(3) the Trustee shall become incapable of acting or shall be adjudged a
bankrupt or insolvent or a receiver of the Trustee or of its property shall be
appointed or any public officer shall take charge or control of the Trustee or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 5-14, any Debentureholder who has been a
bona fide Holder of a Debenture for at least 6 months may, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. if,
within 1 year after such resignation, removal or incapability, or the occurrence
of such vacancy, a successor Trustee shall be appointed by Act of the Holders of
a majority in principal amount of the outstanding Debentures delivered to the
Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Debentureholders and
accepted appointment in the manner hereinafter provided, any Debentureholder who
has been a bona fide Holder of a Debenture for at least 6 months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee by mailing written
notice of such event by first-class mail, postage prepaid, to the Holders of
Debentures as their names and addresses appear in the Debenture Register. Each
notice shall include the name of the successor Trustee and the address of its
principal corporate trust office.
Section 6-11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge and
deliver to the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts
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and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee, and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder, subject nevertheless to its lien, if any,
provided for in Section 6-7. Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
Section 6-12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, to the extent operative, without the execution or filing of any paper
or any further act on the part of any of the parties hereto. In case any
Debentures shall have been authenticated, but not delivered, by the Trustee then
in office, any successor by merger" conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Debentures
so authenticated with the same effect as if such successor Trustee had itself
authenticated such Debentures.
Section 6-13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
(a) Subject to Subsection (b) of this Section, if the Trustee shall be
or shall become a creditor, directly or indirectly, secured or unsecured, of the
Company within 4 months prior to a default, as defined in Subsection (c) of this
Section, or subsequent to such a default, then, unless and until such default
shall be cured, the Trustee shall set apart and hold in a special account for
the benefit of the Trustee individually, the Holders of the Debentures and the
holders of other indenture securities (as defined in Subsection (c) of this
Section):
(1) an amount equal to any and all reductions in the amount due and
owing upon any claim as such creditor in respect of principal or interest,
effected after the beginning of such four (4) months' period and valid as
against the Company and its other creditors, except any such reduction resulting
from the receipt or disposition of any property described in paragraph (2) of
this Subsection, or from the exercise of any right of set-off which the Trustee
could have exercised if a petition in bankruptcy had been filed by or against
the Company upon the date of such default; and
(2) all property received by the Trustee in respect of any claim as such
creditor, either as security therefor, or in satisfaction or composition
thereof, or otherwise, after the beginning of such four (4) months' period or an
amount equal to the proceeds of any such property, if disposed
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of, subject, however, to the rights, if any, of the Company and its other
creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain for its own account (i) payments made on account of any
such claim by any Person (other than the Company) who is liable thereon, and
(ii) the proceeds of the bona fide sale of any such claim by the Trustee to a
third person and (iii) distributions made in cash, securities or other property
in respect of claims filed against the Company in bankruptcy or receivership or
in proceedings for reorganization pursuant to the Federal Bankruptcy Act or
applicable State law;
(B) to realize, for its own account, upon any property held by it as
security for any such claim, if such property was so held prior to the beginning
of such four (4) months' period;
(C) to realize, for its own account, but only to the extent of the claim
hereinafter mentioned, upon any property held by it as security for any such
claim, if such claim was created after the beginning of such four (4) months'
period and such property was received as security therefor simultaneously with
the creation thereof, and if the Trustee shall sustain the burden of proving
that at the time such property was so received the Trustee had no reasonable
cause to believe that a default as defined in Subsection (c) of this Section
would occur within 4 months; or
(D) to receive payment on any claim referred to in paragraph (B) or (C),
against the release of any property held as security for such claim as provided
in paragraph (B) or (C) , as the case may be, to the extent of the fair value of
such property.
For the purposes of paragraphs (B) , (C) and (D) , property substituted
after the beginning of such four (4) months' period for property held as
security at the time of such substitution shall, to the extent of the fair value
of the property released, have the same status as the property released, and, to
the extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of the Trustee as such creditor, such claim shall have
the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property held in
such special account and the proceeds thereof shall be apportioned between the
Trustee, the Debentureholders and the holders of other indenture securities in
such manner that the Trustee, the Debentureholders and the holders of other
indenture securities realize, as a result of payments from such special account
and payments of dividends on claims filed against the Company in bankruptcy or
receivership or in proceedings for reorganization pursuant to the Federal
Bankruptcy Act or applicable State law, the same percentage of their respective
claims, figured before crediting to the claim of the Trustee anything on account
of the receipt by it from the Company of the funds and property in such special
account and before crediting to the respective claims of the Trustee and the
Debentureholders and the holders of other indenture securities dividends on
claims filed against the Company in bankruptcy or receivership or in proceedings
for reorganization pursuant to the Federal Bankruptcy Act or applicable State
law, but after crediting thereon receipts on account of the indebt-
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edness represented by their respective claims from all sources other than
from such dividends and from the funds and property so held in such special
account. As used in this paragraph, with respect to any claim, the term
"dividends" shall include any distribution with respect to such claim, in
bankruptcy or receivership or proceedings for reorganization pursuant to the
Federal Bankruptcy Act or applicable State law, whether such distribution is
made in cash, securities, or other property, but shall not include any such
distribution with respect to the secured portion, if any, of such claim. The
court in which such bankruptcy, receivership or proceedings for
reorganization is pending shall have jurisdiction (i) to apportion between
the Trustee and the Debentureholders and the holders of other indenture
securities, in accordance with the provisions of this paragraph, the funds
and property held in such special account and proceeds thereof, or (ii) in
lieu of such apportionment, in whole or in part, to give to the provisions of
this paragraph due consideration in determining the fairness of the
distributions to be made to the Trustee and the Debentureholders and the
holders of other indenture securities with respect to their respective
claims, in which event it shall not be necessary to liquidate or to appraise
the value of any securities or other property held in such special account or
as security for any such claim, or to make a specific allocation of such
distributions as between the secured and unsecured portions of such claims,
or otherwise to apply the provisions of this paragraph as a mathematical
formula.
Any Trustee which has resigned or been removed after the beginning of such
4 months' period shall be subject to the provisions of this Subsection as though
such resignation or removal had not occurred. If any Trustee has resigned or
been removed prior to the beginning of such 4 months' period, it shall be
subject to the provisions of this Subsection if and only if the following
conditions exist:
(i) the receipt of property or reduction of claim, which would have
given rise to the obligation to account, if such Trustee had continued as
Trustee, occurred after the beginning of such four (4) months'. period; and
(ii) such receipt of property or reduction of claim occurred within 4
months after such resignation or removal.
(b) There shall be excluded from the operation of Subsection (a) of this
Section a creditor relationship arising from:
(1) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year or more
at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court of
competent jurisdiction, or by this Indenture, for the purpose of preserving any
property which shall at any time be subject to the lien of this Indenture or of
discharging tax liens or other prior liens or encumbrances thereon, if notice of
such advances and of the circumstances surrounding the making thereof is given
to the Debentureholders at the time and in the manner provided in this
Indenture;
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(3) disbursements made in the ordinary course of business in the
capacity of trustee under an indenture, transfer agent, registrar, custodian,
paying agent, fiscal agent or depositary, or other similar capacity;
(4) an indebtedness created as a result of services rendered qr premises
rented; or an indebtedness created as a result of goods or securities sold in a
cash transaction as defined in Subsection (c) of this Section;
(5) the ownership of stock or of other securities of a corporation
organized under the provisions of Section 15(a) of the Federal Reserve Act, as
amended, which is directly or indirectly a creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation of any drafts,
bills of exchange, acceptances or obligations which fall within the
classification of self-liquidating paper as defined in Subsection (c) of this
Section.
(c) For the purposes of this Section only:
(1) The term "default" means any failure to make payment in full of the
principal of or interest on any of the Debentures or upon the other indenture
securities when and as such principal or interest becomes due and payable.
(2) The term "other indenture securities" means securities upon which
the Company is an obligor outstanding under any other indenture (i) under which
the Trustee is also trustee, (ii) which contains provisions substantially
similar to the provisions of this Section, and (iii) under which a default
exists at the time of the apportionment of the funds and property held in such
special account.
(3) The term "cash transaction" means any transaction in which full
payment for goods or securities sold is made within 7 days after delivery of the
goods or securities in currency or in checks or other orders drawn upon banks or
bankers and payable upon demand.
(4) The term "self-liquidating paper" means any draft, bill of exchange,
acceptance or obligation which is made, drawn, negotiated or incurred by the
Company for the purpose of financing the purchase, processing, manufacturing,
shipment, storage or sale of goods, wares or merchandise and which is secured by
documents evidencing title to, possession of, or a lien upon, the goods, wares
or merchandise or the receivables or proceeds arising from the sale of the
goods, wares or merchandise previously constituting the security, provided the
security is received by the Trustee simultaneously with the creation of the
creditor relationship with the Company arising from the making, drawing,
negotiating or incurring of the draft, bill of exchange, acceptance or
obligation.
(5) The term "Company" means any obligor upon the Debentures.
ARTICLE SEVEN
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Debentureholders Lists and Reports by Trustee and Company
Section 7-1. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF
DEBENTUREHOLDERS.
The Company will furnish or cause to be furnished to the Trustee:
(a) semiannually, on or before each April 15 and October 15, a list, in
such form as the Trustee may reasonably require, of the names and addresses of
the Holders of Debentures as of the preceding March 31 and September 30,
respectively, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished.
Section 7-2. PRESERVATION OF INFORMATION; COMMUNICATIONS TO
DEBENTUREHOLDERS.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Debentures of each series
received by the Trustee as provided in Section 7-1. The Trustee may destroy any
list furnished to it as provided in Section 7-1 upon receipt of a new list so
furnished.
(b) If three (3) or more Holders of Debentures of a series (hereinafter
referred to as "applicants") apply in writing to the Trustee, and furnish to the
Trustee reasonable proof that each such applicant has owned a Debenture of the
stated series for a period of at least 6 months preceding the date of such
application, and such application states that the applicants desire to
communicate with other Holders of Debentures of such series or of all series
with respect to their rights under this Indenture or under the appropriate
Debentures and is accompanied by a copy of the form of proxy or other
communication which such applicants propose to transmit, then the Trustee shall,
within 5 Business Days after the receipt of such application, at its election,
either
(i) afford such applicants access to the information preserved at the
time by the Trustee in accordance with Section 7-2(a), or
(ii) inform such applicants as to the approximate number of Holders of
Debentures whose names and addresses appear in the information preserved at the
time by the Trustee in accordance with Section 7-2(a), and as to the approximate
cost of mailing to such Debentureholders the form of proxy or other
communication, if any, specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Debentureholder whose name and address appear in the information
preserved at the time by the Trustee in accordance with Section 7-2 (a) , a copy
of the form of proxy or other communication which is specified in such request,
with reasonable promptness after a tender to the Trustee of the material to be
mailed and of payment, or provision for the payment, of the reasonable expenses
of mailing, unless within five (5) days after
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such tender, the Trustee shall mail to such applicants and file with the
Commission, together with a copy of the material to be mailed, a written
statement to the effect that, in the opinion of the Trustee, such mailing would
be contrary to the best interests of the Holders of Debentures or would be in
violation of applicable law. Such written statement shall specify the basis of
such opinion. If the Commission, after opportunity for a hearing upon the
objections specified in the written statement so filed, shall enter an order
refusing to sustain any of such objections or if, after the entry of an order
sustaining one or more of such objections, the Commission shall find, after
notice and opportunity for hearing, that all the objections so sustained have
been met and shall enter an order so declaring, the Trustee shall mail copies of
such material to all such Debentureholders with reasonable promptness after the
entry of such order and the renewal of such tender; otherwise the Trustee shall
be relieved of any obligation or duty to such applicants respecting their
application.
(c) Every Holder of Debentures, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
shall be held accountable by reason of the disclosure of any such information as
to the names and addresses of the Holders of Debentures in accordance with
Section 7-2(b), regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under Section 7-2 (b) .
Section 7-3. REPORTS BY TRUSTEE.
(a) The term "reporting date", as used in this Section, means the first
day of the tenth calendar month following the date of this Indenture and the
same day in every year thereafter so long as any Debentures of any series are
outstanding hereunder. Within 60 days after the reporting date in each year,
the Trustee shall transmit by mail to all Holders of a given series of
Debentures, as their names and addresses' appear in the Debenture Register, a
brief report dated as of such reporting date with respect to:
(1) its eligibility under Section 6-9 and its qualifications under
Section 6-8, or in lieu thereof, if to the best of its knowledge it has
continued to be eligible and qualified under said Sections, a written statement
to such effect;
(2) the character and amount of any advances (and if the Trustee elects
so to state, the circumstances surrounding the making thereof) made by the
Trustee (as such) which remain unpaid on the date of such report, and for the
reimbursement of which it claims or may claim a lien or charge, prior to that of
the Debentures of any series, on any property or funds held or collected by it
as Trustee, except that the Trustee shall not be required (but may elect) to
report such advances if such advances so remaining unpaid aggregate not more
than 1/2 of 1% of the principal amount of the Debentures of such series
outstanding on the date of such report;
(3) the amount, interest rate and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the Debentures) to
the Trustee in its individual capacity, on the date of such report, with a brief
description of any property held as collateral security therefor,
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except an indebtedness based upon a creditor relationship arising in any manner
described in Section 6-13(b) (2) (3) (4) or (6);
(4) the property and funds, if any, physically in the possession of the
Trustee (as such) on the date of such report;
(5) any additional issue of Debentures of any series which the Trustee
has not previously reported; and
(6) any action taken by the Trustee in the performance of its duties
hereunder which it has not previously reported and which in its opinion
materially affects the Debentures of any series, except action in respect of a
default, notice of which has been or is to be withheld by the Trustee in
accordance with Section 6-2.
(b) The Trustee shall transmit by mail to all Debentureholders, as their
names and addresses appear in the Debenture Register, a brief report with
respect to the character and amount of any advances (and if the Trustee elects
so to state, the circumstances surrounding the making thereof) made by the
Trustee (as such) since the date of the last report transmitted pursuant to
Subsection (a) of this Section (or if no such report has yet been so
transmitted, since the date of execution of this instrument) for the
reimbursement of which it claims or may claim a lien or charge, prior to that of
the Debentures of any series, on property or funds held or collected by it as
Trustee, and which it has not previously reported pursuant to this Subsection,
except that the Trustee shall not be required (but may elect) to report such
advances if such advances remaining unpaid at any time aggregate 10% or less of
the principal amount of the Debentures of any series Outstanding at such time,
such report to be transmitted within 90 days after such time.
(c) A copy of each such report shall, at the time of such transmission
to Debentureholders, be filed by the Trustee with each stock exchange upon which
the Debentures are listed, and also with the Commission. The Company will
notify the Trustee when the Debentures are listed on any stock exchange.
Section 7-4. REPORTS BY THE COMPANY.
The Company will:
(1) file with the Trustee, within fifteen (15) days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15 (d) of the Securities Exchange
Act of 1934; or, if the Company is not required to file information, documents
or reports pursuant to either of said Sections, then it will file with the
Trustee and the Commission, in accordance with rules and regulations prescribed
from time to time by the Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to Section 13
of the Securities Exchange Act
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of 1934 in respect of a security listed and registered on a national securities
exchange as may be prescribed from time to time in such rules and regulations;
(2) file with the Trustee and the Commission in accordance with rules
and regulations prescribed from time to time by the Commission, such additional
information, documents and reports with respect to compliance by the Company
with the conditions and covenants of this Indenture as may be required from time
to time by such rules and regulations; and
(3) transmit by mail to all Debentureholders, as their names and
addresses appear in the Debenture Register, within thirty (30) days after the
filing thereof with the Trustee, such summaries of any information, documents
and reports required to be filed by the Company pursuant to paragraphs (1) and
(2) of this Section as may be required by rules and regulations prescribed from
time to time by the Commission.
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
Section 8-1. COMPANY MAY CONSOLIDATE, MERGER, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other corporation
or convey or transfer its properties and assets substantially as an entirety to
any Person, unless:
(1) the corporation formed by such consolidation or into which the
Company is merged or the Person which acquires by conveyance or transfer the
properties and assets of the Company substantially as an entirety shall be a
corporation organized and existing under the laws of the United States of
America or any State or the District of Columbia, and shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the principal of
and premium,, if any, and interest on all the Debentures and the performance of
every covenant of this Indenture on the part of the Company to be performed or
observed;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time, or both, would
become an Event of Default; shall have happened and be continuing; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each stating that such consolidation, merger,
conveyance or transfer and such supplemental indenture comply with this Article
and that all conditions precedent herein provided for relating to such
transaction have been complied with.
Section 8-2. SUCCESSOR CORPORATION SUBSTITUTED.
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Upon any consolidation or merger, or any conveyance or transfer of the
properties and assets of the Company substantially as an entirety in accordance
with Section B-1, the successor corporation formed by such consolidation or into
which the Company is merged or to which such conveyance or transfer is made
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture with the same effect as if such successor
corporation had been named as the Company herein; provided, however, that no
such conveyance or transfer shall have the effect of releasing the Person named
as the "Company' in the first paragraph of this Indenture or any successor
corporation which shall theretofore have become such in the manner prescribed in
this Article from its liability as obligor and maker on any of the Debentures.
ARTICLE NINE
Supplemental Indentures
Section 9-1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF DEBENTUREHOLDERS.
(a) Without the consent of the Holders of any Debentures, the Company,
when authorized by a Board Resolution, and the Trustee, at any time and from
time to time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company,
and the assumption by any such successor of the covenants of the Company herein
and in the Debentures contained; or
(2) to add to the covenants of the Company, for the benefit of the
Holders of the Debentures or any series thereof, or to surrender any right or
power herein conferred upon the Company; or
(3) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Indenture which shall not be inconsistent with the provisions of this Indenture,
provided such action shall not adversely affect the interest of the Holders of
the Debentures or any series thereof; or
(4) to provide for the creation of any series of Debentures (other than
Investment Debentures of Series I) as provided in Article Three.
(b) It shall not be necessary to obtain any consent from the Trustee
with regard to any action taken pursuant to this Section, but the Trustee shall
execute any instrument requested in a Company Request for the purpose of
confirming such action, upon receipt by the Trustee of an Officers' Certificate
and an Opinion of Counsel, each stating that the Company was authorized by this
indenture to take the action taken by it and that the execution of such
instrument is appropriate to confirm such action, provided, however, that the
Trustee shall have no obligation to execute any
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supplemental indenture the purpose of which is to create a series of Debentures
other than Investment Debentures, Series I unless all the terms and conditions
applicable to such series of Debentures affecting the rights, compensation, and
duties of the Trustee shall be satisfactory to the Trustee.
Section 9-2. SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS.
With the consent of the Holders of not less than 66-2/3% in principal
amount of the Outstanding Debentures, by Act of said Holders delivered to the
Company and the Trustee, the Company, when authorized by a Board Resolution, and
the Trustee may enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture or of modifying in any manner the rights
of the Holders of the Debentures under this Indenture; provided, however, if
such additional, changed or eliminated provision applies only to a particular
series of Debentures, or the rights of the Holders of only a particular series
would be modified, the consent of 66-2/3% in principal amount of Outstanding
Debentures of only such series shall be required; and provided, further, that no
such supplemental indenture shall, without the consent of the Holder of each
Outstanding Debenture affected thereby,
(l) change the Stated Maturity of the principal of, or any installment of
interest on, any Debenture, or reduce the principal amount thereof or the
interest thereon or any premium payable upon the redemption thereof, or change
any Place of Payment where, or the coin or currency in which, any Debenture or
the interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment on or after the Stated Maturity thereof (or, in
the case of redemption, on or after the Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding.
Debentures, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose Holders is required for any waiver (of
compliance with certain provisions of this Indenture or certain defaults
hereunder and their consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section or Section 5-13, except
to increase any such percentage or to provide that certain other provisions of
this Indenture cannot be modified or waived without the consent of the Holder of
each Debenture affected thereby.
It shall not be necessary for any Act of Debentureholders under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
Section 9-3. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 6-1) shall be fully protected in relying
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upon, and Opinion of Counsel stating that the execution of such supplemental
indenture is authorized or permitted by this Indenture. The Trustee may, but
shall not be obligated to, enter into any such supplemental indenture which
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.
Section 9-4. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Debentures theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
Section 9-5. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of TIA as then in effect.
Section 9-6. REFERENCE IN DEBENTURES TO SUPPLEMENTAL INDENTURES.
Debentures authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as-to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Debentures so modified as to conform, in the opinion of the Trustee and the
Board of Directors, to any such supplemental indenture may be prepared and
executed by the Company and authenticated by the Trustee in exchange for
Outstanding Debentures, and be delivered as authorized by the Company.
ARTICLE TEN
Covenants
Section 10-1. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company will duly and punctually pay the principal of and premium, if
any, and interest on each series of Debentures in accordance with the terms of
each such series and this Indenture.
Section 10-2. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain an office or agency in the Place of Payment for
Debentures of each series where Debentures of such series may be presented or
surrendered for payment, where
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Debentures may be surrendered for transfer or exchange and where notices and
demands to or upon the Company in respect of such Debentures and this Indenture
may be served. The Company will give prompt written notice to the Trustee of
the location, and of any change in the location, of such office or agency. If
at any time the Company shall fail to maintain such office or agency or shall
fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the principal corporate
trust office of the Trustee, and the Company hereby appoints the Trustee its
agent to receive all such presentations, surrenders, notices and demands.
Section 10-3. MONEY FOR DEBENTURE PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it will, on
or before each due date of the principal of and premium, if any, or interest on,
any of the Debentures, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal, premium, if any,
or interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided, and will promptly. notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, prior
to each due date of the principal of and premium, if any, or interest on, any
Debentures, deposit with a Paying Agent a sum sufficient to pay the principal,
premium, if any, or interest, so becoming due, such sum to be held in trust for
the benefit of the Persons entitled to such principal, premium or interest, and
(unless such Paying Agent is the Trustee) the Company will promptly notify the
Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee to execute
and deliver to the Trustee an instrument in which such Paying Agent shall agree
with the Trustee, subject to the provisions of this Section, that such Paying
Agent will:
(1) hold all sums held by it for the payment of principal of, premium,
if any, or interest on Debentures in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any other
obligor upon the Debentures) in the making of any such payment of principal,
premium, if any, or interest; and
(3) at anytime during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or for any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by the Company or any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
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Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of, premium, if any, or
interest on any Debenture and remaining unclaimed for 6 years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company on Company Request, or (if then held by the Company) shall be
discharged from such trust; and the Holder of such Debenture shall thereafter,
as an unsecured general creditor, -look only to the Company for payment thereof,
and all liability of the Trustee or such Paying Agent with respect to such trust
money and all liability of the Company as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, in an Authorized Newspaper in each Place of Payment of such
Debenture, notice that such money remains unclaimed and that, after a date
specified therein, which shall not be less than 30 days from the date of such
publication, any unclaimed balance of such money then remaining will be repaid
to the Company.
Section 10-4. PAYMENT OF TAXES AND OTHER CLAIMS.
The Company will pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (1) all taxes, assessments and governmental
charges levied or imposed upon it or upon its income, profits or property, and
(2) all lawful claims for labor, materials and supplies which, if unpaid, might
by law become a lien upon its property; provided, however, that the Company
shall not be required to pay or discharge or cause to be paid or discharged any
such tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
Section 10-5. MAINTENANCE OF PROPERTIES.
The Company will cause all its properties used or useful in the conduct of
its business to be maintained and kept in good condition, repair and working
order and supplied with all necessary equipment and will cause to be made all
necessary repairs, renewals, replacements, betterments and improvements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times; provided, however, that nothing in this Section shall prevent the
Company from discontinuing the operation and maintenance of any of its
properties if such discontinuance is, in the judgment of the Company, desirable
in the conduct of its business and not disadvantageous in any material respect
to the Debentureholders.
Section 10-6. STATEMENT AS TO COMPLIANCE.
The Company will deliver to the Trustee, within 120 days after the end of
each fiscal year, a written statement signed by the Chairman of the Board,
President or a Vice President and by the Treasurer, an Assistant Treasurer, the
Controller or an Assistant Controller of the- Company, stating, as to each
signer thereof, that
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(1) a review of the activities of the Company during such year and of
performance under this Indenture has been made under his supervision, and
(2) to the best of his knowledge, based on such review, the Company has
fulfilled all its obligations under this Indenture throughout such year, or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to him and the nature and status thereof.
Section 10-7. CORPORATE EXISTENCE.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence, rights (charter and statutory) and franchises; provided, however,
that the Company shall not be required to preserve any right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Debentureholders.
Section 10-8. BORROWINGS.
The Company may from time to time, in order to further its business, borrow
monies from third parties. The total amount of any loans or other financing
arrangements (the "borrowings") may not exceed thirty-five percent (35%) of the
total principal amount due under the issued and outstanding Debentures at the
time each borrowing is obtained by the Company. In order to secure these
borrowings the Company may agree to pledge some or all of its assets and/or
subordinate payment of the Debentures to payments due to the lenders under the
borrowing arrangements. The Trustee shall have the power to and shall be
obligated to take all actions reasonably necessary to assist the Company in
securing such borrowings, including executing collateral assignment agreements
and subordination agreements related to the Debentures, as may be required by a
lender.
ARTICLE ELEVEN
Redemption of Debentures
Section 11-1. RIGHT OF REDEMPTION.
Notwithstanding anything to the contrary herein contained, the Investment
Debentures, Series I are not redeemable prior to Maturity; the Company may,
however, pay principal and premium, if any, and interest on such Debentures
either upon mutual agreement between the Holders of an Investment Debenture,
Series I and the Company or as provided in this Indenture in the event of the
death of any registered owner or any registered joint owner without such payment
constituting a redemption. The Debentures of each other series, if redeemable,
shall be redeemable on a pro rata basis or by lot or otherwise as set forth in
the supplemental indenture creating such series.
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Section 11-2. APPLICABILITY OF ARTICLE.
Redemption of Debentures at the election of the Company or otherwise as
permitted or required by any provision of this Indenture or any supple ' mental
indenture, shall be made in accordance with such provision and this Article.
Section 11-3. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Debentures shall be evidenced by
a Board Resolution. In case of any redemption at the election of the Company of
the Debentures of any series, the Company shall, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee in writing of such Redemption
Date, the Redemption Price and the principal amount of Debentures to be redeemed
and the series thereof.
Section 11-4. SELECTION BY TRUSTEE OF DEBENTURES TO BE REDEEMED.
If less than all the Debentures of any series are to be redeemed, otherwise
than on a pro rata basis, the particular Debentures to be redeemed shall be
selected not more than 45 days prior to the Redemption Date by the Trustee, from
the Outstanding Debentures of such series not previously called for redemption,
by lot or by such other method as the Trustee shall deem fair and appropriate
and which may provide for the redemption of portions of the principal of
Debentures of a denomination larger than $1,000 or the smallest authorized
denomination of the Debentures, whichever is greater, or an integral multiple
thereof. If redemption is to be other than on a pro rata basis, the Trustee
shall promptly notify the Company in writing of the Debentures selected for
redemption and, in the case of any Debenture selected for partial redemption,
the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Debentures shall relate,, in the
case of any Debenture redeemed or to be redeemed only in part, to the portion of
the principal of such Debenture which has been or is to be redeemed.
Section 11-5. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first class mail, postage prepaid,
mailed not less than 30 nor more than 60 days prior to the Redemption Date, to
each Holder of Debentures to be redeemed, at his address appearing in the
Debenture Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
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(3) if less than all Outstanding Debentures of. any series are to be
redeemed, the identification (and, in the case of partial redemption, the
respective principal amounts) of the Debentures to be redeemed,
(4) that on the Redemption Date the Redemption Price will become due and
payable upon each such Debenture, and that interest thereon shall cease to
accrue from and after said date, and
(5) the place where such Debentures are to be surrendered for payment of
the Redemption Price, which shall be the of f ice or agency of the Company in
each Place of Payment for the Debentures of the series being redeemed.
Notice of redemption of Debentures to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
Section 11-6. DEPOSIT OF REDEMPTION PRICE.
Prior to any Redemption Date, the Company shall deposit with the Trustee or
with a Paying Agent (or, if the Company is acting as its own Paying Agent,
segregate and hold in trust as provided in Section 10-3) an amount of money
sufficient to pay the Redemption Price of all the Debentures which are to be
redeemed on that date.
Section 11-7. DEBENTURES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Debentures so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified and from and after such date (unless the
Company shall default in the payment of the Redemption Price) such Debentures
shall cease to bear interest. upon surrender of such Debentures for redemption
in accordance with said notice, such Debentures shall be paid by the Company at
the Redemption Price. Installments of interest the Stated Maturity of which is
on or prior to the Redemption Date shall be payable to the Holders of such
Debentures registered as such on the relevant Record Dates according to the
terms of such Debentures and the provisions of Section 3-9.
If any Debenture called for redemption shall not be so paid upon surrender
thereof for redemption, the principal and premium, if any, shall, until paid,
bear interest from the Redemption Date at the rate borne by the Debenture.
Section 11-8. DEBENTURES REDEEMED IN PART.
Any Debenture of any series which is to be redeemed only in part shall be
surrendered at a Place of Payment for Debentures of such series (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or his attorney duly authorized in writing) and the
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Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Debenture without service charge, a new Debenture or Debentures
of the same series, of any authorized denomination as requested by such Holder
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Debenture so surrendered.
IN WITNESS WHEREOF, SFG MORTGAGE & INVESTMENT COMPANY, INC. has caused this
Indenture to be signed in its corporate name by its Chairman of the Board, its
President or a Vice President and its corporate seal to be affixed hereunto, and
the same to be attested by the signature of its Secretary or an Assistant
Secretary; and US BANK, in evidence of its acceptance of the trust hereby
created, has caused this Indenture to be signed in its corporate name by one of
its Corporate Trust Officers, and its corporate seal to be affixed hereunto, and
the same to be attested by one of its Corporate Trust Officers.
Executed and delivered as of the date first Above written.
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EXHIBIT 10.1
[PETERSON SULLIVAN P.L.L.C. LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of SFG Mortgage and
Investment Company, Inc. on Amendment 4 to Form SB-2 of our report dated May 20,
1999, appearing in the prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the headings "Schedule of
Managed Funds" and "Experts" in such prospectus.
/s/ Peterson Sullivan PLLC
August 3, 1999
Seattle, Washington
