<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 29, 2000
FILE NO. 33-71399
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT 7 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
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>
91-1916172
(Primary Standard industrial (I.R.S. Employer
Classification Code Number) Identification Number)
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
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. / /
--------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
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
AMOUNT INVESTED TERM INTEREST RATE result of the offering.
---------------- ---------- ---------
$2,000-$9,999 61 Months 8.0% This offering involves a high degree of
$10,000-$19,999 61 Months 8.35% risk. You should purchase the deben-
$20,000-$99,999 61 Months 8.55% tures only if you can afford a loss in
$100,000-$249,999 61 Months 8.85% 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 , 2000.
<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............................................................ 18
Management................................................................................................. 22
Principal Shareholders..................................................................................... 24
Capitalization............................................................................................. 26
Management's Discussion and Analysis of Financial Condition................................................ 26
Plan of Distribution....................................................................................... 27
Description of Debentures.................................................................................. 28
Debenture Holder's Prepayment Rights....................................................................... 30
Reinvestment of Interest Payments.......................................................................... 30
Indemnification............................................................................................ 31
Legal Matters.............................................................................................. 31
Experts.................................................................................................... 31
Available Information...................................................................................... 31
</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 Principal
Anniversary........................
Between Second and Third 100.25% of Principal
Anniversary........................
Thereafter......................... 100.00% of Principal
</TABLE>
4
<PAGE>
SUMMARY FINANCIAL DATA
The financial data shown below as of May 31, 2000 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
MAY 31, 2000
------------
<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>
------------------------
(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 April 30, 2001.
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 did not experience any technical and business issues related to
the Year 2000.
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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.
19
<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
20
<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.
21
<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; 36 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, IV, and V 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
22
<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; 36 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,
IV, and V 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; 39 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, IV, and V 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., SFG Income Fund IV,
L.L.C., and SFG Income Fund V, 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. As of April 30, 2000 SFG Income Fund V had
raised in excess of $3,250,000 through the sale of redeemable secured 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
23
<PAGE>
allowance CMGI will pay all expenses incurred in operating SFG Mortgage, except
certain extraordinary 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 April 30, 2000 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.
24
<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>
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%
</TABLE>
<TABLE>
<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>
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
</TABLE>
<TABLE>
<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>
INVESTOR INFORMATION
(AS OF 09/30/98)
---------------------
<S> <C>
Investor Funds
(including
reinvestment)........ $7,163,433
Average Investment... $44,771
Total Investors...... 160
</TABLE>
<TABLE>
<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>
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.
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of SFG Mortgage at
May 31, 2000 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.
26
<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.
QUALIFIED INDEPENDENT UNDERWRITER
Pacific West Securities is a member of the National Association of
Securities Dealers, Inc. Two of the principals of Pacific West Securities are
the mother and sister of Gregory Elderkin, one of the officers and a director of
the Company. Due to this "close family relationship," NASD Rule 2720 of the NASD
Conduct Rules requires, in part, that a qualified independent underwriter be
engaged to render a recommendation regarding the pricing of the debentures
offered through this prospectus. Accordingly, Pacific West Securities has
obtained a letter from Financial Goal Securities, Incorporated, an NASD
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<PAGE>
member, stating that the yield of the debentures is consistent with Financial
Goal Securities recommendations. Therefore, the yield offered on the debentures
is no lower than that which it would have independently recommended.
Financial Goal Securities has assumed the responsibilities of acting as the
qualified independent underwriter in pricing the offering and conducting due
diligence. For performing its functions as a qualified independent underwriter
with respect to the debentures offered in this prospectus, Financial Goal
Securities will receive $10,000 in fees.
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 ,
2000. 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
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. 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.
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
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<PAGE>
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
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.
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<PAGE>
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.
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 debenture. If a debenture
holder makes such an election, the amount reinvested will be treated as an
additional principal due under the debenture holder's debenture. By increasing
such electing debenture holder's principal balance due, the interest payable
under that debenture holder's debenture 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,
30
<PAGE>
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 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 May 31, 2000, and
December 31, 1999 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., 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. 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
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<PAGE>
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.
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.
32
<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
FINANCIAL REPORT
MAY 31, 2000
<PAGE>
C O N T E N T S
<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 and Investment Company, Inc.
Renton, Washington
We have audited the accompanying balance sheets of SFG Mortgage and
Investment Company, Inc. as of May 31, 2000, and December 31, 1999 and 1998, and
the related statements of cash flows for the five months ended May 31, 2000, the
year ended December 31, 1999, and the period from September 17, 1998 (date of
incorporation) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 the Company as of May 31,
2000, and December 31, 1999 and 1998, and its cash flows for the five months
ended May 31, 2000, the year ended December 31, 1999, and the period from
September 17, 1998 (date of incorporation) to December 31, 1998, in conformity
with generally accepted accounting principles.
As described in Note 4, at May 31, 2000, the Company has not commenced
operations. Therefore, statements of operations for the five months ended May
31, 2000, the year ended December 31, 1999, and the period from September 17,
1998 (date of incorporation) to December 31, 1998, have not been included in
these financial statements.
Peterson Sullivan PLLC
Seattle, Washington
June 14, 2000
1
<PAGE>
SFG MORTGAGE AND INVESTMENT COMPANY, INC.
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
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
YEAR ENDED DECEMBER 31, 1999, AND THE PERIOD FROM SEPTEMBER 17, 1998
(DATE OF INCORPORATION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
YEAR INCORPORATION
ENDED TO
DECEMBER 31, DECEMBER 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 period............................................................ 40,000 --
---------- -----------
Cash, end of period.................................................................. $ 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. (the "Company") 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, the Company issued 40,000 shares of no par
common stock for $40,000 in cash.
The Company's business will be concentrated in non-conventional mortgage
lending activities. This market segment generally has higher default rates than
conventional mortgage lending. The Company'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. The Company 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. The Company'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.
The Company'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. The Company'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.
The Company 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH
Cash consists of amounts held in non-interest bearing 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 will be
established for delinquent receivables, as necessary. Additionally, the Company
will establish allowances, based on prior delinquency and loss experience, for
currently performing receivables and
4
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company 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). The Company 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) the Company 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 the Company'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 the Company'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.
NOTE 3. AFFILIATES
The Company has affiliates which are in the business of acquiring, holding,
selling, originating and servicing mortgage notes receivable primarily in the
Pacific Northwest. Certain of these affiliates will
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. AFFILIATES (CONTINUED)
provide services to and receive compensation from the Company. The following is
a list of affiliates, their relationships to the Company, and a brief
description of services that they will provide:
- Seattle Funding Group, Ltd. will provide mortgage notes receivable
origination services to the Company and other affiliates. Seattle Funding
Group, Ltd. and the Company 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 the Company. The Company 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 the Company. The overhead allowance will cover all
expenses incurred in operating the Company, 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 the Company'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 the Company.
In addition, CMGI will pay all organizational and offering expenses
incurred by the Company related to the offer and sale of the debentures
that are discussed in Note 5. CMGI may borrow up to $60,000 from the
Company for a period not to exceed two years 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 the Company.
- SFG Data Services, Inc. provides mortgage notes receivable services to the
Company 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 the Company.
- Pacific West Securities, Inc. provides brokerage services and will serve
as the principal distributor of the Company'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
the Company.
The Company is affiliated with the SFG Family of Funds (the Funds) which
includes 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 the Company 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 the Company. Also, CMGI is the contract manager.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 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 the Company. Also, CMGI is the contract manager.
- SFG Income Fund V, L.L.C.--This fund has common ownership and officers
with the Company. 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 the Company. 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 the Company.
NOTE 4. STATEMENT OF OPERATIONS
As of May 31, 2000, the Company 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
The Company 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 interest
will be payable quarterly without compounding. The debentures are unsecured debt
instruments, senior in liquidation to outstanding equity securities of the
Company, 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 holder's option beginning on the first anniversary of the date that the
debenture was issued. The Company 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 the Company to a maximum of 12.5% of the
outstanding principal balance of debentures in any ninety day period, if the
Company 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 the Company.
LINE OF CREDIT
The Trust Indenture under which the debentures will be issued permits the
Company to borrow money. The Company intends to negotiate an operating line of
credit with a financial institution.
The amount of money that the Company 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, the Company 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
Independent Underwriter Fee...................................... 10,000
Blue Sky Qualification Fees and Expenses......................... 10,000*
Accounting Fees and Expenses..................................... 20,000*
Legal Fees and Disbursements..................................... 47,500*
Printing Expenses................................................ 5,000*
Miscellaneous Expenses........................................... 10,000*
---------
Total Expenses................................................... $ 108,450*
</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**
1.4 Form of Pricing Opinion of Financial Goal Securities, Inc. with respect to the yield offered
on debentures to be registered*
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.
II-2
<PAGE>
(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 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**
1.4 Form of Pricing Opinion of Financial Goal Securities, Inc. with respect to the yield offered
on debentures to be registered*
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 June 29, 2000.
<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 6/29/00
John Odegard Officer And Director
/s/ GREGORY B. ELDERKIN
------------------------------ Vice-President And 6/29/00
Gregory B. Elderkin Director
/s/ MARK SPENO
------------------------------ Treasurer And Director 6/29/00
Mark Speno
</TABLE>
II-5
<PAGE>
EXHIBIT 10.1
[PETERSON SULLIVAN P.L.L.C. LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SFG Mortgage and
Investment Company, Inc. on Amendment 6 to Form SB-2 of our report dated
June 14, 2000, 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".
Peterson Sullivan PLLC
Seattle, Washington
June 29, 2000
<PAGE>
EXHIBIT 10.2
CONSENT OF LAW OFFICES OF JACK G. ORR, P.S.
<PAGE>
[LETTERHEAD]
June 29, 2000
We hereby consent to the filing of our opinion regarding the validity of the
Investment Debentures, Series I as an exhibit to the SB-2 Registration Statement
of SFG Mortgage and Investment Company, Inc. We further consent to the use of
our name in the prospectus and Registration Statement.
LAW OFFICES OF JACK G. ORR, P.S.
