<PAGE>
As filed with the Securities and Exchange Commission on July 12, 2000
Registration No. 333-32800
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Securities and Exchange Commission
Washington, D.C. 20549
------------------------
AMENDMENT NO. 3
Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
DM MORTGAGE INVESTORS, LLC
(Exact name of registrant as specified in governing instruments)
2901 El Camino Avenue, Suite 206
Las Vegas, Nevada 89102
(Address of Principal executive offices)
------------------------
Michael V. Shustek
Director
CAPSOURCE, INC.
2901 El Camino Avenue, Suite 206
Las Vas, Nevada 89102
(Name and address of agent for service)
The Commission is requested to send copies of all communications to:
Guy P. Lander, Esq.
Goodman Phillips & Vineberg
430 Park Avenue
New York, New York 10022
Approximate date of commencement of proposed sale to the public. As soon
as practicable following effectiveness of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Being Registered Registered (1) Offering Price Aggregate Registration Fee
Per Unit Offering Price
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<S> <C> <C> <C> <C>
Unit of Limited Liability
Company Interest 100,000,000 $1.00 $100,000,000 $26,400
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</TABLE>
(1) The number of units being registered includes units offered under our
distribution reinvestment plan.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION
DATED JULY , 2000
PRELIMINARY PROSPECTUS
DM MORTGAGE INVESTORS, LLC
1,500,000
Units of Limited Liability Company Interests
DM Mortgage Investors, LLC is a Nevada limited liability company. We
invest in mortgage loans, which are loans where our collateral is real property.
The loans will be selected for us by our manager, Capsource, Inc.
We are offering and selling to the public a minimum of 1,500,000 up to a
maximum of 100,000,000 units for $1.00 per unit. This offering includes units to
be issued under our distribution reinvestment plan.
<TABLE>
<CAPTION>
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Selling Commissions/
Price to Public Expense Reimbursement (2) Proceeds to DM LLC
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<S> <C> <C> <C>
Per Unit $1.00 $0.05 $0.95
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Total Minimum $1,500,000.00(1) $75,000.00 $1,425,000.00(1)
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Total Maximum $100,000,000.00(1) $5,000,000.00 $95,000,000.00(1)
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</TABLE>
(1) Includes units purchased under our distribution reinvestment plan.
(2) Assumes that unaffiliated dealers will generate sales of all units. This is
a maximum estimate. We expect that a majority of all units sold will be
sold by DM Financial Services without the unaffiliated dealers, which
reduces the selling commissions by up to 70%.
The most significant risks to our investment include:
o Restricted right to sell or transfer your units
o Total reliance on Capsource
o Payment of substantial fees to Capsource, which is our affiliate
o Tax risks of the offering and membership in DM LLC
o Insufficiency of the minimum proceeds
o Restricted distributions and increased risk due to leveraging
o Conflicts of interest for Capsource and DM Financial Services
o Recent organization and lack of significant assets, operating history
and financing source.
You should read the complete discussion of the risk factors beginning on
page 8.
DM Financial Services, Inc. is the lead dealer selling our units in this
offering. As our "lead dealer," DM Financial Services will be the primary seller
of Units and may also engage other dealers to sell Units. DM Financial Services
and Capsource are both owned by the same company, Vestin Group, Inc., which was
formerly known as Sunderland Corporation.
You must purchase at least 2,000 units for $2,000. To purchase units,
you must first sign the enclosed subscription agreement and make the
representations and warranties included in that agreement. Initially, your money
will be placed in an escrow account with BankWest of Nevada. The escrow will end
upon the earlier of our sale of a minimum of 1,500,000 units or December 31,
2000. If we fail to sell 1,5000,000 units and receive proceeds of $1,500,000 on
or before December 31, 2000, BankWest will promptly return your money without
interest. If we sell the minimum on or before December 31, 2000, we will
continue to sell up to 100,000,000 units. We will terminate the offering on
December 31, 2001.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the units or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The use of forecasts in this offering is prohibited. No one is permitted
to make any oral or written predictions about the cash benefits or tax
consequences you will receive from your investment.
July 12, 2000
<PAGE>
NOTICE TO CALIFORNIA RESIDENTS
All certificates representing units resulting from any offers or
sales of units to California residents will bear the following legend
restricting transfer:
It is unlawful to consummate a sale or transfer of this security, or
any interest therein, or to receive any consideration therefor,
without the prior written consent of the Commissioner of the
Corporation of the State of California, except as permitted in the
Commissioner's Rules.
A copy of the applicable rule of the California Commissioner of Corporations
will be furnished to each California investor by Capsource.
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
SUMMARY......................................................................1
RISK FACTORS.................................................................8
Investment Risks...........................................................8
You will not have the benefit of reviewing the past performance
of DM LLC.............................................................8
Your units lack liquidity and marketability............................8
You have a limited ability to have your units redeemed.................8
If we sell only the minimum number of units, we will be unable
to diversify our loan portfolio adequately or meet investment
objectives............................................................8
We must rely on Capsource to manage our operations and select
our loans for investment..............................................9
We depend on key personnel of Capsource................................9
You may face a delay before distributions begin........................9
Any borrowing by us will increase your risk and reduce the
amount we have available to distribute to members.....................9
Risks of the Mortgage Lending Business.....................................9
Defaults on our mortgage loans will decrease our revenues and
your distributions....................................................9
We will invest in kinds of loans that have a greater risk of
default than first mortgage loans on commercial properties............9
Our loans are not guaranteed by any government agency.................10
Our mortgage loans will not be marketable and we expect no
secondary market to develop..........................................10
Our loan portfolio is riskier because it will not be
diversified geographically...........................................11
We may have difficulty protecting our rights as a secured
lender...............................................................11
Our underwriting standards and procedure are more lenient than
conventional lenders, which may create additional risks to
your return..........................................................11
By becoming the owner of property, we may become liable for
unforeseen environmental obligations.................................11
Our results are subject to fluctuations in interest rates and
other economic conditions............................................11
We face competition for mortgage loans that may reduce
available yields and fees available..................................12
Conflicts of Interest Risks...............................................12
Capsource will face conflicts of interest concerning the
allocation of its personnel's time...................................13
Capsource will face conflicts of interest arising due to our
fee structure........................................................13
Capsource will face conflicts of interest relating to other
investments in mortgage loans........................................13
We may not have control over joint ventures with affiliates...........13
Lack of Control by Members................................................13
Your right to vote is limited and you are bound by majority
vote.................................................................13
Your interest in DM LLC may be diluted as we sell additional
units................................................................14
The value of your units may decrease below one dollar.................14
Risks Related to DM Financial Services....................................14
DM Financial Services is newly formed and has no operating
history or track record in public offerings..........................14
DM Financial Services is an Affiliate of Capsource....................14
Federal Income Tax Risks..................................................14
Your cash flow and distributions will be reduced if we are
taxed as a corporation...............................................14
If we are deemed to not be engaged in a trade or business, the
tax benefits of partnership status will be adversely affected........15
An IRS audit of our books and records could result in an audit
of your tax returns..................................................15
Inconsistencies between federal, state and local tax rules may
adversely affect your return.........................................15
Retirement Plan Risks.....................................................15
An investment in DM LLC may not qualify as an appropriate
investment under all retirement plans................................15
</TABLE>
i
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<TABLE>
<S> <C>
USE OF PROCEEDS.............................................................16
INVESTORS SUITABILITY STANDARDS.............................................18
INVESTMENT OBJECTIVES AND POLICIES..........................................21
Acquisition and Investment Policies.....................................21
Mortgage Loans to Affiliates............................................24
Purchase of Loans from Capsource and its Affiliates.....................24
Commitment of Offering Proceeds.........................................24
Types of Loans We Intend to Invest In...................................24
Prepayment Penalties....................................................26
Balloon Payment.........................................................26
Borrowing...............................................................26
Repayment of Mortgages on Sales of Properties...........................26
No Trust or Investment Company Activities...............................27
Various Other Policies and Procedures...................................27
Competition and General Economic Conditions.............................27
Regulation..............................................................27
MANAGEMENT..................................................................28
Our Management..........................................................28
Capsource...............................................................28
Removal of Capsource as Manager.........................................28
Evaluation and Acquisition by Capsource.................................29
Management of Loan Portfolio............................................29
Mortgage Loans..........................................................29
Prior Experience........................................................30
Directors and Executive Officers of Capsource and Vestin................30
Affiliated Companies....................................................34
COMPENSATION OF CAPSOURCE AND DM FINANCIAL SERVICES.........................36
CONFLICTS OF INTEREST.......................................................39
Share ownership.........................................................41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................................43
FIDUCIARY RESPONSIBILITY....................................................44
Exculpation and Defenses................................................44
Indemnification.........................................................45
SUMMARY OF OPERATING AGREEMENT, RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS..46
Your Status.............................................................46
Limited Liability of Members............................................46
Term of DM LLC..........................................................46
Meetings................................................................46
Voting and Other Rights of Members......................................46
Capital Accounts........................................................47
Capital Contribution of Capsource.......................................47
Unit Repurchases and Deemed Distributions...............................47
Write-Down of Investments...............................................48
Members' Return on Investment...........................................48
Distribution Reinvestment Plan..........................................48
Assignment and Transfer of Units........................................49
Repurchase of units, Withdrawal from DM LLC.............................50
Options and Warrants....................................................50
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Special Power of Attorney...............................................51
FEDERAL INCOME TAX CONSEQUENCES.............................................52
Classification as a Partnership.........................................53
We Will Not Be Classified As A Publicly Traded Partnership..............53
General Principles of Partnership Taxation..............................56
Determination of Basis in Units.........................................56
Allocations of Profits and Losses.......................................56
Limitations on the Deduction of Losses..................................57
Computation of Gain or Loss on Sale or Redemption of units..............58
Character of Gain or Loss...............................................58
Tax Rates on a Partner's Share of Ordinary Income from the Partnership..58
Depreciation............................................................58
Investment Interest.....................................................59
Tax Treatment of Tax-Exempt Entities....................................59
Partnership Tax Returns, Tax Information and Audits.....................60
Capsource is tax Matters Partner........................................61
Original Issue Discount Rules...........................................61
Market Discount.........................................................61
No Section 754 Election - Impact on Subsequent Purchasers...............61
Treatment of Compensation of Capsource..................................62
Possible Legislative Tax Changes........................................63
State and Local Taxes...................................................63
ERISA Considerations....................................................63
Annual Valuation........................................................64
Plan Assets Generally...................................................64
HOW WE PROTECT OUR RIGHTS AS A LENDER.......................................66
Overview of Mortgages...................................................66
Foreclosure.............................................................66
Environmental Risks.....................................................67
Second Mortgages; Rights of Senior Mortgages............................67
Statutory Rights of Redemption..........................................68
Anti-Deficiency Legislation.............................................68
Bankruptcy Laws.........................................................69
Enforceability of Certain Provisions....................................70
REPORTS TO MEMBERS..........................................................72
PLAN OF DISTRIBUTION........................................................74
LEGAL MATTERS...............................................................75
EXPERTS.....................................................................75
AVAILABLE INFORMATION.......................................................75
</TABLE>
iii
<PAGE>
SUMMARY
Because this is a summary, it does not contain all the information that
may be important to you. Before you invest, you should read this entire
prospectus carefully, including the section entitled "Risk Factors," beginning
at page 8, and the Financial Statements and Notes, beginning at page F-1.
DM Mortgage DM Mortgage Investors, LLC was organized in December 1999
Investors, LLC as a Nevada limited liability company. Under our articles
and our Amended and Restated Operating Agreement, which we
refer to as our operating agreement, our existence ends on
December 31, 2019, unless the members vote to extend our
duration. In this prospectus we refer to DM Mortgage
Investors, LLC as "DM LLC," "we," "us" or "our." Our
offices are at 2901 El Camino Avenue, Suite 206, Las Vegas,
Nevada 89102, and our telephone number is (702) 227-0965.
Our Manager Our manager is Capsource, Inc., a Nevada corporation,
which was incorporated in 1997. Its executive offices are
at 2901 El Camino Avenue, Suite 206, Las Vegas, Nevada
89102, and its telephone number is (702) 227-0965.
Capsource is a mortgage broker licensed in the State of
Nevada since 1997.
Investment Policies We will invest in mortgage loans where our
collateral is real property located primarily in Nevada,
Arizona and California. There may be commercial or
residential buildings on the real property, but our
collateral may also consist of real property with buildings
under construction and no physical structures at all. The
loans will be selected for us by Capsource from among loans
obtained by Capsource or mortgage brokers with which we are
not affiliated. We believe these loans will be attractive
to borrowers because of the expediency of Capsource's loan
approval process, which takes from 10 to 20 days.
We do not intend to invest in or own real property.
However, we may own real property if we foreclose on a
defaulted loan.
We expect to obtain a line of credit which we currently
intend to use to acquire, operate and develop for resale
the real properties on which we have foreclosed. Our total
indebtedness under the line of credit will not exceed 70%
of the fair market value of the outstanding mortgage loans
in our loan portfolio.
You will not receive any distributions on your investment
before we invest the proceeds of this offering in mortgage
loans and receive interest payments on those loans. We
estimate that distributions will begin on the later of
eight months after you deliver your subscription amount to
us, or three to six months after the funds are released
from escrow.
1
<PAGE>
Summary Risk Factors The following are some of the significant
risks concerning your investment:
o There is no public trading market for the units, and we
do not expect one to ever develop. Further, the transfer
and redemption of your units is restricted.
Consequently, you will have a difficult time trying to
obtain cash for your units.
o We rely on Capsource, our manager, for the day-to-day
management of our business and the selection of our
mortgages.
o We will pay Capsource and DM Financial Services
substantial fees from the proceeds of this offering and
our operations.
o If we do not remain qualified as a partnership for
federal income tax purposes, we would be subject to the
payment of tax on our income at corporate rates, which
would reduce the amount of funds available for payment
of distributions to you.
o If we sell only 1,500,000 units, our loan portfolio will
not be diversified. Although we expect that no one loan
will exceed 20% of our loan portfolio, if we sell only
the minimum number of units, we will only be able to
invest in one mortgage loan.
o Any borrowing by us under a line of credit will increase
the risk of your investment and reduce the amount we
have available to distribute to you.
o Real estate investments are subject to cyclical economic
trends which are out of our control.
o Capsource has not yet identified the mortgage loans that
we will invest in with the proceeds of this offering. As
a result, you will not have an opportunity to determine
for yourself whether the real properties that are our
collateral justify using the proceeds of this to make a
particular loan.
o We were formed late last year and have no significant
assets, no operating history and no current sources of
financing.
Before you invest in DM LLC, you should see the complete
discussion of "Risk Factors" beginning on page 8 of this
prospectus.
Estimated Use of We anticipate that we will invest in mortgage loans about
Proceeds of 86% of the proceeds of this offering and the distributions
Offering reinvested under our reinvestment plan. We will use the
remainder of offering proceeds to pay organization
expenses, commissions, fees and expenses relating to the
costs of this offering and for obtaining, processing,
making and brokering the mortgage loans in which we invest.
2
<PAGE>
Conflicts of Capsource will face various conflicts of interest resulting
Interest from its activities, including the following:
o We will pay substantial fees to Capsource and DM
Financial Services for the sale of units and for
obtaining, processing, making and brokering, managing
and selling of mortgage loans, as well as for other
services. The terms of these transactions have not been
set by arms-length negotiations. The fees for these
services are described in greater detail under
"Compensation to Capsource and DM Financial Services" in
this summary and as set forth in greater detail in the
main body of this prospectus. We will pay Capsource
based on the volume and size of the mortgages selected
for us, and our interests may diverge from those of
Capsource and Mr. Shustek, the indirect owner of a
conrolling interest in Capsource, in deciding whether we
should invest in a particular loan.
o Capsource will be receiving fees from borrowers that
would otherwise increase our returns. These fees include
the fees listed under "Fees Paid by Borrower" in the
above mentioned compensation description. Because
Capsource receives all of these fees, our interests will
diverge from those of Capsource and Mr. Shustek when
Capsource determines whether to charge higher interest
rates and risk losing fees from the loans.
o Capsource must allocate its time between our activities
and its other activities. These other activities include
its current activities as a licensed mortgage broker and
may in the future include acting as the manager or
general partner of, or adviser to, funds with objectives
similar to ours.
Vestin Group, Capsource and Their Affiliates
--------------------------------------------
The following chart shows the ownership structure of the
various persons and entities that are affiliated with
Vestin (formerly Sunderland Corporation) and Capsource:
Michael V. Shustek
Vestin Group, Inc. Del Mar Mortgage, Inc.
Officers and Directors include: (Predecessor to the
business now operated
by Capsource)
Michael Shustek, Chairman of the
Board, CEO, and 100% owned by
controlling shareholder Michael Shustek
Stephen Byrne, President
Lance Bradford, CFO, Secretary
DM Financial Services Capsource
(Lead Dealer) (Manager and initial
Member of DM LLC)
100% owned by Vestin 100% owned by Vestin
Compensation to Capsource and DM Financial Services will receive fees and
Capsource and DM reimbursement of expenses for performing services in this
Financial Services offering and the investment and management of our assets.
The sales commissions and fees and expenses of this
offering and for Capsource's obtaining, processing, making
and brokering our mortgage loans, as described below, shall
not exceed 14% of the proceeds of this offering. Any part
of the fees and expenses over 14% will be paid by Vestin.
The most significant items of compensation are as follows:
3
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Type of Compensation Form of Compensation
-------------------- --------------------
Offering Stage:
---------------
Paid by Fund
------------
Sales Commission (non-affiliates) 3.5% of gross offering
proceeds
Lead Dealer Fee (paid to DM 1.0% of gross offering
Financial Services) proceeds
Expense Reimbursement 0.5% of gross offering
(paid to DM Financial Services proceeds
and other dealers)
Organization Stage:
-------------------
Promotional Interest 0.5% ownership; no
distributions received until
after all members receive
their initial capital
contributions
Operational Stage:
------------------
Where the fees below are described as competitive fees or
based on local market conditions, that means the fees are
determined by price competition within a given market. To
ensure that our fees remain competitive, we will directly
contact our competition, such as major banks in the local
market or other relevant commercial lenders. We expect that
the interest rate on the loans in which we invest will be
2-3 points higher than comparable loans made by banks and
that the fees paid to Capsource will be 2-3 points higher
than similar fees charged by conventional lenders. We
believe that this rate structure is consistent with rates
and fees charged by other non-conventional lenders.
References below to local law also contemplate additional
requirements imposed by local or state law, such as usury
laws.
Paid by Borrower
----------------
Loan Brokerage Fee 2%-6% of each loan,
competitive fee based on
local market conditions
Loan Evaluation and 2%-5% of each loan,
Processing Fees competitive fee based on
local market conditions
Servicing Fee for Annual fee of 0.25% of
Administering Loans outstanding principal
Escrow/Reconveyance/Loan 2%-5% of outstanding
Extension and Permitting principal, as permitted by
Loan Assumption local law and local market
conditions
Late Fees/Prepayment Fees As permitted by local law
and local market conditions
4
<PAGE>
Paid by Us
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Loan Management Fee Initially, 0.75% of the
offering proceeds used for
mortgage loans, including
working capital reserves.
Beginning with the third
year, 0.75% of the fair
market value of our assets,
including working capital,
less any of our
indebtedness. For funds not
invested in mortgages, the
fee is 0.5%
Reimbursement of Our Lesser of cost or third party
Operating Expenses rate
Real Estate Brokerage Fees Up to 3% of proceeds to
on Resales Capsource
Foreclosed Property where it substantially
contributed to sale; up to 6%
for all persons involved.
Distribution You may elect to reinvest the distributions you receive in
Reinvestment Plan DM LLC when you return your subscription agreement or at
a later date. If you so elect to participate in our
distribution reinvestment plan, you will be taxed on your
share of our taxable income even though you will not
receive any cash distributions. As a result, you may have a
tax liability with no cash distributions to pay that
liability. We may end the distribution reinvestment plan at
any time. See "Summary of Operating Agreement, Rights of
Members and Description of units - Distribution
Reinvestment Plan."
ERISA Considerations The section of this prospectus entitled "ERISA
Considerations" describes the effect the purchase of units
will have on individual retirement accounts, or IRAs,
retirement plans subject to the Employee Retirement Income
Security Act of 1974, also known as ERISA, and the Internal
Revenue Code of 1986, which we call the Internal Revenue
Code. ERISA is a federal law that regulates the operation
of retirement plans. Any retirement plan trustee or
individual considering purchasing shares for a retirement
plan or an IRA should read this section of the prospectus
very carefully.
Units Your investment will be recorded on our books only. We will
not issue Unit certificates. If you wish to redeem or
transfer your units, you must send an executed redemption
or transfer form to us. We will provide the required
redemption form to you upon request.
5
<PAGE>
Operating Agreement Your relationship with DM LLC and with Capsource will be
governed by the operating agreement. Some of the
significant features of the operating agreement are as
follows:
We will allocate to you our income, gains, losses and
distributions in the same proportion that your capital
account bears to all of the capital accounts of all of our
members. The number of units you own will be of no
significance in this determination.
In this prospectus, when we refer to a majority, we mean
those members whose capital accounts together are over 50%
of the amount all of the members' capital accounts. A
majority can bind all of our members on fundamental matters
affecting DM LLC. If such a vote occurs, you will be bound
by the majority vote even if you did not vote with the
majority.
Michael V. Shustek, an officer and a director of
Capsource, is the owner of a controlling interest in
Vestin Group, Inc., the company that owns Capsource.
Accordingly, Mr. Shustek may be deemed to have indirect
control of the conduct of our business, subject to the
rights of the majority described above and elsewhere in
this prospectus.
The operating agreement is discussed in more detail in
"Summary of Operating Agreement, Rights of Members and
Description of Units," beginning on page 43. If any
statements in this prospectus differ from the operating
agreement, you should rely on the operating agreement. The
operating agreement is attached as Exhibit A.
The Offering We are offering for sale a minimum of 1,500,000 units and a
maximum of 100,000,000 units of limited liability company
interests at $1.00 per unit. These units include units
issued under our distribution reinvestment plan. The
minimum initial purchase is 2,000 units for $2,000, except
to the extent that state suitability standards dictate
otherwise.
Tax Considerations In the opinion of our tax counsel, we will be treated for
federal income tax purposes as a partnership. You should
consult your own tax advisor regarding personal tax
consequences that might be associated with your investment
in the units. See "Federal Income Tax Risks," beginning at
page 14, and "Federal Income Tax Consequences," beginning
at page 48 of this prospectus.
Suitability To invest in units, you must have either:
o a net worth, exclusive of home, home furnishings and
automobiles, of at least $45,000 and a minimum annual
gross income of at least $45,000; or
o a minimum net worth of $150,000.
California requires a net worth and annual gross income of
$60,000 or a minimum net worth of $225,000. In addition to
the above standards, Ohio also requires that your
investment does not exceed 10% of your net worth. As
described more fully in "Investor Suitability Standards,"
beginning on page 18, you will have to make additional
representations to us before we determine that the
investment is suitable for you.
6
<PAGE>
To Purchase Units To purchase units you must complete and sign the
subscription agreement, which is Exhibit B at page B-1 of
this prospectus, and deliver it to the securities dealer
that has solicited your investment, together with payment
for the number of units specified in the subscription
agreement. We may accept or reject your subscription in
whole or in part. If we do not accept your subscription
or if we do not sell 1,500,000 units before December 31,
2000, your purchase payment will be returned to you
promptly without interest.
Our acceptance of your subscription agreement is effective
when we countersign it, for the number of units we set
forth next to our signature. If we accept your subscription
agreement, you will be an owner of the units and a member
of DM LLC when we sell a minimum of 1,500,000 units and the
escrow is broken. If we do accept your subscription
agreement, we will provide you with a confirmation of the
number of units you have acquired. Because the units are
not certificated, we will not mail you a unit certificate.
We will furnish all investors in California whose
subscriptions are accepted with a copy of the operating
agreement.
7
<PAGE>
RISK FACTORS
You should carefully consider the following risks and other information in
the prospectus before purchasing units.
Investment Risks
You will not have the benefit of reviewing the past performance of DM LLC.
We were organized in December 1999 and still have no significant assets.
We will only commence operations after we sell 1,500,000 units and receive
$1,500,000, and accordingly we have no operating history. We have no external
source of financing and are relying on capital contributions from Capsource,
which will be our sole member until we sell the minimum amount of units.
Your units lack liquidity and marketability.
There will be no public trading market for your units, and you cannot
freely sell or transfer your units or use them as collateral for a loan. Our
operating agreement restricts transfer of units so that we may avoid being
classified as a "publicly traded partnership," under Section 7704 of the
Internal Revenue Code. Because classification as a publicly traded partnership
would significantly decrease the value of the units of all our members,
Capsource must consent to any assignment of your units. Capsource will withhold
its consent to the extent necessary to prohibit transfers that could cause us to
be classified as a publicly traded partnership. Further, the resale of the units
may be restricted by state securities laws. Consequently, you may not be able to
obtain cash for your units in a timely manner and you should purchase the units
for at least one year.
You have a limited ability to have your units redeemed.
You have a limited ability to have your shares redeemed by us. Some of
these limitations include the following:
o You must give a written request to withdraw at least 60 days before the
withdrawal;
o You can only redeem your units after you have held them for one year;
o Redemption payments only return all or the requested part of your
capital account and are not affected by the value of our underlying
assets, except for any payment made upon final liquidation;
o Payments are made only to the extent we have available cash from
proceeds of repayments of principal and capital contributions;
o There is no reserve fund for repurchases;
o You may withdraw a maximum of $100,000 during any calendar year;
o The total amount withdrawn by all members during any calendar year
cannot exceed 10% of the amount of capital accounts of all the members;
o We will only make redemption payments on the last day of any month.
If we do not sell more than the minimum number of units in this offering
or if principal payments on existing loans decrease, your ability to have your
units redeemed will be adversely affected, particularly if the amount of
requested withdrawals should increase substantially. To help permit redemptions,
we will not refinance or invest in new loans using payments of loan principal by
borrowers or new invested capital of members unless we have sufficient funds to
cover requested withdrawals.
If we sell only the minimum number of units, we will be unable to
diversify our loan portfolio adequately or meet investment objectives.
The minimum proceeds of this offering will be insufficient for
diversification or for achieving our investment objectives. We will be able to
invest in only one mortgage loan with the minimum proceeds of the offering,
based upon an anticipated average loan size of about $1,500,000. We will require
at least $1,500,000 to invest in one or more loans, but we will require about 15
loans to adequately diversify our portfolio to the extent
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desired by Capsource. If we fail to adequately diversify our loan portfolio, our
revenues will be too closely tied to the performance of the borrower under each
loan we invest in. If we raise only the minimum proceeds, we also will not be
able to pursue the investment opportunities that we anticipate will develop.
We must rely on Capsource to manage our operations and select our loans
for investment.
Our ability to achieve our investment objectives and to pay distributions
to you depends upon Capsource's performance in obtaining, processing, making and
brokering loans for us to invest in and determining the financing arrangements
for borrowers. You will have no opportunity to evaluate the terms of mortgages,
the real property that is our collateral or other economic or financial data
concerning our loans. You must rely entirely on the judgment of Capsource in
investing the proceeds of this offering.
We depend on key personnel of Capsource.
We do not have any officers or employees. Our success depends upon the
continued contributions of certain key personnel of Capsource, including Michael
V. Shustek, Stephen J. Byrne and Lance Bradford, each of whom would be difficult
to replace because of his extensive experience in his field, extensive market
contacts and familiarity with Capsource's activities. If any of these key
employees were to cease employment, our operating results could suffer. Our
future success also depends in large part upon Capsource's ability to hire and
retain additional highly skilled managerial, operational and marketing
personnel. Capsource may require additional operations and marketing people who
are experienced in obtaining, processing, making and brokering loans and who
also have contacts in the market. The size of our loan portfolio may require
Capsource to hire and retain additional financial and accounting personnel to
assist to Mr. Bradford in managing Capsource's and our revenues. Competition for
these people is intense, and we cannot assure you that Capsource will be
successful in attracting and retaining skilled personnel.
You may face a delay before distributions begin.
Neither we nor Capsource have identified any specific loans that we will
invest in. Consequently, there may be a substantial period of time before
Capsource invests the proceeds of this offering, during which you will not
receive any distributions on your investment. We estimate that distributions
will begin on the later of eight months after you deliver your subscription
amount to us, or three to six months after the funds are released from escrow.
Any borrowing by us will increase your risk and reduce the amount we have
available to distribute to members.
We anticipate that we will obtain a line of credit that we currently
intend to use to acquire, operate and develop for resale the real properties on
which we have foreclosed. ay borrow up to 70% of the fair market value of
our outstanding mortgage loans at any time to finance these acquisitions. Should
we be unable to repay the indebtedness and make the interest payments on the
loans, the lender will likely declare us in default and require that we repay
all amounts owing under the loan facility. Even if we are repaying the
indebtedness in a timely manner, interest payments owing on the borrowed funds
will reduce our income and the distributions you receive.
Risks of the Mortgage Lending Business
Defaults on our mortgage loans will decrease our revenues and your
distributions.
We are in the business of investing in mortgage loans and, as such, we
risk defaults by borrowers. Any failure of a borrower to repay loans or interest
on loans will reduce our revenues and your distributions, the value of your
units and your interest in DM LLC as a whole.
We will invest in kinds of loans that have a greater risk of default than
first mortgage loans on commercial properties.
o We will likely invest a material amount of our assets in construction
mortgage loans. These are loans made to real estate developers for up
to two years to fund the construction or renovation of buildings on
real property. These loans are riskier than loans secured by income
producing properties because
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during construction the borrower does not receive income from the
property to make payments on the loan.
o We will likely invest about 10% of our assets in second mortgage loans
and, to a much lesser extent, wraparound, or all-inclusive, mortgage
loans. In a second mortgage loan, our rights as a lender, including our
rights to receive payment on foreclosure, will be subject to the rights
of the first mortgage lender. In a wraparound mortgage loan, our rights
will be similarly subject to the rights of a first mortgage lender, but
the aggregate indebtedness evidenced by our loan documentation will be
the first mortgage loan plus the new funds we invest. We would receive
all payments from the borrower and forward to the senior lender its
portion of the payments we receive. Because both of these types of
loans are subject to the first mortgage lender's right to payment on
foreclosure, we incur a greater risk when we invest in each of these
types of loans.
o We expect to invest in commercial property loans that have "balloon
payments". A balloon payment is a large principal balance that is
payable after a period of time during which the borrower has repaid
none or only a small portion of the principal balance. Loans with
balloon payments are riskier than loans with even payments of principal
over an extended time period like 15 or 30 years because the borrower's
repayment depends on its ability to refinance the loan or sell the
property profitably when the loan comes due.
o Sometimes we may invest in loans that are significantly larger than
$1,500,000, which we expect to be the average size of our loans. These
larger loans are risky because they reduce our ability to diversify our
loan portfolio.
o We may invest in loans where the collateral is an interest in a lease.
These loans are riskier because the only rights we will have is to
assume the borrower's obligations under the lease and to use the
property for the length of time and in the limited manner permitted
under the lease.
o We may invest in bridge loans. These are loans to enable commercial
borrowers to make improvements to their property so that they can
qualify for institutional refinancing. These loans are riskier because
there is no assurance that the developer will ever qualify for the
refinancing or that the improvements will yield the anticipated
increase in value and income.
o We will also invest in loans to purchase or develop raw, unimproved
land. We determine whether to invest in these loans based upon the
"90-day quick sale value" of the property and the borrower's actual
capital investment in the property. The "90-day quick sale value" is
the highest price for which the land could actually be sold within the
next 90 days, as determined by local real estate brokers and others. We
believe that this 90-day period approximates the time required for a
foreclosure. These loans are riskier because the property is not
capable of generating any income, as compared to a commercial property,
and because there is no assurance that we will be able to sell the
property within the 90-day period.
Our loans are not guaranteed by any government agency.
Our loans will not be insured or guaranteed by a federally owned or
guaranteed mortgage agency. As a result, our recourse if there is a default may
only be to foreclose upon the mortgaged real property.
Our mortgage loans will not be marketable and we expect no secondary
market to develop.
We do not expect our mortgage loans to be marketable and we do not expect
a secondary market to develop for them. Because of our limited ability to reduce
the risk of default by borrowers by selling or transferring our mortgage loans,
you and we will bear all of the risk of our investments in mortgage loans until
they mature.
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Our loan portfolio is riskier because it will not be diversified
geographically.
Our results will primarily reflect the condition of the real estate
markets in the states of Nevada, California and Arizona, where we will likely
invest in or purchase about 70% of our loans. Consequently, if economic
conditions in any of these three states decline, or if the recent increase in
building and property values in these geographic areas ceases, there will be an
increase in the number of defaults on our loans or fewer loans in which to
invest.
We may have difficulty protecting our rights as a secured lender.
We believe that our loan documents will enable us to enforce our
commercial arrangements with borrowers. However, the rights of borrowers and
other secured lenders may limit our practical realization of those benefits. For
example:
o Judicial foreclosure is subject to the delays of protracted litigation.
Although we expect non-judicial foreclosure to be quicker, our
collateral may deteriorate and decrease in value during any delay in
foreclosing on it.
o The borrower's right of redemption during foreclosure proceedings can
deter the sale of our collateral and can for practical purposes require
us to manage the property.
o Unforeseen environmental hazards may subject us to unexpected liability
and procedural delays in exercising our rights.
o The rights of junior or senior secured parties in the same property can
create procedural hurdles for us when we foreclose on collateral.
o We may not be able to pursue deficiency judgments after we foreclose on
collateral.
o State and federal bankruptcy laws can prevent us from pursuing any
actions, regardless of the progress in any of these suits or
proceedings.
Our underwriting standards and procedure are more lenient than
conventional lenders, which may create additional risks to your return.
o We will invest in loans to borrowers who will not be required to meet
the credit standards of conventional mortgage lenders, which is riskier
than investing in loans made to borrowers who are required to meet
those credit standards.
o Because we approve a mortgage loan more quickly than other mortgage
lenders, there may be a risk that the inquiry we perform as part of our
credit procedures will not reveal the need for additional precautions.
If so, the interest rate we charge and the collateral we require may
not protect us adequately or generate adequate returns for the risk
undertaken.
By becoming the owner of property, we may become liable for unforeseen
environmental obligations.
We intend to only own real property if we foreclose on a defaulted loan
and purchase the property at the foreclosure sale. Under applicable
environmental laws, however, any owner of real property is fully liable for the
costs involved in cleaning up any contamination by materials hazardous to the
environment. Even though we might be entitled to indemnification from the person
that caused the contamination, there is no assurance that the person would be
able to indemnify us to the full extent of our liability. Furthermore, we would
still have court and administrative expenses for which we may not be entitled to
indemnification.
Our results are subject to fluctuations in interest rates and other
economic conditions.
o Our results of operations will vary with changes in interest rates and
with the performance of the relevant real estate markets. If the
economy is healthy, we expect that more people will be borrowing
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money to acquire, develop or renovate real property. However, if the
economy grows too fast, interest rates may increase too much and the
cost of borrowing may become too expensive. This will result in our
investing in fewer loans and thus reduce our revenues and the
distributions you receive.
o One of the results of interest rate fluctuations is that borrowers seek
to extend their low-interest-rate mortgage loans after market interest
rates have increased. All of our loan documents permit us to raise the
interest rate we charge on extended loans anywhere from between 3/4% to
3% from the then-current rate on the loan. This creates two risks for
us:
- There is no assurance that this permitted rate increase will be
adequate if interest rates have increased beyond the range
contemplated by our loan documents.
- If interest rates rise, borrowers may be compelled to extend
their loans to decrease the principal paid with each payment
because the interest component has increased. If this happens, we
are likely to be at a greater risk of the borrower defaulting on
the extended loan, and the increase in the interest rate on our
loan may not be adequate compensation for the increased risk.
Additionally, any fees paid to extend the loan are paid to Capsource,
not to us. Our revenues and distributions will decline if we are unable
to reinvest at higher rates or if an increasing number of borrowers
default in their loans.
o Most of the loans we invest in do not have prepayment penalties. If, at
a time of relatively low interest rates, a borrower should prepay
obligations that have a higher interest rate from an earlier period, we
will likely not be able to reinvest the funds in mortgage loans earning
that higher rate of interest. In the absence of a prepayment fee, we
will receive neither the anticipated revenue stream at the higher rate
nor any compensation for its loss. Furthermore, to the extent that we
do include prepayment fees in our loan documents, these fees are part
of Capsource's compensation.
o Our results will also reflect other economic conditions, such as a
particular industry migrating to or from one of the states into which
we make loans. Although in recent years more businesses have migrated
into and expanded within Nevada, California and Arizona, there is no
assurance that this trend will continue. If this trend reverses, our
ability to invest in loans in these states will be adversely affected.
We face competition for mortgage loans that may reduce available yields
and fees available.
Our competitors consist primarily of conventional mortgage lenders and
mortgage loan investors that operate in Nevada, California and Arizona,
including Bank of America, Bank One, Wells Fargo, Residential Funding, First
Security Bank, and United Bank of Texas. Our ability to invest in loans also
depends on Capsource's ability to compete as a non-conventional mortgage lender
in the Nevada area against companies such as Consolidated Mortgage Corp. and
Global Express Mortgage, which originate the same types of loans as does
Capsource. Many of the companies against which we and Capsource compete have
substantially greater financial, technical and other resources than either DM
LLC or Capsource. Additionally, if our competition decreases interest rates on
their loans or makes funds more easily accessible, yields on our loans could
decrease and the costs associated with making loans could increase, both of
which would reduce our revenues and the distributions you receive.
Conflicts of Interest Risks
The risk factors below describe material conflicts of interest that may
arise in the course of Capsource's management and operation of our business. The
list of potential conflicts of interest reflects our knowledge of the existing
or potential conflicts of interest as of the date of this prospectus. We cannot
assure you that no other conflicts of interest will arise in the future.
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Capsource will face conflicts of interest concerning the allocation of its
personnel's time.
Capsource and Mr. Shustek, who indirectly owns a controlling interest in
Capsource, anticipate that they will also sponsor other real estate programs
having investment objectives and legal and financial obligations similar to ours
and engage in the business activities described in the "Conflicts of Interest"
section in this prospectus. As a result, Capsource and Mr. Shustek may have
conflicts of interest in allocating their time and resources between our
business and those other activities. During times of intense activity in other
programs and ventures, Capsource and Mr. Shustek will likely devote less time
and resources to our business than they ordinarily would.
Capsource will face conflicts of interest arising due to our fee
structure.
We will pay substantial fees to Capsource and DM Financial Services for
transactions involving the sale of units and the selection, purchase, management
and sale of loan mortgages, all of which have not been set by arms-length
negotiations. These fees are quantified and described in greater detail under
"Compensation to Capsource and DM Financial Services" in the summary and in the
compensation table contained elsewhere in this prospectus. We will pay Capsource
based on the volume and size of the mortgages selected for us. Our interests
will diverge from those of Capsource and Mr. Shustek when Capsource decides
whether we should invest in a loan that is not squarely within our investment
guidelines.
Capsource will be receiving fees from borrowers that would otherwise
increase our returns. These fees include the fees listed under "Fees Paid by
Borrower" in the above mentioned compensation description and are also
quantified elsewhere in this prospectus. Because Capsource receives all of these
fees, our interests will diverge from those of Capsource and Mr. Shustek when
Capsource decides whether to charge higher interest rates or require a payment
of principal or additional collateral, or risk losing fees from the loan.
Capsource will face conflicts of interest relating to other investments in
mortgage loans.
We expect to invest in mortgage loans when one or more other companies
managed by Capsource are also investing in mortgage loans. There is a risk that
Capsource may select for us a mortgage loan investment that provides lower
returns than a mortgage loan investment purchased by another Capsource program
or entity.
We may not have control over joint ventures with affiliates.
We will consider investing in or purchasing loans jointly with other
lenders. Although we intend to only participate in loans with publicly
registered entities, we may invest with other entities in the future. In joint
ventures with related parties, there is a risk that neither co-venturer may
control the venture, which could result in an impasse on joint venture
decisions.
Lack of Control by Members
Your right to vote is limited and you are bound by majority vote.
You cannot exercise control over our affairs. That is entirely in the
hands of Capsource. Additionally, because Capsource is wholly owned by Vestin, a
company which Michael Shustek has a controlling interest, Mr. Shustek may be
deemed to indirectly control Capsource's and our activities. You may vote only
in a limited number of specific instances, in which case a majority, being the
owners of our capital accounts aggregating over 50% of all of the members'
capital accounts, can take action and bind all of the members. These situations
in which all members are bound include votes to:
o dissolve DM LLC;
o change the nature of our business;
o amend the operating agreement;
o remove and replace Capsource;
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o approve a merger with or into another company; or
o approve a sale of all or a majority of our assets.
Although Capsource may not change the nature of our business without majority
approval, Capsource may change our investment policies consistent with the
fiduciary duties it owes to all of the members. While you will not have any vote
on these investment policies, you retain your vote to remove and replace
Capsource.
Your interest in DM LLC may be diluted as we sell additional units.
When we receive your initial investment, Capsource will establish for you
an individual capital account on our books. Your capital account will begin with
the amount of your first capital contribution for units. We do not adjust your
capital account for unrealized appreciation or depreciation of our underlying
assets, except for write-downs of assets. Consequently, your capital account may
not reflect your portion of the fair market value of our underlying assets,
particularly immediately after another member makes a capital contribution or
distribution reinvestment.
For example, you bought one unit for one dollar and now have one dollar in
your capital account. The assets we bought for one dollar become worth five
dollars, but the gain is unrealized, which means that we have not yet sold the
relevant assets and "locked in" our profit. A new member contributes one dollar,
which is credited to his capital account. You and the new member will each have
a one dollar capital account. However, as a result of the new contribution, the
value of your units would decrease from five dollars to three dollars. In this
way, your portion of the underlying value of the fair market value of our assets
would be diluted by a later sale of units.
The value of your units may decrease below one dollar.
The value of your share of our underlying assets at any time may be less
or more than $1.00 per unit, depending on when the unit was purchased. For
example, if the fair market value of our assets at the time of a capital
contribution or distribution reinvestment is less than the cost of these assets
on our books, then the value of your units immediately after a capital
contribution or distribution reinvestment may be less than one dollar.
Risks Related to DM Financial Services
DM Financial Services is newly formed and has no operating history or
track record in public offerings.
DM Financial Services, the lead dealer in this offering, is a newly formed
securities brokerage firm that has not previously participated in a public
offering of securities. As a result, DM Financial Services has no history of
selling publicly offered securities itself or in recruiting dealers to assist in
the sale of publicly offered securities. The absence of this track record may
make it more difficult for it to sell our units. If DM Financial Services does
not sell a sufficient number of our units, we may not be able to diversify our
portfolio to the extent necessary to achieve our objectives.
DM Financial Services is an Affiliate of Capsource.
DM Financial Services is wholly owned by Vestin Group Inc., which also
owns Capsource. Consequently, DM Financial Services may have a conflict of
interest in performing its obligations to conduct a "due diligence"
investigation of the statements made in this prospectus and may not conduct the
investigation with the same degree of care as an unaffiliated dealer.
Federal Income Tax Risks
Your cash flow and distributions will be reduced if we are taxed as a
corporation.
If we fail to qualify as a partnership for any taxable year, we would then
be subject to federal income tax on any taxable income in that taxable year at
regular corporate rates. You could not then take tax deductions for your share
of our deductions or credits. You would be subject to tax on your share of our
income to the extent we distribute it to you out of current or accumulated
earnings and profits, or as taxable gain in excess of the cost of your
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units. If we were taxed as a corporation, your cash flow, the distributions you
receive and the value of your units will be significantly reduced. See "Federal
Income Tax Consequences - General Principles of Partnership Taxation," at page
51 and "-Tax Rates on a Partner's Share of Ordinary Income from the
Partnership," at page 53.
If we are deemed to not be engaged in a trade or business, the tax
benefits of partnership status will be adversely affected.
If the Internal Revenue Service does not consider us to be engaged in a
trade or business, the result would be that your share of our expenses would be
deductible only to the extent that all of your miscellaneous itemized deductions
exceed two percent of your adjusted gross income.
An IRS audit of our books and records could result in an audit of your tax
returns.
If we are audited by the IRS and it makes determinations adverse to us,
including the disallowance of deductions we have taken, the IRS may decide to
audit your income tax returns. Any such audit could result in adjustments to
your tax return for items of income, deductions or credits, and the imposition
of penalties and interest for the adjustments and additional expenses for filing
amended income tax returns.
Inconsistencies between federal, state and local tax rules may adversely
affect your return.
If we are treated as a partnership for federal income tax purposes but as
a corporation for state or local income tax purposes, or if deductions that are
allowed by the IRS are not allowed by state or local regulators, your cash flow
and distributions would be adversely affected.
Retirement Plan Risks
An investment in DM LLC may not qualify as an appropriate investment under
all retirement plans.
There are special considerations that apply to pension or profit sharing
trusts or IRAs investing in units. If you are investing the assets of a pension,
profit sharing, 401(k), Keogh or other qualified retirement plan or the assets
of an IRA in DM LLC, you could incur liability or subject the plan to taxation
if:
o your investment is not consistent with your fiduciary obligations under
ERISA and the Internal Revenue Code;
o your investment is not made in accordance with the documents and
instruments governing your plan or IRA, including your plan's
investment policy;
o your investment does not satisfy the prudence and diversification
requirements of Sections 40(a)(1)(B) and 404(A)(1)(C) of ERISA;
o your investment impairs the liquidity of the plan;
o your investment produces "unrelated business taxable income" for the
plan or IRA;
o you will not be able to value the assets of the plan annually in
accordance with ERISA requirements; and
o your investment constitutes a prohibited transaction under Section 406
of ERISA or Section 4975 of the Internal Revenue Code.
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USE OF PROCEEDS
If we sell 1,500,000 units in this offering on or before December 31,
2000, we will continue the offering with the goal of raising $100,000,000, which
includes units sold in our distribution reinvestment plan. Once we have sold
1,500,000 units, we cannot assure you that we will receive any further proceeds
from the offering. If we do not sell significantly more than the 1,500,000
initial units, we will have to restrict our mortgage loans and intended
operations. If we sell the minimum amount, we anticipate that we would only be
able to invest in one mortgage loan. We believe that if we sell fewer than
22,500,000 units, we will not be able to diversify our loan portfolio
adequately. We estimate that we then would only be able to invest in 15 loans,
which would make us more vulnerable to decreased revenues due to any one
nonperforming loan and would result in your distributions being more closely
tied to the performance of a small number of individual loans. Additionally,
depending on the rates of withdrawal by members and principal payments on loans
by borrowers, our lack of available cash could further restrict withdrawals by
members.
If we receive proceeds to invest in fewer than 15 loans, we will conduct
our business as described in this prospectus, although we may be more likely to
enter into loan participation arrangements with Capsource. However, in any loan
participation agreement we might enter into with Capsource, Capsource will be
required to subordinate its interest in the loan to ours. Additionally, the loan
must still meet our investment guidelines. We do not intend to alter our
investment guidelines if we initially are not able to diversify adequately, but
will maintain them consistent with other non-conventional lenders.
We will maintain working capital reserves of at least 3%, consisting of at
least 2 1/2% of the aggregate capital accounts of the members other than
Capsource, with the remaining 1/2% to be provided by Capsource. This reserve is
available to pay expenses in excess of revenues, satisfy obligations of
underlying security properties, expend money to satisfy our unforeseen
obligations and for other permitted uses of our working capital. Working capital
reserves of up to 3% are included in the funds committed to mortgage investments
in determining whether we have invested at least 86% of the offering and
proceeds and reinvested distributions in mortgage loans.
The following table contains information about the estimated use of the
gross proceeds of this offering. Many of the figures represent our best estimate
since we cannot now precisely calculate the figures.
<TABLE>
<CAPTION>
Minimum Offering Pct of Maximum Offering Pct of
(1,500,000 units) Offering (100,000,000 units) Offering
----------------- -------- ------------------- --------
<S> <C> <C> <C> <C>
Gross Offering Proceeds ........... $ 1,500,000 100.0% $100,000,000 100.0%
Less:
Selling Commissions and
Expenses
Paid to affiliates.(1) ..... 15,000 1.0% 1,000,000 1.0%
Paid to nonaffiliates (1). 52,500 3.5% 3,500,000 3.5%
Expense
Reimbursement.(2)......... 7,500 0.5% 500,000 0.5%
Public Offering Expenses:(3).. 135,000(4) 9.0% 500,000 0.5%
------------ ----- ------------ -----
Net Amount received in this
Offering(5) .................. 1,290,000 86.0% 94,500,000 94.5%
Less:
Cash Reserves: ............... 45,000 3.0% 3,000,000 3.0%
------------ ----- ------------ -----
Cash Available for
Investment in
Mortgage Loans: $ 1,245,000 83.0% $ 91,500,000 91.5%
------------ ----- ------------ -----
</TABLE>
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-----------
(1) Amounts shown reflect the worst-case scenario that all of the units will be
sold by our select dealers engaged by our lead broker DM Financial Services.
However, we anticipate that DM Financial Services will sell most of the
units. As a result, in most cases the only amounts payable to dealers other
than expense reimbursement of 0.5% will be 1.0% of proceeds to DM Financial
Services. DM Financial Services will earn this 1.0% commission regardless of
whether it engages any other dealers.
(2) These fees will be allocated among the dealers based upon the amount of
proceeds generated, but in no event will exceed 0.5% of the gross proceeds
of the offering. We expect that most of the expense reimbursement will be
paid to DM Financial Services, which is our affiliate.
(3) Includes filing and review fees, legal, accounting, printing and other
expenses of this offering, which are described further in the registration
statement of which this prospectus forms a part. None of these fees are paid
to affiliates.
(4) If the sales commissions, expenses of this offering and brokerage,
acquisition, selection and processing fees and expenses for our loans exceed
14% of the gross offering proceeds, Vestin has agreed to pay the fees and
expenses in excess of that amount. For example, assuming offering fees and
expenses of $500,000, excluding commissions and expenses paid to all
dealers, if we raise the minimum of $1,500,000 in the offering, Vestin will
pay $365,000 of these fees and expenses. If we raise the maximum of
$100,000,000, Vestin will not be required to pay any of these fees and
expenses.
(5) Borrowers will pay to Capsource all acquisition, selection, processing and
brokerage and selling expenses for loans made by Capsource. Consequently,
these expenses do not appear in the table.
n
Capsource has not set the amount of sales proceeds to be allocated to the
various types of mortgage loans in which we invest, except to the extent
described in "Investment Objectives and Policies." Capsource reviews each loan
to determine if it meets our investment criteria. We plan to invest the entirety
of our cash available for investments in mortgage loans. We do not expect to use
any of the proceeds of this offering to acquire assets other than in the
ordinary course of our business.
Pending investment in the mortgage loans, we may invest the proceeds of
this offering in relatively safe, short-term liquid investments such as U.S.
Treasury bills, notes or bonds, certificates of deposit or commercial paper. We
anticipate that these proceeds, once received, will be held at BankWest of
Nevada or in an account at a financial institution or securities firm that has
assets in excess of $50,000,000.
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INVESTORS SUITABILITY STANDARDS
As a result of the risks inherent in an investment in units, the units are
suitable only for persons who meet the financial suitability standards adopted
by the states in which they live, as set forth below. Our units are only
suitable for those who desire a relatively long term investment for which they
do not need liquidity for at least one year, in light of the other limitations
on redemption and transfer described in this prospectus.
You must meet one of the investor suitability standards contained in the
second and third columns in the table below and the suitability standard
contained in the fourth column, if applicable, to purchase units and to
participate in our reinvestment plan. Fiduciaries must also meet one of these
conditions. If the investment is a gift to a minor, the custodian or the donor
must meet these conditions. For purposes of the net worth calculations below,
net worth is the amount by which your assets exceed your liabilities, but
excluding your house, home furnishings or automobile(s) among your assets. In
the subscription agreement, you will have to confirm that you meet these minimum
standards.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
State(s) 1. Minimum Net
Worth AND Minimum Minimum Net Worth 2. Additional Standards
Gross Income
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama, Arkansas,
Colorado
Connecticut, Delaware,
Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana,
Iowa, Kansas, Kentucky,
Michigan, Minnesota,
Missouri, Montana, $45,000/$45,000 $150,000 N/A
Nevada, New Jersey,
New Mexico, New York,
Oklahoma, Oregon,
Tennessee, Texas, Utah,
Vermont, Virginia, OR AND
Washington, West
Virginia, Wisconsin
-------------------------------------------------------------------------------------------------------------
Arizona, Alaska, $60,000/$60,000 $225,000 N/A
California,
Massachusetts,
Mississippi, Missouri,
Tennessee
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Maine $50,000/$50,000 $200,000 N/A
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New Hampshire $125,000/$50,000 $250,000 N/A
-------------------------------------------------------------------------------------------------------------
South Carolina $65,000/$65,000 $150,000 N/A
-------------------------------------------------------------------------------------------------------------
Nevada $45,000/$45,000 $150,000 Minimum investment is
$5,000
-------------------------------------------------------------------------------------------------------------
Ohio, Pennsylvania $45,000/$45,000 $150,000 Investment is less
than 10% of Net Worth
-------------------------------------------------------------------------------------------------------------
District of Columbia, These jurisdictions do not have quantified suitability requirements. We
Louisiana, Nebraska, believe that it is reasonable for us to rely upon the suitability standards set
North Dakota, Rhode forth above when selling units to residents of these jurisdictions.
Island
-------------------------------------------------------------------------------------------------------------
Maryland, South Dakota, No minimum requirements. Disclosure state only. We will follow the
Wyoming guidelines for the preponderance of the states above in selling units in these
states.
-------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the foregoing suitability standards, we cannot accept
subscriptions from anyone if the representations required are either not
provided or are provided but are inconsistent with our determination that the
investment is suitable for the subscriber. In addition to the financial
information we require, the representations we require of you state that you:
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o have received this prospectus;
o understand that no federal or state agency has made any finding or
determination as to of the fairness for public investment in, nor made
any recommendation or endorsement of, the units; and
o understand that an investment in DM LLC will not, in itself, create a
retirement plan as described in the Internal Revenue Code and that, to
create a retirement plan, you must comply with all applicable
provisions of the Internal Revenue Code.
Each of these representations reflects that we are not indicating any
approval by anyone other than Capsource or that an investment will have an
effect other than to make you a member of DM LLC.
You will also represent that you are familiar with some of the risk
factors we describe and that this investment matches your investment objectives.
Specifically, you represent to us that you:
o recognize that the units as an investment involve a high degree of risk
and that you may lose your entire investment;
o understand that we intend to be taxed as a partnership and not as a
corporation, and that, among other things, this may result in your
being required to pay taxes even though we may not have distributed
cash to you;
o understand that there will be no public market for the units, that
there are substantial restrictions on repurchase, sale, assignment or
transfer of the units, and that it may not be possible readily to
liquidate an investment in the units; and
o have investment objectives that correspond to those described
elsewhere in this prospectus, i.e., to preserve the capital
invested and to receive monthly distributions of cash.
You will also represent to us that you have the capacity to invest in DM
LLC by confirming that:
o you are legally able to enter into a contractual relationship with us,
and, if you are an individual, have attained the age of majority in the
state in which you live; and
o if you are a trustee, are the trustee for the trust on behalf of which
you are purchasing the units, and have due authority to purchase units
on behalf of the trust.
If you are purchasing as a fiduciary, you will also represent that the
above representations and warranties are accurate for the person(s) for whom you
are purchasing units.
By executing the subscription agreement, you will not be waiving any
rights under the Securities Act or the Securities and Exchange Act of 1934.
The subscription agreement also contains a series of short questions so
that we or our dealers may also assess for ourselves the accuracy of these
representations. For employee benefit plans, the questions are more expansive
because of the application of additional provisions of the Internal Revenue Code
relating to retirement plans.
Due to the nature of our investments, it is likely that all or
substantially all of our income will be taxable to you as ordinary income. See
"Federal Income Tax Consequences" at page 48. The units may, therefore, be
suitable for:
o persons seeking current taxable income;
o Keogh Plan accounts or corporation, pension or profit sharing plans,
which we refer to collectively as qualified plans;
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o IRAS or Roth IRAS;
o Simplified Employee Pensions, or SEP's; and
o other entities exempt from federal income taxation such as endowment
partnerships and foundations, and charitable, religious, scientific or
educational organizations (assuming the provisions of their governing
instruments and the nature of their tax exemptions permit such
investment).
Our investment objectives and policies are intended to make the units
suitable investments for employee benefit plans under current law. In this
regard, ERISA provides a comprehensive regulatory scheme for plan assets.
Further, Capsource intends to manage DM LLC so that an investment by a qualified
plan will not make our assets plan assets under ERISA. The ERISA regulations are
also applicable to an IRA. "Federal Income Tax Consequences - ERISA
Considerations" at page 58.
Capsource is not permitted to allow any qualified plan to purchase units
if Capsource has investment discretion over the assets of the qualified plan, or
if Capsource regularly gives individualized investment advice that serves as the
primary basis for the investment decisions made for these assets. This
prohibition is designed to prevent a violation of ERISA. You should obtain the
advice of your attorney, tax advisor, or business consultant for the legal, tax
and business aspects of this investment before subscribing for units.
To assure that this offering complies with applicable state law, each
dealer selling our units is required to:
o inquire diligently of all prospective investors to assure that our
units are a suitable investment in light of the investor's age,
educational level, knowledge of investments, financial means and other
pertinent factors;
o for at least six years, maintain records of the information used to
determine that an investment in units is suitable and appropriate for
each investor; and
o transmit promptly to us all properly completed and executed
subscription agreements.
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INVESTMENT OBJECTIVES AND POLICIES
We intend to invest in mortgage loans where our collateral is real
property located primarily in Nevada, Arizona and California. The loans we
invest in will be selected for us by Capsource from among loans originated by
Capsource or unaffiliated mortgage brokers. When Capsource or someone else
originates a loan for us, that person obtains the borrower, processes the loan
application, makes or invests in the loan, and brokers or sells the loan to us.
We believe our loans will be attractive to borrowers because of the expediency
of Capsource's loan approval process, which takes about 10 to 20 days. Capsource
will obtain, negotiate and make each loan, after which we will acquire the loan.
In addition to those policies contained in this prospectus and the
operating agreement, Capsource may establish written policies on loans and
borrowings. Capsource will also administer our operations and performance to
assure that the policies are implemented and remain in your best interest.
Our principal investment objectives are to:
o Produce revenues from the interest income on our mortgage loans;
o Provide monthly cash distributions to you from the net income
earned on our mortgage loans;
o Preserve and return your capital contributions; and
o Reinvest payments of principal and proceeds of prepayments, sales and
insurance proceeds, net of expenses.
We cannot assure you that we will achieve these objectives or that your
capital will not decrease. Capsource may change the overall investment strategy,
subject to the fiduciary obligations that it owes to all members. However,
Capsource may not change the investment objectives above, except upon majority
approval. Capsource has no authority to do anything that would impair our
ability to carry on our ordinary business as a mortgage investor.
Acquisition and Investment Policies
We will seek to invest substantially all of the offering proceeds and
distribution reinvestments in mortgage loans, after paying applicable fees and
expenses. We anticipate that we will invest about 86% of the offering proceeds
and distribution reinvestments in mortgage loans. We expect to use about 14% of
the proceeds to pay the sales commissions and expenses of this offering and the
brokerage, acquisition, selection and processing fees and expenses for our
loans. Any part of the fees and expenses of this offering over 14% of gross
proceeds will be paid by Vestin.
Our collateral on all of our mortgage loans will be the real property that
the borrower is purchasing with the funds that we make available. We sometimes
refer to these real properties as the security properties. While we may invest
in other types of loans, we believe that most of the loans in which we invest
will have been made to real estate developers with a lesser proportion of loans
involving land loans and bridge financing. We anticipate that about 20-65% of
the loans invested in with the offering proceeds will be secured by commercial
properties, 15-25% by unimproved land, 10-20% by apartments and income-producing
properties and 5% by single family residences. We do not anticipate that our
mortgage investments will be insured or guaranteed by any government agency.
Capsource will continuously evaluate prospective investments, select the
mortgages in which we invest and make all investment decisions on our behalf in
its sole discretion, unless the operating agreement provides otherwise. You are
not entitled to act on any proposed investment. In evaluating prospective
mortgage loan investments, Capsource considers such factors as the following:
o the ratio of the amount of the investment to the value of the
property by which it is secured;
o the potential for capital appreciation of the property securing the
investment;
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o expected levels of rental and occupancy rates;
o current and projected revenues from the property;
o potential for rental increases;
o the status and condition of the record title of the property
securing the investment;
o geographic location of the property securing the investment; and
o the financial condition of the borrowers and their principals, if
any, who guarantee the loan.
Capsource can obtain our loans from unaffiliated mortgage brokers and
previous borrowers, and by solicitations of new borrowers in those states where
permissible. We may purchase existing loans that were originated by third party
lenders and acquired by Capsource for us. Capsource is required to sell the
loans to us for the lower of Capsource's cost or the then-current market value.
When selecting mortgage loans for us, Capsource will adhere to the
following guidelines, which are intended to control the quality of the
collateral given for our loans:
1. Priority of Mortgages. Our mortgage on the security property will not
be junior to more than one other mortgage. The only subordinated mortgages we
currently intend to invest in at this time are second mortgages, although in the
future we may invest in wraparound, or all-inclusive, mortgages. We anticipate
that our mortgage loans will be diversified as to priority approximately as
follows: first mortgages - 90%; second mortgages - 10%.
2. Loan-to-Value Ratio. We do not anticipate that the amount of our loan
combined with the outstanding debt secured by a senior mortgage on a security
property will exceed the following percentage of the appraised value of the
security property:
Type of Secured Property Loan-to-Value Ratio
------------------------ -------------------
Residential 75%
Unimproved Land 60%
Commercial 75%
Property under
Development/Construction Loan 75% (of anticipated post-development
value)
Leasehold Interest 75% (of leasehold interest)
3. Construction Mortgage Loans. We anticipate that we will invest 20-65%
of the offering proceeds in construction loans other than home improvement loans
on residential property, subject to the following guidelines:
o The loan-to-value ratio on construction loans in which we invest will
not exceed 80% of the independently appraised, completed value of the
security property.
o We currently do not intend to invest in or purchase construction loans
secured by properties Capsource considers to be special-use properties,
other than loans to casinos.
Capsource, in its discretion, may increase any of the above loan-to-value
ratios if a given loan is supported by credit adequate to justify a higher
loan-to-value ratio, including personal guarantees. These loan-to-value ratios
will not apply to financing offered by us to the purchaser of any real estate
acquired through foreclosure, or to refinance an existing loan that is in
default when it matures. In those cases, Capsource, in its sole discretion,
shall be free to accept any reasonable financing terms it deems to be in our
best interests. Nevertheless, in no event will the loan-to-value ratio on any
loan exceed 80% of the independently appraised completed value of the property.
The target loan-to-value ratio for our loan portfolio as a whole is
approximately 70%.
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We will receive an independent appraisal for each security property. You
may review copies of these appraisals upon reasonable notice to us. We will
retain appraisers who will be licensed or qualified as independent appraisers
and be certified by or hold designations from one or more of the following
organizations: The Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation, the National Association of Review Appraisers, the
Appraisal Institute, the Society of Real Estate Appraisers, M.A.I., Class IV
Savings and Loan appraisers or from among appraisers with other qualifications
acceptable to Capsource. However, appraisals are only estimates of value and
cannot be relied on as measures of realizable value. An employee or agent of
Capsource will review each appraisal report and will conduct a "drive-by" for
each property on which an appraisal is made. A "drive-by" means that the person
drives to the property and assesses the front exterior of the subject property,
the adjacent properties and the neighborhood. A drive-by does not include
entering any structures on the property, although in most cases our employee or
agent will attempt to do so.
4. Terms of Mortgage Loans. Most of our loans will be for one to seven
years. We anticipate that most of our loans will provide for payments of
interest only with a "balloon" payment of principal payable in full at the end
of the term. Some loans will provide for the deferral and compounding of all or
a part of accrued interest for various periods of time.
5. Escrow Conditions. Our loans will be funded by us through an escrow
account held by a title insurance company, subject to the following conditions:
o Borrowers will obtain satisfactory title insurance coverage for all
loans, with the title insurance policy naming us as the insured and
providing title insurance in an amount at least equal to the principal
amount of the loan. Title insurance insures only the validity and
priority of our deed of trust, and does not insure us against loss by
other causes, such as diminution in the value of the security property.
o Borrowers will obtain satisfactory fire and casualty insurance for all
loans secured by improved real property, naming us as loss payee in an
amount sufficient to cover the replacement cost of improvements.
o All insurance policies, notes, deeds of trust or mortgages, escrow
agreements, and any other loan document for a particular transaction
will name us as payee and beneficiary. Mortgage loans will not be
written in the name of Capsource or any other nominee.
6. Purchase of Mortgage Investments from Affiliates. We may acquire
mortgage loans from our affiliates, including Capsource, for a price not in
excess of the par value of the note or its fair market value, whichever is
lower, plus allowable fees and expenses, but without the allowance of any other
compensation for the loans. Except for the compensation paid to Capsource
described elsewhere in this prospectus, any affiliate from which we purchase
mortgage loans will remit to us all income it earns from the mortgage loan while
the loan is in its portfolio.
7. Note Hypothecation. We may also acquire mortgage loans secured by
assignments of secured promissory notes. These mortgage loans must satisfy our
stated investment standards, including our loan-to-value ratios, and also may
not exceed 80% of the principal amount of the assigned note. For example, if the
property securing a note we acquire is commercial property, the total amount of
outstanding debts secured by the property must not exceed 75% of the appraised
value of the property, and the mortgage loan will not exceed 80% of the
principal amount of the assigned note. For mortgage loans secured by promissory
notes, we will rely on the appraised value of the underlying property, as
determined by an independent written appraisal which was conducted within the
then-preceding twelve months. If an appraisal was not conducted within that
period, then we will arrange for a new appraisal to be prepared for the
property. All these appraisals will satisfy the standards described above.
8. Joint Venturers. We may also participate in loans with other lenders,
including affiliates, by providing funds for or purchasing a undivided interest
in a loan meeting our above requirements described above. Because we will not
participate in a loan that would not otherwise meet our requirements, and will
only participate in a joint venture with third parties where we hold a
controlling interest in the venture, we believe that the risk of our
participation is minimized. We will not give Capsource, Vestin or any of our
affiliates any consideration similar to
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rebates or give-backs or enter into reciprocal arrangements with Capsource or
its affiliates that might be entered into in lieu of joint ventures.
9. Diversification. No single mortgage loan will exceed 20% of our assets
when the loan is made. Additionally, no more than 20% of our loan portfolio will
be represented by mortgage loans in favor of any one borrower.
10. Reserve Fund. We will establish contingency working capital reserves
of at least three percent of the gross proceeds of this offering to cover our
unexpected cash needs.
11. Credit Evaluations. Before making a loan, Capsource must first
determine that a borrower has sufficient equity in the security property to meet
the loan-to-value ratios described above. Capsource may also consider the income
level and creditworthiness of a borrower to determine its ability to repay the
mortgage loan.
12. Sale of Mortgage Investments. Although Capsource has no plan to do so,
Capsource may sell our mortgage loans or interests in our loans to either
affiliates or non-affiliated parties when Capsource believes that it is
advantageous to us to do so. However, as noted elsewhere in this prospectus, we
do not expect that the loans will be marketable or that a secondary market will
ever develop for them.
Mortgage Loans to Affiliates
We will not invest in mortgage loans made to Capsource, Vestin or any of
our affiliates. However, we may acquire an investment in a mortgage loan payable
by Capsource when Capsource has assumed by foreclosure the obligations of the
borrower under that loan.
Purchase of Loans from Capsource and its Affiliates
In addition to those loans Capsource selects for us, we may purchase loans
that were originated by Capsource or other parties and first held for
Capsource's own portfolio, as long as the loan is not in default and otherwise
satisfies all of our lending criteria. Additionally, if the loan did not
originate within the 90 days before its purchase by us, Capsource must retain a
minimum of a 10% interest in the loan. This requirement also applies to any loan
originated by an affiliate of Capsource, such as Vestin, Mr. Shustek or another
principal of Capsource.
Commitment of Offering Proceeds
Capsource shall commit at least 86% of the offering proceeds received by
us and of our investment distributions to invest in or purchase mortgage loans,
including three percent of the proceeds that we will hold as working capital
reserves. If the sales commissions and expenses of this offering and the
brokerage, acquisition, selection and origination fees and expenses for our
loans exceed 14% of the offering proceeds, Vestin will pay the excess.
Types of Loans We Intend to Invest In
We primarily invest in first and second mortgage loans and construction
mortgage loans on real property, although we will also invest in the types of
loans described below. Ordinarily, we will invest in loans having terms of one
to seven years and we will not invest in mortgage loans with a maturity of more
than 15 years. All loans provide for monthly payments of interest and some also
provide for principal amortization although our loans may provide for payments
of interest only and a payment of principal in full at the end of the loan term.
Capsource does not intend loans for us that permit the principal to grow, or be
capitalized, when accrued interest on the loan is not paid.
First Mortgage Loans
First mortgage loans are secured by first mortgages on real property. We
expect that these loans will have terms of one to seven years.
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Second Mortgage Loans
Our collateral for our second mortgage loans is real property that is
already subject to prior mortgage indebtedness. In the future we may also invest
in wraparound loans, which is similar to a second loan except that the loan
balance is the outstanding balance under the existing mortgage loans plus the
amount actually to be advanced by us under the new mortgage loan. Under a
wraparound loan, we would make principal and interest payments on behalf of the
borrower to the holders of the prior mortgage loans.
Construction Loans
Construction loans are loans originally made for both original development
and renovation of property. We expect our construction loans to be secured by
first mortgages on real property for terms of six months to two years.
We do not anticipate that we will disburse funds on a construction loan
until work in the previous phase of the project has been completed, and an
independent inspector has verified certain aspects of the construction and its
costs. Additionally, we require the submission of signed labor and material lien
releases by the borrower for each completed phase of the project before making
any periodic disbursements of loan proceeds.
Leasehold Interest Loans
Loans on leasehold interests are secured by an assignment of the
borrower's leasehold interest in the particular real property. We anticipate
that the terms of these loans will not exceed 15 years. The leasehold interest
loans are either amortized over a period that is shorter than the lease term or
have a maturity date prior to the date the lease terminates. These loans all
permit Capsource to cure any default under the lease.
Variable Rate Loans
Variable rate loans originated by Capsource may use as indices the one and
five year Treasury Constant Maturity Index, the Prime Rate Index and the Monthly
Weighted Average Cost of Funds Index for Eleventh District Savings Institutions
(Federal Home Loan Bank Board). Capsource may negotiate spreads over these
indices of 2.5% to 5.5%, depending upon market conditions when the loan is made.
It is possible that the interest rate index used in a variable rate loan
will rise (or fall) more slowly than the interest rate of other loan investments
available to us. Capsource attempts to minimize this interest rate differential
by tying variable rate loans to indices that are sensitive to fluctuations in
market rates. Additionally, most variable rate loans originated by Capsource
contain provisions under which the interest rate cannot fall below the initial
rate.
Bridge Loans
A bridge loan provides funds for commercial borrowers to make improvements
to the property to increase the net operating income of their property so that
it can qualify for institutional refinancing. Capsource will value the existing
property and we will invest in loans for up to 75% of that value.
Land Loans
We will also invest in loans to purchase or develop of raw, unimproved
land. We determine whether to invest in these loans based upon the "90-day quick
sale value" of the property and the borrower's actual capital investment in the
property. The "90-day quick sale value" is the highest price for which the land
could actually be sold within the next 90 days, as determined by local real
estate brokers and others. We believe this 90-day period approximates the time
required for a foreclosure. The value of the land is generally the same as its
cost to the borrower. We do not expect to invest in loans for more than 60% of
the "90-day quick sale value," and we anticipate that the borrower will have
made actual capital expenditures of at least 25% of the property's value.
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Interest Rate Caps
All our variable rate loans will have interest rate caps. We anticipate
that the interest rate cap will be a ceiling that is 2-4% above the starting
rate with a floor rate equal to the starting rate. For these loans there is the
risk that the market rate may exceed the interest cap rate.
Assumable Loans
Variable rate loans of five to ten year maturities are not assumable
without the prior consent of Capsource. We do not expect to invest in or
purchase a significant amount of other assumable loans. To minimize our risk,
any borrower assuming an existing mortgage loan will be subject to the same
underwriting criteria as the original borrower.
Prepayment Penalties
We do not anticipate that many of the loans we invest in will contain
prepayment penalties. If our loans are at a high rate of interest in a market of
falling interest rates, the failure to have a prepayment penalty provision in
the loan allows the borrower to refinance the loan at a lower rate of interest,
thus providing a lower yield to us on the reinvestment of the prepayment
proceeds. However, these loans will usually be written with relatively high
minimum interest rates, which we would expect to minimize the risk of lower
yields.
Balloon Payment
Most of the loans we invest in or purchase will require the borrower to
make a "balloon payment" on the principal amount upon maturity of the loan. To
the extent that a borrower has an obligation to pay mortgage loan principal in a
large lump sum payment, its ability to repay the loan may be dependent upon its
ability to sell the property, obtain suitable refinancing or otherwise raise a
substantial amount of cash. As a result, these loans involve a higher risk of
default than loans where the principal is paid at the same time as the interest
payments.
Borrowing
We may incur indebtedness:
o to finance our investments in mortgage loans,
o to prevent a default under mortgage loans that are senior to our
mortgage loans,
o to discharge senior mortgage loans if this becomes necessary to
protect our investment in mortgage loans, or
o to operate or develop a property that we acquired under a defaulted
loan.
We currently intend to obtain a line of credit only to acquire, operate or
develop for resale the real properties on which we have foreclosed, although we
may use the funds for the other purposes set forth above in the future. At no
time will our indebtedness under our line of credit, once obtained, exceed 70%
of the fair market value of our mortgage loans. This indebtedness may be with
recourse to our assets.
Repayment of Mortgages on Sales of Properties
We may require a borrower to repay a mortgage loan upon the sale of the
mortgaged property rather than allow the buyer to assume the existing loan. We
will require repayment if we determine that repayment appears to be advantageous
to us based upon then-current interest rates, the length of time that the loan
has been held by us, the creditworthiness of the buyer and our objectives. We
will either invest our net proceeds from any sale or repayment in new mortgage
loans, hold the net proceeds as cash or distribute them to the members. However,
after seven years we will be prohibited from reinvesting proceeds of capital
transactions. Capital transactions include payments of principal, foreclosures
and prepayments of mortgages, to the extent classified as a return of capital
under the Internal Revenue Code, and any other disposition of a mortgage or
property.
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No Trust or Investment Company Activities
We have not qualified as a real estate investment trust under the Internal
Revenue Code, and therefore we are not subject to the restrictions on its
activities that are imposed on real estate investment trusts. We intend to
conduct our business so that we are not an "investment company" within the
meaning of the Investment Company Act of 1940. Last, we intend to conduct our
business so that we are not to be deemed a "dealer" in mortgage loans for
federal income tax purposes.
Various Other Policies and Procedures
Without majority approval, we will not:
o issue securities senior to the units or issue any units or other
securities for other than cash;
o invest in the securities of other issuers for the purpose of exercising
control, except when exercising our rights as a secured lender;
o underwrite securities of other issuers;
o discontinue providing our members with the reports described in
this prospectus; or
o offer securities in exchange for property.
Competition and General Economic Conditions
Banks, thrifts, conduit lenders and other entities both larger and smaller
than us may compete with Capsource to make the type of loans in which we invest.
For the past few years, the major institutional lenders have not been as active
in the commercial mortgage market as in prior years. Recently, however, many
major institutional lenders have reentered the commercial mortgage market due to
a stronger economy, stabilized or increased property values and leasing rates,
and the decrease in demand for residential loans. As a result, we anticipate
competition for investments in mortgages secured by commercial properties, which
creates pressure on lenders to lower interest rates. Consequently, we may not be
able to obtain as high interest rates on mortgage investments as we would
otherwise obtain, which would affect our revenues and the distributions you
receive.
Regulation
Our operations are conducted by Capsource. Capsource's operations as a
mortgage company are subject to extensive regulation by federal, state and local
laws and governmental authorities. Capsource conducts its real estate mortgage
business under a "PRIVILEGED" license issued by the Nevada Division of Financial
Institutions. Under applicable Nevada law, the division has broad discretionary
authority over Capsource's activities, including the authority to conduct
periodic regulatory audits of all aspects of Capsource's operations.
We and Capsource are also subject to the Equal Credit Opportunity Act of
1974, which prohibits creditors from discriminating against loan applicants on
the basis of race, color, sex, age or marital status, and the Fair Credit
Reporting Act of 1970, which requires lenders to supply applicants with the name
and address of the reporting agency if the applicant is denied credit. We are
also subject to various other federal and state securities laws regulating the
issuance and sale of securities, as well as the Employee Retirement Income
Security Act of 1974.
Should we or Capsource fail to adhere to these regulations, we could face
potential disciplinary or other civil action that could have a material adverse
effect on our business.
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MANAGEMENT
Our Management
Our business is managed by Capsource, Inc., as the manager of our limited
liability company. The telephone number for Capsource's offices is (702)
227-0965. Capsource is a mortgage broker licensed in the State of Nevada and a
wholly owned subsidiary of Vestin Group, Inc., formerly Sunderland Corporation.
Vestin is a Delaware corporation with publicly held common stock that trades on
the Nasdaq Smallcap Market under the symbol "VSTN". Until early July, 2000,
Vestin traded under the symbol "DLMA." Vestin had a net worth of approximately
$4,700,000 as of December 31, 1999 and is briefly described later in this
section.
Capsource
Capsource manages and controls our affairs and has responsibility and
final authority in almost all matters affecting our business. These duties
include dealings with members, accounting, tax and legal matters, communications
and filings with regulatory agencies and all other needed management and
operational duties. Additionally, because Michael Shustek owns a controlling
interest in Vestin and Vestin wholly owns Capsource, Mr. Shustek may be deemed
to control our activities through Capsource. As our only manager, Capsource has
complete authority and responsibility for managing DM LLC regarding the
following:
o evaluating and choosing the mortgage loans in which we will invest;
o deciding what agreements we will enter into and whether we will enter
into joint ventures with other companies to invest in mortgage loans;
o originating, servicing and managing our mortgage loan investments;
and
o managing all our other operations.
Notwithstanding that Capsource has the broad authority described above,
neither Capsource directly nor Mr. Shustek indirectly may do any of the
following:
o impair our ability to carry on or change the nature of our business;
o admit a manager without prior majority approval;
o sell all or over 50% of our assets or dissolve DM LLC without the
prior majority approval; and
o anything else not permitted in the operating agreement.
You have no right to participate in the management or control of our
business or affairs other than to exercise the limited voting rights provided
for members in the operating agreement. Capsource has primary responsibility for
the initial selection, evaluation and negotiation of our mortgage loans.
Capsource will provide all executive, supervisory and administrative services
for our operations, including servicing the mortgage loans we hold. Our books
and records are maintained by Capsource, subject to audit by independent
certified public accountants.
Removal of Capsource as Manager
Capsource will cease to be our manager upon its removal, withdrawal or
dissolution, or if it is found to be bankrupt. A majority, excluding Capsource's
interest, can remove Capsource as our manager upon the following conditions:
o if the members have not previously elected an additional manager, the
removal will not become effective for at least 120 days following the
consent or authorizing vote by the majority;
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o during the 120 days set forth above, a majority can agree in writing to
continue our business and, within six months following the termination
date of the last remaining manager, elect and admit a new manager who
agrees to continue our existence; and
o the substitution of a new manager shall be effective when the new
manager accepts in writing the duties and responsibilities of a
manager.
If a majority does not designate and admit a new manager within the time
specified, DM LLC will dissolve. Capsource's interest in DM LLC may be assigned,
but our manager may not be changed except as set forth above.
Evaluation and Acquisition by Capsource
Capsource considers prospective loans for us. In that regard, Capsource
evaluates the credit of prospective borrowers, analyzes the return to us of
potential mortgage loan transactions, reviews property appraisals, and
determines which types of transactions appear to be most favorable to us.
Management of Loan Portfolio
After we acquire mortgage loans, Capsource also manages our mortgage loan
portfolio. Capsource is responsible for:
o creating and implementing investment policies in furtherance of
those contained in the operating agreement;
o preparing and reviewing budgets, economic surveys, cash flow and
taxable income or loss projections and working capital requirements;
o preparing and reviewing of reports for securities filings,
distribution to our members or otherwise;
o communicating with members;
o supervising and reviewing our bookkeeping, accounting and audits;
o supervising and reviewing the preparation of our state and federal
tax returns; and
o supervising professionals employed by us, including attorneys,
accountants and appraisers.
Mortgage Loans
Capsource obtains, processes, makes and invests in, brokers or sells, and
manages and services our mortgage loans. Its mortgage loan services also
include:
o reviewing of loans;
o recommending changes in loans;
o employing and supervising employees who handle the loans;
o preparing and reviewing projected performance;
o reviewing of reserves and working capital; and
o collecting and maintaining all loans.
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<PAGE>
Prior Experience
In April 1999, Vestin, then known as Sunderland, acquired the mortgage
brokerage business of Del Mar Mortgage, Inc. and Del Mar Holdings, Inc. from
Michael Shustek by purchasing their assets and assuming their liabilities in
exchange for shares of common stock. As part of a corporate reorganization,
Vestin transferred the mortgage brokerage business of Del Mar Mortgage and Del
Mar Holdings to Capsource. At the time of these transactions, Vestin conducted
business as Vestin.
Since 1997, Capsource and the above predecessors have acted as mortgage
brokers for the investment by about 4,500 investors in about 400 mortgage notes
totaling about $500 million. Capsource also services the mortgage notes it
sells. Capsource currently services over 125 loans totaling approximately $272
million. The collateral for these loans are mortgages on properties primarily
located in Nevada, California and Arizona. Capsource used working capital
obtained from capital contributions to fund some of these loans prior to selling
them as part of its mortgage brokerage business, except for $1,980,000 of
indebtedness incurred to finance these transactions. Capsource and Del Mar
Mortgage limit their businesses to mortgage lending, and have not acquired any
real properties except in connection with a loan foreclosure.
For the three year period ended December 31, 1999, the properties securing
these loans can be subdivided as follows:
Aggregate amount invested
Property Type (as percentage of total purchases by these programs)
----------------- ----------------------------------------------------
Commercial (total) 58%
Land Acquisition 36%
Residential 6%
Of the loans described in the foregoing table, 90% by dollar amount were
development loans, including construction loans, the balance were land
acquisition loans and loans secured by developed properties.
There have been no major adverse conditions with respect to Capsource's or
Del Mar Mortgage's businesses. Of the loans that were made, we are aware of only
five properties that have gone to foreclosure sale over the last six years. The
default rate on the loans brokered by Capsource and Del Mar Mortgage has
averaged less than 1% during the last three years.
The description above of Capsource and its predecessors is not intended to
provide a description of the loans to be invested in or purchased by us in the
future.
Directors and Executive Officers of Capsource and Vestin
The directors and executive officers of Capsource are listed below:
NAME AGE TITLE
------------------- ----- -----------------------------------------
Michael V. Shustek 41 Director, Chief Executive Officer,
Chairman
Stephen J. Byrne 43 President and Director
Peggy S. May 31 Senior Vice President
Michael Whiteaker 50 Vice President of Regulatory Affairs
Lance Bradford 33 Treasurer, Secretary and Director
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<PAGE>
The directors and officers of Vestin are as follows:
NAME AGE TITLE
------------------- ----- -----------------------------------------
Michael V. Shustek 41 Chairman of the Board, Chief Executive
Officer and Director
Stephen J. Byrne 43 President and Director
Lance Bradford 33 Chief Financial Officer, Corporate
Secretary and Director
Robert J. Aalberts 49 Director
Robert W. Fine 64 Director
John E. Dawson 42 Director
Robert L. Forbuss 51 Director
All the directors of Capsource and Vestin hold office until the next
annual meeting of shareholders or period of one year. The last annual meeting of
stockholders was June 23, 2000. Vestin, as the only shareholder of Capsource,
can change the constitution of Capsource's Board of Directors at its sole
discretion. Similarly, Michael Shustek can cause a change in the Board of
Directors of Vestin by virtue of his controlling ownership interest in Vestin.
Vestin, which is a reporting company under the Securities Exchange Act, has
already established an audit committee consisting of three independent directors
and requires that its audit committee be comprised of independent directors.
Capsource, which is privately held and has only three directors, has no audit
committee and no requirement of independence at this time. The By-laws of
Capsource and Vestin provide for up to 10 directors and permit the Board of
Directors to fill any vacancy on the Board of Directors. Officers of both
companies serve at the discretion of the Board of Directors.
The principal occupation and business experience for each of our officers
and directors, for at least the last five years, are as follows:
MICHAEL V. SHUSTEK has been a director of Capsource and Chairman of the
Board of Directors, Chief Executive Officer and a director of Vestin since April
1999. In 1993, Mr. Shustek founded Del Mar Mortgage, and has been involved in
various aspects of the real estate industry in Nevada since 1990. In 1993, he
founded Foreclosures of Nevada, Inc., a company specializing in non-judicial
foreclosures. In 1990, Mr. Shustek started Shustek Investments, a company that
originally specialized in property valuations for third-party lenders or
investors and which continues today as the primary vehicle for his private
investment portfolio. In 1997, Mr. Shustek founded Nevada First Bank, with the
largest initial capital base of any new state charter in Nevada's history. In
2000, Mr. Shustek co-authored a book, Trust Deed Investments, on the topic of
private mortgage lending. Mr. Shustek is a guest lecturer at the University of
Nevada, Las Vegas, where he also teaches a course in Real Estate Law and Ethics.
Mr. Shustek received a Bachelor of Science degree in Finance at the University
of Nevada, Las Vegas.
On November 9, 1998, the State of Nevada, Department of Business and
Industry, Financial Institutions Division and Del Mar Mortgage Inc., which is
owned by Mr. Shustek, settled allegations of noncompliance brought by the
division. Del Mar Mortgage neither admitted nor denied the division's
allegations. On February 11, 1999, the division issued an order against Del Mar
Mortgage, which alleged violations of the Nevada regulatory statutes and
established a conservator to oversee Del Mar Mortgage's operations. On February
16, 1999, Del Mar Mortgage sued the division, contesting the order. On March 26,
1999, Del Mar Mortgage and the division entered into a stipulated court order
that effectively superceded the November 1998 agreement. The stipulated court
order also vacated the division's order and removed the conservator. Without
admitting any facts, and solely to settle these matters, Del Mar Mortgage agreed
to assure compliance with applicable law in all advertisements, solicitations of
mortgage borrowers and in its making and servicing of mortgage loans. Capsource
and Vestin, as successors to the mortgage company business of Del Mar Mortgage,
agreed to adhere to the terms of the stipulation. Del Mar Mortgage also paid an
additional $20,000 to the division under the November 1998 agreement, in
addition to the $30,000 Del Mar Mortgage had paid prior to February.
STEPHEN J. BRYNE has been the President and a director of Capsource since
its inception in 1997 and has been the President and a director of Vestin since
April 1999. Mr. Byrne joined Del Mar Mortgage in June 1998 as its Senior Lending
Officer. In 1997, Mr. Byrne founded Capsource which he owned and operated before
joining Del Mar Mortgage. From 1991 to 1997, Mr. Byrne served as Vice President
of Wells Fargo Bank and of its predecessor First Interstate Bank of Nevada. Mr.
Byrne served in various capacities with First Interstate Bank,
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<PAGE>
including manager of the Diversified Asset Group based in Las Vegas and the
commercial Diversified Asset Group in Houston, Texas. Mr. Byrne received a
Bachelor of Science degree in Business Administration from Hastings College,
Hastings, Nebraska.
LANCE BRADFORD has been a director Treasurer and Secretary of Capsource
and the Chief Financial Officer, Corporate Secretary, and a director of Vestin
since April 1999. Since 1992, Mr. Bradford has been a partner in L. L. Bradford
& Company, Las Vegas, Nevada, a Certified Public Accounting firm that he
founded. From 1988 to 1991, Mr. Bradford served as an accountant with Ernst &
Young International. Mr. Bradford received a Bachelor of Science degree in
Accounting from the University of Nevada, Reno.
JOHN E. DAWSON has been a director of Vestin since March 2000. Since 1995,
Mr. Dawson has been a partner at the law firm of Marquis & Aurbach. Before
joining Marquis & Aurbach, Mr. Dawson was affiliated with the law firm of
Jeffrey L. Burr & Associates. Mr. Dawson co-authored the Asset Protection
Guidebook for Attorneys and Accountants and has presented seminars on asset
protection. Mr. Dawson received his Bachelor's Degree from Weber State and his
J.D. from Brigham Young University. Mr. Dawson received his Masters of Law
(L.L.M.) in Taxation from the University of San Diego in 1993. Mr. Dawson was
admitted to the Nevada Bar in 1988 and the Utah Bar in 1989.
ROBERT L. FORBUSS has been a director of Vestin since March 2000. Since
February 1999, Mr. Forbuss has been the President of Strategic Alliances, a
business and government affairs consulting organization. From March 1998 through
February 1999, he was the President of Medical Transportation of America. From
February 1997 to March 1998, Mr. Forbes was the Chief Executive Officer of the
Southwest Division of American Medical Response. From March 1994 to February
1997, he was Senior Vice President of Laidlaw Medical Transportation, which had
acquired Mercy Medical Services, Inc., a company that Mr. Forbuss founded, owned
and managed for 22 years. The latter four companies are all in the business of
providing emergency ambulance and transportation services. Mr. Forbuss received
his Bachelor of Arts in Public Administration and Political Science from the
University of California at Long Beach.
ROBERT AALBERTS has been a director of Vestin since April 1999. Since
1991, Mr. Aalberts has held the Ernst Lied Professor of Legal Studies
professorship at the University of Nevada, Las Vegas. From 1984 to 1991, Mr.
Aalberts was an Associate Professor of Business Law at Louisiana State
University - Shreveport. From 1982 through 1984, he served as an attorney for
Gulf Oil Company. Mr. Aalberts has co-authored a book relating to the regulatory
environment, law and business of real estate; and he is the author of numerous
legal articles, dealing with various aspects of real estate, business and the
practice of law. Mr. Aalberts received his Juris Doctor degree from Loyola
University, New Orleans, Louisiana and received a Master of Arts from the
University of Missouri. He is a member of the State Bar of Louisiana.
ROBERT W. FINE has been a director of Vestin since April 1999. Since 1998,
Mr. Fine has been the President of Equisource Group Ltd., a company providing
investment-banking services to businesses seeking to raise capital or to become
public companies. From 1993 to 1998, Mr. Fine was President of Transworld
Healthcare, a company providing home healthcare products and services, during
which period the company grew from less than $7 million in revenues to over $80
million. From 1990 to 1993, the year of its sale, Mr. Fine served as President
of the Fortress Company, a manufacturer of healthcare mobility devices. For the
seven years prior to joining Fortress, Mr. Fine was President of ConAc, a
company that specialized in mergers and acquisitions. During this period, the
company provided assistance to other companies in over 100 mergers, principally
in the healthcare field. Mr. Fine received a Bachelor of Arts in Accounting from
Bentley College, Waltham, Massachusetts.
The following information about executive compensation has been provided
by Vestin and Capsource. Vestin employees receive no extra pay for serving as
directors. Each non-employee director receives $3,750 per quarter, which
includes personal attendance at one quarterly board meeting and one committee
meeting on which the director serves, plus reimbursement of reasonable travel
expenses if the director lives more than 100 miles from Vestin's principal place
of business. For each Board of Directors meeting in excess of one per quarter,
directors receive $750 for each meeting attended in person and $500 for each
meting attended telephonically. For each committee meeting in excess of one per
quarter, directors receive $500 for each meeting attended in person and $250 for
each meeting attended telephonically. Each Vestin director will receive 15,000
options to acquire Vestin common stock at the then fair market value on the
later of the date the non-employee director is elected to the Board
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<PAGE>
or the date the option is approved by Vestin's stockholders and the underlying
shares of common stock are registered. Vestin provides directors' and officers'
liability insurance of $5,000,000 and also has agreed to indemnify each director
to the fullest extent of Delaware law.
The following Summary Compensation Table sets forth the compensation paid
or awarded for the fiscal year ended December 31, 1999 to Vestin and Capsource's
Chief Executive Officer and the next most highly compensated executive officers
whose compensation for the fiscal year ended December 31, 1999 exceeded
$100,000. No other executive officer received compensation in excess of $100,000
for fiscal year ended December 31, 1999 from either Vestin or Capsource.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation (1) Long Term Compensation
----------------------- ----------------------
All Other
---------
Name and Position Year Salary($) Bonus($) Other Awards Compensation
----------------- ---- --------- -------- ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Michael V. Shustek 1999 720,000 0 0 0 0
Chairman and Chief
Executive Officer
Stephen J. Byrne(2) 1999 240,000 171,515 0 0 0
President
Peggy S. May 1999 120,000 0 0 0 0
Senior Vice President
</TABLE>
(1) Vestin began payments to its personnel as of April, 1999.
(2) Vestin entered into employment arrangements with Mr. Byrne who was initially
employed by Del Mar Mortgage, Inc., in October 1998. In April 1999 the
Company assumed Mr. Byrne's two-year employment contract as a loan officer
and underwriter at an annual salary of $65,000. Mr. Byrne has an employment
contract with the Company for serving as its President at an annual salary
of $240,000.
The compensation above for each of Messrs. Shustek and Byrne includes
compensation for services rendered to Capsource and other Vestin affiliates as
set forth in the most recent 10-K of Vestin, which was filed by Sunderland
Corporation. Of the amounts set forth above, Mr. Shustek received $360,000 of
his total compensation for services rendered to Capsource, and Mr. Byrne
received $286,515 of his total compensation for services rendered to Capsource.
Ms. May provided services to and received her compensation directly from
Capsource.
Effective April 1, 2000, Vestin entered into an Employment Agreement with
Lance Bradford, its Chief Financial Officer, Secretary, director and a
stockholder. Mr. Bradford is also the Secretary, Treasurer and a director of
Capsource, but is not being compensated in those capacities. Under the terms of
the Employment Agreement, Mr. Bradford will serve as Vestin's Chief Financial
Officer for three years at an annual salary of $296,000. Paul Connaghan joined
Capsource as general counsel in mid 1999. Mr. Connaghan earns $120,000 per year.
Vestin's Board of Directors adopted a stock option plan on July 28, 1999.
Vestin's stockholders will be voting on adoption of the plan at Vestin's annual
stockholders' meeting on June 23, 2000.
Affiliated Companies
VESTIN GROUP, INC.
Vestin is a holding company, incorporated in Delaware, which owns and
conducts its business primarily through Capsource. Vestin also owns DM Financial
Services, our dealer-manager. The common stock of Vestin trades under the symbol
"VSTN" on the Nasdaq Smallcap Market. Prior to early July, 2000, the symbol was
"DLMA". For a complete description of Vestin, potential investors should review
Vestin's most recent periodic reports on file with the Securities and Exchange
Commission, which can be found in the Commission's EDGAR database on the
Internet at http://www.sec.gov.
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<PAGE>
DM FINANCIAL SERVICES, INC.
DM Financial Services, Inc., the lead dealer, is a securities brokerage
firm registered with the Securities and Exchange Commission and a member of the
National Association of Securities Dealers, Inc., or NASD. DM Financial Services
is a Nevada corporation formed in 1998 to expand and develop business
opportunities, including offering real estate loans and private investments in
promissory notes secured by deeds of trust.
DM Financial Services may obtain other securities brokerage firms to sell
the units, sell the units to its customers and provide us with sales,
promotional and marketing assistance for the distribution of the units.
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<PAGE>
COMPENSATION OF CAPSOURCE AND DM FINANCIAL SERVICES
Capsource and its affiliates will receive fees and expenses for services
relating to this offering and the investment and management of our assets. The
sales commissions and expenses of this offering and the brokerage, acquisition,
selection and origination fees and expenses for our loans shall not exceed 14%
of the proceeds of this offering. The fees that we and our borrowers pay to
Capsource and its affiliates are summarized in the table below.
The maximum aggregate amount of the front-end fees to be paid during the
first year is $14,000,000.
Type of Compensation Form of Compensation(1)
Offering Stage:
---------------
Paid by Fund
Lead Dealer Fee (paid to DM 1.0% of gross offering proceeds plus up
Financial Services) to 0.5% of gross proceeds as expense
reimbursement. Our total compensation to DM
financial can be $1.5 million (including up
to $500,000 in expense reimbursement). We
will pay these fees regardless of whether DM
Financial Services engages any other
selected dealers. These fees will be paid
promptly upon the initial closing in this
offering and on a monthly basis thereafter.
Organization Stage:
-------------------
Promotional Interest of 0.5% ownership interest. Capsource may only
Capsource receive distributions on its entire
interest, including the 0.5% for which it
paid consideration, after all members
receive the return of their initial capital
contributions. The promotional interest will
be allocated to Capsource on the initial
closing and will be increased monthly
thereafter.
Operational Stage:
------------------
Where the fees below are described as competitive fees or
based on local market conditions, that means the fees are
determined by price competition within a given market. To
ensure that our fees remain competitive, we will directly
contact our competition, such as major banks in the local
market or other relevant commercial lenders. We expect that
the interest rate on the loans in which we invest will be
2-3 points higher than comparable loans made by banks and
that the fees paid to Capsource will be 2-3 points higher
than similar fees charged by conventional lenders. We
believe that this rate structure is consistent with rates
and fees charged by other non-conventional lenders.
References below to local law also contemplate additional
requirements imposed by local or state law, such as usury
laws.
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<PAGE>
Paid by Borrowers
-----------------
Loan Brokerage Fees for Loan 2%-6% of each loan, competitive fee based on
Selection and Origination local market conditions. Capsource and its
affiliates may receive up to $5,160,000 in
loan brokerage fees. These fees are paid by
the borrower no later than when the loan
proceeds are disbursed.
Loan Evaluation and Processing 2%-5% of each loan, competitive fee based on
Fees local market conditions. Capsource and its
affiliates may receive up to $4,300,000 in
loan evaluation and processing fees. These
fees are paid by the borrower no later than
when the loan proceeds are disbursed.
Service Fee for Administering Annual fee of 0.25% of the outstanding
Loans principal balance of loans. Capsource may
receive up to $215,000 in servicing fees.
These fees will be paid by the borrower
either annually or added to the monthly
payments.
Escrow/Reconveyance/Loan 2%-5% of outstanding principal, as permitted
Extension and Permitting Loan by local law and local market conditions.
Assumption The amount to be received is not
determinable at this time. These fees will
paid when the loan is extended.
Late Fees/Prepayment Fees As permitted by local law and local market
conditions. The amount to be received is not
determinable at this time. We expect that
late fees will be paid within two days of
the delinquency.
Paid by us
----------
Loan Management Fees Initially 0.75% of the offering proceeds
used for mortgage loans (including working
capital reserves). Beginning with the third
year, 0.75% of the fair market value of our
assets (including working capital), less any
of our indebtedness. For funds not invested
in mortgages, the fee is 0.5%. Capsource may
receive up to $645,000 in loan management
fees per year. We will pay these fees
monthly.
Reimbursement of Our Operating Lesser of cost or third party rate. We will
Expenses pay these fees monthly.
Real Estate Brokerage Fees on Up to 3% of proceeds where Capsource
Resales of Foreclosed property substantially contributed to the sale; up to
to Capsource 6% for all persons involved. These fees are
not yet determinable. We will pay these fees
promptly out of the proceeds of a sale of
the relevant real estate.
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(1) Where aggregate fees are provided, they are based upon our receipt of
$100,000,000 in gross proceeds in this offering and the investment of
$86,000,000 in mortgage loans. Our operating agreement provides that front
end fees, including the sales commissions and expenses of this offering and
the brokerage, acquisition, selection and origination fees and expenses for
our loans, will not exceed 14% of the gross proceeds of this offering, or
$14,000,000.
For the minimum offering, we will pay the amounts owing to DM Financial Services
and any other dealers upon the breaking of escrow. Thereafter, we will pay their
sales commissions and expenses quarterly in arrears.
We will attribute to Capsource its promotional interest on a monthly
basis. If Capsource has not contributed an amount equal to one percent of all
contributions received by the members, we will withhold the incremental
promotional interest.
We will pay Capsource its fees for services during the operational stage
on a monthly basis in arrears.
Capsource will make arrangements with the respective borrowers for
Capsource's fees owing from those borrowers. Capsource anticipates that
borrowers will pay its compensation out of the proceeds of loans or upon closing
the relevant transaction. For loan servicing fees, Capsource will receive these
fees monthly in arrears along with the payments it receives on loans that we
have acquired. Capsource will make arrangements with borrowers within one month
to receive late fees on loan payments.
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<PAGE>
CONFLICTS OF INTEREST
The relationships among us, Capsource and the directors and other
affiliates of Capsource will result in various conflicts of interest. Capsource
and its directors and other affiliates are engaged in business activities
involving real estate lending, and anticipate engaging in additional business
activities in the future that may be competitive with us. Capsource and its
officers and directors will exercise their fiduciary duties to us and to you in
a manner they believe will preserve and protect your rights as a member.
Additionally, our operating agreement contains provisions that limit our ability
to enter into transactions with Capsource and its affiliates.
The paragraphs below describe material conflicts of interest that may
arise in the course of Capsource's management and operation of our business. The
list of potential conflicts of interest reflects our knowledge of the existing
or potential conflicts of interest as of the date of this prospectus. We cannot
assure you that no other conflicts of interest will arise in the future.
The organizational structure of Vestin, Capsource and their affiliates is
as follows:
Michael Shustek
Vestin Group, Inc. Del Mar Mortgage, Inc.
(controlling interest owned by (100% owned by Michael Shustek)
Michael. Shustek)
DM Financial Services Capsource
(100% owned by Vestin) (100% owned by Vestin)
Lead Dealer Manager and initial Member of
DM LLC
1. Payment of Fees and Expenses. Capsource and its affiliates will receive
substantial fees and expenses from the proceeds of the offering and our ongoing
operations, including:
o lead dealer fees and expenses,
o a promotional interest,
o loan brokerage fees,
o loan evaluation and processing fees,
o loan servicing fees,
o escrow, reconveyance loan extension and assumption fees, late fees and
prepayment fees,
o loan management fees,
o reimbursement of operating expenses, and
o real estate brokerage commissions payable upon the resale of foreclosed
properties.
These fees will be payable even if we are not profitable or the particular
transaction causes us to incur a loss.
2. Purchase Of Mortgage Notes from Capsource. We will acquire our mortgage
loans from or through Capsource. Capsource is in the business of obtaining,
processing, making, brokering and selling, and
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<PAGE>
managing and servicing mortgage loans. All our mortgage loans purchased from
Capsource will be at prices no higher than the lesser of the cost of the
mortgage loan to Capsource or the then current market value of the mortgage
loan. A committee of officers and directors of Capsource makes all decisions
concerning the mortgage loans in which we will invest or purchase. This
committee is currently comprised of Michael V. Shustek, Stephen J. Byrne, and
Lance K. Bradford. Because Capsource's fees are generated by the volume of the
mortgage loans we purchase, Capsource will face a conflict of interest in
determining whether a loan not squarely within our investment guidelines is
appropriate for our loan portfolio.
3. Non-Arm's Length Agreements. Our agreements and arrangements for
compensating Capsource are not the result of arm's-length negotiations.
Additionally, none of the three directors of Capsource is independent.
4. Competition for the Time and Services of Common Officers. We will rely
on Capsource and its directors and officers for the management of our
operations. When performing their duties, the officers, directors and employees
of Capsource may, for their own account or that of others, originate mortgages
and acquire investments similar to those made or acquired by DM LLC. The
directors of Capsource also may act as trustees, directors or officers, or
engage in other activities for themselves and/or other entities and may acquire,
broker and originate similar mortgage investments for their own account or that
of others. Accordingly, conflicts of interest will arise in operating more than
one entity for allocating time between the entities. The directors and officers
of Capsource will devote such time to our affairs and as they determine in good
faith and in compliance with their fiduciary obligations to us and our members,
to be necessary for our benefit.
Capsource believes it has sufficient staff to be capable of discharging
its responsibility to us and to all other entities to which they or their
officers or affiliates are responsible. However, during times when we and the
other businesses are handling a high volume of loans, a conflict will arise as
to which company's loan processing to complete first.
Currently, Capsource is not the mortgage broker for another Capsource
program or entity. Capsource does market loans to other investors as part of its
regular mortgage company business, but there are currently no other mortgage
loan investors for which Capsource serves in the same capacity as Capsource does
for DM LLC. We do not believe that Capsource will take on a significant amount
of additional work outside of the services that Capsource performs for DM LLC.
Capsource currently intends to focus its efforts on our mortgage loan
investments and, to the extent that our business grows, to reduce the amount of
time spent on originating other mortgage loans. There can be no assurance,
however, that Capsource will continue with these business plans and Capsource
may service other programs in the future.
5. Competition between us, Capsource and Capsource's Affiliates for the
Purchase and Sale of Mortgage Loans. Capsource anticipates that it or its other
affiliates will engage in businesses which are or will be competitive with ours
or which have the same management as we do. To the extent that these other
entities with similar investment objectives have funds available for investment
when we do and a potentially suitable investment has been offered to us or one
of these programs, conflicts of interest will arise as to which entity should
acquire the investment.
If any conflict arises between us and any other affiliated program as to
which company will have the right to invest in a particular mortgage loan or
other investment, Capsource will make the determination largely based on a
review the respective loan portfolios. Capsource will also base the decision on
factors such as the amount of funds available for investment, yield, portfolio
diversification, type and location of the property on which Capsource will make
the mortgage loan, and proposed loan or other transaction terms. The officers
and directors of Capsource will be responsible for monitoring this allocation
method to be sure that it is applied fairly.
The officers, directors and employees of Capsource may for their own
account or that of others originate, acquire or broker mortgage investments
similar to those made or acquired by us. Capsource remains subject to a
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fiduciary duty to us and our members described in this prospectus. Subject to
this fiduciary duty, neither Capsource nor its affiliates will be obligated to
present to us any particular investment opportunity that comes to their
attention, even if the opportunity is of a character that might be suitable for
us.
6. Because we are a newly formed company with no prior performance
history, we expected difficulty obtaining an unaffiliated brokerage firm to act
as our dealer-manager on terms and conditions that would be as favorable as
those that could be obtained from DM Financial Services. Accordingly, we believe
that the use of DM Financial Services as the lead dealer for our offering of
units is in our best interests and those of our members. We did not negotiate
the fees to be paid to DM Financial Services on an arm's length basis. DM
Financial Services and Capcourse have not entered into any arm's length
agreements.
7. Lack of Separate Representation. We are represented by the same counsel
as Capsource and its affiliates, and we anticipate that this multiple
representation by our attorneys will continue in the future. If a dispute arises
between us and Capsource or any of its affiliates, Capsource or the affiliate
will either obtain separate counsel or facilitate our retaining separate counsel
for such matters. However, we do not anticipate obtaining separate counsel
should there be a need in the future to negotiate or prepare contracts or other
agreements between us and Capsource for services including those contemplated by
this prospectus, and as a result these agreements will not reflect arm's length
bargaining.
8. Rights of Affiliates. Any director or officer of Capsource and any
other affiliate may acquire, own, hold and dispose of units for his individual
account and may exercise all rights of a member, except for voting rights with
respect to the manager, to the same extent and in the same manner as if he were
not an affiliate of ours.
9. We may invest in mortgages acquired by Capsource. If Capsource
determines that an entire loan is not suitable for our loan portfolio, we may
invest in the loan with Capsource. Our portion of the total loan may be smaller
or greater than the portion of the loan made by Capsource, but we expect that
the terms of the loans will be substantially similar. Investing with Capsource
could result in a conflict of interest between us and Capsource if the borrower
defaults on the loan and each of us seeks to protect our interests in the loan
and in the security property. Because no written agreements exist with Capsource
on this issue, you must rely on Capsource to act in accordance with its
fiduciary duty under the operating agreement to protect your interest.
Share ownership
The following table indicates the share ownership of Vestin. This
information was taken from Vestin's proxy statement on file with the Commission.
Vestin owns all of the 100 issued and outstanding shares of Capsource, and
Capsource owns all of the 273,734 issued and outstanding units in DM LLC.
COMMON STOCK PERCENT OF COMMON
BENEFICIALLY STOCK BENEFICIALLY
NAME OWNED(1) OWNED
---- -------- -----
Michael V. Shustek, Chairman and 3,298,000 47.2%
Chief Executive Officer
129 Augusta
Henderson, Nevada 89014
Stephen J. Byrne, President,
Director 30,200 *
1808 Dalton Avenue
Henderson, Nevada 89014
Lance Bradford, Chief Financial 670,000(2) 9.7%
Officer,
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Corporate Secretary and
Director
3441 Eastern Avenue
Las Vegas, Nevada 89109
Robert J. Aalberts, Director 1,000 *
311 Vallarte Drive
Henderson NV 89014
Robert W. Fine, Director 400,000 6.5%
3 Palazzo Terrace
Henderson, Nevada 89014
John E. Dawson, Esq., Director 8,400 *
228 South Fourth Street
Las Vegas, Nevada 89101
Robert L. Forbuss, Director 0 0%
200 Starlite Drive
Las Vegas, Nevada 89107
All directors and %executive 4,567,600(2) 65.4%
officers as a group (8 persons)
----------------
*Less than 1%
(1) Based upon 6,989,270 shares outstanding.
(2) Includes 640,000 shares received by Mr. Bradford and his spouse from the
Company's acquisition of L.L. Bradford & Company on March 31, 2000.
320,000 of these shares are owned by Mr. Bradford's spouse. Mr. Bradford
disclaims beneficial ownership of these shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Twelve Month Plan of Operation
During the next 12 months, if we sell at least 1,500,000 units, we plan to
invest in mortgage loans where our collateral is real property located primarily
in the states of Nevada, California and Arizona. Upon the sale of these units
and the end of our escrow arrangement, Capsource will select mortgage loans for
us, and also will assist us by obtaining, processing and managing these loans
for us. We believe that we will have an adequate number of opportunities to
invest in mortgage loans in the above named states when our escrow ends.
During the next 12 months, Capsource will pay the initial costs we incur,
including accounting, legal, and administrative expenses and fees. We therefore
do not anticipate needing additional funds to satisfy our cash requirements
during this period. If we are unable to raise the minimum offering amount as
described elsewhere in this prospectus, Capsource will fully absorb all costs
incurred on our behalf. Assuming we sell the minimum number of units and escrow
is broken, Capsource will pay for the administrative expenses we incur. However,
Capsource will not purchase units to help us reach the 1,500,000 unit minimum.
We do not anticipate in hiring any employees, acquiring any fixed assets
like office equipment or furniture, or incurring material office expenses during
the next 12 months because we will be utilizing Capsource's personnel and office
equipment. We will not pay Capsource any overhead or other compensation for
providing us with its personnel and equipment.
DM LLC has not committed itself to make any acquisitions, and has not
entered into any arrangements or other transactions other than for compensation
for selling the Units. We do not intend to incur any indebtedness at the
commencement of our operations, although we do intend to establish a line of
credit for future use.
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FIDUCIARY RESPONSIBILITY
Capsource is a fiduciary for you and DM LLC. As a fiduciary, Capsource
must exercise good faith and integrity when handling our affairs. Capsource must
not take advantage of us, and must make full disclosure of any conflicts of
interest or benefit to it in its dealings with us. As set forth in the operating
agreement, Capsource has fiduciary responsibility for the safekeeping and use of
all of our funds and assets and Capsource will not use, or permit another to use
our funds or assets in any manner except for our exclusive benefit. Capsource
will not allow our assets to be commingled with its assets or the assets of any
other person or company. Capsource and its affiliates may engage in activities
similar to or identical with our business, but Capsource must devote such of its
time to our business as it determines, in good faith, to be reasonably
necessary. Capsource also acts for its own account as a mortgage broker. In
connection with this activity, it also brokers, arranges and services mortgage
loans for investors that it obtains in the ordinary course of its mortgage
brokerage business, including by way of seminars, general solicitations and
referrals. When it acts in those capacities, it has a fiduciary duty to each
company as set forth in the respective organizational documents, if any, and
under applicable law, and Capsource is bound to treat each fairly and with equal
access to investment opportunities.
The above described fiduciary duty is both contractual, arising by virtue
of the operating agreement, and imposed by Nevada common law.
Based upon the present state of the law, you have the following legal
rights and remedies concerning Capsource and the conduct of our operations:
o you may bring individual actions on behalf of yourself or class actions
on behalf of yourself and other members to enforce your rights under
the operating agreement and Nevada limited liability company law,
including for breaches by Capsource of its fiduciary duty;
o a majority may remove Capsource as our manager, as described elsewhere
in this prospectus;
o you may bring actions on our behalf for claims we might have as
derivative actions, if Capsource refuses to bring suit; and
o you may bring actions under federal or state securities laws, either
individually or as part of a class of members, if Capsource has
violated those laws in connection with the offer and sale, or
repurchase of units.
This is a rapidly changing and developing area of law. If you have
questions concerning the duties of Capsource in its role as our manager, you
should consult with your own legal counsel.
Exculpation and Defenses
The operating agreement exculpates Capsource from liability to the fullest
extent permitted by law. Capsource will not be liable to us or to you for errors
in judgment or other acts or omissions not amounting to willful misconduct or
negligence. This means that Capsource will have no liability to you unless you
can show that Capsource intentionally caused the damages or losses, or if
Capsource did not exercise the same degree of care that a reasonably careful
person would have used in the same circumstances. If Capsource can show that it
acted in good faith and in a manner reasonably believed to be in our best
interest, and with such care as a reasonably prudent person in a like situation
would use, Capsource would likely have an effective defense to any legal action.
You will have a more limited right of action than you might have absent this
limitation in the operating agreement.
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Indemnification
DM LLC will indemnify Capsource, its affiliates and agents for liabilities
they incur on our behalf in dealing with third parties if they believed the
relevant conduct was in our best interest, and where there was no fraud and no
breach of a fiduciary duty or the operating agreement. The members do not have
any personal obligation to indemnify any person or entity. If the
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, in the opinion of the Securities and
Exchange Commission, that indemnification is contrary to public policy and
unenforceable.
Notwithstanding the statements regarding indemnification in the preceding
paragraph, we will not indemnify Capsource or any of its affiliates, agents, or
attorneys, nor any person acting as securities broker or dealer for the units
from any liability, loss or damage incurred by them arising due to an alleged
violation of federal or state securities laws unless:
o there has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular party;
o the claims have been dismissed with prejudice on the merits by a court
of competent jurisdiction as to the particular party; or
o a court of competent jurisdiction approves a settlement of the claims
against the particular party and finds that indemnification of the
settlement and related costs should be made.
Before seeking a court approval for indemnification, Capsource is required to
cause the party seeking indemnification to apprise the court of the position of
the Securities and Exchange Commission and the Nevada Administrator concerning
indemnification for securities violations.
We will not purchase any insurance that protects a party from any
liability for which we could not indemnify that party.
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SUMMARY OF OPERATING AGREEMENT,
RIGHTS OF MEMBERS AND DESCRIPTION OF UNITS
This is a summary of the operating agreement and does not contain all the
information that may be important to you. Furthermore, you will be bound by the
operating agreement by purchasing your units. Consequently, you should read
carefully both this prospectus and the operating agreement, which you can find
as Exhibit A.
Your Status
Our acceptance of your subscription agreement is effective when we
countersign it for the number of units we set forth next to our signature. If we
accept your subscription and payment for units, you will receive units in DM LLC
when we receive proceeds from the sale of at least 1,500,000 units on or before
December 31, 2000. We will promptly send you a confirmation of the number of
units you have acquired. This will be evidence that you are a member of DM LLC.
As a member, you have the rights that are outlined in this prospectus.
Limited Liability of Members
The Nevada statute under which DM LLC has been formed provides that
members are not personally liable for the obligations of their limited liability
company. The operating agreement also provides that every written agreement
entered into by us is not enforceable against our members personally.
Term of DM LLC
DM LLC will cease operating on December 31, 2019. Before then, the members
may vote by a majority to extend its life or to dissolve it sooner.
Additionally, DM LLC may dissolve earlier if Capsource ceases serving as the
manager and the members cannot agree on a new manager within six months.
Meetings
Either Capsource or members owning capital accounts with at least 10% of
the amounts in all capital accounts may call meetings of the members. Capsource
has informed us that it has no present intention of calling any meetings of the
members. Any voting by the members is anticipated to be by written consent.
Voting and Other Rights of Members
We require the vote or consent of a majority to do any of the following:
o amend the operating agreement, except that Capsource may amend it
- to remedy any ambiguity or formal defect or omission,
- to conform it to applicable laws and regulations, and
- to make any change which, in the judgment of Capsource, is not to
the
prejudice of the members;
o dissolve DM LLC and wind up our business;
o add or remove a manager;
o cause us to merge with another company; and
o approve or disapprove the sale of all or over 50% of our assets.
You may inspect our books and records at our principal office during our
regular business hours. We also maintain a copy of each appraisal for the
security property where we have invested in a mortgage loan at our
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principal office for at least six years after the last date that we held the
related mortgage. You may inspect and copy these appraisals during our regular
business hours. We may charge you a fee for copying them.
Capital Accounts
Capsource will credit the capital account it establishes for you when we
receive your initial investment after the escrow ends. We will allocate to your
capital account the percentage of our income, gains, losses and distributions
that the amount in your capital account bears to all members' capital accounts.
Your capital account will increase by the amount of additional capital
contributions you make, including distribution reinvestments, and by your share
of income and gains realized by us. Your capital account will decrease by your
share of losses realized by us and any income or capital we distribute to you.
Increases and decreases in your capital account do not depend on the number of
units you own.
Except for when we write down our investments, we do not adjust capital
accounts to reflect unrealized appreciation or depreciation of our underlying
assets. Consequently, the amount in your capital account may not reflect your
portion of the fair market value of our underlying assets. This is a continuous
offering in which allocations will be made based on the proportionate interest
of capital accounts. As a result, depending upon when units are purchased, the
units purchased by our members for one dollar will likely have:
o different rights to distributions and income from our mortgage loans,
and
o different proportionate interests in the fair market value of our
underlying assets.
If the fair market value of our assets is less than the cost of the assets
on our books when you make a capital contribution, then the value of your units'
interest in the fair market value of our underlying assets may be less than one
dollar. Conversely, if the fair market value of our assets is greater than the
cost of the assets on our books when a new member makes a capital contribution,
then your units' interest in the realized gains in the fair market value of our
assets will be shared with the new members making the contribution or
reinvestment. This will result in a dilution in the value of your units'
interest in the fair market value of our underlying assets. These principles
apply equally for when a member makes a distribution reinvestment.
Capital Contribution of Capsource
Capsource must contribute to our capital an amount equal to at least 0.5%
of the aggregate capital accounts of all our members. In addition, Capsource is
entitled to a promotional interest of 0.5% of the aggregate capital accounts of
all our members. If the minimum of 1,500,000 units is sold in the offering,
$7,500 of Capsource's existing $273,734 contribution will be considered
Capsource's required minimum capital contribution. We will also credit Capsource
with a $7,500 promotional interest. If the maximum of 100,000,000 units is sold
in the offering, Capsource wi8ll contribute $226,266. In that case, we will
credit Capsource with an additional $500,000 in promotional interest. if a
number of units between the minimum and the maximum number of units is sold,
these amounts will be adjusted accordingly.
Unit Repurchases and Deemed Distributions
The number of units you hold will decrease when we return capital to you,
which we do not anticipate doing until seven years after the effectiveness of
the registration statement or if you properly withdraw. If we return capital to
you, we will treat it as a redemption of units in an amount proportionate to the
amount in your capital account. We will provide statements to you reflecting the
number of units that we have redeemed and the number of units that you still own
as a result of the redemption.
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Write-Down of Investments
As indicated above, we make quarterly downward adjustments to the fair
market value of our assets to reflect then-current market conditions. We refer
to these downward adjustments as write-downs. We will make any necessary
write-downs within 30 days following the end of each calendar quarter. Our
accountants will then confirm that the write-down conforms with generally
accepted accounting principles. If a write-down is required, the write-down
shall be effective on the last day of the calendar quarter and the capital
accounts of all members on that date shall be reduced accordingly.
Members' Return on Investment
Our mortgage loans will generate monthly payments of interest and/or
principal to us. We intend to distribute these payments to you as described
below. These distributions will be paid monthly in arrears in cash or via
reinvestment. We will not accumulate assets other than mortgage notes or similar
instruments and we will not accumulate cash on hand, except for working capital
reserves of at least 3% of capital contributions. We cannot make distributions
to you until we have received the proceeds from the offering, and invested them
in mortgage loans. Thereafter, our first distribution to you will be your share
of our distribution for the month in which your contribution is actually
received by us and invested. We calculate the amount of your distributions on a
pro rata basis, based upon the monthly return, if any, on all of our assets, the
size of your capital account and, if applicable, when during the month we
received your contribution.
All net income attributable to interest payments from borrowers will be
distributed.
Net proceeds include the proceeds from the repayment of principal or the
prepayment of a mortgage loan, or the net proceeds of a foreclosure sale.
Capsource may consider the factors listed below in determining whether and how
much of the net proceeds to distribute:
o reinvesting in new loans, at any time before seven years after the
registration statement becomes effective,
o improving or maintaining any properties that we acquire through
foreclosure,
o paying permitted operating expenses, or
o distributing to the members.
Assuming that the members have received back cash equal to their capital
contributions, when we distribute net proceeds the distributions will be made to
the members in the following ratios: 1% to Capsource and an aggregate of 99% to
the other members. Capsource will not receive any distributions until the other
members have received distributions equaling the amount of their capital
contributions. Before making a distribution, Capsource will pay our expenses and
other liabilities and confirm that our working capital reserves are adequate.
Distribution Reinvestment Plan
You can elect to participate in the distribution reinvestment plan by so
indicating in your completed subscription agreement, or you can later elect to
become a participant. We will treat you as a distribution reinvestment plan
participant on the date we actually receive your initial investment, if you
indicate in your subscription agreement that you want to participate in the
plan. You may also make an election or revoke a previous election at any time by
sending us written notice. Units purchased under the plan will be credited to
your capital account as of the first day of the month following the month in
which the reinvested distribution was made. If you notify us prior to 10 days
before the end of any given month, you will be removed from the reinvestment
plan during that month and any distribution you receive that month will be paid
in cash. If you notify us within ten days of the end of the month, you will need
to wait a month to receive cash instead of units.
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Your continued participation in the plan depends on whether you meet our
investor suitability standards. While you are a participant, for each $1.00 in
distributions you reinvest, you will acquire one unit. Capsource may terminate
or reinstate, as applicable, the distribution reinvestment plan at any time.
Capsource shall not earn any fees when you reinvest net proceeds.
If you choose to reinvest your distributions in units, we will send you a
report within 30 days after each time you receive units describing the
distributions you received, the number of units you purchased, the purchase
price per Unit, and the total number of units accumulated. We will also send you
a current prospectus and tax information for income earned on units under the
reinvestment plan for the calendar year when you receive annual tax information
from us. You must pay applicable income taxes upon all distributions, whether
the distribution is paid in cash or reinvested.
No reinvestment participant shall have the right to draw checks or drafts
against his distribution reinvestment account.
Units you acquire through the distribution reinvestment plan carry the
same rights as the units you acquired through your original investment. However,
as previously noted, the value of the new units issued for one dollar will not
necessarily be the same as those previously acquired for one dollar.
We may amend or end the distribution reinvestment plan for any reason at
any time by mailing a notice to you at your last address or record at least 30
days before the effective date of our action. Capsource specifically reserves
the right to suspend or end the distribution reinvestment plan if:
o Capsource determines that the distribution reinvestment plan impairs
our capital or operations;
o Capsource determines that an emergency makes continuing the plan
unreasonable;
o any governmental or regulatory agency with jurisdiction over us
requires us to do so;
o in the opinion of our counsel, the distribution reinvestment plan is no
longer permitted by federal or state law;
o if transactions involving units within the previous twelve (12) months
would result in our being considered terminated under Section 708 of
the Internal Revenue Code; or
o Capsource determines that allowing any further reinvestments would
crease a material risk that we would be treated as a "publicly traded
partnership" within the meaning of Section 7704 of the Internal Revenue
Code.
Assignment and Transfer of Units
Your rights to sell or transfer units are limited. There is no public
market in which you may sell your units. We do not expect a public market to
emerge anytime in the future. You may not sell parts of units unless required by
law and you may not transfer any units if, as a result, you would own fewer than
2,000 units. You may transfer your units using a form approved by Capsource and
must obey all relevant laws when you are permitted to transfer units. Any person
who buys units from you must meet the investor suitability requirements in his
home state. Capsource must approve any new members and all transfers of
membership must comply with the operating agreement. Capsource's consent to
transfers will be withheld to the extent needed to prohibit transfers that would
cause us to be classified as a publicly traded partnership under the Internal
Revenue Code.
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Repurchase of units, Withdrawal from DM LLC
You may withdraw, or partially withdraw, from DM LLC and obtain the return
of all or part of your capital account within 61 to 91 days after you deliver
written notice of withdrawal to Capsource, subject to the following additional
conditions:
o You should not expect to be able to withdraw from DM LLC until one year
after you purchased units.
o We can only make cash payments in return of an outstanding capital
account from net proceeds and capital contributions.
o You will be limited to a maximum of $100,000 in withdrawals per
calendar year.
o We are not required to sell any portion of our assets to fund a
withdrawal.
o Capsource will not reinvest net proceeds for a period of up to 90 days
after receiving a withdrawal notice from you if we do not have
sufficient funds available to distribute to you all of your capital
account in cash.
o The amount to be distributed to you depends solely on your capital
account on the date of the distribution, even if this is not the same
as your proportionate share of the then fair market value of our
assets.
o We will not permit more than 10% of the outstanding capital accounts of
members to be withdrawn during any calendar year, except upon the
dissolution of DM LLC.
o If your capital account is reduced below $2,000 due to any withdrawal
payment, we may distribute all remaining amounts in your capital
account to you in cancellation of your units, and you will then cease
to be a member.
o All payments to meet requests for withdrawal are on a "first-come,
first-served" basis. If the sums needed to fund withdrawals in any
particular month exceed the amount of cash available for withdrawals,
funds will be distributed first to the member whose request we received
first, until his withdrawal request is paid in full.
Options and Warrants
The operating agreement does not provide for the purchase of options or
warrants to any party. In the event that Capsource, as manager, elects to issue
options or warrants, they will be offered on the same terms to all persons,
including members other than Vestin, its subsidiaries and affiliates,
Additionally:
o The options or warrants will have an exercise price that is not less
than the fair market value of the units on the date the options or
warrants are issued;
o The options or warrants will not be issued for consideration less than
the fair market value of the option or warrant on the date of issue;
and
o Units underlying the options or warrants, in aggregate, shall not
exceed 10% of the then issued and outstanding units.
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Special Power of Attorney
Under the terms of the operating agreement and the subscription agreement,
you appoint Capsource your attorney-in-fact for certain documents, including the
signing of the operating agreement. You cannot revoke this special power of
attorney, which will survive your death and stays with your units even if they
are assigned.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated federal income tax aspects
of an investment in units. Because this is a summary, it does not contain all
the information that may be important to you. This summary is based on the
Internal Revenue Code as in existence on the date of this prospectus, existing
laws, judicial decisions and administrative regulations, rulings and practice,
any of which are subject to change, and these changes could be retroactive.
We and our members may be subject to state and local taxes in states and
localities in which the IRS or state authorities deem us to be doing business,
and except where we reference specific states, this discussion does not cover
state or local tax consequences you may incur in connection with your
investment.
Some of the deductions we intend to claim or positions we intend to take
for tax purposes may be challenged by the IRS. The IRS has increased its audit
efforts with respect to limited partnerships and limited liability companies,
and an audit of our information return may result in, among other things, an
increase in our gross income, the disallowance of certain deductions or credits
we have claimed or in an audit of your income tax returns.
Any audit adjustments made by the IRS could adversely affect you even if
none of these adjustments are ultimately sustained, since you and the other
members will, directly or indirectly, bear the expense of contesting the
adjustments.
We advise you to consult your own tax advisors, with specific reference to
your own tax situation and potential changes in applicable laws and regulations.
Capsource will prepare our information returns, which will not be reviewed
by our independent accountants or tax counsel. Capsource will handle all of our
other tax matters, often with the advice of independent accountants and/or tax
counsel.
Tax counsel has delivered an opinion letter to us which is attached as an
exhibit to the registration statement of which this prospectus forms a part.
This letter contains the following opinions with respect to tax matters
affecting us:
o we will be classified as a partnership rather than as an association
taxable as a corporation for federal income tax purposes;
o we will not be classified as a publicly traded partnership for federal
income tax purposes; and
o the discussion set forth below is an accurate summary of the material
federal income tax aspects of your investment in units.
The following discusses the material tax issues associated with an
investment in units. All of the conclusions as to the tax treatment of a
particular tax item set forth in the following discussion reflect the opinion of
tax counsel unless otherwise expressly indicated.
The discussion considers existing laws, applicable current and proposed
Treasury Regulations; current published administrative positions of the IRS
contained in revenue rulings, revenue procedures and other IRS pronouncements,
and published judicial decisions. We do not know whether a court would sustain
any position we take for tax purposes, if contested, or whether there might be
legislative or administrative changes or court decisions that would modify this
discussion. Any of these changes may or may not be retroactive with respect to
transactions prior to the date of the changes.
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Moreover, it is possible that the changes, even if not applied
retroactively, could reduce the tax benefits anticipated to be associated with
an investment in units.
We urge you to consult and rely upon your own tax advisor with respect to
the federal and state consequences arising from an investment in units. The cost
of the consultation could, depending on the amount charged to you, decrease any
return anticipated on the investment. Nothing in this prospectus is or should be
construed as legal or tax advice to any specific investor as individual
circumstances may vary. This federal income tax consequences section of this
prospectus only provides the current state of tax laws. You should be aware that
the IRS may not agree with all tax positions taken by us and that legislative,
administrative or court decisions may reduce or eliminate your anticipated tax
benefits.
Classification as a Partnership
Under Treasury Regulations issued in December 1996, a domestic limited
liability company with more than one member will be classified as a partnership
for federal income tax purposes unless it makes an election to be classified as
an association taxable as a corporation. We are a domestic limited liability
company, and if we complete a minimum offering of 1,500,000 units, we will have
more than one member. Capsource will not cause us to make an election to be
classified as an association taxable as a corporation. Based on the foregoing,
it is the opinion of tax counsel that we will be classified as a partnership for
federal income tax purposes.
Assuming that we will be classified as a partnership for federal
income tax purposes, in the discussion that follows, as the context requires:
o the use of the term partnership will be construed to refer also to a
limited liability company classified as a partnership for federal
income tax purposes;
o the use of the term partner will be construed to refer also to a member
of a limited liability company; and
o the use of the terms partnership interest or interest in the
partnership or similar terms will be construed to refer also to the
interest of a member in a limited liability company.
We Will Not Be Classified As A Publicly Traded Partnership
Section 7704 of the Internal Revenue Code treats publicly traded
partnerships as corporations for federal income tax purposes. Section 7704(b) of
the Internal Revenue Code defines the term publicly traded partnership as any
partnership, including a limited liability company otherwise classified as a
partnership for federal income tax purposes, where the equity interests are:
o readily traded on an established securities market; or
o readily tradable on a secondary market or the substantial equivalent of
a secondary market. In the discussion that follows, the references to a
secondary marked also include the substantial equivalents to a
secondary market.
In 1995, the IRS issued final Treasury Regulations under Section 7704 of
the Internal Revenue Code. These regulations provide that an established
securities market includes:
o a national securities exchange registered under the Securities Exchange
Act of 1934;
o a national securities exchange exempt from registration because of the
limited volume of transactions;
o a foreign securities exchange;
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o a regional or local exchange; and
o an interdealer quotation system that regularly disseminates firm buy or
sell quotations by identified brokers or dealers by electronic means or
otherwise.
In determining when partnership interests will be treated as readily
tradable on a secondary market, there are a number of safe harbors that allow
certain transactions to be disregarded including a safe harbor that is available
if the sum of the percentage interests in partnership capital or profits that
are sold or otherwise disposed of during the taxable year does not exceed two
percent (2%) of the total interests in partnership capital or profits.
The IRS will disregard certain transfers for purposes of determining
whether this safe harbor is met:
o transfers at death,
o transfers in which the basis is determined under Section 732 of the
Internal Revenue Code,
o interests issued by the partnership for cash, property or services, and
o interests in the partnership which are redeemed pursuant to the safe
harbor discussed in the next paragraph.
The IRS also will disregard transfers of an interest in a partnership
pursuant to a redemption or repurchase agreement where the partnership maintains
a plan of redemption or repurchase in which the partners may tender their
partnership interests for purchase by the partnership, another partner or
persons related to another partner. These transfers will be disregarded in
determining that our units are readily tradable on a secondary market if:
o the redemption agreement requires that the redemption cannot occur
until at least 60 calendar days after the partner notifies the
partnership in writing of the partner's intention to exercise the
redemption rights;
o the redemption agreement requires that the redemption price cannot be
established until at least 60 days after receipt of the notification by
the partnership or the price is established not more than 4 times
during the partnership's taxable year; and
o the sum of the percentage interests in partnership capital and profits
represented by partnership interests that are transferred, other than
in transfers otherwise disregarded, as described above, during the
taxable year of the partnership, does not exceed 10% of the total
interests in partnership capital or profits.
Our operating agreement provides that, subject to the limitations
described elsewhere in this prospectus, you may withdraw or partially withdraw
as a member and obtain the return of your outstanding capital account. These
provisions constitute a redemption or repurchase agreement within the meaning of
these regulations.
The limitations on your right to withdraw your capital account set forth
in our operating agreement include:
o a requirement that the withdrawal will not be made until at least 61
days after written notice of withdrawal is delivered to Capsource;
o the amount distributed to you will be a sum equal to your capital
account as of the date of the distribution; and
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o in no event will Capsource permit the withdrawal during any calendar
year of more than 10% of the outstanding units.
In the opinion of tax counsel, the foregoing limitations satisfy the
requirements applicable to the safe harbor for transfers made pursuant to a
redemption or repurchase agreement.
Our operating agreement provides that you may not transfer your units if
Capsource determines that the transfer would result in our being classified as a
publicly traded partnership within the meaning of Section 7704(b) of the
Internal Revenue Code. To prevent this classification, our operating agreement
provides that:
o Capsource will not permit trading of units on an established securities
market within the meaning of Section 7704(b) of the Internal Revenue
Code;
o Capsource will prohibit any transfer of units which would cause the sum
of percentage interests in our capital or profits represented by
partnership interests that are transferred during any taxable year to
exceed the limitation under the safe harbor which applies if the sum of
the percentage interests in the partnership capital or profits that are
sold or otherwise disposed of during the taxable year does not exceed
two percent of the total interests in partnership capital or profits;
and
o Capsource will not permit any withdrawal of units except in compliance
with the provisions of our operating agreement.
Based upon the provisions of our operating agreement and the
representations of Capsource, tax counsel's opinion is that:
o units will not be traded on an established securities market within the
meaning of Section 7704 of the Internal Revenue Code;
o our operation with regard to the withdrawal by members will qualify for
the safe harbor that applies to interests which are transferred
pursuant to a redemption or repurchase agreement;
o our operation with regard to the transfer of units by members will
qualify for the above-referenced safe harbor that applies based upon
the percentage interests in the partnership capital or profits that are
sold or otherwise disposed of during the taxable year;
o units will not be considered as readily tradable on a secondary market;
and
o we will not be classified as a publicly traded partnership for purposes
of Section 7704 of the Internal Revenue Code.
A partnership which is classified as a publicly traded partnership under
Section 7704 of the Internal Revenue Code will not be treated as a corporation
for federal income tax purposes if 90% or more of its gross income is qualifying
income. Qualifying income under Section 7704(c) includes for these purposes,
among other passive-type items, interest, dividends, real property rents, and
gains from the sale of real property, but excludes interest derived in the
conduct of a financial business.
If a publicly traded partnership is not taxed as a corporation because it
meets the qualifying income test, the passive loss rules discussed below are
applied separately to the partnership, and a tax-exempt partner's share of the
partnership's gross income is treated as income from an unrelated trade or
business under the unrelated trade or business taxable income rules discussed
below.
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It is not clear whether we would satisfy the qualifying income test of
Section 7704(c) of the Internal Revenue Code, and tax counsel is unable to give
an opinion on this issue. This would be relevant only if it were determined that
we should be classified as a publicly traded partnership. Capsource expects that
more than 90% of our income will be qualifying income. However, it is not clear
whether we will be engaged in the conduct of a financial business, and tax
counsel is unable to give an opinion on this issue. If we were classified as a
publicly traded partnership and considered to be engaged in a financial
business, we would be treated as a corporation for federal income tax purposes.
General Principles of Partnership Taxation
A partnership is not subject to any federal income taxes. We will file
information returns reporting our operations on the accrual basis for each
calendar year.
Determination of Basis in Units
You will not be taxed on distributions you receive from us unless the
distributions exceed your adjusted basis in your units. Your adjusted basis in
your units is the amount you originally paid for the units increased by:
o your proportionate share of partnership indebtedness with respect to
which no member is personally liable;
o your proportionate share of our taxable income, and
o any additional capital contributions made by you,
and decreased by:
o your proportionate share of our losses,
o the amount of cash, and fair value of noncash, distributions to you,
and
o any decreases in your share of any of partnership nonrecourse
liabilities.
Any increase in nonrecourse liabilities is treated as a cash contribution
and a decrease in nonrecourse liabilities is treated as a cash distribution,
even though you do not actually contribute or receive cash. Distributions in
excess of your basis generally will be treated as gain from the sale or exchange
of your units.
Allocations of Profits and Losses
We will allocate to the members profits and losses and cash distributions
in the manner described in our operating agreement. Any allocation of profits
and losses will be recognized as long as it has substantial economic effect
under the Treasury Regulations promulgated under Section 704(b) of the Internal
Revenue Code by satisfying one of these tests:
o it has substantial economic effect;
o it is in accordance with the partners' interest in the partnership,
determined by taking into account all facts and circumstances; or
o it is deemed to be in accordance with the partners' interest in the
partnership.
We have decided to establish the validity of the allocations of profits
and losses under our operating agreement by demonstrating that these allocations
will be in accordance with the partners' interest in the partnership.
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The allocations of profits, losses and cash distributions contained in our
operating agreement will be substantially proportionate to the capital accounts
of the members. For this reason, in the opinion of tax counsel, the IRS should
treat the allocations as being substantially in accordance with the partners'
interests in the partnership within the meaning of this alternative method for
establishing the validity of allocations.
Limitations on the Deduction of Losses
We do not expect that we will incur net losses in any taxable year.
However, if we were to incur losses in any year, your ability to deduct your
distributive share of the losses would be subject to the potential application
of the limitations discussed below.
The Basis Limitation
Section 704(d) of the Internal Revenue Code provides that a partner's
share of partnership losses is deductible only to the extent of his adjusted
basis in his partnership interest at the end of the year in which the losses
occur. Losses disallowed under Section 704(d) of the Internal Revenue Code may
be carried forward indefinitely until adequate basis is available to permit
their deduction. Due to this limitation, you will be precluded from deducting
losses in excess of your adjusted basis in your units.
The At Risk Limitation
Section 465 of the Internal Revenue Code provides that a partner's share
of partnership losses is deductible only to the extent the partner is at risk.
The primary effect of this provision is to limit the availability of tax losses
of a partnership as offsets against other taxable income of a partner to the
partner's adjusted basis in his partnership interest, excluding any portion of
adjusted basis attributable to partnership nonrecourse indebtedness. In
addition, the at risk amount does not include contributions by a partner to the
extent the partner used the proceeds of a nonrecourse borrowing to make the
contributions.
The Passive Loss Rules
Section 469 of the Internal Revenue Code limits the deductibility of
losses from passive activities for individuals, estates, trusts and certain
closely-held corporations. A passive activity includes an activity which
involves the conduct of a trade or business in which the taxpayer does not
materially participate. Losses from passive activities are only allowed to
offset income from passive activities and will not be allowed to offset
portfolio income, trade or business income or other nonpassive income, including
wages or salaries. Suspended losses and credits attributable to passive
activities are carried forward and treated as deductions and credits from
passive activities in the next year. Suspended losses from a passive activity
are allowed in full when the taxpayer disposes of his entire interest in the
passive activity in a taxable transaction.
The Treasury Regulations under Section 469 of the Internal Revenue Code
provide that in certain situations, net income, but not net loss from a passive
activity is treated as nonpassive. One of the items covered by these regulations
is net income from an equity-financed lending activity. An equity-financed
lending activity is defined as an activity that involves a trade or business of
lending money, if the average outstanding balance of liabilities incurred in the
activity for the taxable year does not exceed 80% of the average outstanding
balance of the interest-bearing assets held in the activity for the year.
Capsource expects that at no time will the average outstanding balance of
our liabilities exceed 80% of the average outstanding balance of our mortgage
loans. If we are deemed to be engaged in the trade or business of lending money,
our income will generally be recharacterized as nonpassive income, even though
our net losses or your loss on the sale of a unit will be treated as passive
activity losses.
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If we are not considered engaged in a trade or business of lending money,
then income and loss will be considered portfolio income and loss, and you will
not be permitted to offset passive losses from other activities against your
share of our income.
Section 67(a) of the Internal Revenue Code provides that most
miscellaneous itemized deductions are deductible by an individual taxpayer only
to the extent that they exceed 2% of the taxpayer's adjusted gross income and
are subject to additional limitations for certain high-income taxpayers.
Deductions from a trade or business are not subject to these limitations. Your
allocable share of our expenses will be considered miscellaneous itemized
deductions subject to this 2% limitation only if we are not considered to be in
the trade or business of lending money.
Computation of Gain or Loss on Sale or Redemption of units
If you sell your units, including a sale of your units to us in a
redemption transaction, you will recognize gain or loss on the sale measured by
the difference between the amount realized and your adjusted basis in the units.
Character of Gain or Loss
Gain on the sale of units which have been held over 12 months should be
taxable as long-term capital gain, except for that portion of the gain allocable
to substantially appreciated inventory items and unrealized receivables, as
those terms are defined in Section 751 of the Internal Revenue Code, which would
be treated as ordinary income. We may have unrealized receivables arising from
the ordinary income component of market discount bonds. In addition, if we hold
property as a result of foreclosure, which is unsold at the time you sell your
units, or hold an investment in a mortgage loan that is classified as an equity
interest, the amount of ordinary income that would result if we were to sell the
property is expected to be an unrealized receivable.
For noncorporate taxpayers, long-term capital gain for assets held longer
than 12 months is subject to a maximum rate of 20%, or 10% for individuals in
the 15% tax bracket. The amount of ordinary income against which a noncorporate
taxpayer may deduct a capital loss is the lower of $3,000 or $1,500 in the case
of a married taxpayer filing a separate return, or the excess of these losses of
the taxpayer over the taxpayer's capital gain.
Tax Rates on a Partner's Share of Ordinary Income from the Partnership
Your tax liability with respect to an investment in units will depend upon
your individual tax bracket. Currently, there are five tax brackets for
individuals. For calendar year 2000,
o the first bracket is at 15% on taxable income not over $43,850 in the
case of married taxpayers filing joint returns,
o the second at 28% on taxable income from $43,850-$105,950,
o the third at 31% on taxable income from $105,950-$161,450,
o the fourth at 36% on taxable income from $161,450-$288,350, and
o the fifth at 39.6% on taxable income over $288,350.
Depreciation
From time to time we may acquire equity or leasehold interests in real
property by foreclosure. The cost of the improvements on any of these owned real
property may be recovered through depreciation deductions over a period of 39
years.
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Investment Interest
Section 163(d) of the Internal Revenue Code, applicable to noncorporate
taxpayers and S corporation shareholders, limits the deductibility of interest
incurred on loans used to acquire or carry property held for investment.
Property held for investment includes all investments held for the production of
taxable income or gain, but does not include trade or business property or
interest incurred to construct trade or business property. Investment interest
is deductible by noncorporate taxpayers and S corporation shareholders only to
the extent it does not exceed net investment income for the taxable year.
Net investment income is the excess of investment income over the sum of
investment expenses. Interest expense we incur and interest expense you incur to
acquire your units will not be treated as investment interest to the extent
attributable to a passive activity conducted by us. However, that portion of
interest expense allocable to portfolio investments is subject to the investment
interest limitations.
Interest attributable to debt you incur in order to purchase or carry
units may constitute investment interest subject to these deductibility
limitations. You should consider the effect of investment interest limitations
on using debt financing for your purchase of units.
Tax Treatment of Tax-Exempt Entities
Sections 511 through 514 of the Internal Revenue Code impose a tax on the
unrelated business taxable income of organizations otherwise exempt from tax
under Section 501(a) of the Internal Revenue Code. The entities subject to the
unrelated business income tax include:
o qualified plans, and
o IRAs.
Other charitable and tax-exempt organizations are also generally subject
to the unrelated business income tax. Interest income is not subject to this tax
unless it constitutes debt-financed income.
Unrelated business taxable income includes gross income, which may be
subject to deductions and modifications, derived from any trade or business
regularly carried on by a partnership. Among the items excluded from unrelated
business taxable income are:
o interest and dividend income;
o rents from real property, other than debt-financed property or property
from which participating rentals are derived; and
o gains on the sale, exchange or other disposition of assets held for
investment.
The receipt of unrelated business taxable income by an entity subject to
the unrelated business income tax has no effect on the entity's tax-exempt
status or on the exemption from tax of its other income; however, the continual
receipt of unrelated business taxable income may cause some of these entities to
lose their exemptions. For certain types of entities subject to this tax, the
receipt of any unrelated business income taxable may cause all income of the
tax-exempt entity to be subject to tax. For example, for charitable remainder
trusts, the receipt of any taxable income from an unrelated trade or business
during a taxable year will result in the taxation of all of the trust's income
from all sources for that year. If you are a tax-exempt entity, we urge you to
consult your own tax advisors concerning the possible adverse tax consequences
resulting from an investment in units.
Capsource intends to invest our assets so as to assure that tax-exempt
members will not derive unrelated business taxable income or unrelated
debt-financed income with respect to their units. Unrelated debt-financed
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income might be derived in the event that Capsource deems it advisable to incur
indebtedness under a line of credit in connection with foreclosures on property
where mortgagors have defaulted on their loans.
If we acquire property subject to acquisition indebtedness, the income
attributable to the portion of the property which is debt financed may be
treated as unrelated business taxable income to the entity holding units.
Sales of foreclosure property might also produce unrelated business
taxable income if we are characterized as a dealer with respect to that
property. Mortgage loans which we invest in or purchase which permit us to
participate in the appreciation value of the properties may be recharacterized
by the IRS as an equity interest and the recharacterization could result in
unrelated debt-financed income. The IRS might not agree that our other income is
not subject to tax under the unrelated business income and unrelated
debt-financed income tax provisions.
If an IRA or a qualified plan is a member and its partnership income
constitutes unrelated business taxable income, this income is subject to tax
only to the extent that its unrelated business taxable income from all sources
exceeds $1,000 for the taxable year.
In considering an investment in units of a portion of the assets of a
qualified plan or IRA, a fiduciary should consider:
o whether the investment is in accordance with the documents and
instruments governing the plan or IRA;
o whether the investment satisfies the diversification requirements of
Section 404(a)(1)(c) of ERISA;
o whether the investment is prudent considering, among other matters,
that there probably will not be a market created in which the
investment can be sold or otherwise disposed of; and
o whether the investment would cause the IRS to impose an excise tax
under Section 4975 of the Internal Revenue Code.
We do not expect an investment in units by an IRA to be subject to the
above diversification and prudence requirements of ERISA unless the IRA also is
treated under Section 3(2) of ERISA as part of an employee pension benefit plan
which is established or maintained by an employer, employee organization, or
both.
Partnership Tax Returns, Tax Information and Audits
Capsource will prepare our information income tax returns. In connection
with the preparation of our income tax returns, Capsource will prepare and
distribute to the Members not later than seventy-five (75) days after the close
of each fiscal year all information necessary in the preparation of the Members'
federal income tax returns, including our Schedule K (Form 1065), Partner's
Share of Income, Credits, Deductions, and each Member's respective Schedule K-1.
Such information will not be supplied to assignees who are not substitute
Members.
You are required to report your distributive share of the items set forth
on your Schedule K-1 on your individual tax return consistent with our treatment
of the items on our returns. You may report an item inconsistently if you file a
statement with the IRS identifying the inconsistency. Otherwise, the IRS may
summarily assess additional tax necessary to make your treatment of the item
consistent with our treatment of the item without a notice of deficiency or an
opportunity to protest the additional tax in the Tax Court being afforded to
you. Penalties for intentional disregard of the consistency requirements may
also be assessed.
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Our tax returns may be audited by the IRS. Tax audits and adjustments are
made at our level in once unified proceeding, the results of which are binding
on all members. You may, however, protest the additional tax paying the full
amount thereof and suing for a refund in either the U.S. Claims Court or a U.S.
District Court.
Capsource is tax Matters Partner
A limited liability company which is classified as partnership for tax
purposes must designate a tax matters partner to represent it in dealing with
the IRS. Capsource will serve as the tax matters partner to act on our behalf
and on behalf of the members with respect to partnership items, to deal with the
IRS and to initiate any appropriate administrative or judicial actions to
contest any proposed adjustments at the partnership level.
If you own less than a 1% of the units, you will not receive notice from
the IRS of these administrative proceedings unless you form a group with other
members, having an aggregate interest of 5% or more, and request the notice.
However, all members have the right to participate in the administrative
proceedings will be our responsibility and may adversely affect the
profitability, if any, of our operations.
Adjustments, if any, resulting from any audit may require you to file an
amended tax return, and may result in an audit of your own tax return. Any audit
of your tax return could result in adjustments of items unrelated to our
operations as well as income and losses from our operations.
Original Issue Discount Rules
The original issue discount rules under the Internal Revenue Code pertain
to mortgage loans and obligations issued by us. The effect will be that we will
realize as interest income the amount that economically accrues under a mortgage
loan during the course of the year, using compound interest concepts, even where
a lesser amount is actually paid or accrued under its terms. Identical concepts
will be used for determining our interest deduction on our obligations, if any.
Market Discount
We may purchase mortgage investments for an amount substantially less than
the remaining principal balance of the mortgage investments. Each monthly
payment which we receive from a mortgagor will consist of interest at the stated
rate for the investment in a mortgage loan and a principal payment. If we
purchase an investment in a mortgage loan at a discount, for federal income tax
purposes the principal portion of each monthly payment will constitute the
return of a portion of our investment in the investment in a mortgage loan and
the payment of a portion of the market discount for the investment in a mortgage
loan.
We will recognize the amount of each monthly payment attributable to
market discount as ordinary income, but the amount of each monthly payment
representing the return of our investment will not constitute taxable income to
us. The Internal Revenue Code also treats accrued market discount as ordinary
income on the sale of an investment in a mortgage loan.
No Section 754 Election - Impact on Subsequent Purchasers
Section 754 of the Internal Revenue Code permits a partnership to elect to
adjust the basis of its property in the case of a transfer of an interest in the
partnership. The effect of this election would be that, with respect to the
transferee only, the basis of our property would either be increased or
decreased by the difference between the transferee's basis for his units and his
proportionate share of our basis for all proportionate share of our basis for
all property we own.
Capsource has decided that due to the accounting difficulties which would
be involved, it will not cause us to make an election pursuant to Section 754 of
the Internal Revenue Code. Accordingly, our basis in our assets will not be
adjusted to reflect the transferee's purchase price of his units.
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This treatment might not be attractive to prospective purchasers of units,
and you might have difficulty for that reason in selling your units or you might
be forced to sell at a discounted price.
Treatment of Compensation of Capsource
We will pay Capsource an annual management fee of up to three-quarters of
one percent (0.75%) of the original capital contributions committed to investing
in mortgage loans, including working capital reserves. Beginning with the third
year, it will be three-quarters of one percent (0.75%) of the fair market value
of our assets, including working capital, less any of our indebtedness. For
funds not invested in mortgages, the percentage paid as a management fee is
one-half of one percent (0.5%). Capsource will be entitled to loan processing
fees paid by us in connection with our investing in or purchasing a mortgage
loan, in addition to reimbursement from us of permitted expenses. In addition,
Capsource or an affiliate of Capsource will act as a servicing agent with
respect to our mortgage investments, for which it will be paid by the relevant
borrower an annual fee of up to one-quarter of one percent (0.25%) of the unpaid
balance of the respective mortgage loan serviced.
In computing our taxable income each year, we will deduct the amount of
all management, loan processing and other fees paid during the year. The
deductibility of these fees depends on the value of the services rendered, which
is a question of fact that may depend on events to occur in the future.
Due to this uncertainty, tax counsel was unable to render an opinion as to
the proper tax treatment of these fees, and the IRS may attempt to
recharacterize our treatment of these fees by disallowing the deduction we will
claim. Such a recharacterization could cause the tax benefits generated by the
payment of such fees to be deferred or lost.
Capsource may also act as escrow agent for mortgage investments we make
and may also provide certain document preparation, notarial and credit
investigation services for which Capsource will be entitled to receive from the
applicable borrower such fees as are permitted by law and as are generally
prevailing in the geographical area where the mortgaged property is located.
We will enter into mortgage investment transactions in which the borrower
has employed and agreed to compensate Capsource, an affiliate of Capsource or a
non-affiliated third party to act as a broker in arranging the loan. The exact
amount of the loan brokerage commissions will be negotiated with prospective
borrowers on a case-by-case basis. Capsource may also receive a fee from a
borrower for the reconveyance of property upon full payment of a loan in an
amount as is generally prevailing in the geographical area where the property is
located. In addition, Capsource and/or an affiliate may receive a fee payable by
a borrower for permitting the assumption of a loan. Capsource will be entitled
to fees from the borrower upon a delinquent payment under a mortgage loan or, in
some cases, the prepayment of a mortgage investment.
Since the commissions or fees described in the preceding two paragraphs
will be payable by the borrowers, their payment should not have any effect on
the calculation of our taxable income. The IRS could take the position that
these commissions or fees, or any of them, are constructively paid by us, in
which case our interest income would be increased by the amount of the
commissions, and we could deduct the commissions only to the extent the
commissions or fees are reasonable compensation for the services rendered and
otherwise considered deductible expenditures. This could result in an increase
in the Company's taxable income for any year in which such a recharacterization
occurs and an allocation of this increase in taxable income among the members.
Since this is ultimately an issue of fact which may depend on future
events, tax counsel was unable to give an opinion regarding the issue.
Capsource or its affiliates will be entitled to reimbursement from us for
expenses advanced by Capsource or its affiliates for our benefit and for
salaries and related expenses for nonmanagemenent and nonsupervisory
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services performed for our benefit. Our reimbursement of these expenses will be
treated in the same manner as if we had incurred these expenses directly.
Possible Legislative Tax Changes
In recent years there have been a number of proposals made in Congress by
legislators, government agencies and by the executive branch of the federal
government for changes in the federal income tax laws. In addition, the IRS has
proposed changes in regulations and procedures, and numerous private interest
groups have lobbied for regulatory and legislative changes in federal income
taxation. It is impossible to predict the likelihood of adoption of any
proposal, the likely effect of any proposals upon the income tax treatment
presently associated with investment in mortgage loans or units, or the
effective date, which could be retroactive, of any legislation which may derive
from any past or future proposal.
We strongly urge you to consider ongoing developments in this uncertain
area and to consult your own tax advisors in assessing the risks of investment
in units.
State and Local Taxes
We currently contemplate investing in or purchasing loans in Nevada,
California and Arizona. Nevada does not have an income tax law, and, we believe
that no taxes will be imposed by the State of Nevada or any of its localities on
our assets or income or on any member's share of any income derived from our
activities in Nevada.
California and Arizona may impose a tax on our assets or income, or on
each member based on his share of any income derived from our activities in
those states. In addition, we may decide to invest in or purchase loans secured
by properties in other states and localities which also may impose these taxes.
If you are entity that is exempt from federal income taxation, it is
likely that you are also exempt from state and local taxation.
The state in which you reside may impose taxes on your share of any income
derived from your interest in us. You should consult with your own tax advisors
concerning the applicability and impact of any state and local tax laws in your
state of residence.
ERISA Considerations
ERISA requires that the assets of qualified plans be held in trust and
that the trustee, or a duly authorized investment manager, within the meaning of
Section 3(38) of ERISA shall have exclusive authority and sole discretion to
manage and control the assets of the plan. ERISA also imposes certain duties on
persons who are fiduciaries of employee benefit plans subject to its provisions
and prohibits certain transactions between ERISA and an employee benefit plan
and the parties in interest with respect to qualified plans, including
fiduciaries.
Under the Internal Revenue Code, similar prohibitions apply to all
qualified plans and IRAs. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a qualified
plan or IRA is considered to be a fiduciary of the plan or IRA, subject to
certain exceptions not here relevant.
ERISA and the Internal Revenue Code also prohibit parties in interest,
including fiduciaries of an IRA or qualified plan, from engaging in various acts
of self-dealing. To prevent a possible violation of these self-dealing rules,
Capsource may not permit the purchase of units with assets of any IRA or
qualified plan if Capsource:
o has investment discretion with respect to the assets of the plan or
IRA, or
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o regularly gives individualized investment advice which serves ad the
primary basis for the investment decisions made with respect to the
assets of the plan or IRA.
Annual Valuation
Fiduciaries of any qualified plan subject to ERISA are required to
determine annually the fair market value of the assets of the plan as of the
close of the plan's fiscal year. Although Capsource will provide annually upon
the written request of a member an estimate of the value of the units based
upon, among other things, outstanding mortgage investments, fair market
valuation based on trading will not be possible because there will be no market
for the units.
Plan Assets Generally
If our assets are deemed to be plan assets under ERISA:
o our investment will be subject to the prudence standards and other
provisions of ERISA applicable to investments by qualified plans and
their fiduciaries would extend to investments made by us,
o certain transactions that we might seek to enter into might constitute
prohibited transactions under ERISA and the Internal Revenue code
because Capsource would be deemed to be a fiduciary of the plans, and
o our audited financial information would have to be reported annually to
the Department of Labor.
In 1986, the Department of Labor promulgated final regulations defining
the term plan assets. Under these regulations, when a plan makes an equity
investment in another entity, the underlying assets of that entity will be
considered plan assets unless one or more of the following exemptions applies:
o equity participation by benefit plan investors is not significant,
o the entity is a real estate operating company, or
o the equity interest is a publicly-offered security.
Exemption for Insignificant Participation by Qualified Plans. This
exemption is available if less than 25% of each class of equity interests in the
corporation or partnership is held in the aggregate by qualified plans or IRAs.
For purposes of this 25% rule, the interests of any person who had
discretionary authority or control with respect to the assets of the entity, or
who provides investment advice for a fee with respect to the assets of the
entity, or any affiliate of a person who has that authority or control, shall be
disregarded.
Thus, while Capsource and its affiliates are not prohibited from
purchasing units, any purchases of units by any of them will be disregarded in
determining whether this exemption is satisfied. We cannot assure you that we
will always qualify for this exemption.
Exemption For a Real Estate Operating Company. For purposes of this
exemption, an entity is a real estate operating company if at least 50% of its
assets valued at cost, other than short-term investments pending long-term
commitment, are invested in real estate which is managed or developed and with
respect to which the entity has the right substantially to participate directly
in the management or development of real estate.
The preamble to these regulations states the Department of Labor's view
that an entity would not be engaged in the management or development of real
estate if it merely services mortgages on real estate. Thus, it is unlikely that
we would qualify for an exemption from plan assets treatment as a real estate
operating company.
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Exemption for Publicly Offered Securities. For purposes of this
exemption, a publicly offered security is a security that is:
o freely transferable,
o part of a class of securities that is owned by 100 or more investors
independent of the issuer and of one another, and
o either part of a class of securities registered under Section 12(b) or
12(g) of the Exchange Act of 1934, or sold to the plan as part of an
offering of securities to the public pursuant to an effective
registration statement under the Securities Act and the class of
securities of which the security is a part is registered under the
Securities Exchange Act of 1934 within 120 days, or such later time as
may be allowed by the Securities and Exchange Commission, after the end
of the fiscal year of the issuer during which the offering of such
securities to the public occurred.
For purposes of this definition, whether a security is freely transferable
is a factual question to be determined on the basis of all relevant facts. If a
security is part of an offering in which the minimum is $10,000 or less,
however, certain customary restrictions on the transferability of partnership
interests necessary to permit partnerships to comply with applicable federal and
state laws, to prevent a termination or of the entity for federal or state tax
purposes and to meet certain enumerated administrative needs not, alone or in
combination, affect a finding that such securities are freely transferable.
The units will be sold as part of an offering of securities to the public
pursuant to registration under the Securities Act, and Capsource has represented
that it will cause us to register the units under the Exchange Act within 120
days, or such later time as may be allowed by the Securities and Exchange
Commission, after the end of our fiscal year during which the offering of units
to the public occurred. The units will not be subject to any restrictions on
transfer other than those enumerated in these regulations and referenced in the
preceding paragraph. Based on the foregoing, the units should be publicly
offered securities within the meaning of these regulations. As a result, our
underlying assets should be not considered to be plan assets under these
regulations.
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HOW WE PROTECT OUR RIGHTS AS A LENDER
The following discussion is a summary of legal aspects of mortgage loans.
Because this is a summary, it does not contain all the information that may be
important to you. Many of the legal aspects of mortgage loans are governed by
applicable state laws, which may vary substantially. The following material does
not reflect the laws of any particular state, unless specifically indicated.
Overview of Mortgages
We invest in mortgage loans. In connection with these loans, we receive
mortgages or other similar instruments such as deeds of trust, granting us
rights in the security properties. Our authority under a mortgage is governed by
applicable law and the express provisions of the mortgage.
Priority of liens on mortgaged property created by mortgages depends on
their terms and on the order of filing with a state, county or municipal office,
although this priority may be altered by the mortgagee's knowledge of unrecorded
liens against the security property. However, filing or recording does not
establish priority over governmental claims for real estate taxes and
assessments. In addition, the Internal Revenue Code provides priority for
certain tax liens over the lien of the mortgage.
Foreclosure
Non-judicial Foreclosure
If a mortgage loan secured by a deed of trust is in default, we will
protect our rights by foreclosing by a non-judicial sale. Deeds of trust differ
from mortgages in form, but are in most other ways similar to mortgages. Deeds
of trust will contain specific provisions enabling non-judicial foreclosure in
addition to those provided for in applicable statutes upon any material default
by the borrower. Applicable state law controls the extent that we have to give
notice to interested parties and the amount of foreclosure expenses and costs,
including attorney's fees, which may be covered by a lender, and charged to the
borrower.
Judicial Foreclosure
Foreclosure under mortgage instruments other than deeds of trust is more
commonly accomplished by judicial action initiated by the service of legal
pleadings. When the mortgagee's right to foreclose is contested, the legal
proceedings necessary to resolve the issue can be time-consuming. A judicial
foreclosure is subject to most of the delays and expenses of other litigation,
sometimes requiring up to several years to complete. For this reason, we do not
anticipate using judicial foreclosure to protect our rights due to the
incremental time and expense involved in these procedures.
When foreclosing under a mortgage instrument, the sale by the designated
official is often a public sale. The willingness of third parties to purchase
the property will depend to some extent on the status of the borrower's title,
existing redemption rights and the physical condition of the property. It is
common for the lender to purchase the security property at a public sale where
no third party is willing to purchase the property, for an amount equal to the
outstanding principal amount of the indebtedness and all accrued and unpaid
interest and foreclosure expenses. In this case, the debt owed to the mortgagee
will be extinguished. Thereafter, the mortgagee would assume the burdens of
ownership, including paying operating expenses and real estate taxes and making
repairs. The lender is then obligated as an owner until it can arrange a sale of
the property to a third party. If we foreclose on the security property, we
expect to obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal our
investment in the property. A lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings.
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Lenders also need to comply with procedure-related environmental rules and
regulations. An increasing number of states require that any environmental
hazards are eliminated before a property may be resold. A lender may be
responsible under federal or state law for the cost of cleaning up a mortgaged
property that is environmentally contaminated. As a result, a lender could
realize an overall loss on a mortgage loan even if the related mortgaged
property is sold at foreclosure or resold after it is acquired through
foreclosure for an amount equal to the full outstanding principal amount of the
mortgage loan, plus accrued interest.
In foreclosure proceedings, courts frequently apply equitable principles,
which are designed to relieve the borrower from the legal effects of his
immaterial defaults under the loan documents or the exercise of remedies that
would otherwise be unjust in light of the default. These equitable principles
and remedies may impede our efforts to foreclose.
Environmental Risks
Our security property may be subject to potential environmental risks. Of
particular concern may be those security properties which are, or have been, the
site of manufacturing, industrial or disposal activity. These environmental
risks may give rise to a diminution in value of the security property or
liability for clean-up costs or other remedial actions. This liability could
exceed the value of the real property or the principal balance of the related
mortgage loan. For this reason, we may choose not to foreclose on contaminated
property rather than risk incurring liability for remedial actions.
Under the laws of certain states, an owner's failure to perform remedial
actions required under environmental laws may give rise to a lien on mortgaged
property to ensure the reimbursement of remedial costs. In some states this lien
has priority over the lien of an existing mortgage against the real property.
Because the costs of remedial action could be substantial, the value of a
mortgaged property as collateral for a mortgage loan could be adversely affected
by the existence of an environmental condition giving rise to a lien.
The state of law is currently unclear as to whether and under what
circumstances clean-up costs, or the obligation to take remedial actions, can be
imposed on a secured lender. If a lender does become liable for clean up costs,
it may bring an action for contribution against the current owners or operators,
the owners or operators at the time of on-site disposal activity or any other
party who contributed to the environmental hazard, but these persons or entities
may be bankrupt or otherwise judgment-proof. Furthermore, an action against the
borrower may adversely affected by the limitations on recourse in the loan
documents.
For the foregoing reasons, we anticipate that Capsource will protect us
and you by requiring a Phase I Environmental Site Assessment of the security
properties prior to selecting a loan for us to invest in.
Second Mortgages; Rights of Senior Mortgages
We do not presently intend to acquire mortgages that are subordinate to
more than one other mortgage. Our rights as mortgagee or beneficiary under a
second mortgages will be subordinate to those of the mortgagee under the senior
mortgage, including the prior rights of the senior mortgagee to receive rents,
hazard insurance and condemnation proceeds and to cause the security property to
be sold upon default of the mortgagor. This can extinguish a second mortgage
unless we assert our subordinate interest in foreclosure litigation or satisfy
the defaulted senior loan. In many states a junior mortgagee may satisfy a
defaulted senior loan in full, or may cure the default, and bring the senior
loan current, in either even adding the amounts expended to the balance due on
the junior loan. Absent a provision in the senior mortgage, or unless required
by state law, a senior mortgagee need not give notice of default to a junior
mortgagee.
The form of mortgage used by many institutional lenders confers on the
mortgagee the right both to receive insurance proceeds and condemnation awards.
Thus, in the event improvements on the property are damaged or destroyed by fire
or other casualty, or in the event the property is taken by condemnation, the
first mortgagee will
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have the prior right to collect any insurance proceeds payable and any
condemnation award of damages in and to apply the same to the indebtedness
secured by the senior mortgage. Proceeds in excess of the amount of senior
indebtedness will, in most cases, be applied to the indebtedness secured by a
junior mortgage. The right to insurance proceeds and condemnation awards may be
limited, as in cases where the mortgagor is allowed to use the insurance
proceeds and condemnation award to repair the damage unless the security of the
mortgagee has been impaired.
The form of mortgage used by many institutional lenders also contains a
"future advance" clause, which provides that additional amounts advanced to or
on behalf of the mortgagor by the mortgagee are to be secured by the mortgage.
While this type of clause is valid under the laws of most states, the priority
of any advance made under the clause may depend on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee is obligated to advance the
additional amounts, the advance may be entitled to receive the same priority as
amounts initially made under the mortgage, notwithstanding that there may be
intervening junior mortgages and other liens and notwithstanding that the
mortgagee or beneficiary had actual knowledge of them. Where the mortgagee is
not obligated to advance the additional amounts and has actual knowledge of the
intervening junior mortgages and other liens, the advance may be subordinate to
these intervening junior mortgages and other liens. Priority of advances under a
"future advance" clause may also rest on state law giving priority to advances
made under the loan agreement up to a "credit limit" amount stated in the
recorded mortgage.
We can also protect ourselves by including provisions obligating the
mortgagor to do the following:
o pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which
appear prior to the mortgage,
o to provide and maintain fire insurance on the property,
o to maintain and repair the property,
o and not to commit or permit any waste on the property, and
o to appear in and defend any action or proceeding purporting to affect
the property or the rights of the mortgagee under the mortgage.
Upon a failure of the mortgagor to perform any of these obligations, we
would have the right under the mortgage to perform the obligation, with the
mortgagor agreeing to reimburse us for any sums we expend on behalf of the
mortgagor. All sums we expend become part of the indebtedness secured by the
mortgage.
Statutory Rights of Redemption
After a foreclosure sale pursuant to a mortgage, the borrower and
foreclosed junior lienors may have a statutory period in which to redeem the
property from the foreclosure sale. Redemption may be limited to where the
mortgagee receives payment of all or the entire principal balance of the loan,
accrued interest and expenses of foreclosure. The statutory right of redemption
diminishes the ability of the lender to sell the foreclosed property. The right
of redemption may defeat the title of any purchaser at a foreclosure sale or any
purchaser from the lender subsequent to a foreclosure sale. One remedy we may
have is to avoid a post-sale redemption by waiving our right to a deficiency
judgment. Consequently, as noted above, the practical effect of the redemption
right is often to force the lender to retain the property and pay the expenses
of ownership until the redemption period has run.
Anti-Deficiency Legislation
We may acquire interests in mortgage loans which limit our recourse to
foreclosure upon the security property, with no recourse against the borrower's
other assets. Even if recourse is available pursuant to the terms of
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the mortgage loan against the borrower's assets in addition to the mortgaged
property, we may confront statutory prohibitions which impose prohibitions
against or limitations on this recourse. For example, the right of the mortgagee
to obtain a deficiency judgment against the borrower may be precluded following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the security and the amount due to the lender. Other
statutes require the mortgagee to exhaust the security afforded under a mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. We may elect, or be deemed to have elected, between
exercising our remedies with respect to the security or the deficiency balance.
The practical effect of this election requirement is that lenders will usually
proceed first against the security rather than bringing personal action against
the borrower. Other statutory provisions limit any deficiency judgment against
the former borrower following a judicial sale to the excess of the outstanding
debt over the fair market value of the property at the time of the public sale.
In Nevada, we can pursue a deficiency judgment against the borrower or a
guarantor if the value of the property securing the loan is insufficient to pay
back the debt owed to us. In jurisdictions like California, however, if we
desire to seek a judgment in court against the borrower for the deficiency
balance, we may be required to seek judicial foreclosure and/or have other
security from the borrower. We would expect this to be a more prolonged
procedure, and is subject to most of the delays and expenses that affect other
lawsuits.
Bankruptcy Laws
We may subject to delays from statutory provisions that afford relief to
debtors from our ability to obtain payment of the loan, to realize upon
collateral and/or to enforce a deficiency judgment. Under the United States
Bankruptcy Code of 1978, which we refer to as the Bankruptcy Code, and analogous
state laws, foreclosure actions and deficiency judgment proceedings are
automatically suspended upon the filing of the bankruptcy petition, and often no
interest or principal payments are made during the course of the bankruptcy
proceeding. The delay and consequences in obtaining our remedy can be
significant. Also under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of the holder of a second mortgage may prevent the
senior lender from taking action to foreclose out the junior lien.
Under the Bankruptcy Code, the amount and terms of a mortgage on property
of the debtor may be modified under equitable principles or otherwise. Under the
terms of an approved bankruptcy plan, the court may reduce the outstanding
amount of the loan secured by the real property to the then current value of the
property in tandem with a corresponding partial reduction of the amount of the
lender's security interest. This leaves the lender having the status of a
general unsecured creditor for the differences between the property value and
the outstanding balance of the loan. Other modifications may include the
reduction in the amount of each monthly payment, which may result from a
reduction in the rate of interest and/or the alteration of the repayment
schedule, and/or change in the final maturity date. A court may approve a plan,
based on the particular facts of the reorganization case that effected the
curing of a mortgage loan default by paying arrearage over time. Also, under the
Bankruptcy Code, a bankruptcy court may permit a debtor to de-accelerate a
mortgage loan and to reinstate the loan even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state court
prior to the filing of the debtor's petition. This may be done even if the full
amount due under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage or deed of trust may be acceptable to
the bankruptcy court, often depending on the particular facts and circumstances
of the specific case.
In a bankruptcy or similar proceeding action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the lender. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
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Enforceability of Certain Provisions
Due-On-Sale Provisions
Federal law pre-empts state constitutional, statutory and case law that
prohibits the enforcement of due-on-sale clauses and permits lenders to enforce
these claims in accordance with their terms. As a result, due-on-sale clauses
are enforceable except in those states whose legislatures exercised their
limited authority to regulate the enforceability of these clauses. Due-on-sale
clauses will not be enforceable in bankruptcy proceedings.
Acceleration on Default
We may invest in mortgage loans which contain a "debt-acceleration"
clause, which permits us to accelerate the full debt upon a monetary or
nonmonetary default of the borrower. The courts of most states will enforce
clauses providing for acceleration in the event of a material payment default
after we give appropriate notices. The equity courts of any state, however, may
refuse to foreclose a mortgage when an acceleration of the indebtedness would be
inequitable or unjust. Furthermore, a borrower may avoid foreclosure and
reinstate an accelerated loan by paying only the defaulted amounts and the costs
and attorney's fees incurred by the lender in collecting these defaulted
payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of instalment
contracts. For example, a lender's practice of accepting late payments from the
borrower may be deemed a waiver of the forfeiture clause. State courts also may
impose equitable grace periods for payment of arrearage or otherwise permit
reinstatement of the contract following a default. If a borrower under an
instalment contract has significant equity in the property, a court may apply
equitable principles to reform or reinstate the contract or to permit the
borrower to share the proceeds upon a foreclosure sale of the property if the
sale price exceeds the debt.
Prepayment Provisions
In the absence of state statutory provisions prohibiting prepayment fees,
we expect that the courts will enforce claims requiring prepayment fees.
However, in some states prepayment fees may be unenforceable for residential
loans or after a mortgage loan has been outstanding for a number of years.
Applicable law may limit the amount of any prepayment fee to a specified
percentage of the original principal amount of the mortgage loan, to a specified
percentage of the outstanding principal balance of a mortgage loan, or to a
fixed number of month's interest on the prepaid amount. We may have to contend
with laws that render prepayment provisions on default or other involuntary
acceleration of a mortgage loan unenforceable against the mortgagor or trustor.
Some state statutory provisions may also treat prepayment fees as usurious if
they exceed statutory limits. We anticipate that our loans will not have
prepayment provisions.
Secondary Financing: Due-on-Encumbrance Provisions
Some mortgage loans may have no restrictions on secondary financing,
thereby permitting the borrower to use the mortgaged property as security for
one or more additional loans. We are more likely to invest in mortgage loans
that permit us, as first lender, to accelerate the maturity of a loan if the
borrower grants a second mortgage or in mortgage loans that require our consent
to any junior or substitute financing.
Where a borrower encumbers the mortgaged property with one or more junior
liens, the first lender is subjected to the following additional risks:
o the borrower may have difficulty servicing and repaying multiple loans;
o acts of the senior lender which prejudice the junior lender or impair
the junior lender's security may create a superior equity in favor of
the junior lender;
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o if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior
lenders can impair the security available to the senior lender and can
interfere with, delay and even prevent the taking of action by the
senior lender.
o the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
We expect that our loans will prohibit junior mortgages and intend to
monitor our loans closely so that we will know when a junior lien holder
acquires an interest in the security property.
Applicability of Usury Laws
State and federal usury laws limit the interest that lenders are entitled
to receive on a mortgage loan. In determining whether a given transaction is
usurious, courts may include charges in the form of points and fees as interest,
but may exclude payments in the form of reimbursement of foreclosure expenses or
other charges found to be distinct from interest. If, however, the amount
charged for the use of the money loaned is found to exceed a statutorily
established maximum rate, the form employed and the degree of overcharge are
both immaterial. Statutes differ in their provision as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
above the applicable limit or imposes a specified penalty. Under this statutory
scheme, the borrower may have the recorded mortgage or deed of trust cancelled
upon paying its debt with lawful interest, or the lender may foreclose, but only
for the debt plus lawful interest. Under a second, more severe type of statute,
a violation of the usury law results in the invalidation of the transaction,
thereby permitting the borrower to have the recorded mortgage or deed of trust
cancelled without any payment and prohibiting the lender from foreclosing.
Nevada law does not apply limitations on interest that may be charged on
the type of loans that we intend to invest in or purchase. In California, we
will only invest in loans that were made through real estate brokers licensed by
the California Department of Real Estate. Mortgage loans made or arranged by a
licensed real estate broker are exempt from the California usury law provisions
that restrict the maximum rate of interest on California loans. All underlying
mortgage loans on California property that are invested in or purchased by us
will be arranged for us by such a licensed California real estate broker.
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REPORTS TO MEMBERS
Pursuant to applicable state guidelines and the undertakings we have made
to the Securities and Exchange Commission in our filings, we will be required to
deliver certain reports to our members and make various filings with the
Commission, particularly in the early stages of our operations. These reports
and filings are described in this section.
Within 75 days after the close of our fiscal year, Capsource will prepare
and distribute to you all the information about us you need to prepare your
federal income tax return. The materials delivered to you annually will include:
o audited financial statements: balance sheet, statements of income or
loss, Members' equity, and cash flow;
o a statement as to any transactions between us and Capsource or its
affiliates, and of the fees, commissions, compensation and other
benefits paid by us or accrued to Capsource or its affiliates for the
fiscal year completed, showing the amount paid or accrued to each
recipient and the respective services performed; and
o a report identifying distributions from:
- cash flow from operations during that year,
- cash flow from operations of prior years that had been held as
reserves,
- proceeds from capital transactions, lease payments on net leases
with builders and sellers, and
- reserves from the gross proceeds of the offering originally obtained
from our members.
Copies of the financial statements and reports referred to above, other
than those delivered for purposes of your income tax return, shall be
distributed to you within 120 days after the close of each taxable year. We will
reimburse Capsource for the costs of any verification performed by our
accountants in the preparation of their reports, but only to the extent that the
reimbursement when added to the costs for administrative services rendered by
Capsource does not exceed the competitive rate for such services.
We will also provide you with the information required by Form 10-Q within
45 days of the end of each fiscal quarter.
Once the Securities and Exchange Commission declares effective the
registration statement of which this prospectus is a part, we will become
subject to the reporting requirements of the Securities Exchange Act. This means
that we will be required to file periodic reports, including quarterly reports
within 45 days after the end of each fiscal quarter and annual reports within 90
days of the end of each fiscal year. These reports contain financial information
and an analysis of our business for that quarter or year, including comparisons
with prior performance, as well as additional disclosure in the annual reports.
Our manager and the holders of over 5% of our units will also be required to
file reports reflecting their levels of unit ownership. Furthermore, for so long
as the proceeds of this offering are not fully committed or returned to
investors, Capsource shall prepare a special report containing a statement of
the amount of the mortgage loans in which we have invested, the material terms
of these loans, the identity of the borrower and the real property securing the
mortgage loans and the appraised values of that real property. This report may
be included in the quarterly report described below. We will send you copies of
the report within sixty (60) days after the end of each quarter. Capsource will
not prepare a special report during quarters when there are no mortgage loans or
origination, placement or evaluation fees.
If we decide to register our units under Section 12(g) of the Securities
Exchange Act of 1934, Capsource shall prepare, at our expense:
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o a quarterly report for each of the first three quarters in each fiscal
year containing unaudited financial statements, consisting of a balance
sheet, a statement of income or loss and statement of cash flow, and
o a statement of other pertinent information regarding DM LLC and its
activities during the period covered by the report.
We will distribute copies of these statements and information to you
within sixty (60) days after the close of the respective quarter.
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PLAN OF DISTRIBUTION
DM Financial Services, Inc., our lead dealer, is using this prospectus to
offer units to the public on our behalf. DM Financial Services, which is an NASD
member, is an affiliate of Capsource and wholly owned subsidiary of Vestin
Group, Inc., the Delaware corporation that owns Capsource. We will pay DM
Financial Services 1.0% of the gross proceeds of the sale of units as a fee for
selling the units and for managing these selected dealers. DM Financial Services
may engage non-affiliated securities brokerage firms that are members of the
NASD to act as selected dealers to sell units to the public; however, we will
pay this 1.0% fee to DM Financial Services even if it does not engage other
selected dealers.. We will pay the selected dealers sales commissions of up to
3.5% of the gross proceeds of their respective sales of units. We will reimburse
DM Financial Services and these select dealers for their accountable expenses up
to a maximum of 0.5% of the gross proceeds of this offering. In no event will
the maximum compensation to be paid to NASD members in connection with this
offering exceed 10% of the gross proceeds plus 0.5% for bona fide due diligence
expenses.
We will be reviewing subscription applications as they are received. We
will indicate our acceptance of your subscription agreement by countersigning it
and indicating the number of units we will issue. We will place all proceeds
from the sale of units in a segregated escrow account until at least 1,500,000
units have been sold. The escrow account will be with BankWest of Nevada, whose
address if 2700 West Sahara Avenue, Las Vegas, Nevada 89102-1700. We have
entered into escrow agreement with BankWest, which you can find as an exhibit to
our registration statement.
If we sell 1,500,000 units on or before December 31, 2000, the escrow
account will be closed and the proceeds, after deduction of Bank West's escrow
agent fees, together with amounts earned as interest on those proceeds, will be
delivered to us. If we have not sold 1,500,000 units on or before December 31,
2000, Bank West will promptly return to all investors the amounts they have paid
to buy units, without interest. We will then stop selling units and the
subscription agreements will be cancelled, regardless or whether or not
previously accepted.
If we sell 1,500,000 units on or before December 31, 2000, we will
continue to sell units to the public through DM Financial Services and selected
dealers. We will seek to sell a total of 100,000,000 units for $100,000,000,
which includes units to be issued under our distribution reinvestment plan. We
may sell units through December 31, 2001, or we may decide to end the offering.
In certain states where the offering will be made, we may not be allowed to
extend the offering beyond one year unless we have the permission of the
appropriate state agency.
If you want to purchase units, you should complete the subscription
agreement, which you can find at Exhibit B to this prospectus and which will be
provided by the person or the securities dealer that offered you the units. You
should return the subscription agreement and full payment for the units being
purchased to that dealer, who will tell you whether to make your payment to
"Bank West of Nevada, as Escrow Agent" or, to "DM Mortgage Investors, LLC". You
may obtain additional copies of the subscription agreement from DM Financial
Services, whose address is 2901 El Camino Avenue, Suite 207, Las Vegas, Nevada
89102, telephone number (702) 247-1332.
By submitting the signed Subscription Agreement with payment for the
purchase of units, you:
o agree to be bound by the operating agreement;
o grant a special and limited power of attorney to Capsource; and
o represent and warrant that you meet the relevant suitability standards
and are eligible to purchase units.
Neither DM Financial Services nor any other securities brokerage firm will
permit sales to discretionary accounts without prior specific written approval
of the owner of the account.
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LEGAL MATTERS
The legality of our issuance of the units offered under the Securities Act
will be reviewed for us by Goodman Phillips & Vineberg. For matters of Nevada
law, Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, Capsource's attorneys,
have reviewed the legality of our issuance of units. Our tax counsel is Wendel,
Rosen, Black & Dean, LLP, Oakland, California.
EXPERTS
Grant Thornton have audited our financial statements as of December 31,
1999, and for the period from December 14, 1999 (the date we began business)
through December 31, 1999. These financial statements are included in this
prospectus and in the registration statement of which this prospectus forms a
part. We include Grant Thornton's report here and elsewhere in this registration
statement. We rely on Grant Thornton as experts in auditing and on the Grant
Thornton report for the financial statements we include here.
Grant Thornton LLP has also audited the financial statements of Vestin
Group, Inc. as of December 31, 1999 and for the year then ended included in this
prospectus or in the Registration Statement. We include Grant Thornton's report
here and elsewhere in this Registration Statement. We rely on Grant Thornton as
experts in auditing and on the report of Grant Thornton for the financial
statements included here.
AVAILABLE INFORMATION
This prospectus does not contain all the information in the Registration
Statement on Form S-11 (No. 333-32800) and accompanying exhibits which we have
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933. Additionally, we anticipate that we will become subject
to the informational requirements of the Securities and Exchange Act of 1934.
When we are subject to the Securities Exchange Act of 1934, we will file reports
and other information with the Commission. Copies of the Registration Statement
on Form S-11 and other reports and information filed by us can be inspected and
copied at the public reference facilities (phone number (800) SEC-0330)
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of that material can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a World Wide Web site that contains reports, proxy
and information statements and other information for registrants that file
electronically with the Commission. The address of this site is
http://www.sec.gov.
As required by the Commission in connection with real estate related
offerings on Form S-11, we have also undertaken to provide you directly with the
financial statements required by Form 10-K for the first full year of operations
of the Company and to file with the Commission "sticker supplements" to this
prospectus during the distribution period. We will also consolidate all of these
supplements into a post-effective amendment filed at least once every three
months, with the information contained in such amendment provided simultaneously
to our members.
You will also be able to review our filing on Form 8-K that we will file
after the end of the distribution period. This report will contain additional
financial statements and information required under the Securities Exchange Act
for purchases made after the end of the distribution period involving the use of
10 percent or more, on a cumulative basis, of the net proceeds of the offering.
We will also provide the information contained in this report to the members at
least once each quarter after the distribution period of the offering has ended.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
DM MORTGAGE INVESTORS, LLC
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
BALANCE SHEETS AT DECEMBER 31, 1999 AND MARCH 31, 2000 F-2
STATEMENTS OF MEMBERS' EQUITY FOR THE PERIOD FROM
DECEMBER 14, 1999 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1999 AND MARCH 31, 2000 F-3
NOTES TO THE FINANCIAL STATEMENTS F-4
SUNDERLAND CORPORATION
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-8
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1999
AND MARCH 31, 20000 F-9
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR
ENDED DECEMBER 31, 1999 AND THE THREE MONTHS
ENDED MARCH 31, 2000 F-10
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999 F-11
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 1999 AND THE THREE
MONTHS ENDED MARCH 31, 2000 F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-14
<PAGE>
Report of Independent Certified Public Accountants
Member
DM Mortgage Investors, LLC
We have audited the accompanying balance sheet of DM Mortgage Investors, LLC (A
Development Stage Company), as of December 31, 1999, and the related statement
of members' equity for the period from December 14, 1999 (date of inception)
through December 31, 1999. These financial statements are the responsibility of
the Company's management and Board of Directors. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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 DM Mortgage Investors, LLC, as
of December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/S/ GRANT THORNTON LLP
Reno, Nevada
January 10, 2000
F-1
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------- -----------
<S> <C> <C>
(Unaudited)
Deferred offering costs $ 115,100 $ 273,734
------------- -----------
Total assets $ 115,100 $ 273,734
============= ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities $ - $ -
Members' equity - actual 115,100 and 273,734
units at $1 per unit at December 31, 1999 and
March 31, 2000, respectively. 115,100 273,734
------------- -----------
Total liabilities and members' equity $ 115,100 $ 273,734
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
STATEMENTS OF MEMBERS' EQUITY
Inception, December 14, 1999 $ -
Issuance of units 115,100
---------
Members' equity at December 31, 1999 115,100
Issuance of units 158,634
---------
Members' equity at March 31, 2000 (unaudited) $ 273,734
=========
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 (data relating to March 31, 2000 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
DM Mortgage Investors, LLC, a Nevada Limited Liability Company, (the
Company) is a development stage company primarily engaged in business as a
mortgage lender to make and purchase first, second, wraparound,
participating and construction mortgage investments secured by deeds of
trust and mortgages on real estate. The Company was organized on December
14, 1999 (date of formation) and will continue until December 31, 2019
unless dissolved prior or extended thereto under the provisions of the
operating agreement.
The Manager of the Company is Capsource, Inc., dba Del Mar Mortgage, a
Nevada corporation engaged in the business of mortgage services,
specifically the origination of mortgages, principally in the greater Las
Vegas area. Capsource, Inc. is a wholly-owned subsidiary of Sunderland
Corporation, a Delaware Corporation, whose common stock is publicly held
and is traded on the NASDAQ under the symbol "DLMA".
For the period from December 14, 1999 (date of inception) through March
31, 2000, the only transactions were non-cash deferred offering costs
which were paid by the Manager on behalf of the Company.
2. Interim Financial Statements
The financial statements for the three months ended March 31, 2000 are
unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations
for such period have been included. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
3. Management Estimates
The preparation of financial statements in conformity 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
4. Income Taxes
Income tax effects resulting from the Company's operations pass through to
the members individually and, accordingly, no provision for income taxes
is included in the financial statements.
F-4
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 (data relating to March 31, 2000 is unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Revenue Recognition
Interest is recognized as revenue when earned according to the terms of
the loan.
6. Debt Securities
The Company will classify its debt securities as held-to-maturity, as the
Company has the ability and the intent to hold the securities until
maturity. These securities will be recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts. A decline in
the market value of any held-to-maturity security below cost that is
deemed to be other than temporary will result in a reduction in carrying
amount to fair value. The impairment would be charged to earnings and a
new cost basis for the security would be established. Premiums and
discounts will be amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
7. Loans Secured by Trust Deeds
Loans secured by trust deeds will be originated by Capsource, Inc. and
will be recorded at cost. Interest income on loans will be accrued by the
simple interest method. The Company will not recognize interest income on
loans once they are determined to be impaired until the interest is
collected in cash. A loan is impaired when, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement and a
specific reserve has been recorded. Cash receipts will be allocated to
interest income, except when such payments are specifically designated as
principal reduction or when management does not believe the Company's
investment in the loan is fully recoverable.
NOTE B - MEMBERS' EQUITY
1. Membership Units
The Manager shall contribute to the capital of the Company an amount in
cash equal to 0.5% of the aggregate of the capital accounts of the other
members. The members shall contribute to the capital of the Company an
amount equal to $1.00 for each unit subscribed for by each member, with a
minimum subscription of 2,000 units per member. The total Capital
contributions of the members will not exceed $100,000,000. The period of
public offering will be for a period of two years following the effective
date of the prospectus during which time the Company must receive paid
subscriptions for at least 1,500,000 units by December 31, 2000. In the
event the minimum number of units are not sold by December 31, 2000, the
subscription amounts will be returned in full to the subscribers.
F-5
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 (data relating to March 31, 2000 is unaudited)
NOTE B - MEMBERS' EQUITY - Continued
1. Membership Units - Continued
Notwithstanding, (i) Net Losses, if any, allocable to the period prior to
the admission of any additional members pursuant to the Operating Agreement
(see Note B2) hereof shall be allocated 99% to the Manager and 1% to the
Initial Member, and net income during the same period, if any, shall be
allocated to the Manager, and (ii) Profits or Losses allocable to the
period commencing with the admission of any additional such members and all
subsequent periods shall be allocated pursuant to the operating agreement.
2. Allocations and Distributions
In accordance with the operating agreement, the Company's profits, gains
and losses are to be credited to and charged against each member in
proportion to their respective capital accounts as of the close of business
on the last day of each calendar month.
Distributions of net income are made monthly to the members in proportion
to their weighted average capital accounts during the preceding calendar
month. The Company will make monthly net income distributions to those
members who elect to receive such distributions. Those members who elect
not to receive cash distributions shall have their distributions reinvested
in additional membership units.
3. Promotional Interest of Manager
Capsource, Inc. will contribute capital to the Company in the amount of
0.5% of the members' aggregate capital accounts, and together with its
promotional interest, Capsource, Inc. will have an interest equal to 1% of
the members' capital accounts. This promotional interest of Capsource,
Inc. of up to 0.5% will be recorded as an expense of the Company and
credited as a contribution to Capsource's capital account as additional
compensation. Capsource, Inc. may only receive distributions on its
interest, including the portion for which it paid consideration, after all
members receive a return of 100% of their capital contributions
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES
Broker-dealer affiliates of the Manager are to receive as compensation for
services in the offering up to 1.5% of gross proceeds of this offering, of
which a maximum of 0.5% of gross proceeds is for reimbursement of expenses.
Capsource, Inc. will receive fees as compensation for loan evaluation and
processing fees. These fees shall be reasonable and shall be payable only
for services actually rendered.
F-6
<PAGE>
DM Mortgage Investors, LLC
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 (data relating to March 31, 2000 is unaudited)
NOTE C - TRANSACTIONS WITH THE MANAGER AND ITS AFFILIATES - Continued
Capsource, Inc. will originate all loans the Company invests in. Capsource,
Inc. has the ability to act as broker for which it will receive a
commission of approximately 2.00% to 6.00% of the principal amount of each
mortgage investment made during the year.
Capsource, Inc. is entitled to receive from the Company a management fee
for services rendered as Manager of the Company. These fees will initially
be up to 0.75% of the original capital contributions committed to mortgage
loans. Beginning with the third year it will be 0.75% of the fair market
value of the Company's assets, less any indebtedness of the Company. For
funds not invested in mortgages, the percentage paid as a management fee is
0.5%.
Capsource, Inc. or its affiliates will be reimbursed for the costs of goods
and materials used for or by the Company and obtained from entities
unaffiliated with the Manager or its affiliates. The Company shall also pay
or reimburse the Manager or its affiliates for the cost of administrative
services necessary to the prudent operation of the Company.
Capsource, Inc. will receive fees for reselling properties foreclosed upon.
These fees are to be not greater than 3.00% of the proceeds where
substantial service has been performed by the Manager.
All of the Company's loans are to be serviced by Capsource, Inc., in
consideration for which Capsource, Inc. will receive up to 0.25% of the
total unpaid principal balance of each mortgage investment serviced.
Capsource, Inc. has the ability to act as an escrow agent for mortgage
investments made by the Company and may also provide certain document
preparation, notarial and credit investigation services, for which services
the manager will be entitled to receive such fees as are permitted by law
and as are generally prevailing in the geographical area where the property
securing the mortgage investment is located.
In addition to the above, Capsource, Inc. may be entitled to receive
reconveyance, extension, assumption, prepayment and late fees and
acquisition service fees, on a case by case basis.
Capsource, Inc. has the right to purchase from the Company the interest
receivable or principal on delinquent loans held by the Company. The
Company shall not sell a foreclosed property to the Manager or to another
program in which the Manager or its affiliates has an interest.
F-7
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
Sunderland Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of Sunderland
Corporation and Subsidiaries as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides 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 Sunderland Corporation and
Subsidiaries as of December 31, 1999, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
/S/ GRANT THORNTON LLP
Reno, Nevada
May 18, 2000
F-8
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---------------- ----------------
<S> <C> <C>
(Restated) (Unaudited)
Cash $ 1,109,454 666,831
Accounts receivable, net 1,157,047 1,505,838
Due from affiliate - 168,952
Notes receivable 323,000 292,097
Investments in marketable securities 114,949 207,856
Investment in real estate held for sale 1,293,194 1,306,901
Investments in mortgage loans on real estate 5,516,244 4,798,552
Other investments - 42,530
Deferred tax asset 27,542 27,542
Other assets 134,089 213,638
Property and equipment, net 107,988 140,883
---------------- ----------------
Total assets $ 9,783,507 $9,371,620
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 250,765 95,636
Accrued expenses 205,477 92,633
Lines of credit 1,985,564 1,076,241
Income taxes payable 736,875 898,921
Due to related party 269,641 54,675
Note payable 1,290,000 1,284,339
Obligations under capital leases 24,127 -
---------------- ----------------
Total liabilities 4,762,449 3,502,445
---------------- ----------------
Commitments and contingencies - -
---------------- ----------------
Stockholders' equity
Preferred stock, $.0001 par value; 20 million
shares authorized; no shares issued - -
Common stock, $.0001 par value; 100 million
shares authorized; 6,989,270 shares issued
and outstanding 699 699
Additional paid-in capital 1,739,427 1,739,427
Retained earnings 3,280,932 4,129,049
---------------- ----------------
Total stockholders' equity 5,021,058 5,869,175
---------------- ----------------
Total liabilities and stockholders' equity $ 9,783,507 $9,371,620
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-9
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
----------------- -----------------
(Restated) (Unaudited)
<S> <C> <C>
Revenues
Loan origination and related fees $11,237,208 $ 2,558,454
Revenue from accounting services 1,313,885 539,116
Interest income 612,391 233,418
Other income 58,825 13,781
----------------- -----------------
Total revenues 13,222,309 3,344,769
----------------- -----------------
Expenses
Sales and marketing expenses 1,749,948 570,766
General and administrative expenses 7,077,536 1,476,663
Interest expenses 148,272 27,143
----------------- -----------------
Total expenses 8,975,756 2,074,572
----------------- -----------------
Income before provision for income taxes 4,246,553 1,270,197
Provision for income taxes 959,333 362,046
----------------- -----------------
NET INCOME $ 3,287,220 $ 908,151
================= =================
Pro forma information (unaudited) (Note A):
Historical income before income taxes $ 4,246,553 $ 1,270,197
Pro forma income taxes 1,443,828 431,867
----------------- -----------------
Pro forma net income $ 2,802,725 $ 838,330
================= =================
Pro forma net income per share $ 0.40 $ 0.12
================= =================
Weighted average shares outstanding 6,982,914 6,989,270
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-10
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Receivable
------------------------- ------------------------- Paid-in From
Shares Amount Shares Amount Capital Stockholder
------------ ----------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999, restated - $ - 5,719,270 $ 572 $ 3,135,064 $ (535,646)
Cancellation of $0.0001 common stock
in connection with recapitalization - - (100,000) (10) - -
Issuance of $0.0001 common stock in
connection with recapitalization - - 1,350,000 135 291 -
Distribution of assets, net of liabilities,
to Del Mar Mortgage, Inc. - - - - (1,152,046) -
Distribution of assets, net of liabilities,
to Del Mar Holdings, Inc. - - - - (643,260) -
Acquisition of Capsource - - 20,000 2 12,358 -
Contribution by stockholder through
relief of note payable - - - - 350,000 -
Payments received on receivable
from stockholder - - - - - 535,646
Distribution to stockholders of
L.L. Bradford and Company - - - - - -
Cash contributions 37,020 -
Net income - - - - - -
------------ ----------- ----------- ----------- ------------- --------------
Balance at December 31, 1999, restated - $ - 6,989,270 $ 699 $ 1,739,427 $ -
============ =========== =========== =========== ============= ==============
<CAPTION>
Retained
Earnings Total
------------- ------------
<S> <C> <C>
Balance at January 1, 1999, restated $ 344,347 $ 2,944,337
Cancellation of $0.0001 common stock
in connection with recapitalization - (10)
Issuance of $0.0001 common stock in
connection with recapitalization - 426
Distribution of assets, net of liabilities,
to Del Mar Mortgage, Inc. - (1,152,046)
Distribution of assets, net of liabilities,
to Del Mar Holdings, Inc. - (643,260)
Acquisition of Capsource - 12,360
Contribution by stockholder through
relief of note payable - 350,000
Payments received on receivable
from stockholder - 535,646
Distribution to stockholders of
L.L. Bradford and Company (350,635) (350,635)
Cash contributions - 37,020
Net income 3,287,220 3,287,220
------------- ------------
Balance at December 31, 1999, restated $ 3,280,932 $ 5,021,058
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
----------------- -----------------
<S> <C> <C>
(Restated) (Unaudited)
Cash flow from operating activities:
Net income $ 3,287,220 $ 908,151
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 51,470 8,706
Loss on disposal of assets 466 -
Changes in operating assets and liabilities:
Accounts receivable (537,469) (348,791)
Deferred tax asset (27,542) -
Other assets (16,078) (79,549)
Due from related party (292,033) (168,952)
Accounts payable and accrued expenses 746,900 (267,973)
Due to related party 332,270 (214,966)
Income taxes payable 736,875 162,046
----------------- -----------------
Net cash provided by (used in) operating activities 4,282,079 (1,328)
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (52,241) (14,838)
Purchase of investment in note receivable (323,000) -
Proceeds from notes receivable - 30,903
Purchase of investment in marketable securities (114,949) -
Proceeds from sale of investments, net - 568,548
Purchase of real estate held for sale (3,194) -
Purchase of investments in mortgage loans (3,055,520) -
----------------- -----------------
Net cash provided by (used in) investing activities (3,548,904) 584,613
----------------- -----------------
Cash flows from financing activities:
Advances (payments) on line of credit, net 1,978,588 (960,213)
Payments on short-term note (100,000) -
Distribution to stockholders (2,482,940) (60,034)
Payments received from note receivable from stockholder 535,646 -
Deferred offering costs (115,100) -
Proceeds from stockholders 62,020 -
Capital lease payments (4,742) (5,661)
----------------- -----------------
Net cash used in financing activities (126,528) (1,025,908)
----------------- -----------------
NET INCREASE (DECREASE) IN CASH 606,647 (442,623)
Cash at beginning of year 502,807 1,109,454
----------------- -----------------
Cash at end of year $ 1,109,454 $ 666,831
================= =================
</TABLE>
F-12
<PAGE>
Sunderland Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
----------------- -----------------
<S> <C> <C>
(Restated) (Unaudited)
Supplemental cash flow information:
Cash paid for Federal income taxes $ 250,000 $ 200,000
================= =================
Cash paid for interest $ 134,566 $ 27,143
================= =================
Noncash investing and financing activities:
Investment in real estate held for sale $ 1,290,000 $ -
================= =================
Contribution by stockholder through relief of note payable $ 350,000 $ -
================= =================
Distribution of liabilities, net of assets assumed to
stockholders of Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. $ 336,999 $ -
================= =================
Purchase of property and equipment on line of credit $ 6,976 $ 26,763
================= =================
Purchase of property and equipment on capital lease $ 9,435 $ -
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-13
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sunderland Corporation ("Sunderland" or the "Company"), was incorporated
in the state of Delaware on June 2, 1998. The Company conducts its
operations primarily through Capsource, Inc. (Capsource), its wholly owned
subsidiary. Capsource operates as a mortgage company licensed in the state
of Nevada. Capsource is engaged in the origination, arrangement and
secondary purchase and sale of loans secured by real property. The
Company's primary operations consist of arranging for investor funding of
mortgage loans for the construction of commercial and residential projects
in southern Nevada. The Company also services such loans.
On April 27, 1999, Sunderland, a non-operating public company with nominal
net assets, acquired certain assets and assumed certain liabilities
representing the operations of Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. (the "Del Mar Entities") in exchange for 4,891,270 shares
of Sunderland common stock (post 5-for-3 stock split). The combination of
the Del Mar Entities has been accounted for in a manner similar to a
pooling of interest, as the companies were under common control.
Sunderland concurrently acquired 100% of the outstanding common stock of
Capsource in exchange for 20,000 shares of Sunderland common stock.
Under generally accepted accounting principles, the acquisition of the Del
Mar Entities is considered to be a capital transaction in substance,
rather than a business combination. That is, the acquisition is equivalent
to the issuance of stock by the Del Mar Entities for the net monetary
assets of Sunderland, accompanied by a recapitalization, and is accounted
for as a change in capital structure. Accordingly, the accounting for the
acquisition is identical to that resulting from a reverse acquisition,
except that no goodwill is recorded. Under reverse takeover accounting,
the post reverse-acquisition comparative historical financial statements
of the "legal acquirer" (Sunderland), are those of the "legal acquiree"
(Del Mar Entities) (i.e. the accounting acquirer).
Accordingly, the consolidated financial statements of Sunderland as of
December 31, 1999, and for the year then ended, are the combined
historical financial statements of Del Mar Mortgage, Inc. and Del Mar
Holdings, Inc. The assets not acquired, net of the liabilities not
assumed, have been accounted for as distributions to Del Mar Mortgage,
Inc. and Del Mar Holdings, Inc.'s stockholders.
The business combination with Capsource has been accounted for as a
purchase business combination. The cost of Capsource is based upon the
fair value of the 20,000 common shares issued to the Capsource
shareholder, which was $12,360. The acquisition resulted in the
recognition of $1,390 of goodwill, which was expensed for the year ended
December 31, 1999.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-14
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Organization - Continued
On March 31, 2000, the Company consummated a merger with L.L. Bradford &
Company (LLB) (see Note T). LLB operates as a certified public accounting
and consulting practice in the State of Nevada offering services in the
area of attestation, tax planning and preparation, general accounting
services, business valuation, mergers and acquisition, management advisory,
financial consulting, initial public and private offering consulting, and
internet start-up consulting.
As disclosed in Note R, the Company acquired all of the outstanding common
stock of DM Financial Services, Inc. and DM Mortgage Advisors, Inc. These
acquisitions have been accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements of the
Company have been restated to include the accounts and operations for all
periods presented.
The Company operates in one business segment. As a result of the mergers
discussed above, the Company will determine the applicability of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information,
which requires reporting business segments and information, including how
the segments are determined, products and services provided, and changes
in the measurement of segment accounts from period to period.
Interim Financial Statements
The financial statements for the three months ended March 31, 2000 are
unaudited; however, in the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair
presentation of the Company's financial position and results of operations
for such period have been included. The results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and it's wholly-owned subsidiaries. All significant inter-company
transactions and balances have been eliminated in consolidation.
Concentrations
Substantially all of the Company's operations are derived from Southern
Nevada. Consequently, the Company's results of operations and financial
condition are affected by general trends in the Southern Nevada economy and
its commercial and residential real estate market.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-15
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Concentrations - Continued
The Company's mortgage loans will require the borrower to make a balloon
payment of the principal at maturity. To the extent that a borrower has an
obligation to pay a mortgage loan in a lump sum payment, its ability to
satisfy this obligation may be dependent upon its ability to refinance or
raise a substantial amount of cash. An increase in interest rates over the
mortgage rate applicable at origination of the loan may have an adverse
effect on the borrower's ability to refinance.
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of cash in bank. The Company maintains its cash in
bank deposit accounts, which at times may exceed Federally insured limits.
Use of Estimates
The preparation of financial statements in conformity 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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue primarily from loan origination fees, loan
servicing fees, extension fees and accounting services. Loan origination
fees are recorded as revenue at the close of escrow and reduced by direct
loan origination costs. Loan servicing fees are recorded as revenue when
such services are rendered. Servicing fees represent the interest spread
between what is paid to the investor and what the borrower pays for the
use of the money. This can vary from loan to loan. Extension fees are
recorded as revenue at the extension grant date. Accounting services are
recognized when services are rendered.
Loan Origination Fees
Loan origination fees related to investments in mortgage loans on real
estate are amortized principally by the effective interest method over the
term of the related obligation.
Investments in Marketable Securities
Investments in equity securities consist of common stock. The securities
are stated at market value as determined by the most recently traded price
of each security at the balance sheet date. All marketable securities are
defined as available-for-sale securities under the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-16
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Investments in Marketable Securities - Continued
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are
classified as trading securities and unrealized holding gains and losses
are included in earnings. Debt securities for which the Company does not
have the intent or ability to hold to maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are
carried at fair value, with the unrealized gains and losses, net of tax,
reported in other comprehensive income. The net unrealized gains and
losses were immaterial for the year ended December 31, 1999. The cost of
investments sold is determined on the specific identification or the
first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
principally on the straight-line method over the estimated useful lives of
the assets of 5 and 7 years. The cost of repairs and maintenance is
charged to expense as incurred.
Comprehensive Income
The Company has no material components of other comprehensive income, and
accordingly, comprehensive income is the same as net income for the
period.
Advertising Costs
Advertising costs are expensed as incurred and amounted to $365,836 for
the year ended December 31, 1999.
Income Taxes
The liability method is used to account for income taxes. Under this
method, deferred income tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
scheduled to be in effect when the differences are expected to reverse.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-17
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- Continued
Pro Forma Financial Information (Unaudited)
Prior to the recapitalization of the Company (April 27, 1999) and the
acquisition of L.L. Bradford & Company, the earnings of Del Mar Mortgage,
Inc. and L.L. Bradford & Company, which are included in the Consolidated
Statement of Income, were taxed to the shareholders of Del Mar Mortgage,
Inc. and L.L. Bradford & Company The pro forma information reflects a
provision for income taxes as if the Company had been a C corporation for
the entire year ended December 31, 1999 using an assumed effective tax
rate of 34%. Pro forma net income per share has been computed by dividing
pro forma net income by the weighted average shares outstanding, assuming
that the shares exchanged for the purchase of L.L. Bradford & Company were
outstanding for the entire year.
Impairment of Long-Lived Assets to be Disposed
The Company continually monitors events and changes in circumstances that
could indicate carrying amounts of long-lived assets may not be
recoverable. When such events or changes in circumstances are present, the
Company assesses the recoverability of long-lived assets by determining
whether the carrying value of such assets will be recovered through
undiscounted expected future cash flows. If the total of the future cash
flows is less than the carrying amount of those assets, the Company
recognizes an impairment loss based on the excess of the carrying amount
over the fair value of the assets. Assets to be disposed of are reported
at the lower of the carrying amount or the fair value less costs to sell.
Earnings Per Share
Primary and fully-diluted earnings per share is based on the
weighted-average number of outstanding common shares during the applicable
period.
NOTE B - ACCOUNTS RECEIVABLE
The Company services loans which have been arranged for the investor
parties through a servicing agreement. The servicing agreement stipulates
that all extension fees charged on behalf of the investors shall be
retained by the Company as part of the loan servicing fees. Accounts
receivable represent extension and loan origination fees earned but not
yet received along with receivables for accounting services net of
$117,420 allowance for doubtful accounts at December 31, 1999 and March
31, 2000.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-18
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE C - INVESTMENT IN REAL ESTATE HELD FOR SALE
The Company has an investment in real estate held for sale totaling
$1,293,194 at December 31, 1999. The investment in real estate held for
sale is recorded at the lower of carrying amount or fair value less cost
to sell.
NOTE D - INVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
The Company invests in mortgage loans. The mortgage loans are secured by
first trust deeds on real estate. These loans have maturities of one year
or less with interest rates ranging from 12% to 14% payable monthly, with
principal due at maturity. Management believes the underlying value of the
assets securing the mortgage loans was sufficient at December 31, 1999 to
realize their carrying value. Accordingly, no allowance for loan losses
has been established.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, March 31,
1999 2000
------------------ -------------
Furniture and equipment $116,267 $274,292
Computers and equipment held
under capital leases 26,446 26,446
------------------ -------------
142,713 300,738
Less: Accumulated depreciation (34,725) (159,855)
------------------ -------------
Total property and equipment $107,988 $140,883
================== =============
NOTE F - NOTE PAYABLE
In 1999, the Company foreclosed on real estate which was subject to an
existing lien (the "note"). The term of the note is for one year and
includes interest at 12.75% per annum. The note is secured by certain real
estate. The note was originally due on October 8, 1999 and was extended to
April 8, 2000. The note requires monthly interest payments with the
balance of unpaid principal and interest due on demand.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-19
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE G - LINES OF CREDIT
The Company maintains a $3,000,000 floating line of credit with a
financial institution. The outstanding balance as of December 31, 1999
totaled $1,980,000. The line of credit, which is guaranteed by the
Company's majority shareholder, is payable in monthly installments of
interest only at the bank's prime lending rate plus 1.5% (10% at December
31, 1999) and expires on December 15, 2000. The line of credit is secured
by 1,450,000 shares of the Company's common stock held by the majority
stockholder (23.5% of the outstanding stock at December 31, 1999) and the
deeds of trust on the property being advanced against. The line of credit
agreement limits payments of dividends on the Company's stock and
transfers between related parties without prior written consent from
financial institution. The line of credit contains certain covenants,
which the Company has complied with as of December 31, 1999.
The Company also maintains an equipment line of credit with Wells Fargo
Bank. $50,000 is available on this line of credit for the acquisition of
equipment through February 26, 2000. Principal and interest is payable on
each advance over a payment schedule of not less than 36 months or more
than 96 months, as agreed by the Company and the bank. At the time of each
advance, the Company can either elect a fixed or a variable interest rate.
The fixed interest rate is 2.875% above the treasury rate in effect as of
the close of the business on the Thursday of the week preceding
disbursement of the advance, rounded to the nearest .05%. The variable
interest rate is at .5% above the prime rate. The outstanding balance as
of December 31, 1999 totaled $5,564 and is at the fixed interest rate
(10.65% at December 31, 1999). The line of credit is secured by the
Company's equipment purchased or acquired in whole or in part with the
advance.
The following are the maturities under the lines of credit as of December
31, 1999:
2000 $1,981,994
2001 2,464
2002 1,106
-------------
$1,985,563
=============
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-20
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE H - CREDIT AGREEMENT
The Company has entered into a credit agreement with a financial
institution that maintains non-interest bearing trust funds held on behalf
of the investors and the Company (Note J). The credit agreement allows the
Company to borrow funds up to the amount held in the trust accounts at a
rate of 1% and invest those funds in commercial paper (securities). The
Company has provided the financial institution with a security interest in
the securities and, at all times, the securities remain in the financial
institution's custody and control. The balance drawn down upon the credit
agreement was $-0- at December 31, 1999 and March 31, 2000.
NOTE I - CAPITAL LEASES
The Company is the lessee of computers and equipment under capital leases
expiring in various years through 2004. The assets and liabilities under
capital leases are recorded at the lower of the present value of the
minimum lease payments or the fair value of the assets. The assets are
depreciated over the lower of their related lease terms or their estimated
productive lives. Depreciation of capital leases is included in
depreciation expense for 1999. Accumulated depreciation on capital leases
was $6,596 at December 31, 1999.
Minimum future lease payments under capital leases as of December 31, 1999
for each of the next five years and in the aggregate are:
Year ending December 31,
2000 $ 8,458
2001 8,458
2002 8,458
2003 4,629
2004 423
-----------
30,426
Less: Amounts representing interest (6,299)
-----------
$24,127
===========
Interest rates on capital leases vary from 6.7% to 15.5%.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-21
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE J - TRUST ACCOUNTS
The Company manages on behalf of Del Mar Mortgage, Inc., a company wholly
owned by the Company's majority stockholder, certain trust assets
including cash and receivables on behalf of the investors. The cash is
held at a financial institution and the Company records and reconciles the
receivables from borrowers. At December 31, 1999, the cash held in trust
was $667,345 and the trust receivables were $1,215,466. The related trust
liability was $1,882,811 at December 31, 1999. The trust assets and
liabilities are not recorded on the balance sheet of the Company at
December 31, 1999.
NOTE K - LOANS SERVICED FOR OTHERS
The Company services loans for others, which are not shown on the balance
sheet. The face amount of these loans at December 31, 1999 approximated
$227,000,000. Loans serviced for others include construction loans that
are originated by the Company.
NOTE L - RELATED PARTY TRANSACTIONS
On April 27, 1999, the Company entered into a non-renewable transition
agreement (the "Agreement") with Del Mar Mortgage, Inc., a company wholly
owned by the Company's majority stockholder. The Agreement requires the
Company to pay Del Mar Mortgage, Inc. 25% of loan origination fees earned
from April 27, 1999 through October 26, 1999 and 12.5% of such fees from
October 27, 1999 through April 26, 2000. The Agreement also requires the
Company to remit to Del Mar Mortgage, Inc. all future loan servicing and
extension fees recognized on loans originated by the Company prior to
April 27, 1999. The Agreement terminates on April 26, 2000. The Company
incurred $2,597,641 in fees related to the Agreement for the year ended
December 31, 1999, which have been recorded as general and administrative
expenses in the consolidated financial statements.
The Company has recorded accounts receivable from Del Mar Mortgage, Inc.
of $443,390 as of December 31, 1999. The Company also has a balance due to
Del Mar Mortgage, Inc. of $244,641. These balances bear no interest and
are due on demand.
As of December 31, 1999, the Company had $25,000 due to stockholders,
bearing no interest and due on demand.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-22
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE M - INCOME TAXES
The components of income tax expense (benefit) are as follows:
Current $986,875
Deferred (27,542)
-------------
$959,333
=============
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The significant components of the Company's deferred taxes as of
December 31, 1999 are as follows:
Deferred tax assets:
Accrued compensation $27,542
Less: Valuation allowance -
-----------
Net deferred taxes $27,542
===========
The reconciliation of the statutory federal rate to the Company's
effective income tax rate is as follows:
Statutory tax provision $1,332,880
Earnings taxed to shareholder (381,867)
Non-deductible expenses 8,320
---------------
$ 959,333
===============
NOTE N - EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) Savings Plan which covers substantially all
full-time employees. Participants may make tax-deferred contributions of
up to 15% of annual compensation (subject to other limitations specified
by the Internal Revenue Code). The Company matches employee contributions
dollar for dollar up to 5% of compensation. The Company contributed
$37,537 to the plan for the year ended December 31, 1999.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-23
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE O - EMPLOYMENT AGREEMENTS
The Company has employment agreements and arrangements with certain
officers and key employees. The agreements generally continue for a period
of three years or until terminated by the executive or the Company with
cause. The agreements and arrangements provide the employees with a base
salary and benefits. The agreements contain covenants against competition
with the Company, which extend for a period of time after termination.
NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, notes receivable,
mortgage loans, accounts payable and notes payable approximate fair value
because of the short-term maturity of these instruments.
NOTE Q - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company operates from leased office facilities under a noncancellable
operating lease. The lease requires the Company to pay certain escalation
clauses for real estate taxes, operating expense, usage and common area
charges. The Company also leases equipment under a noncancellable
operating lease. Rent expense for leased office facilities and equipment
charged to operations for the year ended December 31, 1999 was $254,278.
Future minimum rental payments required under the operating leases as of
December 31, 1999, are as follows:
2000 $180,418
2001 190,193
2002 193,728
2003 197,128
2004 66,363
------------
$827,830
============
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-24
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE R - ACQUISITIONS
On December 23, 1999, the Company consummated an agreement to acquire all
the outstanding capital stock of DM Financial Services, Inc., a newly
formed Las Vegas, Nevada based securities broker-dealer for 10,300 shares
of the Company's common stock and DM Mortgage Advisors, Inc., a Phoenix,
Arizona based mortgage funding company for 17,700 shares of the Company's
common stock. The acquisition of DM Financial Services, Inc. and DM
Mortgage Advisors, Inc. is accounted for as a pooling of interest, and
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations for all periods presented.
NOTE S - LITIGATION
The Company is a defendant in various lawsuits incurred in the normal
course of business. In the opinion of management, after consulting with
legal counsel, the liabilities, if any, resulting from these matters will
not have a material effect on the consolidated financial statements of the
Company.
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-25
<PAGE>
Sunderland Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, restated (data relating to March 31, 2000 is unaudited)
NOTE T - POOLING OF INTEREST TRANSACTION
On March 31, 2000, the Company consummated a merger with L.L. Bradford &
Company (LLB), accounted for as a pooling of interest, and accordingly,
the accompanying consolidated financial statements have been restated to
include the accounts and operations of LLB for all periods presented.
Under the terms of the merger, the Company issued 800,000 shares of its
common stock for all of LLB's outstanding common stock.
The consolidated balance sheet at December 31, 1999 reflects the combining
of the Company prior to consummation of the merger and LLB as of this
date. Combined and separate results of operations for the year ended
December 31, 1999 of the Company and LLB for the restated period is as
follows:
<TABLE>
<CAPTION>
Sunderland
Corporation
and
Subsidiaries LLB Eliminations Combined
---------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Year ended December 31,
1999 revenues $11,868,918 $1,503,391 $(150,000) $13,222,309
Income before provision
for income taxes December 31,
1999 3,869,956 376,597 - 4,246,553
Net income December 31,
1999 2,910,623 376,597 - 3,287,220
Three months ended March 31,
2000 revenues 2,805,568 576,701 (37,500) 3,344,769
Income before provision for
income taxes March 31, 2000 1,064,842 205,355 - 1,270,197
Net income March 31, 2000 702,796 205,355 - 908,151
</TABLE>
During the year ended December 31, 1999, the Company and LLB entered into
certain transactions for services performed by LLB in the normal course of
business. These intercompany transactions have been eliminated in the
accompanying financial statements.
The acquisition of DM Financial Services, Inc. and DM Mortgage Advisors,
Inc. treated as a pooling of interest is not separately stated in the
above schedule as the effect to revenues and income is immaterial (see
Note R).
The investors in DM Mortgage Investors, LLC are not acquiring an interest in
Sunderland Corporation and Subsidiaries.
F-26
<PAGE>
FEDERAL EXPRESS
March 20, 2000
Mr. Lance Bradford, CFO
Sunderland Corporation
2901 El Camino Ave., Suite 206
Las Vegas, NV 89102
Dear Lance,
Enclosed are 5 bound and 4 unbound copies of the following:
|X| Consolidated Financial Statements and Report of Independent Certified
Public Accountants for Sunderland Corporation and Subsidiaries for the
year ended December 31, 1999.
|X| Financial Statements and Report of Independent Certified Public
Accountants for DM Mortgage Investors, LLC for the year ended December 31,
1999.
Report letters describing the scope of our work are included with the financial
statements.
If you have any questions or need additional information, please feel free to
contact me.
Very truly yours,
GRANT THORNTON LLP
Brian S. Wallace
Managing Partner
BSW:th
Enclosures
(fs\sunderlandSEC)
<PAGE>
Exhibit A
DM MORTGAGE INVESTORS, LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
DM MORTGAGE INVESTORS, LLC
TABLE OF CONTENTS
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY 1
1.1 Formation 1
1.2 Name 1
1.3 Place of Business 1
1.4 Purpose 1
1.5 Articles of Organization 1
1.6 Term of Existence 2
1.7 Power of Attorney 2
1.8 Nature of Power of Attorney 2
ARTICLE 2
DEFINITIONS 2
2.1 Acquisition and Investment Evaluation Expenses 3
2.2 Acquisition and Investment Evaluation Fees 3
2.3 Administrator 3
2.4 Affiliate 3
2.5 Agreement 3
2.6 Capital Account 3
2.7 Capital Contribution 4
2.8 Capital Transaction 4
2.9 Code 4
2.10 Company 4
2.11 [Reserved] 4
2.12 Deed of Trust 4
2.13 [Reserved] 4
2.14 Fiscal Year 4
2.15 Front-End Fees 4
2.16 Gross Asset Value 4
2.17 Independent Expert 5
2.18 Interest 5
2.19 Investment in Mortgage Loans 5
2.20 [Reserved] 5
2.21 Majority 5
2.22 [Reserved] 5
2.23 Manager 5
2.24 Member 5
2.25 Mortgage Investment(s) 5
2.26 Mortgage Loans 5
2.27 NASAA Guidelines 6
2.28 Net Income Available for Distribution 6
2.29 Net Proceeds 6
2.30 Net Worth 6
2.31 Nevada Statutes 6
2.32 Offering 6
2.33 Organization and Offering Expenses 6
2.34 Person 6
2.35 Profits and Losses 6
2.36 Program 7
<PAGE>
2.37 Promotional Interest 7
2.38 [Reserved] 7
2.39 Prospectus 7
2.40 Real Property 7
2.41 Regulations 7
2.42 Distribution Reinvestments 7
2.43 Roll-Up 7
2.44 Roll-Up Entity 7
2.45 Sales Commissions 7
2.46 Sponsor 7
2.47 Subscription Agreement 7
2.48 Units 8
2.49 Writedown 8
2.50 Writedown Amount 8
ARTICLE 3
THE MANAGER 8
3.1 Control in Manager 8
3.2 Limitations on Manager's Authority 9
3.3 Right to Purchase Receivables and Loans 11
3.4 Extent of Manager's Obligation and Fiduciary Duty 11
3.5 Liability and Indemnification of Manager 11
3.6 Assignment by the Manager 13
3.7 Promotional Interest of Manager 13
3.8 Removal of Manager 13
3.9 Right to Rely on Manager 14
3.10 Transfer of the Control of the Manager 14
ARTICLE 4
INVESTMENT AND OPERATING POLICIES 14
4.1 Commitment of Capital Contributions 14
4.2 Limitation on Single Property Loans 14
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY 14
5.1 Capital Contribution by Manager 14
5.2 Contributions of Other Members 14
5.3 Interest 15
5.4 Loans 15
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS 15
6.1 No Participation in Management 15
6.2 Rights and Powers of Members 15
6.3 Meetings 15
6.4 Limited Liability of Members 16
6.5 Access to Books and Records 16
6.6 Representation of Company 17
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS 17
7.1 Allocation of Profits and Losses 17
7.2 Net Income Available For Distribution 17
7.3 Net Proceeds 17
7.4 Cash Distributions Upon Dissolution 17
ii
<PAGE>
7.5 Special Allocation Rules. 17
7.6 Code Section 704 (c) Allocations 19
7.7 Intent of Allocations 20
7.8 Quarterly Valuation of Assets 20
ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN 21
8.1 Members' Reinvested Distributions 21
8.2 Purchase of Additional Units 21
8.3 Statement of Account 21
8.4 Continued Suitability Requirements 21
ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS 21
9.1 Books and Records 21
9.2 Annual Statements 22
9.3 Special Quarterly Reports 23
9.4 Filings 23
9.5 Suitability Requirements 24
9.6 Fiscal Matters 24
ARTICLE 10
TRANSFER OF COMPANY INTERESTS 24
10.1 Interest of Manager 24
10.2 Transfer of Member's Interest 25
10.3 Further Restrictions on Transfers 25
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL
OF A MEMBER; WITHDRAWAL OF MANAGER 26
11.1 Effect of Death or Legal Incompetency of a
Member on the Company 26
11.2 Rights of Personal Representative 26
11.3 Withdrawal of Members Other than Managers 26
11.4 Withdrawal by Manager 28
11.5 Payment to Terminated Manager 28
ARTICLE 12
DISSOLUTION OF THE COMPANY 28
12.1 Events Causing Dissolution 28
12.2 Winding Up 28
12.3 Order of Distribution of Assets 29
12.4 No Recourse to Manager 29
12.5 Compliance With Timing Requirements of Regulations 29
ARTICLE 13
ROLL-UPS AND INVESTMENTS IN OTHER PROGRAMS 29
13.1 Roll-Up Transactions: Appraisal 29
13.2 Members' Rights in a Roll-Up 30
13.3 Limitations on Roll-Ups 30
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES 30
ARTICLE 15
MISCELLANEOUS 30
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15.1 Covenant to Sign Documents 30
15.2 Notices 31
15.3 Right to Engage in Competing Business 31
15.4 Amendment 31
15.5 Entire Agreement 31
15.6 Waiver 32
15.7 Severability 32
15.8 Application of Nevada law 32
15.9 Captions 32
15.10 Number and Gender 32
15.11 Counterparts 32
15.12 Waiver of Action for Partition 32
15.13 Defined Terms 32
15.14 Binding on Assignees 32
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AMENDED AND RESTATED
OPERATING AGREEMENT
OF
DM MORTGAGE INVESTORS, LLC
A Nevada Limited Liability Company
THIS AMENDED AND RESTATED OPERATING AGREEMENT (this "Agreement") was made
and entered into as of the ____ day of May, 2000, by and between Capsource,
Inc., a Nevada corporation (in its capacity as a member of the Company, the
"Initial Member" and collectively with all Persons who may become members of the
Company from time to time in accordance herewith, the "Members"), and DM
Mortgage Investors, LLC, a Nevada limited liability company (the "Company").
WITNESSETH
WHEREAS, the Initial Member and the Company are the parties to the
Company's Operating Agreement dated as of December 15, 1999 (the "Original
Agreement"); and
WHEREAS, the Initial Member, being the sole member of the Company and the
sole Manager of the Company (in this latter capacity, the "Manager"), desires to
amend and restate the Original Agreement;
NOW, WHEREFORE, in consideration for the mutual agreements, covenants and
premises set forth herein, the Original Agreement is hereby amended and restated
in its entirety as follows:
ARTICLE 1
ORGANIZATION OF THE LIMITED LIABILITY COMPANY
1.1 Formation. The Initial Member caused the formation of the Company on
December 14, 1999 under the provisions of Title 7, Chapter 86, of the Nevada
Statutes.
1.2 Name. The name of the Company is DM MORTGAGE INVESTORS, LLC.
1.3 Place of Business. The principal place of business of the Company is
and will be located at 2901 El Camino Avenue, Suite 206, Las Vegas, Nevada
89102, until the manager changes it after giving the Members notice. In
addition, the Company may maintain such other offices and places of business in
the United States as the Manager may deem advisable. The Manager will file all
necessary or desirable documents to permit the Company to conduct its business
lawfully in any state or territory of the United States.
1.4 Purpose. The primary purpose of this Company is to generate cash flow
and to distribute to the Members the Profits of the Company from its operations.
The Company will invest in and purchase first, second, wraparound, participating
and construction Mortgage Investments, and do all things reasonably related
thereto, including developing, managing and either holding for investment or
disposing of real property acquired through foreclosure, either directly or
through general partnerships or other joint ventures, all as further provided
for in this Agreement.
1.5 Articles of Organization. The Company's Articles of Organization, as
amended, and Certificate of Acceptance of Appointment of Resident Agent have
been duly executed, acknowledged and filed with the Office of the Secretary of
State of the State of Nevada under the provisions of the Nevada Statues. The
Initial Member hereby approves, ratifies and confirms all
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of these actions. The Manager is authorized to execute and cause to be filed
additional Certificates of Amendment of the Articles of Organization whenever
required by the Nevada Statutes or this Agreement.
1.6 Term of Existence. The Company's existence began on December 14, 1999
and will continue until December 31, 2019, unless earlier terminated under the
provisions of this Agreement or by operation of law. A Majority may extend the
Company's term, provided that the Company remains in compliance with the NASAA
Guidelines.
1.7 Power of Attorney. Each of the Members irrevocably constitutes and
appoints the Manager as his true and lawful attorney-in-fact, with full power
and authority for him, and in his name, place and stead, to execute,
acknowledge, publish and file:
1.7.1 This Agreement, the Articles of Organization, as amended to
date, as well as any and all additional amendments thereto
required under the laws of the State of Nevada or of any
other state, or which the Manager deems advisable to
prepare, execute and file;
1.7.2 Any certificates, instruments and documents, including,
without limitation, Fictitious Business Name Statements, as
may be required to be filed by the Company by any
governmental agency or by the laws of any state or other
jurisdiction in which the Company is doing or intends to do
business, or which the Manager deems advisable to file; and
1.7.3 Any documents which may be required to effect the
continuation of the Company, the admission of an additional
or substituted Member, or the dissolution and termination of
the Company, provided that the continuation, admission,
substitution or dissolution or termination, as applicable,
is in accordance with the terms of this Agreement.
1.8 Nature of Power of Attorney. The grant of authority in Section 1.7:
1.8.1 Is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of the Member and shall not
be affected by the subsequent incapacity of the Member;
1.8.2 May be exercised by the Manager for each member by a
facsimile signature of or on behalf of the Manager or by
listing all of the members and by executing any instrument
with a single signature of or on behalf of the Manager,
acting as attorney-in-fact for all of them; and
1.8.3 Shall survive the delivery of an assignment by a Member of
the whole or any portion of his Interest; except that where
the assignee thereof has been approved by the Manager for
admission to the Company as a substituted Member, the
Special Power of Attorney shall survive the delivery of the
assignment for the sole purpose of enabling the person to
execute, acknowledge, and file any instrument necessary to
effect the substitution.
ARTICLE 2
DEFINITIONS
Unless stated otherwise, the terms set forth in this Article 2 shall, for
all purposes of this Agreement, have the following meanings:
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2.1 Acquisition and Investment Evaluation Expenses means expenses
including but not limited to legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses, title insurance
funded by the Company, and miscellaneous expenses related to the evaluation,
selection and acquisition of Mortgage Investments, whether or not acquired.
2.2 Acquisition and Investment Evaluation Fees means the total of all
fees and commissions paid by any Person when purchasing or investing in Mortgage
Investments. Included in the computation of these fees or commissions shall be
any selection fee, mortgage placement fee, nonrecurring management fee, and any
evaluation fee, loan fee, or points paid by borrowers to the Manager, or any fee
of a similar nature, however designated.
2.3 Administrator means the agency or official administering the
securities law of a state in which Units are registered or qualified for offer
and sale.
2.4 Affiliate means, for any person, (a) any person directly or
indirectly controlling, controlled by or under common control with the Person,
(b) any other Person owning or controlling ten percent (10%) or more of the
outstanding voting securities of the Person, (c) any officer, director or Member
of the Person, or (d) if the other Person is an officer, director or Manager,
any company for which the Person acts in any similar capacity.
2.5 Agreement means this Amended and Restated Operating Agreement, as
further amended from time to time.
2.6 Capital Account means, for any Member, the Capital Account maintained
for the Member in accordance with the following provisions:
2.6.1 The Manager shall credit to each Member's Capital Account
the Member's Capital Contribution, the Member's distributive
share of Profits, any items in the nature of income or gain
(from unexpected adjustments, allocations or distributions)
that are specially allocated to a Member, and the amount of
any Company liabilities that are assumed by the Member or
that are secured by any Company property distributed to the
Member.
2.6.2 The Manager shall debit from each Member's Capital Account
the amount of cash and the fair market value of any Company
property distributed to the Member under any provision of
this Agreement, the Member's distributive share of Losses,
and any items in the nature of expenses or losses that are
specially allocated to a Member and the amount of any
liabilities of the Member that are assumed by the Company or
that are secured by any property contributed by the Member
to the Company.
If the Gross Asset Value of a Company asset is adjusted as a result of a
Writedown, the Manager shall concurrently adjust the Capital Accounts of all
Members in order to reflect the aggregate net adjustment that would have
occurred if the Company had recognized Losses equal to the Writedown Amount and
the Losses were allocated under Article 7.
If any interest in the Company is transferred in accordance with Section
10.2 of this Agreement, the transferee shall succeed to the Capital Account of
the transferor to the extent it relates to the transferred interest.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704-1(b), and shall be interpreted and applied in
a manner consistent with the Regulation. If the
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Manager determines that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed in order to comply with
the then existing Treasury Regulation, the Manager may make the modification,
provided that it is not likely to have a material effect on the amounts
distributable to any Member under Articles 7 and 12 of this Agreement upon the
dissolution of the Company. The Manager shall adjust the amounts debited or
credited to Capital Accounts for (a) any property contributed to the Company or
distributed to the Manager, and (b) any liabilities that are secured by the
contributed or distributed property or that are assumed by the Company or the
Manager, if the Manager determines the adjustments are necessary or appropriate
under Treasury Regulation Section 1.704-1(b)(2)(iv). The Manager shall make any
appropriate modification if unanticipated events might otherwise cause this
Agreement not to comply with Treasury Regulation Section 1.704-1(b) as provided
for in Sections 7.7 and 15.4.
2.7 Capital Contribution means the total investment and contribution to
the capital of the Company by a Member in cash or by way of automatic
reinvestment of Company distributions and, in the case of the Manager (in its
capacity as a Member), its Promotional Interest. "Initial Capital Contribution"
means the amount paid in cash by each Member with his original subscription for
and acquisition of Units of the Company under the Prospectus. . 2.8 Capital
Transaction means (i) the repayment of principal or prepayment of a Mortgage
Investment to the extent classified as a return of capital under the Code, (ii)
the foreclosure, sale, exchange, condemnation, eminent domain taking or other
disposition of a Mortgage Investment or Real Property subject to a Mortgage
Investment, or (iii) the payment of insurance or a guarantee for a Mortgage
Investment.
2.9 Code means the Internal Revenue Code of 1986, as amended from time to
time, and corresponding provisions of subsequent revenue laws.
2.10 Company means DM Mortgage Investors, LLC, the Nevada limited
liability company to which this Agreement pertains.
2.11 [Reserved]
2.12 Deed(s) of Trust means the lien(s) created on the Real Property of
borrowers securing their respective obligations to the Company to repay Mortgage
Investments, whether in the form of a deed of trust, mortgage or otherwise.
2.13 [Reserved]
2.14 Fiscal Year means, subject to the provisions of Section 706 of the
Code and Section 9.6.1, (i) the period commencing on the date of formation of
the Company and ending on December 31, 1999 (ii) any subsequent 12 month period
on January 1 and ending on December 31 and (iii) the period commencing January 1
and ending on the date on which all Company assets are distributed to the
Members under Article 12.
2.15 Front-End Fees means fees and expenses paid by any Person to organize
the Company and acquire assets for the Company, including Organization and
Offering Expenses, Acquisition and Investment Evaluation Expenses, Acquisition
and Investment Evaluation Fees, interest on deferred fees and expenses, and any
fees otherwise deemed to be "Front-End Fees" under the NASAA Guidelines.
2.16 Gross Asset Value means, for any Company asset, the following:
2.16.1 The initial Gross Asset Value of any Company asset at the
time that it is contributed by a Member to the capital of
the Company shall be an amount equal to the fair market
value of the Company asset (without
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regard to the provisions of Code Section 7701(g)), as
determined by the contributing Member and the Manager;
2.16.2 The Gross Asset Values of all Company assets shall be
adjusted, as determined by the distributed Member and the
Manager, to equal their respective fair market values upon
the distribution to a Member by the Company of more than a
de minimis amount of Company assets (other than money),
unless all Members simultaneously receive distributions of
undivided interests in the distributed Company assets in
proportion to their respective Capital Accounts;
2.16.3 The Gross Asset Values of all Company assets shall be
adjusted to equal their respective fair market values (as
determined by the Manager, in its reasonable discretion)
upon the termination of the Company for Federal income tax
purposes under Code Section 708(b)(1)(B); and
2.16.4 The Gross Asset Value of a Company asset shall be adjusted
in the case of a Writedown of the Company asset in
accordance with Sections 2.49, 2.50 and 7.8.
2.17 Independent Expert means a Person with no material current or prior
business or personal relationship with the Manager, who is engaged to a
substantial extent in the business of rendering opinions regarding the value of
assets of the type held by the Company, and who is qualified to perform the
services.
2.18 Interest means the Capital Accounts of Members, which are divided
into "Units."
2.19 Investment in Mortgage Loans means the amount of Capital
Contributions used to make or invest in Mortgage Investments or the amount
actually paid or allocated to the purchase of Mortgage Investments, working
capital reserves allocable thereto (except that working capital reserves in
excess of 3.0% shall not be included), and other cash payments such as interest
and taxes but excluding Front-End Fees.
2.20 [Reserved]
2.21 Majority means any group of Members who together hold a majority of
the total outstanding Interests of the Company as of a particular date (or if no
date is specified, the first day of the then current calendar month).
2.22 [Reserved]
2.23 Manager means Capsource, Inc., a Nevada corporation, in that
capacity, or any Person replacing Capsource under this Agreement. For greater
certainty, Capsource, in its capacity as the Initial Member, is a distinct
entity from the Manager for purposes of this Agreement unless the context should
indicate to the contrary.
2.24 Member means the owners of Units in the Company, unless the
instruments through which the Units were transferred to the owner did not also
convey the transferor's status as a Member.
2.25 Mortgage Investment(s) means the Mortgage Loan(s) or an interest in
the Mortgage Loans that are held by the Company.
2.26 Mortgage Loans means investments of the Company that are notes,
debentures, bonds and other evidences of indebtedness or obligations that are
negotiable or non-negotiable and secured or collateralized by Deeds of Trust on
Real Property.
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2.27 NASAA Guidelines means the Mortgage Program Guidelines of the North
American Securities Administrators Association, Inc. adopted on September 10,
1996, as amended from time to time unless indicated to the contrary by the
context.
2.28 Net Income Available for Distribution means an amount equal to the
excess of accrued income from operations and investment, or the sale or
refinancing or other disposition of, Company assets during any calendar month
over the accrued operating expenses of the Company during the month; provided
that:
2.28.1 the operating expenses shall not include any general
overhead expenses of the Manager not specifically related
to, billed to or reimbursable by the Company as specified in
Exhibit 14 to this Agreement; and
2.28.2 Net Income Available for Distribution shall not exceed the
amount of cash on hand.
2.29 Net Proceeds means the net cash proceeds from any Capital
Transaction.
2.30 Net Worth means the excess of total assets over total liabilities as
determined by generally accepted accounting principles consistently applied,
except that if any of the assets have been depreciated, then the amount of the
depreciation relative to any particular asset may be added to the depreciated
cost of the asset to compute total assets, provided that the amount of
depreciation may be added only to the extent that the amount resulting after
adding the depreciation does not exceed the fair market value of the asset.
2.31 Nevada Statutes means Nevada Revised Statutes, as amended from time
to time, unless indicated to the contrary by the context.
2.32 Offering means the offer and sale of Units of the Company made under
the Prospectus.
2.33 Organization and Offering Expenses means those expenses incurred when
preparing the Company for registration with the Securities and Exchange
Commission and states and subsequently offering and distributing Units to the
public, including without limitation Sales Commissions and all advertising
expenses.
2.34 Person means any natural person, partnership, corporation,
unincorporated association or other legal entity.
2.35 Profits and Losses mean, for each Fiscal Year or any other period, an
amount equal to the Company's taxable income or loss for the Fiscal Year or
other given period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated
separately under Code Section 703(a)(1) shall be included in taxable income or
loss), with the following adjustments (without duplication):
2.35.1 Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing
Profits or Losses under this Section 2.35 shall be added to
the taxable income or loss;
2.35.2 Any expenditures of the Company described in Section
705(a)(2)(B) of the Code or treated as Section 705(a)(2)(B)
of the Code expenditures under Treasury Regulation Section
1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses under this Section 2.35,
shall be subtracted from the taxable income or loss.
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If any Company asset has a Gross Asset Value which differs from its
adjusted cost basis, gain or loss resulting from the disposition of the Company
asset shall be computed using the Gross Asset Value (rather than adjusted cost
basis) of the Company asset.
Notwithstanding any other provision of this Section, any items in the
nature of income, gain, expenses or losses, which are specially allocated under
Section 7.5.1, 7.5.2 and 7.6, shall not be taken into account in computing
Profits or Losses.
2.36 Program means a limited or general partnership, limited liability
company, limited liability partnership, trust, joint venture, unincorporated
association or similar organization other than a corporation formed and operated
for the primary purpose of investing in mortgage loans.
2.37 Promotional Interest means one-half (1/2) of one percent (1%) of the
aggregate Capital Contributions of the non-Manager Members, as thereafter
adjusted in accordance with Article 7.
2.38 [Reserved]
2.39 Prospectus means the prospectus that forms a part of the Registration
Statement on Form S-11 under the Securities Act of 1933 (Registration No.
333-32800), originally filed by the Company with the Securities and Exchange
Commission on February 17, 2000, as amended, and any supplement or amended
Prospectus or new prospectus that forms a part of a supplement to the
Registration Statement filed by the Company.
2.40 Real Property means and includes (a) land and any buildings,
structures, and improvements, and (b) all fixtures, whether in the form of
equipment or other personal property, that is located on or used as part of
land. Real Property does not include Deeds of Trust, mortgage loans or interests
therein.
2.41 Regulations means, except where the context indicates otherwise, the
permanent, temporary, proposed, or proposed and temporary regulations of the
U.S. Department of the Treasury under the Code, as the regulations may be
lawfully changed from time to time.
2.42 Reinvested Distributions means Units purchased under the Company's
Reinvested Distribution Plan that is described in Article 8 of this Agreement.
2.43 Roll-Up means a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Company and
the issuance of securities of a Roll-Up Entity. "Roll-Up" does not include a
transaction involving (i) securities of the Company, if any, listed on a
national securities exchange or quoted on the Nasdaq National Market for 12
months or (ii) conversion to corporate, trust, limited liability company, or
association form of only the Company if, as a consequence of the transaction,
there will be no significant adverse change in any of the following: (a)
Members' voting rights; (b) the term of existence of the Company; (c) Manager
compensation; (d) the Company's investment objectives.
2.44 Roll-Up Entity means a company, real estate investment trust,
corporation, limited liability company, limited or general partnership or other
entity that would be created or would survive after the successful completion of
a proposed Roll-Up.
2.45 Sales Commissions means the compensation that may be paid to
broker-dealers for the sale of Units under the Prospectus.
2.46 Sponsor means any Person (a) directly or indirectly instrumental in
organizing, wholly or in part, a Program, or a Person who will manage or
participate in the management of a Program, and any Affiliate of any the Person,
but does not include a Person whose only relation with a Program is that of an
independent property manager or other provider of services (such as
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attorneys, accountants or underwriters), whose only compensation is received in
that capacity, or (b) is a "Sponsor" as otherwise defined in the NASAA
Guidelines. Sunderland Corporation, the Manager's parent company, is the initial
Sponsor of the Company.
2.47 Subscription Agreement means the document that is an exhibit to and
part of the Prospectus that every Person who buys Units of the Company must
execute and deliver with full payment for the Units and which, among other
provisions, contains the written consent of each Member to the adoption of this
Agreement.
2.48 Units mean the units of equity in the Company evidencing the
Company's Interests that are (a) issued to Members upon their admission to the
Company under the Subscription Agreement and the Prospectus or (b) transferred
to those who become substituted Members under Section 10.2 hereof. The Manager
may purchase Units on the same basis as other Members. Units purchased at
different times do not necessarily represent the same underlying amount of
Interests.
2.49 Writedown means a determination by the Manager for a particular
Mortgage Investment or other Company investment (which determination has been
verified by the Company's accountants as being in conformity with generally
accepted accounting principles) that the fair market value of the investment at
the time the determination is made is less than the amount actually paid or
allocated to the purchase of the investment, which determination shall be made
by the Company and its accountants within thirty (30) days of the end of each
calendar quarter and any Writedown shall be effective on the last day of the
relevant calendar quarter during the term of this Agreement.
2.50 Writedown Amount means, for any Mortgage Investment or other Company
investment, the amount by which, at the time that a Writedown is determined for
the Investment, the amount actually paid or allocated to the purchase of the
investment exceeds its fair market value.
ARTICLE 3
THE MANAGER
3.1 Control in Manager. Subject to the provisions of Section 3.2 and
except as otherwise expressly stated elsewhere in this Agreement, the Manager
has exclusive control over the business of the Company (with all acts and
decisions being in its sole discretion except as specifically set forth in this
Agreement), including the power to assign duties, to determine how to invest the
Company's assets, to sign bills of sale, title documents, leases, notes,
security agreements, Mortgage Investments and contracts, and to assume direction
of the business operations. As Manager of the Company and its business, the
Manager has all duties generally associated with that position, including
dealing with Members, being responsible for all accounting, tax and legal
matters, performing internal reviews of the Company's investments and loans,
determining how and when to invest the Company's capital, and determining the
course of action to take for Company loans that are in default. The Manager also
has all of these powers for ancillary matters. Without limiting the generality
of the foregoing, the powers include the right (except as specifically set forth
in this Agreement, including under Section 3.2):
3.1.1 To evaluate potential Company investments and to expend the
capital of the Company in furtherance of the Company's
business;
3.1.2 To acquire, hold, lease, sell, trade, exchange, or otherwise
dispose of all or any portion of Company property or any
interest therein at a price and upon the terms and
conditions as the Manager may deem proper;
3.1.3 To cause the Company to become a joint venturer, general or
limited partner or member of an entity formed to own,
develop, operate and
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dispose of properties owned or co-owned by the Company
acquired through foreclosure of a Mortgage Loan;
3.1.4 To manage, operate and develop Company property, or to
employ and supervise a property manager who may, or may not,
be an Affiliate of the Manager;
3.1.5 To borrow money from banks and other lending institutions
for any Company purpose, and as security therefor, to
encumber Company property;
3.1.6 To repay in whole or in part, refinance, increase, modify,
or extend, any obligation, affecting Company property;
3.1.7 To employ from time to time, at the expense of the Company,
persons, including the Manager or its Affiliates, required
for the operation of the Company's business, including
employees, agents, independent contractors, brokers,
accountants, attorneys, and others; to enter into agreements
and contracts with persons on terms and for compensation
that the Manager determines to be reasonable; and to give
receipts, releases, and discharges for all of the foregoing
and any matters incident thereto as the Manager may deem
advisable or appropriate; provided, however, that any
agreement or contract between the Company and the Manager or
between the Company and an Affiliate of the Manager shall
contain a provision that the agreement or contract may be
terminated by the Company without penalty on sixty (60)
days' written notice and without advance notice if the
Manager or Affiliate who is a party to the contract or
agreement resigns or is removed under the terms of this
Agreement;
3.1.8 To maintain, at the expense of the Company, adequate records
and accounts of all operations and expenditures and furnish
the Members with annual statements of account as of the end
of each calendar year, together with all necessary
tax-reporting information;
3.1.9 To purchase, at the expense of the Company, liability and
other insurance to protect the property of the Company and
its business;
3.1.10 To refinance, recast, modify, consolidate, extend or permit
the assumption of any Mortgage Loan or other investment
owned by the Company;
3.1.11 To pay all expenses incurred in the operation of the
Company;
3.1.12 To file tax returns on behalf of the Company and to make any
and all elections available under the Code;
3.1.13 To modify, delete, add to or correct from time to time any
provision of this Agreement as permitted under Section 15.4
hereof.
3.2 Limitations on Manager's Authority. The Manager has no authority to:
3.2.1 Do any act in contravention of this Agreement;
3.2.2 Do any act which would make it impossible to carry on the
ordinary business of the Company;
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3.2.3 Confess a judgment against the Company;
3.2.4 Possess Company property or assign the rights of the Company
in property for other than a Company purpose;
3.2.5 Admit a person as a Manager without the prior affirmative
vote or consent of a Majority, or any higher vote as may be
required by applicable law;
3.2.6 Voluntarily withdraw as Manager without the prior
affirmative vote or consent of a Majority unless its
withdrawal would neither affect the tax status of the
Company nor materially adversely affect the Members (subject
to any delay in effectiveness of the withdrawal as set forth
elsewhere herein);
3.2.7 Sell all or substantially all of the assets of the Company
in one or a series of related transactions that is not in
the ordinary course of business, without the prior
affirmative vote or consent of a Majority;
3.2.8 Amend this Agreement without the prior affirmative vote or
consent of a Majority, except as permitted by Section 15.4
of this Agreement;
3.2.9 Dissolve or terminate the Company without the prior
affirmative vote or consent of a Majority;
3.2.10 Cause the merger or other reorganization of the Company
without the prior affirmative vote or consent of a Majority;
3.2.11 Grant to the Manager or any of its Affiliates an exclusive
right to sell any Company assets;
3.2.12 Receive or permit the Manager or any Affiliate of the
Manager to receive any insurance brokerage fee or write any
insurance policy covering the Company or any Company
property;
3.2.13 Receive from the Company a rebate or participate in any
reciprocal business arrangement which would enable the
Manager or any of its Affiliates to do so;
3.2.14 Commingle the Company's assets with those of any other
Person;
3.2.15 Use or permit another Person to use the Company's assets in
any manner, except for the exclusive benefit of the Company;
3.2.16 Pay or award, directly or indirectly, any commissions or
other compensation to any Person engaged by a potential
investor for investment advice as an inducement to the
advisor to advise the purchase of Units; provided, however,
that this clause shall not prohibit the payment of Sales
Commissions;
3.2.17 Make loans to the Manager or an Affiliate of the Manager; or
3.2.18 Pay, directly or indirectly, a commission or fee to the
Manager in connection with the reinvestment or distribution
of Net Proceeds.
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3.3 Right to Purchase Receivables and Loans. As long as the requirements
of Article 4 are met and the Company adheres to the investment policy described
in the Prospectus, the Manager, in its sole discretion, may at any time, but is
not obligated to:
3.3.1 Purchase from the Company the interest receivable or
principal on delinquent Mortgage Loans held by the Company;
3.3.2 Purchase from a senior lien holder the interest receivable
or principal on mortgage loans senior to Mortgage Loans held
by the Company; and/or
3.3.3 Use its own monies to cover any other costs associated with
Mortgage Loans held by the Company such as property taxes,
insurance and legal expenses.
3.4 Extent of Manager's Obligation and Fiduciary Duty. The Manager shall
devote the portion of its time to the business of the Company as it determines,
in good faith, to be reasonably necessary to conduct the Company's business. The
Manager shall not be bound to devote all of its business time to the affairs of
the Company, and the Manager and its Affiliates may engage for their own account
and for the account of others in any other business ventures and employments,
including ventures and employments having a business similar or identical or
competitive with the business of the Company. The Manager has fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Company, whether or not in the Manager's possession or control, and the Manager
will not employ, or permit another to employ the Company's funds or assets in
any manner except for the exclusive benefit of the Company. The Manager will not
allow the assets of the Company to be commingled with the assets of the Manager
or any other Person. The Company shall not permit a Member to contract away the
fiduciary duty owed to any Member by the Manager under common law. The Manager,
for so long as it owns any Units as a Member, hereby waives its right to vote
its Units and to have them considered as outstanding in any vote for removal of
the Manager or for amendment of this Agreement (except as provided in Sections
3.1.13 and 15.4) or otherwise.
3.5 Liability and Indemnification of Manager.
3.5.1 Neither the Manager nor any of its Affiliates, agents or
attorneys (hereinafter, an "Indemnified Party") shall be
liable, responsible or accountable in damages or otherwise
to any other Member, the Company, its receiver or trustee
(the Company and its receiver or trustee, if any, are
hereinafter referred to as "Indemnitors") for, and the
Indemnitors agree to indemnify, pay, protect and hold
harmless each Indemnified Party (on the demand of the
Indemnified Party) from and against any and all liabilities,
obligations, losses, damages, actions, judgments, suits,
proceedings, reasonable costs, reasonable expenses and
disbursements (including, without limitation, all reasonable
costs and expenses of defense, appeal and settlement of any
and all threatened, pending, or completed suits, actions or
proceedings instituted against the Indemnified Party or the
Company and all reasonable costs of investigation related
thereto) (collectively referred to as "Liabilities" for the
remainder of this Section) which may be imposed on, incurred
by, or asserted against the Indemnified Party or the
Company, where the Liabilaities relate to or arise out of
any action or inaction on the part of the Company or on the
part of the Indemnified Party for services to or on behalf
of the Company (and for an Indemnified Party which is an
Affiliate of the Manager for an act which the Manager would
be entitled to indemnification if the act were performed by
it). These rights are conditioned upon the Indemnified Party
having reasonably believed that its actions were in or not
opposed to the best interest of the Company,
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and for any criminal action or proceeding, the Indemnified
Party's having had no reasonable cause to believe its
conduct was unlawful.
Notwithstanding the foregoing, each Indemnified Party shall
be liable, responsible and accountable, and neither the
Company nor any Indemnitor shall be liable to an Indemnified
Party, for any portion of the Liabilities which resulted
from the Indemnified Party's (i) own fraud, negligence or
misconduct or knowing violation of law, (ii) breach of
fiduciary duty to the Company or any Member, or (iii) breach
of this Agreement, regardless of whether or not any the act
was first determined by the Indemnified Party, in good
faith, to be in the best interests of the Company. If any
action suit or proceeding shall be pending against the
Company or any Indemnified Party relating to or arising out
of any of these actions or inactions, the Indemnified Party
shall have the right to employ, at the reasonable expense of
the Company (subject to the provisions of Subsection 3.5.2,
below), separate counsel of the Indemnified Party's choice
in the action, suit or proceeding. The satisfaction of the
obligations of the Company under this Section shall be from
and limited to the assets of the Company and no Member shall
have any personal liability on account thereof.
3.5.2 Cash advances from Company funds to an Indemnified Party for
reasonable legal expenses and other costs incurred as a
result of any legal action or proceeding are permissible if
(i) the suit, action or proceeding relates to or arises out
of any action or inaction on the part of the Indemnified
Party in the performance of its duties or provision of its
services on behalf of the Company; (ii) the suit, action or
proceeding is initiated by a third party who is not a
Member, or a court of competent jurisidiction specifically
authorizes the indemnification of the Indemnified Party; and
(iii) the Indemnified Party undertakes by written agreement
to repay any funds advanced under this Section 3.5.2 in the
cases in which the Indemnified Party would not be entitled
to indemnification under Subsection 3.5.1 above.
If advances are permissible under this Section 3.5, the
Indemnified Party shall have the right to bill the Company
for, or otherwise request the Company to pay, at any time
and from time to time after the Indemnified Party shall
become obligated to make payments therefor, any and all
amounts for which the Indemnified Party believes in good
faith that it is entitled to indemnification under
Subsection 3.5.1 above. The Company shall pay any and all of
these bills and honor any and all of these requests for
payment within 60 days after the bill or request is
received.
If a final determination is made that the Company is not
obligated for any amount paid by it to a particular
Indemnified Party, the Indemnified Party will refund the
amount within 60 days of the final determination. If a final
determination is made that the Company is obligated for any
amount not paid by the Company to a particular Indemnified
Party, the Company will pay the amount to the Indemnified
Party within 60 days of the final determination.
Notwithstanding anything to the contrary contained in
Subsection 3.5.1 above, neither the Manager nor any of its
Affiliates, agents, or attorneys, nor any person acting as a
broker-dealer for the offer and sale of Units shall be
indemnified from any Liability, loss or damage incurred by
them arising due to an alleged violation of federal or state
securities laws
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unless (i) there has been a successful adjudication on the
merits of each count involving alleged securities law
violations as to the Indemnified Party, or (ii) the claims
have been dismissed with prejudice on the merits by a court
of competent jurisdiction as to the Indemnified Party, or
(iii) a court of competent jurisdiction approves a
settlement of the claims against the Indemnified Party and
finds that indemnification of the settlement and related
costs should be made. Before seeking a court approval for
indemnification, the Manager shall undertake to cause the
party seeking indemnification to apprise the court of the
position of the Securities and Exchange Commission and the
Nevada Administrator regarding indemnification for
securities violations.
The Company shall not incur the cost of the portion of any
insurance which insures any party against any liability as
to which the party is prohibited from being indemnified as
set forth above.
For purposes of this Section 3.5, an Affiliate, agent or
attorney of the Manager shall be indemnified by the Company
only in circumstances where that Person has performed an act
on behalf of the Company or the Manager within the scope of
the authority of the Manager and for which the Manager would
have been entitled to indemnification had the act been
performed by it.
Nothing in this Section 3.5 or otherwise in this Agreement
is intended to, nor shall it be construed to, limit the full
and complete indemnification that is provided to the Manger
and its Affiliates and all other persons under Sections
86.411, 421, 431, 441 and 451 of the Nevada Law, which
provisions are hereby adopted and incorporated in this
Agreement by this reference.
3.6 Assignment by the Manager. The Manager's Interest in the Company may
be assigned at the discretion of the Manager, subject to Section 10.1.
3.7 Promotional Interest of Manager. The Manager shall be allocated the
Promotional Interest as defined in Section 2.37.
3.8 Removal of Manager. The Manager may be removed upon the following
conditions:
3.8.1 The Members may remove the Manager by written consent or
vote of a Majority (excluding any Interest of the Manager
being removed). This removal of the Manager, if there is no
other Manager, shall not become effective for at least 120
days following the consent or vote of the Majority.
3.8.2 During the 120 day period described in Section 3.8.1, the
Majority (excluding any Interest of the removed Manager)
shall have the right to agree in writing to continue the
business of the Company and, within six months following the
termination date of the last remaining Manager, elect and
admit a new Manager(s) who agree(s) to continue the
existence of the Company.
3.8.3 Substitution of a new Manager, if any, shall be effective
upon written acceptance of the duties and responsibilities
of a Manager by the new Manager. Upon effective substitution
of a new Manager, this Agreement shall remain in full force
and effect, except for the change in the
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Manager, and business of the Company shall be continued by
the new Manager. The new Manager shall thereupon execute,
acknowledge and file a certificate of amendment to the
Articles of Organization of the Company in the manner
required by Section 26.221 of the Nevada Law.
3.8.4 Failure of a Majority to designate and admit a new Manager
within the time specified herein shall dissolve the Company,
in accordance with the provisions of Article 12 of this
Agreement.
3.9 Right to Rely on Manager. Any person dealing with the Company may
rely (without duty of further inquiry) upon a certificate signed by the Manager
as to:
3.9.1 The identity of the Manager or any Member;
3.9.2 The existence or nonexistence of any fact or facts which
constitute a condition precedent to acts by the Manager or
which are in any further manner germane to the affairs of
the Company;
3.9.3 The persons who are authorized to execute and deliver any
instrument or document of the Company; and
3.9.4 Any act or failure to act by the Company or any other matter
whatsoever involving the Company or any Member.
3.10 Transfer of the Control of the Manager. A sale or transfer of a
controlling interest in the Manager will not terminate the Company or be
considered the withdrawal or resignation of the Manager.
ARTICLE 4
INVESTMENT AND OPERATING POLICIES
4.1 Commitment of Capital Contributions. At a minimum, the Manager shall
commit at least eighty-six percent (86%) of Capital Contributions to investments
in Mortgage Loans (including up to 3.0% of the amount established as reserves).
The Company may invest in or purchase Mortgage Loans of such duration and on
such real property and with such additional security as the Manager in its sole
discretion shall determine, subject to Section 4.2. These Mortgage Loans may be
senior to other mortgage loans on the real property, or junior to other mortgage
loans on the real property, all in the sole discretion of the Manager.
4.2 Investment Policy. In making investments, the Manager shall follow
the investment policy described in the Prospectus.
ARTICLE 5
CAPITAL CONTRIBUTIONS; LOANS TO COMPANY
5.1 Capital Contribution by Manager. The Manager (in its capacity as the
Initial Member) shall contribute to the capital of the Company an amount in cash
equal to one-half (1/2) of one percent (1%) of the aggregate of the Capital
Contribution of the other Members. The Manager shall also be deemed to have
contributed to the capital of the Company an amount equal to the Promotional
Interest. The Interests of the Manager in aggregate shall equal one percent of
the aggregate Capital accounts of the other Members.
5.2 Contributions of Other Members. Members other than the Manager shall
acquire Units in accordance with the terms of the Subscription Agreement or any
future subscription
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materials approved by the Manager. The names, addresses, date of admissions and
Capital Contributions of the Members are and shall be set forth in Schedule A to
this Agreement, as amended from time to time, and incorporated herein by
reference. The Manager shall update Schedule A to reflect the then-current
ownership of Units (and Interests) without any further need to obtain the
consent of any Member, and Schedule A, as revised from time to time by the
Manager, shall be presumed correct absent manifest error.
5.3 Interest. No interest shall be paid on, or in respect of, any
contribution to Company Capital by any Member, nor shall any Member have the
right to demand or receive cash or other property in return for the Member's
Capital Contribution.
5.4 Loans. Any Member or Affiliate of a Member may, with the written
consent of the Manager, lend or advance money to the Company. If the Manager or,
with the written consent of the Manager, any Member shall make any loans to the
Company or advance money on its behalf, the amount of any loan or advance shall
not be treated as a contribution to the capital of the Company, but shall be a
debt due from the Company. The amount of any loan or advance by a lending Member
or an Affiliate of a Member shall be repayable out of the Company's cash and
shall bear interest at a rate of not in excess of the lesser of (i) the prime
rate established, from time to time, by any major bank selected by the Manager
for loans to the bank's most creditworthy commercial borrowers, plus five
percent (5%) per annum, or (ii) the maximum rate permitted by applicable law.
None of the Members or their Affiliates shall be obligated to make any loan or
advance to the Company. This section shall be subject to the Company's
Investment Policy as it relates to transactions with the Manager or its
Affiliates.
ARTICLE 6
VOTING AND OTHER RIGHTS OF MEMBERS
6.1 No Participation in Management. Except as expressly provided in this
Agreement, no Member shall take part in the conduct or control of the Company's
business or have any right or authority to act for or bind the Company.
6.2 Rights and Powers of Members. In addition to the rights of the
Members to remove and replace the Manager and as otherwise provided for in
Section 3.2, the Members shall have the right to vote upon and take any of the
following actions upon the approval of a Majority, without the concurrence of
the Manager, and an affirmative vote of a Majority shall be required to allow or
direct the Manager to:
6.2.1 Dissolve and windup the Company before the expiration of the
term of the Company;
6.2.2 Amend this Agreement, subject to the rights to the Manager
granted in Section 15.4 of this Agreement and subject also
to the prior consent of the Manager if either the
distributions due to the Manager or the duties of the
Manager are affected;
6.2.3 Merge the Company or sell all or substantially all of the
assets of the Company, otherwise than in the ordinary course
of its business.
6.2.4 Change the nature of the Company's business; and
6.2.5 Elect to continue the business of the Company other than in
the circumstances described in Section 3.8 of this
Agreement.
6.3 Meetings.
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6.3.1 The Members may hold meetings of Members within or outside
the State of Nevada at any place selected by the Person or
Persons calling the meeting. If no other place is stated,
meetings shall be held at the Company's principal place of
business as established in accordance with Section 1.3 of
this Agreement. The Members may approve by written consent
of a Majority any matter upon which the Members are entitled
to vote at a duly convened meeting of the Members, which
consents will have the same effect as a vote held at a duly
convened meeting of the Members.
6.3.2 The Manager, or Members representing more than ten percent
(10%) of the outstanding Interests for any matters on which
the Members may vote, may call a meeting of the Company. If
Members representing the requisite Interests present to the
Manager a statement requesting a Company meeting, or the
Manager calls the meeting, the Manager shall fix a date for
a meeting and shall (within ten (10) days after receipt of a
statement, if applicable) give personal or mailed notice or
notice by any other means of written communication,
addressed to each Member at the respective address of the
Member appearing on the books of the Company or given to the
Company for the purpose of notice, not less than fifteen
(15) or more than sixty (60) days before the date of the
meeting, to all Members of the date, place and time of the
meeting and the purpose for which it has been called. Unless
otherwise specified, all meetings of the Company shall be
held at 2:00 p.m. local time at the principal office of the
Company.
6.3.3 Members may vote in person or by proxy. A Majority, whether
present in person or by proxy, shall constitute a quorum at
any meeting of Members. Any question relating to the Company
which may be considered and acted upon by the Members may be
considered and acted upon by vote at a Company meeting, and
any vote required to be in writing shall be deemed given if
approved by a vote by written ballot.
6.4 Limited Liability of Members. Units are non-assessable. No Member
shall be personally liable for any of the expenses, liabilities, or obligations
of the Company or for any Losses beyond the amount of the Member's Capital
Contribution to the Company and the Member's share of any undistributed net
income and gains of the Company.
6.5 Access to Books and Records. The Members and their designated
representatives shall have access to all books and records of the Company during
the Company's normal business hours. An alphabetical list of the names and
addresses of all Members together with the number of Units held by each of them
will be maintained as a part of the books and records of the Company. The
Company shall make the list available on request to any Member or his
representative for a stated purpose including, without limitation, matters
relating to Members' voting rights, tender offers, and the exercise of Members'
rights under federal proxy law. A copy of the Members list shall be mailed to
any Member requesting it within ten business days of the request, although the
Company may change a reasonable amount for the copy. The Member list shall be
updated at least quarterly to reflect changes in the information contained
therein.
If the Manager neglects or refuses to exhibit, produce or mail a copy of
the Member list as requested, the Manager shall be liable to any Member
requesting the list for the costs, including attorney fees, incurred by that
Member for compelling the production of the list, and for actual damages
suffered by the Member by reason of the refusal or neglect. However, the Company
need not exhibit, produce or mail a copy of the Member list if the actual
purpose and reason for the request therefor is to secure the list or other
information for the purpose of selling
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the list or copies thereof, or of using it for a commercial purpose other than
the in the interest of the Person as a Member in the Company. The Manager may
require the Person requesting the list to represent that the list is not
requested for any commercial purpose. The remedies provided hereunder to Members
requesting copies of the list are in addition to, and shall not in any way
limit, other remedies available to Members under federal or Nevada law.
6.6 Representation of Company. Each of the Members hereby acknowledges
and agrees that the attorneys representing the Company and the Manager and its
Affiliates do not represent and shall not be deemed under the applicable codes
of professional responsibility to have represented or be representing any or all
of the Members in any respect at any time. Each of the Members further
acknowledges and agrees that the attorneys shall have no obligation to furnish
the Members with any information or documents obtained, received or created in
connection with the representation of the Company, the Manager and its
Affiliates.
ARTICLE 7
PROFITS AND LOSSES; CASH DISTRIBUTIONS
7.1 Allocation of Profits and Losses. The Manager shall credit all
Company Profits to and charge all Company Losses against the Members in
proportion to their respective Interests. The total Interest of the Manager
(including its Promotional Interest) shall at all times be not less than one
percent (1%) of the total Interests of all Members. The Manager shall allocate
to the Members all Profits and Losses realized by the Company during any month
as of the close of business on the last day of each calendar month, in
accordance with their respective Interests and in proportion to the number of
days during the month that they owned the Interests (i.e., a weighted average
Capital Account), without regard to Profits and Losses realized for time periods
within the month.
7.2 Net Income Available For Distribution. The Company shall distribute
Net Income Available For Distribution to Members according to the above
allocations, in cash to those Members who have on file with the Company their
written election to receive cash distributions, as a pro rata share of the total
Net Income Available For Distribution. The Company shall make these
distributions monthly in proportion to the weighted average Capital Account of
each Member during the preceding calendar month. The Manager's proportionate
share of Net Income Available For Distribution shall be distributed to the
Manager in cash or credited to its Capital Account, as it elects, beginning when
the Manager, in its capacity as a Member, is eligible to receive the
distributions (as indicated in the last sentence of Section 7.3).
7.3 Net Proceeds. The Company may reinvest Net Proceeds, if any, in new
Mortgage Investments for up to seven (7) years after the effectiveness of the
registration statement containing the Prospectus. The Company may use Net
Proceeds to improve or maintain properties acquired by the Company through
foreclosure or to pay operating expenses. Net Proceeds may also be distributed
to Members. If the Company makes distributions of Net Proceeds, the Company
shall make the distributions to Members according to the allocations described
in Section 7.1 above, provided that no distributions shall be made to the
Manager until the Members (excluding any Interest held by the manager) shall
have received total distributions of one hundred percent (100%) of their Initial
Capital Contributions.
7.4 Cash Distributions Upon Dissolution. Upon dissolution and winding up
of the Company, the Company shall thereafter distribute Net Income Available for
Distribution and Net Proceeds available for distribution, if any, to the Members
in accordance with the provisions of Section 12.3 of this Agreement.
7.5 Special Allocation Rules.
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7.5.1 For purposes of this Agreement, a loss or allocation (or
item thereof) is attributable to non-recourse debt which is
secured by Company property to the extent of the excess of
the outstanding principal balance of the debt (excluding any
portion of the principal balance which would not be treated
as an amount realized under Section 1001 of the Code and
Treasury Regulation Section 1.1001-2 if the debt were
foreclosed upon) over the adjusted basis of the property.
This excess is called "Minimum Gain" (whether taxable as
capital gain or as ordinary income) as more explicitly set
forth in Treasury Regulation Sections 1.704-2(b)(2) and
1.704-2(d). Notwithstanding any other provision of Article
7, the allocation of loss or deduction (or item thereof)
attributable to non-recourse debt which is secured by
Company property will be allowed only to the extent that the
allocation does not cause the sum of the deficit Capital
Account balances of the Members receiving the allocations to
exceed the Minimum Gain determined at the end of the
Company's taxable year to which the allocations relate. The
balance of the losses shall be allocated to the Manager. Any
Member with a deficit Capital Account balance resulting in
whole or in part from allocations of loss or deduction (or
item thereof) attributable to non-recourse debt which is
secured by Company property shall, to the extent possible,
be allocated income or gain (or item thereof) in an amount
not less than the Minimum Gain at a time no later than the
time at which the Minimum Gain is reduced below the sum of
the deficit Capital Account balances. This section is
intended and shall be interpreted to comply with the
requirements of Treasury Regulation Section 1.704-2(f).
7.5.2 If any Member receives any adjustments, allocations or
distributions, not covered by Subsection 7.5.1, so as to
result in a deficit Capital Account, items of Company income
and gain shall be specially allocated to the Members in an
amount and manner sufficient to eliminate the deficit
balances in his Capital Account created by the adjustments,
allocations or distributions as quickly as possible. This
Section shall constitute a qualified income offset under
Treasury Regulation Section 1.704-1(b)(2)(ii).
7.5.3 Organization and Offering Expenses for any Fiscal Year or
other period shall be specially allocated to the Members in
proportion to their Interests, provided that if additional
Members are admitted to the Company on different dates, all
Organization and Offering Expenses shall be divided among
the Persons who own Interests from time to time so that, to
the extent possible, the amount of Organization and Offering
Expenses allocated to the Interests is in the same
proportion as the Members' Interests bears to the aggregate
capital of the Company. If the Manager shall determine that
the result is not likely to be achieved through future
allocations of Organization and Offering Expenses, the
Manager may allocate a portion of Net Income or Losses so as
to achieve the same effect on the Capital Accounts of the
Members, notwithstanding any other provision of this
Agreement.
7.5.4 The Manager's Promotional Interest resulting from a Capital
Contribution by a non-Manager Member shall be treated as an
expense of the Company at the time of the Capital
Contribution, and this expense shall be specially allocated
to the Member whose Capital Contribution gave rise to the
Promotional Interest.
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7.5.5 For purposes of determining the Profits, Losses, Net Income
Available for Distribution or any other items allocable to
any period, these other items shall be determined on a
daily, monthly, or other basis, as determined by the Manager
using any permissible method under Section 706 of the Code
and the Treasury Regulations thereunder.
7.5.6 Notwithstanding Sections 7.1 and 7.2 hereof, (i) Net Losses,
if any, allocable to the period before the admission of any
additional Members under Section 5.2 hereof shall be
allocated ninety-nine percent (99%) to the Manager and one
percent (1%) to the Initial Member, and Net Income during
that same period, if any, shall be allocated to the Manager,
and (ii) Profits or Losses allocable to the period
commencing with the admission of any additional Members and
all subsequent periods shall be allocated under Section 7.1.
7.5.7 Except as otherwise provided in this Agreement, all items of
Company income, gain, loss, deduction, and any other
allocations not otherwise provided for shall be divided
among the Members in the same proportions as they share Net
Income or Net Losses, as the case may be, for the year.
7.6 Code Section 704(c) Allocations.
7.6.1 Income, gains, losses and deductions, as determined for
Federal income tax purposes, for any Company asset which has
a Gross Asset Value that differs from its adjusted basis for
Federal income tax purposes shall, solely for Federal income
tax purposes, be allocated among the Members so as to take
account of any variation between the adjusted basis of the
Company asset to the Company for Federal income tax purposes
and its initial Gross Asset Value in accordance with Code
Section 704(c) and the Treasury Regulations thereunder. In
furtherance of the foregoing, it is understood and agreed
that any income, gain, loss, or deduction attributable to
Code Section 704(c) property shall be allocated to the
Members in accordance with the traditional method of making
Code Section 704(c) allocations, in accordance with Treasury
Regulationss.1.704-3(b).
7.6.2 If the Gross Asset Value of any Company asset is adjusted
under and under Section 2.16, subsequent allocations of
income, gain, losses and deductions, as determined for
Federal income tax purposes, for the Company asset shall,
solely for Federal income tax purposes, take account of any
variation between the adjusted basis of the Company asset
for Federal income tax purposes and its Gross Asset Value in
the same manner as under Code Section 704(c) and the
Treasury Regulations thereunder.
7.6.3 Allocations under this Section 7.6 are solely for purposes
of Federal, state and local income taxes and shall not
affect, or in any way be taken into account in computing,
any Member's Capital Account.
7.6.4 Except as otherwise set forth in this Agreement, any
elections or other decisions relating to allocations under
this Section 7.6 shall be made by the Manager, with the
review and concurrence of the Company's accountants, in a
manner that reasonably reflects the purpose and intention of
this Agreement.
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7.7 Intent of Allocations. It is the intent of the Company that this
Agreement comply with the safe harbor test set out in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d) and 1.704-2 and the requirements of those
Sections, including the qualified income offset and minimum gain charge-back,
which are hereby incorporated by reference. If, for whatever reasons, the
Company is advised by counsel or its accountants that the allocation provisions
of this Agreement are unlikely to be respected for federal income tax purposes,
the Manager is granted the authority to amend the allocation provisions of this
Agreement, to the minimum extent deemed necessary by counsel or its accountants
to effect the plan of Allocations and Distributions provided in this Agreement.
The Manager shall have the discretion to adopt and revise rules, conventions and
procedures as it believes appropriate for the admission of Members to reflect
Members' interests in the Company at the close of the years.
7.8 Quarterly Valuation of Assets. For each of the Company's Mortgage
Investments and other investments, the Manager shall review the investments at
the end of each calendar quarter and determine if a Writedown is required with
respect thereto. The Manager shall cause the Company's accountants, within
thirty (30) days of the end of each calendar quarter, to verify that the
Manager's determination was made in compliance with generally accepted
accounting principles. Any Writedown of an asset resulting from the valuation
shall be effective on the last day of the respective calendar quarter during the
term of this Agreement.
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ARTICLE 8
REINVESTED DISTRIBUTIONS PLAN
8.1 Members' Reinvested Distributions. A Member may elect to participate
in the Company's Distribution Reinvestment Plan (the "Plan") at the time of his
purchase of Units, by electing to do so in the Subscription Agreement executed
by the Member. The Member's participation in the Plan commences after (a) the
escrow has terminated in the Offering and (b) the Company has accepted the
Member's Subscription Agreement. Subsequently, a Member may revoke any previous
election or make a new election to participate in the Plan by sending written
notice to the Company. The notice shall be effective for the month in which the
notice is received, if received at least ten (10) days before the end of the
calendar month. Otherwise the notice is effective the following month.
8.2 Purchase of Additional Units. Under the Plan, participating Members
use distributions to purchase additional Units at one dollar ($1.00) per Unit.
The Manager will credit Units purchased under the Plan to the Member's Capital
Account as of the first day of the month following the month in which the
Reinvested Distribution is made. If a Member revokes a previous election to
participate in the Plan, subsequent to the month in which the Company receives
the revocation notice, the Company shall make distributions in cash to the
Member instead reinvesting the distributions in additional in Units.
8.3 Statement of Account. Within 30 days after the Reinvested
Distributions have been credited to Members participating in the Plan, the
Manager will mail to participating Members a statement of account describing the
Reinvested Distributions received, the number of incremental Units purchased,
the purchase price per Unit (if other than one dollar ($1.00) per Unit), and the
total number of Units held by the Member. Before the Members' reinvestment of
distributions in the Company, the Manager will also mail an updated Prospectus
or other updated disclosure document to each Member that fully describes the
Plan, including the minimum investment amount, the type or source of proceeds
which may be reinvested and the tax consequences of the reinvestment to the
Members.
8.4 Continued Suitability Requirements. Each Member who is a participant
in the Plan must continue to meet the investor suitability standards described
in the Subscription Agreement and Prospectus (subject to minimum requirements of
applicable securities laws) to continue to participate in reinvestments. It is
the responsibility of each Member to notify the Manager promptly if he no longer
meets the suitability standards set forth in the Prospectus for a purchase of
Units in the Offering. The Members acknowledge that the Company is relying on
this notice in issuing the Units, and each Member shall indemnify the Company if
he fails to so notify the Company and the Company suffers any damages, losses or
expenses, or any action or proceeding is brought against the Company due to the
issuance of Units to the Member.
8.5 Changes or Termination of the Plan. The terms and conditions of the
Plan may be amended, supplemented, suspended or terminated for any reason by the
Manager at any time by mailing notice thereof at least thirty (30) days before
the effective date of the action to each participating Member at his last
address of record.
ARTICLE 9
BOOKS AND RECORDS, REPORTS AND RETURNS
9.1 Books and Records. The Manager shall cause the Company to keep the
following:
9.1.1 Complete books and records of account in which shall be
entered fully and accurately all transactions and other
matters relating to the Company;
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9.1.2 A current list setting forth the full name and last known
business or residence address of the Manager and each Member
which shall be listed in alphabetical order and stating his
respective Capital Contribution to the Company and share in
Profits and Losses;
9.1.3 A copy of the filed Articles of Organization, and all
amendments thereto;
9.1.4 Copies of the Company's federal, state and local income tax
returns and reports, if any, for the six (6) most recent
years;
9.1.5 Copies of this Agreement, including all amendments thereto;
and
9.1.6 The financial statements of the Company for the three (3)
most recent years.
All books and records shall be maintained at the Company's principal place
of business and shall be available for inspection and copying by, and at the
sole expense of, any Member, or any Member's duly authorized representatives,
during the Company's normal business hours.
9.2 Annual Statements.
9.2.1 The Manager shall cause to be prepared at least annually, at
the Company's expense, audited financial statements prepared
in accordance with generally accepted accounting principles
and accompanied by a report thereon containing an opinion of
an independent certified public accountant. The financial
statements will include
(a) an audited balance sheet, statements of income or loss,
Members' equity, and a statement of cash flow;
(b) a statement as to any transactions with the Manager or
its Affiliates, and of fees, commissions, compensation
and other benefits paid or accrued to the Manager or
its Affiliates from the Company for the fiscal year
completed, showing the amount paid or accrued to each
recipient and the respective services performed; and
(c) a report identifying distributions from (i) cash flow
from operations during that year, (ii) cash flow from
operations of prior years that had been held as
reserves, (iii) proceeds from capital transactions,
(iv) lease payments on net leases with builders and
sellers, and (v) reserves from the gross proceeds of
the offering originally obtained from the Members. The
Company shall reimburse the Manager or its Affiliates
at the lower of their cost or the amount that the
Company would be required to pay to independent Persons
for comparable administrative services in the same
geographic location. Copies of the aforementioned
financial statements and reports shall be distributed
to each Member within 120 days after the close of each
taxable year of the Company.
9.2.2 The Company's accounts will itemize the costs of any
verification performed by them and may be reimbursed to the
Manager by the Company only to the extent that the
reimbursement when added to the costs for administrative
services rendered does not exceed the competitive rate for
the services as determined in the above paragraph.
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9.2.3 Notwithstanding the 120-day period specified in Section
9.2.1 above, the Manager shall cause to be prepared and
distributed to the Members not later than 75 days after the
close of each fiscal year of the Company all Company
information necessary in the preparation of the Members'
federal income tax returns.
9.3 Special and Quarterly Reports.
9.3.1 For each quarter in which the Company bought or invested in
a Mortgage Loan or it or a borrower incurred origination or
evaluation fees, and for so long as the proceeds of the
Offering are not fully committed and/or returned to
investors, at the Company's expense, the Manager shall cause
to be prepared a special report (which may be included in
the quarterly report described below) which shall contain a
statement listing:
(a) the amount of the Mortgage Loans purchased or invested
in;
(b) the material terms of the loans;
(c) the identity of the borrower; and
(d) the real property securing the Mortgage Loan and the
appraised value of that real property.
Copies of the statements shall be distributed to each Member
within sixty (60) days after the end of the quarterly
period.
9.3.2 The Manager will supply to each Member the information
required by Form 10-Q (if Form 10-Q is required to be filed
with the Securities and Exchange Commission) within 45 days
of the end of each quarterly period.
9.3.3 If the Company is registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended, the Manager
shall cause to be prepared, at Company expense, a quarterly
report for each of the first three quarters in each fiscal
year containing unaudited financial statements (consisting
of a balance sheet, a statement of income or loss and a
statement of cash flow) and a statement of other pertinent
information regarding the Company and its activities during
the period covered by the report. Copies of the statements
and other pertinent information shall be distributed to each
Member within 60 days after the close of each quarter. This
report may be combined with the delivery of information
described in the immediately preceding Section 9.3.2,
subject to the 45-day period described therein.
9.4 Filings. The Manager, at Company expense, shall cause the income tax
returns for the Company to be prepared and timely filed with the appropriate
authorities. The Manager, at Company expense, shall also cause to be prepared
and timely filed with and/or delivered to appropriate federal and state
regulatory and administrative bodies and/or the Members applicable, all reports
required to be filed with or delivered to those entities or Members under
applicable law, including those described in the Company's undertakings in any
securities filing. The reports shall be prepared using the accounting or
reporting basis required by the relevant regulatory bodies. The Company will
provide a copy of the reports to each Member who requests one, without expense
to the Member. The Manager, at Company expense, shall file, with the
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Administrators for the states in which this Company is registered, as required
by these states, a copy of each report referred to this Article 9.
9.5 Suitability Requirements. The Manager, at Company expense, shall
maintain for a period of at least six years a record of the documentation
indicating that a Member complies with the suitability standards set forth in
the Prospectus.
9.6 Fiscal Matters.
9.6.1 Fiscal Year. The Company has previously adopted the Fiscal
Year for tax and accounting purposes. Subject to the
provisions of Section 706 of the Code and approval by the
Internal Revenue Service and the applicable state taxing
authorities, in the Manager's sole discretion and without
the approval of a Majority, from time to time the Manager
may change the Company's fiscal year to a period to be
determined by the Manager.
9.6.2 Method of Accounting. The Company shall continue to use the
accrual method of accounting for both income tax purposes
and financial reporting purposes.
9.6.3 Adjustment of Tax Basis. Upon the transfer of an interest in
the Company, the Company may, at the sole discretion of the
Manager, elect under Code Section 754, to adjust the basis
of the Company property as allowed by Sections 734(b) and
743(b) thereof.
9.6.4 Tax Matters Partner. The Manager shall act as the "Tax
Matters Partner" ("TMP") and shall have all the powers and
duties assigned to the TMP under Sections 6221 through 6234
of the Code and the Treasury Regulations thereunder. The
Members agree to perform all acts necessary under Section
6231 of the Code and Treasury Regulations thereunder to
designate the Manager as the TMP.
ARTICLE 10
TRANSFER OF COMPANY INTERESTS
10.1 Interest of Manager. A successor or additional Manager may be
admitted to the Company as follows:
10.1.1 With the consent of all Managers (should there be any
manager other than the Manager) and a Majority, a manager
may at any time designate one or more Persons to be a
successor to it or to be an additional manager, in each case
with the participation in the Manager's Interest as they may
agree upon, so long as the Company and the Members shall not
be adversely affected thereby.
10.1.2 Upon any sale or transfer of a manager's Interest, if there
is an additional or successor manager of the Company, the
successor manager shall succeed to all the powers, rights,
duties and obligations of the assigning Manager hereunder,
and the assigning Manager shall thereupon be irrevocably
released and discharged from any further liabilities or
obligations of or to the Company or the Members accruing
after the date of the transfer. The sale, assignment or
transfer of all or any portion of the outstanding stock of
the Manager, or of any interest therein, or an assignment of
the Manager's Interests for security purposes only, shall
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not be deemed to be a sale or transfer of the Manager's
Interests subject to the provisions of this Section 10.1.
10.2 Transfer of Member's Interest. To the extent any of the following
restrictions is not necessary to the Company, in the discretion of the Manager
reasonably exercised, the Manager may eliminate or modify any restriction.
Subject to the immediately preceding sentence, no assignee of the whole or any
portion of a Member's Interest in the Company shall have the right to become a
substituted Member in place of his assignor, unless the following conditions are
first met:
10.2.1 No Member may transfer a fractional Unit, and no Member may
transfer Units where, as a result of the transfer, the
Member would thereafter, own fewer than two thousand (2,000)
Units, except where the transfer occurs by operation of law;
10.2.2 The assignor shall designate its intention in a written
instrument of assignment, which shall be in a form and
substance reasonably satisfactory to the Manager;
10.2.3 The transferring Member shall first obtain written consent
of the Manager to the substitution. The Manager shall not
unreasonably withhold its consent, but the Manager will
withhold its consent to the extent necessary to prohibit
transfers that could cause us to be classified as a publicly
traded partnership. The Manager will also withhold consent
if it determines that the sale or transfer will otherwise
jeopardize the continued ability of the Company to qualify
as a "partnership" for federal income tax purposes or that
the sale or transfer may violate any applicable securities
laws (including any investment suitability standards);
10.2.4 The assignor and assignee named therein shall execute and
acknowledge any other instruments as the Manager may deem
necessary or desirable to effect the substitution,
including, but not limited to, a power of attorney;
10.2.5 The assignee shall accept, adopt and approve in writing all
of the terms and provisions of this Agreement as the same
may have been amended;
10.2.6 The assignee shall pay or, at the election of the Manager,
obligate himself to pay all reasonable expenses connected
with the substitution, including but not limited to
reasonable attorneys' fees associated therewith; and
10.2.7 The Company has received, if required by the Manager, a
legal opinion satisfactory to the Manager that the transfer
will not violate the registration provisions of the
Securities Act of 1933, as amended, or any applicable state
securities laws, which opinion shall be furnished at the
Member's expense.
Assignments complying with the above shall be recognized by the Company not
later than the last day of the calendar month in which the written notice of
assignment is received by the Company.
10.3 Further Restrictions on Transfers. Notwithstanding any provision to
the contrary contained in this Agreement, the following restrictions shall also
apply to any and all proposed
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sales, assignments and transfer of Interests, and any proposed sale, assignment
or transfer in violation of same shall be void and of no effect:
10.3.1 No Member shall make any transfer or assignment of all or
any part of his Interest if said transfer or assignment
would, when considered with all other transfers during the
same applicable twelve month period, cause a termination of
the Company for federal or Nevada state income tax (if any)
purposes;
10.3.2 Notice to California residents:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
10.3.3 Appropriate legends (including the legend above) under
applicable securities laws shall be affixed to certificates
evidencing the Units and issued or transferred to purchasers
in other states.
10.3.4 No Member shall make any transfer or assignment of all or
any of his Interest if the Manager determines that the
transfer or assignment would result in the Company being
classified as a "publicly traded partnership" with the
meaning of Section 7704(b) of the Code or Regulations. To
prevent that:
(a) The Manager will not permit trading of Units on an
established securities market within the meaning of
Section 7704(b);
(b) The Manager will prohibit any transfer of Units which
would cause the sum of percentage interest in Company
capital or profits represented by Interests that are
sold or otherwise disposed of during any taxable year
of the Company to exceed two percent (2%) of the total
Interests in Company capital or profits; and
(c) The Manager will not permit any withdrawal of Units
except in compliance with the provisions of this
Agreement.
ARTICLE 11
DEATH, LEGAL INCOMPETENCY, OR WITHDRAWAL OF A MEMBER;
WITHDRAWAL OF THE MANAGER
11.1 Effect of Death or Legal Incompetency of a Member on the Company. The
death or legal incompetency of a Member shall not cause a dissolution of the
Company or entitle the Member or his estate to a return of his Capital Account.
11.2 Rights of Personal Representative. On the death or legal incompetency
of a Member, his personal representative shall have all the rights of that
Member for the purpose of settling his estate or managing his property,
including the rights of assignment and withdrawal.
11.3 Withdrawal of Members Other than Managers. To withdraw, or partially
withdraw from the Company, a Member must give written notice thereof to the
Manager and may thereafter obtain the return, in cash, of his Capital Account,
or the portion thereof as to which he requests
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withdrawal, within sixty-one (61) to ninety-one (91) days after written notice
of withdrawal is delivered to the Manager, subject to the following limitations:
11.3.1 Except with regard to the right of the personal
representative of a deceased Member under Section 11.2
above, no notice of withdrawal shall be honored and no
withdrawal made of or for any Units until the expiration of
at least one year from the date of purchase of those Units
in the Offering, other than purchases by way of automatic
reinvestment of Company distributions described in Article 8
of this Agreement;
11.3.2 To assure that the payments to a Member or his
representative do not impair the capital or the operation of
the Company, any cash payments in return of an outstanding
Capital Account shall be made by the Company only from Net
Proceeds and Capital Contributions;
11.3.3 A maximum of one hundred thousand dollars ($100,000) may be
withdrawn by any Member during any calendar year;
11.3.4 The Member shall have the right to receive distributions of
cash from their Capital Accounts only to the extent that
funds described in Subsection 11.3.2 are available; the
Manager shall not be required to establish a reserve fund
for the purpose of funding the payments; the Manager shall
not be required to use any other sources of Company funds
other than those set forth in Section 11.3.2; the Manager
shall not be required to sell or otherwise liquidate any
portion of the Company's Mortgage Investments or any other
asset in order to make a cash distribution of any Capital
Account under this Section 11.3;
11.3.5 Subject to Section 7.3, during the ninety (90) days
following receipt of written notice of withdrawal from a
Member, the Manager shall not refinance any loans of the
Company or reinvest any Net Proceeds or Capital
Contributions in new loans or other non-liquid investment
unless and until the Company has sufficient funds available
in cash to distribute to the withdrawing Member the amount
that he is withdrawing from his Capital Account;
11.3.6 Subject to the restrictions on withdrawal contained in this
Agreement, the amount to be distributed to any withdrawing
Member shall be an amount equal to the amount of the
Member's Capital Account as of the date of the distribution,
as to which the Member has given a notice of withdrawal
under this Section 11.3, notwithstanding that the amount may
be greater or lesser than the Member's proportionate share
of the current fair market value of the Company's net
assets;
11.3.7 In no event shall the Manager permit the withdrawal during
any calendar year of total amounts from the Capital Accounts
of members that exceeds ten percent (10%) of the aggregate
Interests, except upon the vote of the Members to dissolve
the Company under this Agreement;
11.3.8 Requests by Members for withdrawal will be honored in the
order in which they are received by the Manager. If any
request may not be honored, due to any limitations imposed
by this Section 11.3 (except the one year holding limitation
set forth in Subsection 11.3.1), the Manager will so notify
the requesting Member in writing, whose request, if not
withdrawn by the Member, will be honored if and when the
limitation no longer is imposed; and
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11.3.9 If a Member's Capital Account would have a balance of less
than two thousand dollars ($2,000) following a requested
withdrawal, the Manager, at its discretion, may distribute
to the Member the entire balance in the account.
11.4 Withdrawal by Manager. The Manager may withdraw from the Company upon
not less than 120 days written notice of the same to all Members, but only with
the affirmative vote or consent of a Majority, as noted in Section 3.2. The
withdrawing Manager shall not be liable for any debts, obligations or other
responsibilities of the Company or this Agreement arising after the effective
date of the withdrawal.
11.5 Payment to Terminated Manager. If the business of the Company is
continued as provided elsewhere in this Agreement upon the withdrawal, removal,
dissolution, or bankruptcy of the Manager, then the Company shall pay to the
Manager a sum equal to the Manager's outstanding Capital Account as of the date
of the removal, withdrawal, dissolution or bankruptcy, payable in cash within
thirty (30) days after that date. If the business of the Company is not so
continued, then the Manager shall receive from the Company the sums it would
have received in the course of dissolving the Company and winding up its
affairs, as provided in Section 12.2 below.
ARTICLE 12
DISSOLUTION OF THE COMPANY
12.1 Events Causing Dissolution. The Company shall dissolve upon
occurrence of the earlier of the following events:
12.1.1 The expiration of the term of the Company as stated in
Section 1.6 of this Agreement;
12.1.2 Upon the written consent of the Manager and any other Person
who is then a manager, and the affirmative vote or consent
of a Majority;
12.1.3 The withdrawal, removal, dissolution or bankruptcy of the
Manager, unless, if there is no remaining manager, a
Majority agree in writing to continue the business of the
Company and, within six months after the last remaining
manager has ceased to be a manager, admit one or more
managers who agree to such election and join the Company as
managers.
12.2 Winding Up. Upon the occurrence of an event of dissolution, the
Company shall immediately be dissolved, but shall continue until its affairs
have been wound up according to the provisions of the Nevada Statutes. Upon
dissolution of the Company, unless the business of the Company is continued as
provided above, the Manager will wind up the Company's affairs as follows:
12.2.1 No new Mortgage Investments shall be invested in or
purchased;
12.2.2 The Manager(s) shall liquidate the assets of the Company as
promptly as is consistent with recovering the fair market
value thereof, either by sale to third parties or by
servicing the Company's outstanding Mortgage Investments in
accordance with their terms;
12.2.3 All sums of cash held by the Company as of the date of
dissolution, together with all sums of cash received by the
Company during the
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winding up process from any source whatsoever, shall be
distributed in accordance with Section 12.3 below.
12.3 Order of Distribution of Assets. If the Company is dissolves under
Section 12.1 above, the assets of the Company shall be distributed in accordance
with Nevada Statutes Section 86.521.
12.4 No Recourse to Manager. Upon dissolution and winding up under the
Nevada Statutes, each Member shall look solely to the assets of the Company for
the return of his Capital Account, and if the Company assets remaining after the
payment or discharge of the debts and liabilities of the Company are
insufficient to return the amounts of the Capital Account of Members, Members
shall have no recourse against the Manager or any other Member. The winding-up
of the affairs of the Company and the distribution of its assets shall be
conducted exclusively by the Manager. The Manager is hereby authorized to do any
and all acts and things authorized by law for these purposes. If the Manager
becomes insolvent or bankrupt, dissolves, withdraws or is removed by the
Members, the winding-up of the affairs of the Company and the distribution of
its assets shall be conducted by the person or entity selected by a vote of a
Majority, which person or entity is hereby authorized to do any and all acts and
things authorized by law for such purposes.
12.5 Compliance With Timing Requirements of Regulations. If the Company is
"liquidated" within the meaning of Treasury Regulation Section
1.704-1(b)(2)(ii)(g):
12.5.1 Distributions shall be made under this Article 12 (if such
liquidation constitutes a dissolution of the Company) or
Article 7 hereof (if it does not) to the Manager and Members
who have positive Capital Accounts in compliance with
Treasury Regulation Section 1.704-1(b)(2)(ii)(b)(2); and
12.5.2 if the Manager's Capital Account has a deficit balance
(after giving effect to all contributions, distributions,
and allocations for all taxable years, including the year
during which such liquidation occurs), the Manager shall
contribute to the capital of the Company the amount
necessary to restore such deficit balance to zero in
compliance with Treasury Regulation Section
1.704-1(b)(2)(ii)(b)(3).
ARTICLE 13
ROLL-UPS
13.1 Roll-Up Transactions: Appraisal. If the Company proposes to enter
into a Roll-Up transaction, an appraisal of all Company assets shall be obtained
from a competent, Independent Expert. If the appraisal will be included in a
Prospectus to offer the securities of a Roll-Up entity to the Members, the
appraisal shall be filed with the Securities and Exchange Commission and the
states as an exhibit to the Registration Statement for that offering. The
Independent Expert will appraise the assets of the Company on a consistent
basis, and conduct the appraisal based on an evaluation of the Company's assets
as of a date immediately before the announcement of the proposed Roll-Up. The
performing the appraisal, the Independent Expert shall assume an orderly
liquidation of the Company's assets over a 12-month period. The terms of the
engagement of the Independent Expert shall clearly state that the engagement is
for the benefit of the Company and its Members. The Company shall include a
summary of the Independent Expert's appraisal, indicating all material
assumptions underlying the appraisal, in a report to the Members regarding the
proposed Roll-Up.
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13.2 Members' Rights in a Roll-Up. If a Roll-Up is effected as to the
Company, the Roll-Up Entity making the offer to the Company shall offer to each
Member who votes against the Roll-Up the choice of
13.2.1 accepting the securities of the Roll-Up Entity that were
offered in the proposed Roll-Up, or
13.2.2 either (a) remaining as a Member of the Company and
preserving its interests therein unchanged; or (b) receiving
cash in an amount equal to the Member's pro-rata share of
the appraised Net Asset Value of the Company.
13.3 Limitations on Roll-Ups. The Company's ability to participate in a
Roll-Up is also subject to the following:
13.3.1 The Company shall not participate in any proposed Roll-Up
which would result in Members having voting rights in the
Roll-Up Entity which are less than those provided in Section
6.2 of this Agreement.
13.3.2 If the Roll-Up Entity is a corporation, the voting rights of
the Members shall correspond to the voting rights provided
in this Agreement to the extent reasonably possible.
13.3.3 The Company will not participate in any proposed Roll-Up
which includes provisions which would operate to materially
impede or frustrate the accumulation of shares, units or
other equity interests, however denominated, by any
purchaser of the securities of the Roll-Up Entity (except to
the minimum necessary to preserve the tax status of the
Roll-Up Entity).
13.3.4 The Company will not participate in any proposed Roll-Up
which would limit the ability of a Member to exercise the
voting rights of the securities of the Roll-Up Entity on the
basis of the value of the Interest held by the Member.
13.3.5 The Company will not participate in any proposed Roll-Up in
which the Members' rights as securities holders to access to
the records of the Roll-Up Entity will be less than those
provided for in this Agreement or in which any of the costs
of the Roll-Up transaction would be borne by the Company if
the Roll-Up is not approved by necessary vote of the
Members.
ARTICLE 14
COMPENSATION TO THE MANAGER AND ITS AFFILIATES
The Company shall pay the Manager the compensation and permit the Manager
to charge and collect the fees and other amounts from borrowers as set forth in
the Prospectus.
ARTICLE 15
MISCELLANEOUS
15.1 Covenant to Sign Documents. Each Member covenants, for himself and
his successors and assigns, to execute, with acknowledgment or verification, if
required, any and all certificates, documents and other writings which may be
necessary or expedient to form the
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Company and to achieve its purposes, including, without limitation, any
amendments to the Articles of Organization and any filings, records or
publications necessary or appropriate under the laws of any jurisdiction in
which the Company shall conduct its business.
15.2 Notices. Except as otherwise expressly provided for in this
Agreement, all notices which any Member may desire or may be required to give
any other Members shall be in writing and shall be deemed duly given when
delivered personally or when deposited in the United States mail, first-class
postage pre-paid. Notices to Members shall be addressed to the Members at the
last address shown on the Company records. Notices to the Manager or to the
Company shall be delivered to the Company's principal place of business, as set
forth in Section 1.3 above or as hereafter changed as provided herein.
15.3 Right to Engage in Competing Business. Nothing contained in this
Agreement shall preclude any Member from purchasing or lending money upon the
security of any other property or rights therein, or in any manner investing in,
participating in, developing or managing any other venture of any kind, without
notice to the other Members, without participation by the other Members, and
without liability to them or any of them. Each Member waives any right he may
have against the Manager for using for its own benefit information received as a
consequence of the Manager's management of the affairs of the Company. This
Section 15.3 shall be subject in its entirety to the fiduciary duty of the
Manager set forth in Section 3.4.
15.4 Amendment. This Agreement is subject to amendment by the affirmative
vote of a Majority in accordance with Section 6.2; provided, however, that no
amendment shall be permitted if the effect of such amendment would be to
increase the duties or liabilities of any Member or materially adversely affect
any Member's interest in Profits, Losses, Company assets, distributions,
management rights or voting rights, except as agreed by that Member. In
addition, and notwithstanding anything to the contrary contained in this
Agreement, the Manager shall have the right to amend this Agreement, without the
vote or consent of any of the Members, if, in the reasonable judgment of the
Manager, such amendment does not adversely affect the rights of the Members,
including an amendment:
15.4.1 to grant to Members (and not solely the Manager in its
capacity as a Member) additional rights, remedies, powers or
authority that may lawfully be granted to or conferred upon
them;
15.4.2 to cure any ambiguity, to correct or supplement any
provision which may be inconsistent with any other
provision, or to make any other provisions for matters or
questions arising under this Agreement which will not be
inconsistent with the provisions of this Agreement;
15.4.3 to conform this Agreement to applicable laws and
regulations, including without limitation, federal and state
securities and tax laws and regulations, and the NASAA
Guidelines;
15.4.4 in the form of a revision to or updating of Schedule A in
accordance with Section 5.2 hereof; and
15.4.5 to elect for the Company to be governed by any successor
Nevada statute governing limited liability companies.
The Manager shall notify the Members within a reasonable time of the adoption of
any amendment.
15.5 Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes any and all prior agreements and
representations, either oral or in writing, between the parties hereto regarding
the subject matter contained herein.
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15.6 Waiver. No waiver by any party hereto of any breach of, or default
under, any provision of this Agreement by any party shall be construed or deemed
a waiver of any breach of or default under any other provision of this
Agreement, and shall not preclude any party from exercising or asserting any
rights under this Agreement for any future breach or default of the same
provision of this Agreement.
15.7 Severability. If any term, provision, covenant or condition of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the provisions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.
15.8 Application of Nevada law. This Agreement and the application or
interpretation thereof shall be governed, construed, and enforced exclusively by
its terms and by the law of the State of Nevada.
15.9 Captions. Section titles or captions contained in this Agreement are
inserted only as a matter of convenience and for reference and in no way define,
limit, extend or describe the scope of this Agreement.
15.10 Number and Gender. Whenever the singular form is used in this
Agreement it includes the plural when required by the context, and the masculine
gender shall include the feminine and neuter genders.
15.11 Counterparts. This Agreement may be executed in counterparts, any or
all of which may be signed by Manager on behalf of the Members as their
attorney-in-fact.
15.12 Waiver of Action for Partition. Each of the parties hereto
irrevocably waives during the term of the Company any right that it may have to
maintain any action for partition for any property of the Company.
15.13 Defined Terms. All terms used in this Agreement which are defined in
the Prospectus shall have the meanings assigned to them in said Prospectus,
unless this Agreement shall provide for a specific definition in Article 2.
15.14 Binding on Assignees. Each and all of the covenants, terms,
provisions and agreements herein contained shall be binding upon and inure to
the benefit of the successors and assigns of the respective parties hereto,
subject to the provisions of Section 10.2, which control the assignment or other
transfer of Company Interests.
32
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the
day and year first above written.
CAPSOURCE, INC., a Nevada corporation, as the sole initial Member
By:
----------------------------------
Name:
Title:
DM MORTGAGE INVESTORS, LLC, a Nevada Limited Liability Company
By: Capsource, Inc., a Nevada corporation, as Manager
By:
-----------------------------
Name:
Title:
33
<PAGE>
SCHEDULE A
LIST OF MEMBERS/ UNIT OWNERSHIP
(As of March 31, 2000)
Member No. Units Capital
Contribution
Capsource, Inc. 273,734 $273,734
2901 El Camino Avenue
Suite 206
Las Vegas, Nevada 89102
34
<PAGE>
EXHIBIT B
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT
WAIVING ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION INSTRUCTIONS
A. Completion of Subscription Agreement
(1) Subscription and related undertakings, representations and warranties:
Please read carefully pages B-1 to B-4.
o Initial the representation contained in Section 6(d) on page B-2.
o Indicate in section 13 on page B-4 whether you want to reinvest
distributions by purchasing additional Units.
o Indicate in section 14 on page B-4 how you will own the Units.
(2) Questionnaire(s):
o Individual Subscribers. Complete page B-5.
o Entities other than Employee Benefit Plans. Complete page B-6.
o Employee Benefit Plans. Complete pages B-7 and B-8.
(3) Registration Information. Complete all information on page B-9
(4) Signature Page. Complete and sign page B-10.
(5) Existing Members Only (for use after initial acquisition of Units).
After acquiring Units, you only have to complete the one page form
entitled "Additional Subscription Request" at page B-11.
B. Payment. All subscriptions should be for at least $2,000, corresponding to
a minimum of 2,000 Units.
<TABLE>
<CAPTION>
If you are purchasing Units during If you are purchasing Units following
the course of the Minimum Offering the period of the Minimum Offering
---------------------------------- -------------------------------------
<S> <C> <C>
Payment by Bank Check or Certified Make payable to order of "BankWest Make payable to the order of "DM
Check: of Nevada, as Escrow Agent" Mortgage Investors, LLC"
Payment by Wire Transfer: BankWest of Nevada, as Escrow Agent DM Mortgage Investors, LLC
for DM Mortgage Investors, LLC Account No. 153790228677
Account No. 320003485 Bank Routing No. 121201694
Bank Routing No. 122401778
</TABLE>
<PAGE>
C. Questions. If you have any questions in completing this Subscription
Agreement, please call DM Financial Services, Inc. at (702) 247-1332.
D. Return of Documents. The Subscription Agreement should be returned to the
following address:
DM Financial Services, Inc.
2901 El Camino Avenue, Suite 207
Las Vegas, NV 89102
<PAGE>
BY EXECUTING THIS SUBSCRIPTION AGREEMENT, AN INVESTOR IS NOT
WAIVING ANY RIGHTS UNDER THE FEDERAL SECURITIES LAWS.
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
DM Mortgage Investors, LLC
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby applies to
become a member in DM Mortgage Investors, LLC, a Nevada limited liability
Company (the "Company"). The Investor subscribes $_______________________ for
the purchase of _____________ units of limited liability interest in the Company
(the "Units"), the price being $1.00 per Unit (with a 2,000 Unit minimum
purchase). The undersigned agrees to purchase the number of Units stated above
in accordance with the terms and conditions of the Operating Agreement (the
"Operating Agreement"), a copy of which is contained in the Prospectus of the
Company as Exhibit A. The Units which the Investor offers to purchase shall not
be deemed issued to, or owned by, the Investor until: (a) the Investor has fully
paid by certified or bank check or by wire transfer for such Units, and (b) the
Manager has in its sole discretion accepted all or any portion of Investor's
offer of purchase.
2. PAYMENT OF SUBSCRIPTION. The amount of the Investor's subscription set
forth above either (a) has already been delivered by wire transfer, to the
account set forth below, or (b) is enclosed in the form of a certified or bank
check.
The Investor hereby authorizes and directs DM Financial Services, Inc.
to deliver this Subscription Agreement to the Manager. The undersigned hereby
directs BankWest of Nevada, as Escrow Agent (the "Bank") to pay to the Company
the funds delivered by the Investor for the Units, to the extent the Investor's
subscription has been accepted, subject to the Bank's receiving the Minimum
Proceeds described in Section 3 below. The Investor acknowledges that the
Manager can accept or reject all or any part of this subscription in its sole
discretion, and that this offering may be terminated at any time by the Manager.
If the Investor's subscription is rejected in part, the funds delivered
herewith, to the extent the application is so rejected, will be returned to
Investor as soon as practicable without interest or deduction, except to the
extent of any interest actually earned.
3. As described in the Prospectus under "Plan of Distribution," payments
for Units will be held by the Bank in a segregated account (the "Escrow
Account") until the Bank has received payment for subscriptions accepted by the
Company for not fewer than 1,500,000 Units (the "Minimum Offering"),
corresponding to not less than an aggregate of $1,500,000 in subscription
payments (the "Minimum Proceeds").
4. If the Minimum Proceeds have not been received by the Bank on or before
the end of the Bank's business day on December 31, 2000, the Bank will return
your payments, in full, together with your pro rata share of any net earnings
received by the Bank on the subscription amount held by it as escrow agent, to
you at the address shown on the Subscription Agreement Signature Page.
5. If the Minimum Proceeds have been received by the Bank on or before
December 31, 2000, the offering by the Company will continue, without use of the
Bank or any escrow agent, to seek to distribute a total of 100,000,000 Units for
$100,000,000. The Escrow Account will be closed upon the Bank's distribution of
funds either (a) to the Company after the Bank receives the Minimum Proceeds, or
(b) to the Investors, in accordance with Section 4. Proceeds from sales of Units
in the offering following the close of the Escrow Account will be paid directly
to the Company for its use as described in the "Prospectus" under "Use of
Proceeds."
6. REPRESENTATIONS BY THE INVESTOR. The Investor represents and warrants
that the Investor:
(a) has received the Prospectus of the Company dated March ___, 2000;
(b) understands that no federal or state agency has made any finding or
determination as to the fairness for public investment in, nor any
recommendation nor endorsement of, the Units;
B-1
<PAGE>
(c) recognizes that the Units as an investment involve a high degree of
risk and that the Investor may lose his entire investment;
(d) ILLIQUID INVESTMENT: understands that there will be no public market
for the Units, that there are substantial restrictions on repurchase, sale,
assignment or transfer of the Units, and that it may not be possible readily to
liquidate this investment;
PLEASE CONFIRM THE REPRESENTATION SET FORTH IN
SECTION 6(d) BY PLACING YOUR INITIALS HERE: __________
(e) meets the following criteria:
(i) if financial suitability standards (i.e., based on net worth or
income levels) are provided in Appendix A to this Subscription
Agreement for the state in which the Investor is domiciled, the
undersigned meets those financial suitability standards;
(ii) IF NO FINANCIAL SUITABILITY STANDARDS ARE INCLUDED IN APPENDIX A
FOR THE STATE IN WHICH THE INVESTOR IS DOMICILED, ONE OF THE
FOLLOWING IS TRUE:
(A) the undersigned has a minimum net worth (exclusive of home,
furnishings, and automobiles) of $45,000, and an annual
gross income of at least $45,000;
(B) the undersigned has a minimum net worth (exclusive of home,
furnishings, and automobiles) of $150,000; or
(C) the undersigned is purchasing in a fiduciary capacity for a
person meeting the requirements of either (i) or (ii) above;
or
(f) is under no disability with respect to entering into a contractual
relationship with the Company, and, if the Investor is an individual, has
attained the age of majority (as established in the state in which domiciled);
(g) if a trustee, is the trustee for the trust on behalf of which it is
purchasing the Units, and has due authority to purchase Units on behalf of the
trust;
(h) fully indemnifies and holds harmless the Company, the Manager, and
its affiliates from any and all claims, actions, causes of action, damages, and
expenses (including legal fees and expenses) whatsoever which may result from a
breach of any of the representations by Investor contained herein;
(i) has investment objectives that correspond to those stated in the
Prospectus, i.e., to preserve the capital of the Company and to provide monthly
distributions of cash to the members;
(j) understands that the Company intends to be taxed as an association
(partnership) and not as a corporation, and that, among other things, this may
result in taxes being payable by the Investor even though the Company may not
have distributed cash to the Investor.
(k) understands that an investment in the Company will not, in itself,
create a retirement plan (as defined in the Internal Revenue Code of 1986, as
amended) for any investor and that, in order to create a retirement plan, an
investor must comply with all applicable provisions of the Code.
7. PURCHASE BY FIDUCIARY. If the Investor is purchasing the Units
subscribed for hereby in a fiduciary capacity, the above representations and
warranties are to be deemed to have been made on behalf of the person(s) for
whom the Investor is so purchasing except that such person(s) need not be over
18 years of age.
8. ADOPTION OF OPERATING AGREEMENT. The Investor hereby adopts, accepts,
and agrees to be bound by all terms and provisions of the Operating Agreement
(Exhibit A to the Prospectus) and to perform all
B-2
<PAGE>
obligations therein imposed upon a member with respect to Units to be purchased.
By signing and completing the signature page of this Subscription Agreement, the
undersigned agrees to become a Member in the Company upon acceptance of this
Subscription Agreement by the Manager on behalf of the Company, and to pay the
subscription price in full.
9. LIMITATION ON ASSIGNMENT. The Investor acknowledges that the Units may
be assigned only as provided in the Operating Agreement and further acknowledges
the restrictions on the Company's repurchase or the Investor's resale, transfer,
or assignment of the Units set forth in the Operating Agreement and as described
in the Prospectus.
10. SPECIAL POWER OF ATTORNEY. The Investor hereby makes, constitutes, and
appoints the Manager of the Company to be such person's true and lawful
attorney-in-fact with full power and authority for him, and in his name, place
and stead, to execute, acknowledge, publish and file, as necessary or
appropriate:
(a) the Operating Agreement and the Articles of Organization, as amended
to date, as well as any and all additional amendments thereto required under the
laws of the State of Nevada or of any other state or which the Manager deems
advisable to prepare, execute and file;
(b) any other certificate, instrument or document, including Fictitious
Business Name Statements, which may be required to be filed by the Company by
any governmental agency or by the laws of any state or other jurisdiction in
which the Company is doing or intends to do business, or which the Manager deems
advisable to file; and
(c) any documents which may be required to effect the continuation of
the Company, the admission of an additional or substituted member, or the
dissolution and termination of the Company, provided such continuation,
admission, or dissolution and termination are in accordance with the terms of
the Operating Agreement.
The foregoing grant of authority:
(i) is a Special Power of Attorney coupled with an interest, is
irrevocable, survives the death of the Investor and shall not be affected by the
subsequent incapacity of the Investor;
(ii) may be exercised by the Manager for each member by a
facsimile signature of or on behalf of the Manager or by listing all of the
members and by executing any instrument with a single signature of or on behalf
of the Manager, acting as attorney-in-fact for all of them; and
(iii) shall survive the delivery of an assignment by a member of
the whole or any portion of his interest; except that where the assignee thereof
has been approved by the Manager for admission to the Company as a substituted
member, the Special Power of Attorney shall survive the delivery of such
assignment for the sole purpose of enabling such person to execute, acknowledge,
and file any instrument necessary to effect such substitution.
11. NOTIFICATION OF MANAGER. The Investor agrees to notify the Manager
immediately if any of the foregoing statements made herein shall become untrue.
12. OPERATING AGREEMENT GOVERNS. In the event of any conflict between the
provisions of the Operating Agreement and any instrument or document executed,
acknowledged, filed or recorded by the Manager pursuant to this special power of
attorney, the Operating Agreement will govern.
13. REINVESTMENT OF DISTRIBUTIONS. The Company maintains a Distribution
Reinvestment Plan ("Plan") under which distributions of income of the Company
may be reinvested for the purchase of additional Units, rather than being
received in cash. See Prospectus, under "Summary of Operating Agreement, Rights
of Members and Description of Units - Reinvestments." So long as Investor meets
the suitability standards established by the Company and by the securities law
administrator of the state in which Investor is domiciled, and subject to
possible suspension or termination of the Plan by the Manager, as set forth in
the Operating Agreement, the Investor will continue to participate in the Plan.
The Investor may change his election at any time by written notice to the
B-3
<PAGE>
Company. Please choose one or the other of the two options by a check mark in
the appropriate blank. If you check neither blank, you will be considered to
have elected to receive your distributions in cash (Option B).
A. _______________ Investor elects to participate in the Company
Distribution Reinvestment Plan and receive additional Units rather
than cash as distributions of Net Income from the Company.
B. _______________ Investor elects not to participate in the Company's
Distribution Reinvestment Plan and to receive distributions of Net
Income in cash.
14. OWNERSHIP OF UNITS. The Investor's Units will be owned and should be
shown on the Company's records as follows:
Check one: ___Individual Ownership
___Joint Tenants with Right of Survivorship (all
parties must sign)
___Tenants in Common (all parties must sign)
___Community Property (one signature required)
___Custodian
___Trustee
___Corporation
___Partnership
___Nonprofit Organization
* * *
If you have any questions in completing this Subscription Agreement, please call
DM Financial Services, Inc. at
(702) 247-1332
B-4
<PAGE>
INDIVIDUAL INVESTORS MUST COMPLETE THIS PAGE
--------------------------------------------
Name: ____________________________________________
Date of Birth ___________________________________________
Occupation ____________________________________________
Marital Status (check one) Single___ Married___
Citizenship U.S.___ Other_______________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) __________________________________________________
________________________________________________________________________________
Investor's Financial Status and Suitability:
-------------------------------------------
Investor's Net Worth, exclusive of home, furnishings, and automobiles
(check appropriate range):
______ under $30,000 ______ $30,001 - $45,000 ______ $45,001 - 150,000
______ $150,001 - $250,000 ______ over $250,000
Investor's Annual Income (check appropriate range)
______ under $30,000 ______ $30,001 - $45,000 ______ $45,001 - 75,000
______ $75,001 - $150,000 ______ over $150,000
Describe your investments in the last five years and discuss who made the
relevant investment decisions (you, your financial adviser, broker, accountant
or attorney): __________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units.__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Are you subject to any regulatory or other constraints that may preclude or
limit your participation in any potential Company investment?
____ YES ____ NO
If yes, please describe: _______________________________________________________
B-5
<PAGE>
LEGAL ENTITIES (NON-BENEFIT PLANS)
----------------------------------
TO COMPLETE THIS PAGE
---------------------
Name of Investor: ____________________________________________
Type of Legal Entity:
____ corporation (if so, provide jurisdiction of incorporation)___________
____ partnership or limited liability company (provide
jurisdiction of organization) _______________________________________
____ trust (provide state in which formed and date of
trust indenture) ____________________________________________________
____ other (describe)_____________________________________________________
Principal place of business ____________________________________________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) __________________________________________________
________________________________________________________________________________
Total assets (as indicated on the most recent balance sheet) of the Investor:
$____________________________
Describe the Investor's investments in the last five years and discuss who made
the relevant investment decisions (director, officer, financial adviser, broker,
accountant or attorney): _______________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units.__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
Is the Investor subject to any regulatory or other constraints that may preclude
or limit the Investor's participation in any potential Company investment?
____ YES ____ NO
If yes, please describe: _______________________________________________________
B-6
<PAGE>
EMPLOYEE BENEFIT PLANS
----------------------
TO COMPLETE PAGES B-7 AND B-8
-----------------------------
Name of Investor (the "Plan"): ____________________________________________
Investment Objective:
Preservation of capital and monthly income distributions ___ (check)
Other (please explain) __________________________________________________
________________________________________________________________________________
Total assets (as indicated on the most recent balance sheet) of the Investor:
$____________________________
Does this investment exceed 10% of the Plan's assets?
____ YES ____ NO
Is the Plan an "employee benefit plan" within the meaning of Title I of ERISA
(an "ERISA Plan") with a fiduciary as defined in Section 3(21) of ERISA which is
a bank, insurance company or registered investment adviser (other than an
affiliate of the Manager), which fiduciary will decide whether to purchase
Units?
____ YES ____ NO
If yes, provide details __________________________________________________
________________________________________________________________________________
Is the Plan an employee benefit plan other than an ERISA plan?
____ YES ____ NO
If yes, provide details as to the nature of the Plan (IRA, Keogh, etc.) and
the person making investment decisions on behalf of the Plan ___________________
________________________________________________________________________________
Does the Plan permit participants to direct the investment of the contributions
made to the Plan on their behalf?
____ YES ____ NO
Additional Plan Representations and Warranties:
The undersigned authorized signatory of the Plan hereby represents and warrants
on behalf of the Plan that the answers to the following questions are true:
Does the Manager or any of its employees or affiliates manage any part of
the Plan's investment portfolio on a discretionary basis?
____ YES ____ NO
Does the Manager or any of its employees or affiliates regularly give
investment advice to the Plan?
____ YES ____ NO
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives information, recommendations and
advice concerning investments which are used as a primary basis for the
Plan's investment decisions?
____ YES ____ NO
B-7
<PAGE>
Does the Manager or any of its employees or affiliates have an agreement
or understanding, written or unwritten, with the investment director of
the Plan under which the latter receives individualized investment advice
concerning the Plan's assets?
____ YES ____ NO
IF THE ANSWER TO ANY OF THESE IS "YES," INDICATE WHETHER ALL OF THE
REPRESENTATIONS AND WARRANTIES BELOW ARE TRUE BY INITIALING BELOW.
The investment director of the Plan has studied the Prospectus and has
made an independent decision to purchase Units solely on the basis
thereof and without reliance on any other information or statements as
to the appropriateness of this investment for the Plan.
All the obligations and requirements of ERISA, including prudence and
diversification, with respect to the investment of "plan assets" in
the Company have been considered by the investment director of the
Plan.
The investment director and, if different, authorized signatory of the
Plan understand that neither the Manager nor any of its affiliates:
(a) has exercised any investment discretion or control with respect to
the Plan's purchase of any Units, (b) have authority, responsibility
to give, or have given individualized investment advice with respect
to the Plan's purchase of any Units, or (c) are employers maintaining
or contributing to such Plan.
An investment in the Company conforms in all respects to the governing
documents of the Plan.
The person executing this Subscription Agreement on behalf of the Plan
is a "fiduciary" of such Plan and trust and/or custodial account
(within the meaning of Section 3(21)(A) of ERISA); the execution and
delivery of this Subscription Agreement with respect to the Plan and
trust and/or custodial account have been duly authorized; and
investment in the Company conforms in all respect to laws applicable
to the Plan and to the Plan documents; and in making this investment,
the Plan, its fiduciaries and its investment director are aware of,
and have taken into consideration, among other things, risk return
factors and the anticipated effect of an investment in the Company on
the diversification, liquidity and cash flow needs of the Plan and the
projected effect of the investment in meeting the Plan's funding
objectives and have concluded that this investment is a prudent one.
The Plan's governing documents do not prohibit the Company from
investing in specific securities or issues, including, but not limited
to, securities which would be deemed to be "employer securities" with
respect to the Plan as defined in Section 407 of ERISA.
The Plan's proxy voting guidelines do not apply to securities held by
the Company.
The Plan, its investment director and, if different, the person
executing this Subscription Agreement fully understand the tax
considerations and risks of this investment.
ARE THE FOREGOING RESPRESENTATIONS AND WARRANTIES TRUE?
____ YES ____ NO
* * *
Please provide any other information that would help the Manager determine
whether the Investor has sufficient knowledge and experience in financial and
business matters to evaluate the merits and risks of an investment in the
Units.__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
B-8
<PAGE>
REGISTRATION INFORMATION FOR THE INTERESTS
------------------------------------------
__________________________________________________$_____________________________
(Subscriber Name(s)) (Subscription Amount)
________________________________________________________________________________
(Street Address) (State/Zip Code)
________________________________________________________________________________
(Telephone and Facsimile Numbers) (e-mail - Optional)
The full address to which any communications, distribution checks, and
redemption checks, if applicable, should be sent (if different from registered
address furnished in response to the preceding requirement) is:
________________________________________________________________________________
(Name (s))
________________________________________________________________________________
(Street Address) (City) (State/Country)
________________________________________________________________________________
(Telephone and Facsimile Numbers) (e-mail - Optional)
If the proceeds of distributions or redemptions, if any, are to be wired rather
than sent by check, the account to which such proceeds should be wired is:
________________________________________________________________________________
(Name of Financial Institution)
________________________________________________________________________________
(Routing ABA Number - if a Bank)
________________________________________________________________________________
(Address of Financial Institution)
________________________________________________________________________________
(Financial Institution Account Name and Number)
____________________________________
Social Security No./EIN (Entity) U.S. Citizen or Resident ___ YES ___ NO
____________________________________
Plan Number (if applicable) Existing Partner ___ YES ___ NO
B-9
<PAGE>
SIGNATURE PAGE
--------------
BEFORE SIGNING THIS PAGE, HAVE YOU: (a) initialed the representation contained
in Section 6(d) on page B-2, (b) indicated in section 13 on page B-4 whether you
want to reinvest distributions by purchasing additional Units, and (c) indicated
in section 14 on page B-4 how you will own the Units? If not, please do so.
INDIVIDUAL(S):
--------------
_____________________________________________________ Dated:________________
(Signature of Subscriber)
_____________________________________________________
(Print Name of Subscriber)
_____________________________________________________ Dated:________________
(Signature of Co-Subscriber)
_____________________________________________________
(Print name of Co-Subscriber)
ENTITIES (other than Plans):
----------------------------
_____________________________________________________
(Print Name of Subscriber)
By:__________________________________________________ Dated:________________
(Signature of Authorized Signatory)
_____________________________________________________
(Print Name and Title of Signatory)
By:__________________________________________________ Dated:________________
(Signature of Required Authorized Co-Signatory)
_____________________________________________________
(Print Name and Title of Co-Signatory)
PLAN ENTITIES:
--------------
_____________________________________________________ Dated:________________
(Signature of Individual Plan Participant)(Print Name)
_____________________________________________________ Dated:________________
(Signature of Custodian or Trustee) (Print Name)
_____________________________________________________ Dated:________________
(Signature of Other Authorized Signatory) (Print Name)
================================================================================
FOR USE BY THE COMPANY ONLY
Subscription has been: ___ Accepted ___ Accepted in Part ___ Rejected ___ Other
Subscription Amount: $________________ Dated:_______________________________
Signed: Capsource, Inc., Manager
By:_____________________________________
Name:
Title:
B-10
<PAGE>
ADDITIONAL SUBSCRIPTION REQUEST
(To Be Completed By Existing Investors Instead of Subscription Agreement)
Name of Investment Fund:________________________________________________________
Name of Subscriber(s):__________________________________________________________
Additional Subscription Amount: $_______________________________________________
The undersigned hereby subscribes for the additional amount set forth above
upon the terms and conditions described in the Confidential Private Offering
Memorandum. The undersigned restates all of the covenants, representations and
warranties made in the undersigned's original Subscription Agreement as if they
were made on the date hereof and certifies that all of the financial information
set forth in the undersigned's original Subscription Agreement remains accurate
and complete on the date hereof.
INDIVIDUAL SIGNATURES:
----------------------
_____________________________________________________ Dated:________________
(Signature of Subscriber)
_____________________________________________________ Dated:________________
(Signature of Co-Subscriber)
ENTITY AND PLAN SIGNATURES
--------------------------
By:__________________________________________________ Dated:________________
(Signature of Authorized Signatory)
_____________________________________________________
(Print Name and Title of Signatory)
By:__________________________________________________ Dated:________________
(Signature of Required Authorized Co-Signatory)
_____________________________________________________
(Print Name and Title of Co-Signatory)
================================================================================
FOR USE BY THE COMPANY ONLY
Subscription has been: ___ Accepted ___ Accepted in Part ___ Rejected ___ Other
Additional Subscription Amount Accepted: $______________________________________
Dated:__________________________________________________________________________
Signed: Capsource, Inc., Manager
By:_____________________________________
Name:
Title:
B-11
<PAGE>
APPENDIX A
STATE REGULATIONS
-----------------
("Blue Sky" Law)
Various states have established suitability standards for individual investors
and subsequent transferees different from and/or in addition to those set by the
Company. These requirements are set forth below:
<TABLE>
<CAPTION>
-------------- ----------------------------------------------------- -------------------------------------------------
State Suitability Standards Requirements
-------------- ----------------------------------------------------- -------------------------------------------------
<S> <C> <C>
NV Same as in body of agreement Minimum investment is $5,000
-------------- ----------------------------------------------------- -------------------------------------------------
OH, PA Same as in body of agreement, except that in
addition, the amount an Investor pays for units may
not exceed 10% of the Investor's net worth (without
including the Investor's home, home furnishings and
automobiles)
-------------- ----------------------------------------------------- -------------------------------------------------
AZ, AK, CA, Investors must have either (i) a minimum net worth The following may appear on certificates issued
MA, MS, MO, (without including an Investor's home, home to California residents:
TN furnishings, and automobiles) of $60,000, and
an annual gross income of at least $60,000; or (ii) IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER
minimum net worth (exclusive of home, furnishings, OF THIS SECURITY, OR ANY INTEREST THEREIN, OR
and automobiles) of $225,000 or (iii) are TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
purchasing in a fiduciary capacity for a person THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER
meeting the requirements of either (i) or (ii) OF CORPORATIONS OF THE STATE OF CALIFORNIA,
above. EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
There are restrictions on the transfer of the Units
in California, which are set forth in the statute
included in Appendix B on the following two pages.
-------------- ----------------------------------------------------- -------------------------------------------------
ME Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $50,000, and an
annual gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $200,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
SC Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $65,000, and an
annual gross income of at least $65,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $150,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
NH Investors must have either (i) a minimum net worth
(without including an Investor's home, home
furnishings, and automobiles) of $125,000, and an
annual gross income of at least $50,000; or (ii)
minimum net worth (exclusive of home, furnishings,
and automobiles) of $250,000 or (iii) are
purchasing in a fiduciary capacity for a person
meeting the requirements of either (i) or (ii)
above.
-------------- ----------------------------------------------------- -------------------------------------------------
DC, LA, NE, These jurisdictions do not have quantified
ND, RI suitability requirements. Accordingly, in addition
to assuring compliance with the guidelines set forth
in the body of this agreement, dealers are instructed
to review, and investors should provide any other
relevant information that they believe is necessary
to making an assessment of suitability.
-------------- ----------------------------------------------------- -------------------------------------------------
</TABLE>
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APPENDIX B
RESTRICTIONS ON TRANSFER SET FORTH
IN RULE 260.141.11 OF
THE CALIFORNIA CODE OF REGULATIONS TITLE 10, CHAPTER 3 (the "Code")
(a) The issuer of any security upon which a restriction on transfer has been
imposed pursuant to Section 260.102.6, 260.141.10 or 260.534 shall cause a
copy of this section to be delivered to each issuee or transferee of such
security.
(b) It is unlawful for the holder of any such security to consummate a sale or
transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed
pursuant to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferors ancestors, descendants or spouse or any custodian
or trustee for the account of the transferor or the transferors
ancestors, descendants or spouse; or to a transferee by a trustee or
custodian for the account of the transferee or the transferees
ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting
as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign
state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or group;
(9) if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule is not
required;
(10) by way of a sale qualified under Sections 25111, 25112, or 25113, or
25121 of the Code, of the securities to be transferred, provided that
no order under Section 25140 or Subdivision (a) of Section 25143 is in
effect with respect to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or
by a wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112, or 25113
of the Code, provided that no order under Section 25140 or Subdivision
(a) of Section 25148 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
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<PAGE>
(14) to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state, if,
in either such case, such person (i) discloses to potential purchasers
at the sale that transfer of the securities is restricted under this
rule, (ii) delivers to each purchaser a copy of this rule, and (iii)
advises the Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities,
provided that any such transfer is on the condition that any
certificate evidencing the security issued to such transferee shall
contain the legend required by this section.
(c) The certificate representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as
follows:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONERS RULES.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
The expenses incurred and estimated to be incurred in connection with this
offering are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $ 26,400
National Association of Securities Dealers, Inc. Filing Fee 10,500
Blue Sky Fees 30,000
Accounting Fees and Expenses 80,000
Legal Fees and Expenses 200,000
Printing Fees and Expenses 75,000
Mailing 25,000
Miscellaneous 53,100
Total $ 500,000
</TABLE>
Item 32. Sales to Special Parties
Not applicable.
Item 33. Recent Sales of Unregistered Securities
Not applicable.
Item 34. Indemnification of Directors and Officers
Indemnification of the Partners and any officer, director, employee,
agent, subsidiary or assign thereof, is provided for in Section 3.5 of the
operating agreement, which is included as Exhibit A to the Prospectus.
Item 35. Treatment of Proceeds from Stock Being Registered
Not applicable
Item 36. Financial Statements and Exhibits
(a) Financial Statements: See "Index to Financial
Statements" and the financial statements appearing
thereafter in Part I of this registration statement.
(b) Exhibits:
1.1 Dealer Manager Agreement
1.2 Selected Dealer Agreement
3 Articles of Organization, as amended
4.1 Operating agreement of Registrant (included as
Exhibit A to the Prospectus)
4.2 Subscription Agreement and Power of Attorney
(included as Exhibit B to the Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP with respect to legality of the
securities
8 Opinion of Wendel, Rosen, Black & Dean, LLP with
respect to federal income tax matters
10.1 Bank West Escrow Agreement
23.1 Consent of Berkley, Gordon, Levine, Goldstein &
Garfinkel, LLP (contained in Exhibit 5.1)
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<PAGE>
23.2 Consent of Wendel, Rosen, Black & Dean, LLP
(contained in Exhibit 8)
23.3 Consent of Grant Thornton LLP (DM Mortgage
Investors, LLC)
23.4 Consent of Grant Thornton LLP (Vestin Group, Inc.)
24 Power of Attorney
27 Financial Data Schedule
Item 37. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include therein any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in any such prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the
foregoing, any increase of decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected
in the form of prospectus filed of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and
price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration
statement.
(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.
(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
find offering thereof.
(3) That all post-effective amendments will comply with the applicable
forms, rules and regulations of the Securities and Exchange Commission in effect
at the time such post-effective amendments are filed.
(4) To remove from regulation by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(5) To send to each limited partner at least on an annual basis a
detailed statement of any transactions with the Manager or its affiliates, and
of fees, commissions, compensation and other benefits paid, or accrued to the
Manager or its affiliates for the fiscal year completed, showing the amount paid
or accrued to each recipient and the services performed.
(6) 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
person of the registrant in the successful defense of any action, suit or
proceeding) is director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
II-2
<PAGE>
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.
(7) To provide to the Members the financial statements required by Form
10-K for the first full year of operations of the Company.
(8) To file a sticker supplement pursuant to Rule 424(c) under the Act
during the distribution period describing each property not identified in the
prospectus at such time as there arises a reasonable probability that such
property will be acquired and to consolidate all such stickers into a
post-effective amendment filed at least once every three months, with the
information contained in such amendment provided simultaneously to the existing
members. Each sticker supplement should disclose all compensation and fees
received by the Manager and its affiliates in connection with any such
acquisition. The post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-14 of Regulation S-X only for
properties acquired during the distribution period.
(9) To file, after the end of the distribution period, a current report
on Form 8-K containing the financial statements and any additional information
required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the
signing of a binding purchase agreement) made after the end of the distribution
period involving the use of 10 percent or more (on a cumulative basis) of the
net proceeds of the offering and to provide the information contained in such
report to the members at least once each quarter after the distribution period
of the offering has ended.
[The remainder of this page intentionally left blank]
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on this Amendment No. 2 on Form S-11 and has
duly caused this Amendment No. 2 to its registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Las
Vegas, Nevada, on July 12, 2000.
DM MORTGAGE INVESTORS, LLC
By: Capsource, Inc., its sole manager
By: /s/ Stephen Byrne
-----------------------------------
Stephen Byrne
Director and President
(Principal Officer of Manager)
By: /s/ Lance Bradford
-----------------------------------
Lance Bradford
Director, Secretary and Treasurer
(Chief Accounting Officer of the Manager)
By: /s/ Michael Shustek
-----------------------------------
Michael Shustek
Director of the Manager
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<PAGE>
DM MORTGAGE INVESTORS, LLC
A Nevada Limited Liability Company
INDEX TO EXHIBITS
1.1 Form of Dealer Manager Agreement*
1.2 Form of Selected Dealer Agreement*
3 Articles of Organization, as amended*
4.1 Amended and Restated Operating Agreement (included as Exhibit A to the
Prospectus)
4.2 Subscription Agreement and Power of Attorney (included as Exhibit B to
the Prospectus)
5.1 Opinion of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP, with
respect to the legality of the securities
8 Opinion of Wendel, Rosen, Black & Dean, LLP with respect to federal
income tax matters
10.1 Bank West Escrow Agreement*
23.1 Consent of Berkley, Gordon, Levine, Goldstein & Garfinkel, LLP
(contained in Exhibit 5.1)
23.2 Consent of Wendel, Rosen, Black & Dean, LLP (contained in Exhibit 8)
23.3 Consent of Grant Thornton LLP (DM Mortgage Investors, LLC)*
23.4 Consent of Grant Thornton LLP (Vestin Group, Inc.)*
24 Power of Attorney*
27 Financial Data Schedule*
*= Previously filed.
II-5
